<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 19, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
MEDIA ARTS GROUP, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3999 77-0354419
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
521 CHARCOT AVENUE
SAN JOSE, CALIFORNIA 95131
(408) 324-2020
(Address, including zip code, and telephone number of Registrant's principal
executive offices)
----------------
JAMES F. LANDRUM, JR., ESQ.
MEDIA ARTS GROUP, INC.
521 CHARCOT AVENUE
SAN JOSE, CALIFORNIA 95131
(408) 324-2020
(Name, address, including ZIP code, and telephone number, including area code,
of agent for service)
----------------
COPIES TO:
<TABLE>
<S> <C>
PETER F. KERMAN, ESQ. CARLA S. NEWELL, ESQ.
ORA T. FISHER, ESQ. SANJOY K. GOYLE, ESQ.
LATHAM & WATKINS GUNDERSON DETTMER STOUGH
75 WILLOW ROAD VILLENEUVE FRANKLIN & HACHIGIAN, LLP
MENLO PARK, CALIFORNIA 94025 155 CONSTITUTION DRIVE
(650) 328-4600 MENLO PARK, CALIFORNIA 94025
(650) 321-2400
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TITLE OF SHARES TO BE REGISTERED BE REGISTERED (1) SHARE (2) PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value.............. 2,783,000 shares $15.250 $42,440,750 $12,520
</TABLE>
(1) Includes 363,000 shares subject to an over-allotment option granted to the
Underwriters.
(2) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act of 1933. The registration fee has been
calculated based upon the average of the high and low prices of the
Company's Common Stock as reported on the Nasdaq National Stock Market on
December 16, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 19, 1997
PROSPECTUS
2,420,000 SHARES
[LOGO]
COMMON STOCK
Of the 2,420,000 shares of Common Stock offered hereby, 1,500,000 shares are
being sold by the Company and 920,000 shares are being sold by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders. See "Principal and Selling Stockholders."
The Company's Common Stock is quoted on the Nasdaq Stock Market under the
symbol ARTS. On December 15, 1997, the last reported sale price of the Common
Stock was $15.625 per share. See "Price Range of Common Stock."
--------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total (3)..................... $ $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $1,100,000.
(3) Certain stockholders have granted to the Underwriters a 30-day option to
purchase up to 363,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Selling Stockholders will
be $ , $ , and $ , respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998, at the office of the agent of Hambrecht
& Quist LLC in New York, New York.
HAMBRECHT & QUIST NEEDHAM & COMPANY, INC.
, 1998
<PAGE>
EDGAR COLORWORK DESCRIPTIONS:
INSIDE FRONT COVER OF PROSPECTUS: Shows photo of Thomas Kinkade with framed
painting plus four other Thomas Kinkade images and "Thomas Kinkade--Painter
of Light" logo.
INSIDE GATEFOLD (RIGHT): Contains one large photo showing interior space of
Thomas Kinkade Store and three smaller photos showing interior space of
Signature Galleries; text at upper left states "Thomas Kinkade Galleries."
INSIDE GATEFOLD (LEFT): Contains photographs of nine Thomas Kinkade products
including stationery, mugs, gift prints, books and other gift products; text
at upper left states "Thomas Kinkade Products."
INSIDE BACK COVER OF PROSPECTUS: Contains one large Thomas Kinkade image
with "Thomas Kinkade--Painter of Light" logo.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE AND COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
------------------------
The Company owns and uses a variety of trademarks, including the registered
trademarks MAGI-Registered Trademark-, Media Arts Group,
Inc.-Registered Trademark- and Painter of Light-Registered Trademark-
(registered for use with respect to books and paper goods, wood or plastic
sculptures and Christmas ornaments).
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE
SET FORTH IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. SEE "CAUTIONARY
LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS." ALL REFERENCES TO A PARTICULAR
"FISCAL YEAR" OF THE COMPANY REFER TO THE 12 MONTHS ENDED MARCH 31 OF THE YEAR
REFERENCED, UNLESS OTHERWISE NOTED.
THE COMPANY
Media Arts Group, Inc. is a leading designer, manufacturer, marketer and
branded retailer of art-based home decorative accessories, collectibles and gift
products based on the works of the award-winning artist Thomas Kinkade, Painter
of Light. The Company's primary products are canvas and paper lithographs that
feature Mr. Kinkade's unique use of light and his peaceful and inspiring themes.
The Company believes that the Thomas Kinkade lifestyle brand appeals to a wide
range of consumers because of its broad and inclusive message that celebrates
home, family, nature and traditions. The Company strives to reach a broad
consumer base by offering products at a variety of price points, controlling its
distribution through branded retail stores and galleries and developing
strategic marketing relationships with companies such as Hallmark Cards, Inc.
("Hallmark"), Avon Products, Inc. ("Avon") and QVC, Inc. ("QVC").
The Company believes that its focus on high quality products sold in Thomas
Kinkade branded retail environments has allowed it to increase sales and
profitability significantly. In the twelve month period ended September 30,
1997, the Company recorded an increase in net sales of 34.6% over the comparable
prior period to $57.4 million, with a gross margin of 67.1% and an operating
margin of 21.3%. In this same period, Thomas Kinkade Stores had average sales
per square foot of $1,193. The Company's growth strategy includes a continued
focus on building the Thomas Kinkade brand, building market awareness and
increasing the number of Thomas Kinkade Stores and Signature Galleries.
The Company distributes its products through a network of 18 Company-owned
Thomas Kinkade Stores and 60 independently owned Signature Galleries that
exclusively sell Thomas Kinkade products. The Company plans to expand this
network by adding approximately 10 Thomas Kinkade Stores and approximately 100
Signature Galleries in fiscal 1999. This controlled distribution strategy
focuses on developing stores and galleries to provide warm and inviting shopping
environments that showcase Thomas Kinkade products as they might appear in a
customer's home. The Company also distributes its products through approximately
2,200 independent dealers that commit to varying levels of minimum purchases.
Furthermore, the Company has established licensing and/or distribution
arrangements with Hallmark for stationery items, ornaments and other gift
products; Avon for gift products; and QVC for paper lithographs and other gift
products.
The Company's products include limited edition canvas and paper lithographs,
open edition prints and gift products. The Company plans to introduce
approximately 10 new limited edition images per year and intends to leverage its
library of new images and over 160 existing Thomas Kinkade images into
additional products. The Company's retail price points range from $50 for small
gift prints to $150 to $15,000 for lithographs. The Company also offers a
variety of products at lower price points, including books, mugs, decorative
tins and gift baskets. The Company's canvas lithographs are manufactured at its
San Jose, California production facility using a proprietary manufacturing
process. Paper lithographs and most of the Company's gift items are manufactured
by third parties.
According to Packaged Facts, a consumer research organization, the home
decorative accessories, collectibles and gift products market is expected to
grow from $6.9 billion in 1996 to $9.2 billion by the year 2001. The Company's
goal is to capitalize on the significant opportunity afforded by this market by
developing Thomas Kinkade into a leading art-based brand. The Company's key
business strategies include: (i) providing a wide array of branded home
accessories; (ii) expanding controlled distribution through Thomas Kinkade
Stores and Signature Galleries; (iii) expanding its dealer network and promoting
existing dealers to higher purchase levels; (iv) developing strategic business
relationships to expand consumer reach and product lines; and (v) providing high
quality products.
Media Arts Group, Inc. was incorporated in Delaware in 1993. The Company
maintains its executive offices at 521 Charcot Avenue, San Jose, California
95131. The Company's telephone number is (408) 324-2020.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........... 1,500,000 shares
Common Stock offered by the Selling
Stockholders.................................. 920,000 shares
Common Stock to be outstanding after the
offering...................................... 12,571,942 shares (1)
Use of proceeds............................... The net proceeds to the Company from the
offering will be used to repay certain
indebtedness, to open new Thomas Kinkade Stores,
for other capital expenditures and for general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market symbol................. ARTS
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED SEPTEMBER 30,
FISCAL YEAR ENDED MARCH 31,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA: (2)
Net sales............................................................. $ 33,485 $ 39,752 $ 47,018 $ 20,041 $ 30,413
Operating income...................................................... 6,397 5,547 6,791 1,410 6,841
Income from continuing operations before extraordinary loss........... 4,014 2,455 2,644 163 4,204
Net income (loss)..................................................... $ 3,789 $ (673) $ (10,986) $ (13,467) $ 4,204
Income from continuing operations before extraordinary loss per
share............................................................... $ 0.42 $ 0.25 $ 0.26 $ 0.02 $ 0.37
Net income (loss) per share (3)....................................... $ 0.40 $ (0.07) $ (1.09) $ (1.36) $ 0.37
Shares used in per share calculations (3)............................. 9,481 9,875 10,076 9,867 11,296
SELECTED OPERATING DATA:
Number of Thomas Kinkade Stores (4)................................... 8 14 15 14 18
Retail sales per square foot (4)(5)................................... $ 804 $ 1,001 $ 1,133 $ 489 $ 708
Number of Signature Galleries......................................... -- -- 17 10 45
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
ACTUAL AS ADJUSTED (6)
--------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................................................................... $ 5,180 $ 20,711
Working capital.............................................................................. 10,135 25,666
Total assets................................................................................. 27,176 42,707
Long-term debt less current portion.......................................................... 4,169 1,200
Total stockholders' equity................................................................... 10,109 29,508
</TABLE>
- ------------------------------
(1) Excludes (i) 1,406,446 shares of Common Stock reserved for issuance under
the Company's stock option plans and other stock option agreements, of which
1,078,266 shares were subject to outstanding options as of November 30, 1997
at a weighted average exercise price of $3.73 per share, 573,434 of which
were immediately exercisable within 60 days of such date; (ii) 600,000
shares of Common Stock reserved for issuance to Thomas Kinkade under an
option agreement dated December 3, 1997 at an exercise price of $12.375 per
share, subject to stockholder approval; and (iii) 633,432 shares issuable
under warrants and convertible notes at a weighted average exercise price of
$7.54 per share.
(2) Restated to reflect (i) discontinuance of John Hine Limited during the year
ended March 31, 1997; and (ii) an acquisition of six galleries during the
year ended March 31, 1996 which has been accounted for as a pooling of
interests. See Notes 2 and 3 of Notes to Consolidated Financial Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing net earnings per share.
(4) In fiscal 1996, the Company acquired six galleries which are included in the
number of Thomas Kinkade Stores commencing with the fiscal year ended March
31, 1996. Since these galleries were acquired in transactions accounted for
as a pooling of interests, the operating results of these galleries are
included in the Company's Consolidated Statement of Income in all prior
periods.
(5) Includes sales by Thomas Kinkade Stores open for 12 or more months.
(6) Adjusted to reflect the sale by the Company of 1,500,000 shares of Common
Stock offered hereby at an estimated price of $15.625 per share and the
application of the estimated net proceeds therefrom as if such transaction
had occurred as of September 30, 1997. See "Use of Proceeds" and
"Capitalization."
------------------------------
ALL REFERENCES TO THE "COMPANY" AND "MEDIA ARTS" MEAN MEDIA ARTS GROUP, INC.
AND ITS SUBSIDIARIES, UNLESS THE CONTEXT INDICATES OTHERWISE. EXCEPT AS
OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION.
4
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE
SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. SEE "CAUTIONARY LANGUAGE
REGARDING FORWARD-LOOKING STATEMENTS." THE FOLLOWING RISK FACTORS SHOULD BE
CONSIDERED CAREFULLY IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS
BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.
DEPENDENCE ON THOMAS KINKADE; LACK OF PRODUCT REVENUE
DIVERSIFICATION. Thomas Kinkade, a founder and principal stockholder of the
Company, supplies all of the artwork for the Company's existing art-based home
decorative accessories, collectibles and gift products, and his artwork and
message form the foundation for the Company's business strategy. On December 3,
1997, the Company entered into a license agreement with Thomas Kinkade (the "New
License Agreement"). The New License Agreement gives the Company perpetual and
exclusive rights to each image produced by Mr. Kinkade under the New License
Agreement or prior thereto, subject to certain exceptions. The New License
Agreement requires Mr. Kinkade to deliver 150 paintings to the Company during
the period commencing December 3, 1997 and ending 15 years thereafter, with at
least 10 paintings to be delivered during each of the first five years. However,
the New License Agreement is terminable by Mr. Kinkade under certain
circumstances, including upon a change in control of the Company or a material
breach of the New License Agreement by the Company. If Mr. Kinkade were unable
or unwilling to produce new artwork for the Company for any reason, the loss of
Mr. Kinkade's services would have a material adverse effect on the Company.
Moreover, the Company's available remedies in the event of a breach of the New
License Agreement by Mr. Kinkade are limited to monetary damages because the
license is a personal service contract. In addition, the Company is dependent
upon continued customer demand for products based upon the artwork of Thomas
Kinkade. Any decline in sales of such products in existing markets or any
failure of such products to gain consumer acceptance as the Company expands its
distribution would have a material adverse effect on the Company. See
"--Dependence on Consumer Preferences," "Business--License with Thomas Kinkade"
and "Management."
RISKS ASSOCIATED WITH EXPANSION. The Company's strategy includes
aggressively expanding its distribution channels, and its future operating
results will depend, in large part, upon its ability to effectively implement
this strategy. The Company had 18 Company-owned Thomas Kinkade Stores and 60
independently owned Signature Galleries as of November 30, 1997. The Company
currently plans to open two additional Thomas Kinkade Stores during fiscal 1998
and approximately 10 in fiscal 1999 and to add 12 additional Signature Galleries
in fiscal 1998 and approximately 100 in fiscal 1999. If successfully
implemented, this expansion would result in significant increases in the number
of stores operated by the Company and the number of galleries that sell Thomas
Kinkade products exclusively.
The Company's planned expansion of its Thomas Kinkade Stores is dependent
upon a number of factors including the ability of the Company to locate and
obtain suitable store sites, negotiate acceptable lease terms, hire and train
employees, and adapt its management information systems and other systems to the
extent necessary to accommodate and facilitate such growth. The Company's
planned expansion of its Signature Gallery program is also dependent upon a
number of factors, including the ability of the Company to identify appropriate
owners and integrate them into the Company's dealership network, as well as the
ability of such owners to locate suitable store sites and effectively promote
and sell the Company's products. The Company intends to open Thomas Kinkade
Stores and/or add Signature Galleries in geographic markets where it has little
or no experience and it may encounter competitive challenges that it has not
experienced to date. In addition, the Company intends to open or license stores
near existing Thomas Kinkade Stores, Signature Galleries and independent
dealers, which could result in lower sales of the Company's products at such
existing sites. There can be no assurance that the Company will be able to open
its planned Thomas Kinkade Stores or that such stores will operate on a
profitable basis. Furthermore, there can be no assurance that the Company will
be able to identify suitable owners for its planned Signature Galleries
expansion or that such owners will become effective distributors for the
Company's products. Failure by the Company to achieve its planned expansion of
Thomas Kinkade Stores and Signature Galleries or to do so on a profitable basis
could have a material adverse
5
<PAGE>
effect on the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business--Business Strategy" and
"--Distribution."
ABILITY TO EFFECTIVELY MANAGE EXPANSION; NEED FOR ADDITIONAL MANUFACTURING
CAPACITY. The Company's recent rapid and substantial growth in its sales and
its strategy for introducing new products and expanding its distribution
channels could place a significant strain on its management and operations. The
Company has recently hired several key officers and employees to supplement its
management team. To manage any expansion effectively, the Company's management
will need to anticipate the changing demands of the Company's operations and to
adapt systems and procedures accordingly. There can be no assurance that the
Company will anticipate all of the demands that an expansion of operations will
impose on such systems and procedures. To support the planned expansion of the
Company's products and distribution channels, the Company will have to hire
additional manufacturing, sales and administrative personnel. There can be no
assurance that the Company will be able to hire such personnel, particularly due
to the competitive nature of current labor markets, or that the Company will be
able to train successfully and supervise such personnel if hired. In addition,
the Company may need to add shifts to its manufacturing operations or implement
other efficiencies to satisfy any significant future increase in production. The
failure of the Company to increase its operational and manufacturing capacity in
a timely and effective manner while maintaining its product quality and customer
service standards could result in a failure to meet demand on a timely and
satisfactory basis, which would have a material adverse effect on the Company.
Failure to continue to upgrade operating and financial control systems or
unexpected difficulties encountered during expansion could materially adversely
affect the Company. There can be no assurance that such systems and controls
will be adequate to sustain and effectively monitor future growth. See "--Need
for Further Automation" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE UPON CONSUMER PREFERENCES. Sales of the Company's existing and
new products depend upon continued consumer demand for the Thomas Kinkade brand
and products. Demand for the Company's products can be affected generally by
consumer preferences, which are subject to frequent and unanticipated changes.
The Company is dependent on its ability to continue to produce appealing and
popular Thomas Kinkade art-based products that anticipate, gauge and respond in
a timely manner to changing consumer demands and preferences. Failure to
anticipate and respond to changes in consumer preferences could lead to, among
other things, lower sales, excess inventories, diminished consumer loyalty and
lower margins, all of which would have a material adverse effect on the Company.
There can be no assurance that the current level of demand for products based
upon Mr. Kinkade's artwork will be sustained or grow, and any decline in the
demand for such products or failure of demand to grow would have a material
adverse effect on the Company. See "Business--Business Strategy."
SEASONALITY. The Company has experienced, and is expected to continue to
experience, significant seasonal fluctuations in net sales and net income. The
Company's net sales historically have been higher in the September and December
quarters and lower in the March and June quarters. Management believes that this
seasonal effect is due primarily to customer buying patterns, particularly with
respect to holiday purchases, and is typical of the home decorative accessories,
collectibles and gift product industries. The Company expects these seasonal
trends to continue in the foreseeable future; therefore, quarterly results are
not necessarily indicative of results for an entire year and will fluctuate
significantly from quarter to quarter. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results have
fluctuated significantly in the past and may continue to fluctuate as a result
of numerous factors, including demand for the art of Thomas Kinkade and the
Company's Thomas Kinkade products (including new product categories and series),
the Company's ability to achieve its expansion plans, the timing, mix and number
of new product releases, the timing of opening of new Thomas Kinkade Stores and
the expensing of the associated pre-opening costs, the successful implementation
of the Signature Gallery program and expansion of distribution generally, the
Company's ability to implement strategic business alliances, the Company's
ability to hire and train new
6
<PAGE>
manufacturing, sales and administrative personnel, continued implementation of
manufacturing efficiencies, timing of product deliveries and the incurrence of
other operating costs. In addition, since a significant portion of the Company's
revenues are generated from orders received in the quarter, sales in any quarter
are substantially dependent on orders booked in that quarter. The Company's
results of operations may also fluctuate based on extraordinary events. For
example, the Company's net income fluctuated significantly as a result of the
Company's acquisition and subsequent discontinuance of the operations of John
Hine Limited. In addition, as a result of the expected repayment of the
outstanding subordinated debt due to Levine Leichtman Capital Partners, L.P.
("Levine Leichtman") of $5.4 million using the net proceeds of the offering, the
Company will record an extraordinary expense in the quarter the debt is repaid
as a result of the write-off of deferred debt discount associated with that
debt. The deferred debt discount was $2.4 million as of September 30, 1997. See
Note 6 of Notes to Consolidated Financial Statements. Accordingly, the results
of operations in any quarter will not necessarily be indicative of the results
that may be achieved for a full fiscal year or any future quarter. As a result
of the foregoing factors, it is likely that in some future quarter or quarters
the Company's operating results may be below the expectation of public market
analysts and investors. In such event, the trading price of the Common Stock
will be adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
INTRODUCTION OF NEW PRODUCT LINES. A significant element of the Company's
strategy is to expand the Thomas Kinkade brand into new product lines.
Historically, substantially all of the Company's net sales from Thomas Kinkade
products have been generated through sales of limited edition wall art products.
The Company recently added open edition wall art products to its offerings and
intends to continue to broaden its line of Thomas Kinkade branded products to
include other home decorative accessories, collectibles and gift products. The
Company has little or no experience in the marketing and sale of certain of
these potential home accessory products. There can be no assurance that the
Company will be able to successfully market these potential new products or that
any of the new product lines will gain market acceptance, and such failure could
result in lower than anticipated sales for such products and affect adversely
the image and value of the Thomas Kinkade brand. See "Business--Business
Strategy."
NEED FOR FURTHER AUTOMATION. In order to support the Company's planned
expansion in a cost-effective manner, the Company needs to further automate
certain portions of its manufacturing and inventory control processes. The
Company may encounter difficulties associated with implementing new automation
processes which could adversely affect the Company's ability to produce products
in a timely manner and in turn, could have a material adverse effect on the
Company. Furthermore, if unit sales were to increase significantly prior to the
Company's implementation of these automation processes, the Company may find it
necessary to expand production in a less cost-effective manner, including
through the addition of more employees and further capital investments which
could have a material adverse effect on the Company. See
"Business--Manufacturing and Production."
RELIANCE ON THIRD PARTIES. The Company relies on third parties to
distribute a majority of its products, manufacture certain of its products and
supply certain materials and components for use in its own manufacturing
processes. The substantial majority of its product distribution, as well as its
interaction with the ultimate customer, is conducted by independent dealers,
including Signature Gallery owners whose stores may bear the Thomas Kinkade
name. The Company is in the process of entering into formal licensing agreements
with Signature Gallery owners and there can be no assurance that the Company
will enter into such agreements with all of its current Signature Gallery
owners. The failure of these dealers to properly represent the Company's
products could damage the reputation of the Company or Thomas Kinkade and
adversely affect the ability of the Company to build the Thomas Kinkade brand.
Most of the Company's three-dimensional products and gift items are manufactured
by third parties under licensing or manufacturing arrangements. The failure of
any of these third party vendors to produce products that meet the Company's
specifications could result in lower sales or otherwise adversely affect
consumer perceptions of the Company's brand and products. In addition, the
Company relies on third party vendors to supply frames, paper, canvas, paint and
other materials and components for its limited edition and other wall art
products. Although the Company maintains relationships with several framing
suppliers, in the past it has experienced shortages in framing supplies. There
can be no
7
<PAGE>
assurance that the Company will not encounter similar shortages in the future
and any prolonged shortage in frames or other materials could have a material
adverse effect on the Company. See "Business--Distribution" and "--Manufacturing
and Production."
LIMITED OPERATING HISTORY; FUTURE OPERATING RESULTS. The Company commenced
operations in 1990 with the introduction of Thomas Kinkade lithograph products,
opened its first Thomas Kinkade Store in 1993 and formally launched the
Signature Gallery program in 1996. Since its inception in 1990, the Company has
experienced rapid and substantial growth in sales, as well as in the scope of
its operations generally. However, the Company remains vulnerable to a variety
of business risks generally associated with rapidly growing companies with
limited operating histories, and there can be no assurance that the Company will
be able to sustain its sales growth, effectively manage its operations or remain
profitable in future periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
CHANGES IN ECONOMIC CONDITIONS AND CONSUMER SPENDING. The home decorative
accessories, collectibles and gift product industries are subject to cyclical
variations. Purchases of these products are discretionary for consumers and,
therefore, such purchases tend to decline during recessionary periods in the
national or regional economies and may also decline at other times. The success
of the Company depends in part upon a number of economic factors relating to
discretionary consumer spending, including employment rates, business
conditions, future economic prospects, interest rates and tax rates. In
addition, the Company's business is sensitive to consumer spending patterns and
preferences. Shifts in consumer discretionary spending away from home decorative
accessories, collectibles or gift products, as well as general declines in
consumer spending, could have a material adverse effect on the Company.
DEPENDENCE ON MANAGEMENT. The Company is dependent upon the efforts of its
executive officers and other key personnel and on its ability to continue to
attract and retain qualified personnel in the future. The loss of certain of the
Company's executive officers and key personnel or its inability to attract and
retain qualified personnel in the future could have a material adverse effect on
the Company. The Company currently maintains key man insurance on the lives of
Thomas Kinkade, Kenneth E. Raasch, Daniel P. Byrne and Raymond A. Peterson in
the amounts of $10 million, $2 million, $1 million and $1 million, respectively.
See "Management."
COMPETITION. The home decorative accessories, collectibles and gift
products industries are highly fragmented and competitive. The Company's
products compete with products marketed by numerous regional, national and
foreign companies that are distributed through a variety of retail formats
including department stores, mass merchants, art and gift galleries and frame
shops, bookstores, mall-based specialty retailers, direct response marketing
programs, catalogs and furniture and home decor stores. The number of marketers
and retail outlets selling home accessory and gift products has increased in
recent years and the entry of these companies into the market, together with the
lack of significant barriers to entry, may result in increased competition. The
Company intends to open Thomas Kinkade Stores and/or add Signature Galleries in
geographic markets where it has little or no experience and, as a result, it may
encounter competitive challenges that it has not experienced to date. Such
competition could have a material adverse effect on the Company. Some of the
Company's competitors have substantially greater resources than the Company,
including name recognition and capital resources, have more diversified product
offerings and sell their products through broader distribution channels than the
Company. There can be no assurance that the Company will be able to compete
effectively in the future. See "Business--Competition."
CONTROL BY EXISTING STOCKHOLDERS; CERTAIN TRANSACTIONS. After completion of
this offering, Messrs. Kinkade and Raasch will own beneficially an aggregate of
approximately 56.5% of the outstanding Common Stock (53.7% if the overallotment
option is exercised in full). See "Principal and Selling Stockholders" and
"Shares Eligible for Future Sale." As a result, Messrs. Raasch and Kinkade will
continue to be in a position to control the outcome of all actions requiring
stockholder approval, including the election of the entire Board of Directors,
thereby ensuring their ability to control the future direction and management of
the Company. Mr. Kinkade, the Company's principal artist, has been engaged and
will continue to be engaged in transactions with the Company. See
"Business--License with Thomas Kinkade," "Management--Employment and Change of
Control Arrangements" and "Certain Transactions."
8
<PAGE>
PRICE VOLATILITY. The market price of the Common Stock has been and will
likely continue to be subject to significant fluctuations in response to
variations in quarterly operating results, changes in analysts' earnings
estimates and other factors specific to the Company or affecting the Company's
industry generally. In addition, the stock markets in recent years have
experienced extreme price and volume fluctuations that often have been unrelated
to or disproportionate to the operating performance of companies. These broad
fluctuations may adversely affect the market price of the Common Stock. See
"Price Range of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the public market following this offering (including shares issued upon
the exercise of stock options and warrants) by current holders of the Company's
Common Stock and stock options and warrants exercisable therefor, including
Kenneth E. Raasch, Thomas Kinkade and Levine Leichtman, who beneficially own
3,851,875, 3,312,043 and 980,000 shares (of which 700,000 shares are expected to
be sold in the offering), respectively, or the perception that such sales might
occur, could adversely affect the market price of the Common Stock and the
Company's ability to raise additional equity capital. Certain of the Selling
Stockholders, the Company's executive officers and directors and certain
additional stockholders have agreed with the Underwriters not to offer to sell,
contract to sell or otherwise sell (including without limitation in a short
sale) or dispose of, for a period of 90, 120 and 150 days after the effective
date of the Registration Statement of which this Prospectus is a part, (the
"lock-up period") 100%, 66 2/3% and 33 1/3%, respectively, of the shares of
Common Stock of the Company or any options or warrants to purchase any shares of
Common Stock of the Company now owned or thereafter acquired by them or with
respect to which they have the power of disposition, without the prior written
consent of Hambrecht & Quist LLC. Stockholders holding an aggregate of 8,372,293
shares of Common Stock or securities exercisable or exchangeable for Common
Stock are subject to the lock-up period. The Company has similarly agreed with
the Underwriters that it will not offer, subject to certain limited exceptions,
to sell, contract to sell or otherwise sell or issue any shares of the Company's
Common Stock for 120 days after the effective date of the Registration
Statement, of which this Prospectus is part, without the prior written consent
of Hambrecht & Quist LLC. See "Principal and Selling Stockholders" and "Shares
Eligible for Future Sale."
CERTAIN ANTI-TAKEOVER EFFECTS. The Company's Amended and Restated
Certificate of Incorporation and Bylaws, as well as Delaware corporate law,
contain certain provisions that could have the effect of delaying, deferring or
preventing a change of control of the Company that may be in the best interest
of stockholders. These provisions include the ability of the Company to issue up
to 1,000,000 shares of Preferred Stock having such designations, preferences and
rights as may be fixed by the Board of Directors, without stockholder approval.
Under certain conditions, Section 203 of the Delaware General Corporation Law
would prohibit the Company from engaging in a "business combination" with an
"interested stockholder" (in general, a stockholder owning 15% or more of the
Company's outstanding voting stock) for a period of time. See "Description of
Capital Stock." In addition, the New License Agreement enables Mr. Kinkade to
terminate the agreement in the event of certain changes in control. See
"Business--License with Thomas Kinkade."
CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Such
statements may be found in the material set forth under "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as in the Prospectus generally
and are indicated by words or phrases such as "anticipate," "estimate,"
"project," "believe," "intend," "seek," "expect," "plan" and similar words or
phrases. Such statements are based on current expectations and are subject to
certain risks, uncertainties and assumptions, including but not limited to those
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Risk Factors." Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially and adversely from those anticipated,
estimated or projected. These forward-looking statements are made as of the date
of this Prospectus, and the Company assumes no obligation to update such
forward-looking statements or to update the reasons why actual results could
differ materially from those anticipated in such forward-looking statements.
9
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares of
Common Stock offered hereby are estimated to be $20.9 million based upon an
assumed offering price per share of $15.625 after deducting the underwriting
discount and estimated offering expenses. The Company expects to use
approximately $5.4 million of the estimated net proceeds to repay the remaining
principal amount due under its note payable to Levine Leichtman; such note bears
interest at the rate of 13.5% and is subject to semi-annual repayments
commencing on December 28, 1998 and continuing through December 31, 2001. The
Company also has deferred debt discount costs in relation to that debt which are
being amortized over the repayment term resulting in an effective interest rate
of 28.3%. As a result of the expected repayment of this debt, the Company will
record an extraordinary expense relating to the write-off of deferred debt
discount associated with that debt. Deferred debt discount aggregated $2.4
million as of September 30, 1997. The Company also expects to use approximately
$5.0 million of the net proceeds for capital expenditures through fiscal 1999 to
open new Thomas Kinkade Stores, for leasehold improvements and increased
automation at its manufacturing facilities and for upgrades to its management
information systems. The Company expects to use the remainder of the net
proceeds for general corporate purposes. Furthermore, from time to time the
Company evaluates the acquisitions of galleries and business operations which
complement the Company's business, for which a portion of the proceeds may be
used. Currently, however, the Company does not have any understandings,
commitments or agreements with respect to any such acquisitions. Pending use of
the net proceeds for the above purposes, they will be invested in short-term,
interest bearing, investment-grade securities. The Company will not receive any
proceeds from the sale of Common Stock by the Selling Stockholders.
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company commenced trading publicly on the Nasdaq
Stock Market on August 3, 1994 and is traded under the symbol ARTS. The
following table sets forth for the periods indicated the high and low daily
closing prices for the Common Stock:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1996
First Quarter............................................................................... $ 7.500 $ 5.625
Second Quarter.............................................................................. 6.625 5.750
Third Quarter............................................................................... 5.000 2.625
Fourth Quarter.............................................................................. 3.500 2.125
FISCAL YEAR ENDED MARCH 31, 1997
First Quarter............................................................................... $ 3.250 $ 2.625
Second Quarter.............................................................................. 2.875 1.313
Third Quarter............................................................................... 2.875 1.438
Fourth Quarter.............................................................................. 5.125 2.438
FISCAL YEAR ENDING MARCH 31, 1998
First Quarter............................................................................... $ 5.125 $ 3.750
Second Quarter.............................................................................. 6.750 3.875
Third Quarter (through December 15, 1997)................................................... 17.000 6.500
</TABLE>
On December 15, 1997, the last reported sale price of the Common Stock as
quoted on the Nasdaq Stock Market was $15.625 per share. As of November 30,
1997, there were 196 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock since the
Company's initial public offering in 1994. Moreover, the Board of Directors of
the Company does not anticipate paying any cash dividends in the foreseeable
future. In addition, certain of the Company's financing agreements with lenders
prohibit payment of dividends. See Note 6 of the Notes to Consolidated Financial
Statements.
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 (i) on an actual basis; and (ii) as adjusted to give effect
to the sale by the Company of the 1,500,000 shares of Common Stock offered
hereby at an assumed offering price of $15.625 per share and the application of
the estimated net proceeds therefrom. This table should be read in conjunction
with the Consolidated Financial Statements and Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term portion of long-term debt...................................................... $ 1,789 $ 1,789
--------- -----------
Long-term debt, less current portion (1).................................................. 2,969 --
--------- -----------
Convertible notes......................................................................... 1,200 1,200
--------- -----------
Stockholders' equity:
Preferred Stock, $0.01 par value; 1,000,000 shares authorized; no shares outstanding
actual or as adjusted................................................................. -- --
Common Stock, $0.01 par value; 20,000,000 shares authorized; 11,031,527 shares issued
actual; 12,571,942 shares issued as adjusted for the offering (2)..................... 69 84
Additional paid-in capital.............................................................. 17,191 38,107
Retained earnings (accumulated deficit)................................................. (7,151) (8,683)
--------- -----------
Total stockholders' equity............................................................ 10,109 29,508
--------- -----------
Total capitalization................................................................ $ 16,067 $ 32,497
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Amount is net of unamortized deferred debt discount of $2,431,000. See Note
6 to Notes to Consolidated Financial Statements.
(2) Excludes (i) 1,441,586 shares of Common Stock reserved for issuance under
the Company's stock option plans and other stock option agreements, of which
1,070,406 shares were subject to outstanding options as of September 30,
1997 at a weighted average exercise price of $3.58 per share, 608,074 of
which were immediately exercisable within 60 days of such date; (ii) 600,000
shares of Common Stock reserved for issuance to Thomas Kinkade under an
option agreement dated December 3, 1997 at an exercise price of $12.375 per
share, subject to stockholder approval; and (iii) 633,432 shares issuable
under warrants and convertible notes at a weighted average exercise price of
$7.54 per share.
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of March 31, 1996 and
1997 and for each of the three years in the period ended March 31, 1997 are
derived from the Consolidated Financial Statements of the Company audited by
Price Waterhouse LLP, independent accountants, which are included elsewhere in
this Prospectus. The consolidated statement of income data for the fiscal years
ended December 31, 1992 and 1993, the three months ended March 31, 1994 and the
consolidated balance sheet data at December 31, 1992 and 1993 and March 31, 1995
are derived from the Company's consolidated financial statements that were also
audited by Price Waterhouse LLP and which are not included herein. The selected
consolidated financial data for the six months ended September 30, 1996 and 1997
and as of September 30, 1997 are derived from the unaudited consolidated
financial statements of the Company which, in the opinion of management of the
Company, reflect all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation of the
financial position and results of operations for these periods.
<TABLE>
<CAPTION>
SIX
MONTHS
FISCAL YEAR ENDED THREE MONTHS ENDED
ENDED FISCAL YEAR ENDED MARCH 31, SEPTEMBER
DECEMBER 31, MARCH 31, 30,
-------------------- --------------- ------------------------------- ---------
1992 1993 1994 1995 1996 1997 1996
--------- --------- --------------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SELECTED OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
(1)
Net sales................................ $ 7,123 $ 16,705 $ 6,258 $ 33,485 $ 39,752 $ 47,018 $ 20,041
Cost of sales............................ 2,633 5,531 2,166 10,330 13,343 16,760 7,754
--------- --------- ------ --------- --------- --------- ---------
Gross profit............................. 4,490 11,174 4,092 23,155 26,409 30,258 12,287
Operating expenses
Selling and marketing expenses......... 1,263 3,904 1,571 6,685 10,028 12,784 6,129
General and administrative expenses.... 1,016 3,234 1,473 10,073 10,834 10,683 4,748
Bonuses to S Corporation
stockholders......................... 878 1,256 -- -- -- -- --
--------- --------- ------ --------- --------- --------- ---------
Total operating expenses............... 3,157 8,394 3,044 16,758 20,862 23,467 10,877
--------- --------- ------ --------- --------- --------- ---------
Operating income......................... 1,333 2,780 1,048 6,397 5,547 6,791 1,410
Interest expense......................... -- (163) (389) (870) (1,447) (2,348) (1,080)
Gain on sale and leaseback............... -- -- (53) -- -- -- --
Foreign exchange losses.................. -- -- -- -- (42) (31) (62)
--------- --------- ------ --------- --------- --------- ---------
Income before income taxes............... 1,333 2,617 606 5,527 4,058 4,412 268
Provision for income taxes............... 37 109 75 1,513 1,603 1,768 105
--------- --------- ------ --------- --------- --------- ---------
Income from continuing operations before
extraordinary loss...................... 1,296 2,508 531 4,014 2,455 2,644 163
Discontinued operations.................. -- -- (30) (53) (3,128) (13,630) (13,630)
Extraordinary loss....................... -- -- -- (172) -- -- --
--------- --------- ------ --------- --------- --------- ---------
Net income (loss)........................ $ 1,296 $ 2,508 $ 501 $ 3,789 $ (673) $ (10,986) $ (13,467)
--------- --------- ------ --------- --------- --------- ---------
--------- --------- ------ --------- --------- --------- ---------
Income from continuing operations before
extraordinary loss per share............ $ 0.42 $ 0.25 $ 0.26 $ 0.02
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share (2).......... $ 0.40 $ (0.07) $ (1.09) $ (1.36)
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma income from continuing
operations before extraordinary loss
(3)..................................... $ 2,302 $ 312
--------- ------
--------- ------
Pro forma income from continuing
operations before extraordinary loss per
share (3)............................... $ 0.28 $ 0.04
--------- ------
--------- ------
Shares used in per share calculation
(2)..................................... 8,183 8,464 9,481 9,875 10,076 9,867
--------- --------- ------ --------- --------- --------- ---------
--------- --------- ------ --------- --------- --------- ---------
Pro forma supplemental income from
continuing operations before
extraordinary loss per share (4)........ $ 0.31 $ 0.04
--------- ---------
--------- ---------
SELECTED OPERATING DATA:
Number of Thomas Kinkade Stores (5)...... -- 5 7 8 14 15 14
Retail sales per square foot (5)(6)...... -- -- -- $ 804 $ 1,001 $ 1,133 $ 489
Number of Signature Galleries............ -- -- -- -- -- 17 10
<CAPTION>
1997
---------
<S> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
(1)
Net sales................................ $ 30,413
Cost of sales............................ 9,892
---------
Gross profit............................. 20,521
Operating expenses
Selling and marketing expenses......... 7,766
General and administrative expenses.... 5,914
Bonuses to S Corporation
stockholders......................... --
---------
Total operating expenses............... 13,680
---------
Operating income......................... 6,841
Interest expense......................... (1,163)
Gain on sale and leaseback............... 997
Foreign exchange losses.................. (16)
---------
Income before income taxes............... 6,659
Provision for income taxes............... 2,455
---------
Income from continuing operations before
extraordinary loss...................... 4,204
Discontinued operations.................. --
Extraordinary loss....................... --
---------
Net income (loss)........................ $ 4,204
---------
---------
Income from continuing operations before
extraordinary loss per share............ $ 0.37
---------
---------
Net income (loss) per share (2).......... $ 0.37
---------
---------
Pro forma income from continuing
operations before extraordinary loss
(3).....................................
Pro forma income from continuing
operations before extraordinary loss per
share (3)...............................
Shares used in per share calculation
(2)..................................... 11,296
---------
---------
Pro forma supplemental income from
continuing operations before
extraordinary loss per share (4)........ $ 0.40
---------
---------
SELECTED OPERATING DATA:
Number of Thomas Kinkade Stores (5)...... 18
Retail sales per square foot (5)(6)...... $ 708
Number of Signature Galleries............ 45
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- ------------------------------------------
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA: (1)
Cash and cash equivalents... $ 539 $ 801 $ 847 $ 1,552 $ 382 $ 374
Working capital (7)......... 1,417 4,442 (2,229) 4,239 3,891 6,982
Total assets................ 2,315 12,871 18,764 31,271 36,658 23,061
Long-term debt less current
portion.................... -- 5,216 3,326 3,166 9,610 5,809
Total stockholders'
equity..................... 1,442 3,998 2,562 18,033 15,578 5,890
<CAPTION>
SEPTEMBER 30,
1997
---------------
<S> <C>
CONSOLIDATED BALANCE SHEET
DATA: (1)
Cash and cash equivalents... $ 5,180
Working capital (7)......... 10,135
Total assets................ 27,176
Long-term debt less current
portion.................... 4,169
Total stockholders'
equity..................... 10,109
</TABLE>
- ------------------------------
(1) Restated to reflect (i) discontinuance of John Hine Limited during the year
ended March 31, 1997; and (ii) an acquisition of six galleries during the
year ended March 31, 1996 which has been accounted for as a pooling of
interests. See Notes 2 and 3 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing net earnings per share.
(3) Pro Forma Statement of Income Data reflects the historical statement of
income data for the year ended December 31, 1993 and the three months ended
March 31, 1994 as if (i) certain subsidiaries of the Company had ceased to
be treated as S Corporations for income tax purposes on January 1, 1993;
and (ii) the Company had paid principal stockholders distributions in the
form of annual executive compensation aggregating no more than $720,000. On
April 1, 1994, the Company changed its fiscal year end from December 31 to
March 31.
(4) The supplemental pro forma income from continuing operations per share is
based on income from continuing operations, increased to give effect to the
reduction of interest expense, assuming a portion of the net proceeds from
the offering were used to repay notes payable aggregating $5.4 million on
April 1, 1996, and the number of shares used in the calculation of income
from continuing operations per share, increased by the estimated number of
shares required to be sold by the Company to repay such notes payable.
(5) In fiscal 1996, the Company acquired six galleries which are included in
the number of Thomas Kinkade Stores commencing with the fiscal year ended
March 31, 1996. Since these galleries were acquired in transactions
accounted for as a pooling of interests, the operating results of these
galleries are included in the Company's Consolidated Statement of Income in
all prior periods.
(6) Includes sales by Thomas Kinkade Stores open for 12 or more months.
(7) Excludes net assets of discontinued operations.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED CONSOLIDATED FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE
SET FORTH IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. SEE "CAUTIONARY
LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS."
OVERVIEW
The Company was founded in 1990 primarily to manufacture, market and
distribute paper lithographs of Thomas Kinkade's artwork. The Company's net
sales have grown rapidly as a result of growing consumer awareness and
acceptance of Thomas Kinkade's paintings, the Company's penetration of the gifts
and collectibles retail distribution channels and the introduction of the framed
canvas lithograph. In 1993, the Company acquired John Hine Limited, a producer
of miniature collectible English cottages and figurines. In September 1996, as a
result of declining sales, the Company decided to discontinue the operations of
John Hine Limited and focus on further development of the Thomas Kinkade product
line. As a result, in the quarter ended September 30, 1996, the Company incurred
a loss from discontinuance totaling $12.2 million.
The Company has continued to expand its Thomas Kinkade product line to
include home decorative accessories, collectibles and gift products featuring
the art of Thomas Kinkade. The Company's principal products currently include
limited and open edition canvas and paper lithograph reproductions of the art of
Thomas Kinkade. In addition, the Company offers a line of gift and home
accessory products. In the first six months of fiscal 1998, limited edition
canvas and paper lithograph sales accounted for 70.7% of the Company's revenues.
See "Risk Factors--Dependence on Thomas Kinkade; Lack of Product Revenue
Diversification."
Since its inception, the Company has focused on controlled distribution. As
of November 30, 1997, the Company distributed its products through Thomas
Kinkade Stores, independently owned Signature Galleries and other independent
dealers. In 1993, the Company initiated the development of Company-owned Thomas
Kinkade Stores, which exclusively sell Thomas Kinkade products. The Company
currently has 18 Thomas Kinkade Stores located in California, Hawaii, Minnesota,
Missouri and Illinois, and currently plans to open two additional Thomas Kinkade
Stores in fiscal 1998 and approximately 10 stores in fiscal 1999 in strategic
mall locations, downtown shopping areas and high tourist traffic areas. Thomas
Kinkade Stores generally range in size from 1,000 square feet to 2,200 square
feet. Build-out expenses are anticipated generally to range from approximately
$75,000 to $150,000 per store. In addition, pre-opening costs are anticipated
generally to range from $50,000 to $75,000 per store. It is the Company's policy
to expense pre-opening costs as they are incurred. As a result, quarterly
operating results may fluctuate as a result of the number of Thomas Kinkade
Stores opened during a given quarter. In the first six months of fiscal 1998,
Thomas Kinkade Stores accounted for 32.1% of the Company's net sales, compared
to 33.1% in fiscal 1997. There can be no assurance that the Company will be able
to open its planned Thomas Kinkade Stores or that such stores will operate on a
profitable basis. See "Risk Factors--Risks Associated With Expansion."
In 1996, in an effort to accelerate expansion of distribution, the Company
initiated its Thomas Kinkade Signature Gallery program. These independently
owned and operated Signature Galleries are modeled on Thomas Kinkade Stores and
exclusively sell Thomas Kinkade products. As of November 30, 1997, there were 60
Signature Galleries. The Company currently plans to add 12 additional Signature
Galleries, including through the conversion of existing independent dealers,
through the end of fiscal 1998 and approximately 100 through fiscal 1999. Since
Signature Galleries are independently owned, the Company does not incur any
build-out expense in connection with their opening. Signature Galleries are
required to make an initial advance purchase of between $25,000 and $75,000, as
well as annual minimum purchases of $100,000 per location. In the first six
months of fiscal 1998, sales to Signature Galleries accounted for 18.2% of the
Company's net sales, compared to
14
<PAGE>
5.0% in fiscal 1997. There can be no assurance that the Company will be able to
identify suitable owners for its planned Signature Galleries expansion or that
such owners will become effective distributors for the Company's products. See
"Risk Factors--Risks Associated With Expansion."
The Company also markets its products through approximately 2,200
independent dealers organized into various incentive and commitment levels and
through QVC, a cable television shopping network. Additionally, the Company has
established key strategic alliances with major retailers such as Avon and
Hallmark to expand brand recognition and generate revenues.
The Company's cost of sales consists primarily of raw material and component
costs, manufacturing and supervisory labor, manufacturing overhead costs and
royalties. Although the Company may realize economies of scale as unit volumes
increase, cost of sales may increase as a percentage of net sales as the Company
expands its open edition products, which historically have had lower gross
margins than limited edition products.
Selling and marketing expenses consist primarily of salaries and
commissions, as well as advertising and promotional expenses. General and
administrative expenses consist primarily of salaries and bonuses, rent and
professional services such as legal and accounting fees. The Company expects
that efforts to expand distribution will result in increased selling and
marketing and general and administrative expenses. See "Risk Factors--
Fluctuations in Operating Results."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Company's statement of operations to net
sales (restated to reflect the discontinuance of John Hine Limited):
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------------------------------------
SIX MONTHS ENDED
FISCAL YEAR ENDED
MARCH 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales......................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................................... 30.8 33.6 35.6 38.7 32.5
--------- --------- --------- --------- ---------
Gross margin...................................................... 69.2 66.4 64.4 61.3 67.5
Operating expenses:
Selling and marketing expenses.................................. 20.0 25.2 27.2 30.6 25.5
General and administrative expenses............................. 30.1 27.3 22.7 23.7 19.4
--------- --------- --------- --------- ---------
Total operating expenses...................................... 50.1 52.5 49.9 54.3 44.9
--------- --------- --------- --------- ---------
Operating income.................................................. 19.1 13.9 14.5 7.0 22.6
Interest expense.................................................. (2.6) (3.6) (5.0) (5.4) (3.8)
Gain on sale and leaseback........................................ -- -- -- -- 3.3
Foreign exchange losses........................................... -- (0.1) (0.1) (0.3) (0.1)
--------- --------- --------- --------- ---------
Income before income taxes........................................ 16.5 10.2 9.4 1.3 22.0
Provision for income taxes........................................ 4.5 4.0 3.8 0.5 8.1
--------- --------- --------- --------- ---------
Income from continuing operations before extraordinary loss....... 12.0 6.2 5.6 0.8 13.9
Discontinued operations........................................... (0.2) (7.9) (29.0) (68.0) --
Extraordinary loss................................................ (0.5) -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss)................................................. 11.3% (1.7)% (23.4)% (67.2)% 13.9%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
15
<PAGE>
COMPARISON OF SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
NET SALES. Net sales increased 51.8% from $20.0 million in the first six
months of fiscal 1997 to $30.4 million in the first six months of fiscal 1998.
Net sales to wholesale customers increased 54.9% from $13.3 million in the first
six months of fiscal 1997 to $20.6 million in the first six months of fiscal
1998. Net sales to wholesale accounts include sales to Signature Galleries,
sales to other independent dealers, sales to QVC and revenue generated from
licensing arrangements. The increase in wholesale sales was a result of an
increase in the number of Signature Galleries, an increase in the number of
other independent dealers and an increase in sales to existing accounts. Retail
sales through Thomas Kinkade Stores increased 45.5% from $6.7 million in the
first six months of fiscal 1997 to $9.8 million in the first six months of 1998.
The increase in retail sales was due to an increase in the number of units sold
as well as a result of a shift in the retail product mix towards higher priced
editions and the opening of two retail stores during the first six months of
fiscal 1998.
GROSS MARGIN. Gross margin increased from 61.3% in the first six months of
fiscal 1997 to 67.5% for the first six months of fiscal 1998 primarily due to
efficiencies resulting from increased sales volumes, as well as improved
management of labor and manufacturing processes resulting from the hiring of
more experienced management. Gross margin also improved as a result of the
outsourcing of the manufacturing of certain open edition products.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
26.7% from $6.1 million in the first six months of fiscal 1997 to $7.8 million
in the first six months of fiscal 1998 but decreased as a percentage of net
sales from 30.6% in the first six months of fiscal 1997 to 25.5% in the first
six months of fiscal 1998. The increase in absolute selling and marketing
expenses was due primarily to higher compensation costs associated with higher
sales levels. The decrease of selling and marketing expenses as a percentage of
net sales was due primarily to the fact that a significant portion of the
compensation of the Company's sales force is fixed and, as a result, selling and
marketing expenses increased at a slower rate than net sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 24.6% from $4.7 million in the first six months of fiscal 1997 to $5.9
million in the first six months of fiscal 1998, but decreased as a percentage of
net sales from 23.7% in the first six months of fiscal 1997 to 19.4% in the
first six months of fiscal 1998. The decrease in general and administrative
expenses as a percentage of net sales was due to the leveraging of relatively
fixed general and administrative expenses over a higher sales base. This
decrease was offset primarily by payments under incentive compensation plans as
a result of higher levels of profitability, increased headcount and other costs
related to expansion.
INTEREST EXPENSE. Interest expense increased from $1.1 million in the first
six months of fiscal 1997 to $1.2 million in the first six months of fiscal
1998. This increase was due to an increase in non-cash amortization of debt
issuance costs resulting from the refinancing of the Company's long-term debt in
February 1997, offset by a reduction in the Company's borrowings under lines of
credit.
SALE AND LEASEBACK. In July 1997, the Company exercised an option to
purchase its leased San Jose, California facility. The Company subsequently sold
the facility and entered into a four year lease agreement with the purchaser.
The gain on the sale and leaseback of the facility, after transaction costs of
$110,000 and deferral of $650,000 to offset future rent increases as compared to
the previous lease, aggregated $997,000.
PROVISION FOR INCOME TAXES. The provision for income taxes as a percentage
of income before income taxes decreased from 39.2% in the first six months of
fiscal 1997 to 36.9% in the first six months of fiscal 1998.
COMPARISON OF YEARS ENDED MARCH 31, 1996 AND 1997
NET SALES. Net sales increased 18.3% from $39.8 million in fiscal 1996 to
$47.0 million in fiscal 1997. Net sales to wholesale customers increased 20.9%
from $26.0 million in fiscal 1996 to $31.5 million in fiscal 1997. The increase
in wholesale sales was a result of the addition of new Signature Galleries, an
increase in the number of other wholesale accounts, as well as increased sales
to existing wholesale accounts. Retail sales
16
<PAGE>
through Thomas Kinkade Stores increased 13.2% from $13.7 million in fiscal 1996
to $15.5 million in fiscal 1997. The increase in retail sales was due to an
increase in the number of units sold as well as to an increase in product prices
during fiscal 1997.
GROSS MARGIN. Gross margin declined from 66.4% in fiscal 1996 to 64.4% in
fiscal 1997 as a result of the introduction of lower priced, lower margin open
edition products as part of the Company's strategy to expand the range of prices
of available products and leverage its library of Thomas Kinkade images. Gross
margin in fiscal 1997 was also adversely affected by a temporary loss of
efficiency during the consolidation of the Company's administrative functions
with the manufacturing facility in San Jose. These additional costs were partly
offset by efficiencies gained from increased sales volumes.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
27.5% from $10.0 million in fiscal 1996 to $12.8 million in fiscal 1997 and
increased as a percentage of net sales from 25.2% in fiscal 1996 to 27.2% in
fiscal 1997. The increase in selling and marketing expenses in fiscal 1997 was
due to higher compensation costs associated with the Company's efforts to expand
sales volumes through an increase in the number of customers as well as through
new channels of distribution. In addition, the Company experienced
inefficiencies when it reduced its in-house sales force subsequent to the
discontinuance of John Hine Limited in September 1996. During fiscal 1997, the
Company also incurred additional marketing costs as part of the development of
the Signature Gallery program.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased from $10.8 million in fiscal 1996 to $10.7 million in fiscal 1997 and
decreased as a percentage of net sales from 27.3% in fiscal 1996 to 22.7% in
fiscal 1997. The decrease in general and administrative expenses was a result of
various cost cutting programs, such as the consolidation of the Company's
administrative operations in San Jose in fiscal 1997, partially offset by
increased costs due to the Company's expanding level of activity. Fiscal 1996
expenses also included approximately $450,000 of charges related to a reduction
in headcount.
INTEREST EXPENSE. Interest expense increased from $1.4 million in fiscal
1996 to $2.3 million in fiscal 1997 due to higher interest rates on the
Company's long-term debt due to covenant defaults, as well as to an increase in
the amount of amortization of debt discount.
PROVISION FOR INCOME TAXES. The provision for income taxes as a percentage
of income before income taxes was 39.5% in fiscal 1996 and 40.1% in fiscal 1997.
DISCONTINUED OPERATIONS. In September 1996, the Company decided to
discontinue the operations of John Hine Limited and recorded a loss of $12.2
million, including a tax benefit of $2.4 million and a write-off of intangible
assets with a net book value of $8.4 million.
COMPARISON OF YEARS ENDED MARCH 31, 1995 AND 1996
NET SALES. Net sales increased 18.7% from $33.5 million in fiscal year 1995
to $39.8 in fiscal 1996. Net sales to wholesale customers increased 7.6% from
$24.2 million in fiscal year 1995 to $26.0 million in fiscal year 1996 due to an
increase in the number of units sold and an increase in product prices in fiscal
1996. Unit volume increased in fiscal 1996 as a result of an increase in the
edition size of limited edition releases. Retail sales through Thomas Kinkade
Stores increased 47.7% from $9.3 million in fiscal 1995 to $13.7 million in
fiscal 1996 due to increased sales productivity as retail stores matured.
GROSS MARGIN. Gross margin declined from 69.2% in fiscal 1995 to 66.4% in
fiscal 1996 due to inefficient manufacturing labor practices, a temporary loss
of efficiency during the consolidation of the Company's manufacturing operations
into one facility in fiscal 1996, as well as increased overhead costs resulting
from investments in manufacturing infrastructure. These factors were partly
offset by increased sales volumes.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
50.0% from $6.7 million in fiscal 1995 to $10.0 million in fiscal 1996 and
increased as a percentage of net sales from 20.0% in fiscal 1995 to
17
<PAGE>
25.2% in fiscal 1996. This increase was due to the expansion of the Company's
sales and marketing staff, including recruiting and training expenses associated
with a change from the use of independent sales representatives to an
exclusively in-house sales force as well as higher promotional costs associated
with the Company's efforts to expand its product range. Selling and marketing
expense also increased due to the recognition of approximately $340,000 of
commission expense during the phase-out of the independent sales force in
addition to the relatively fixed salary costs of the new in-house sales force.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 7.6% from $10.1 million in fiscal 1995 to $10.8 million in fiscal
1996, due primarily to severance costs related to a reduction in head count, but
decreased as a percentage of net sales from 30.1% in fiscal 1995 to 27.3% in
fiscal 1996 due to an increase in net sales.
INTEREST EXPENSE. Interest expense increased from $870,000 in fiscal 1995
to $1.4 million in fiscal 1996. The increase in interest expense in fiscal 1996
was due to an increase in the amount and interest rate of the Company's
long-term debt which was used in part to retire shorter term debt that had a
lower interest rate.
PROVISION FOR INCOME TAXES. The provision for income taxes as a percentage
of income before income taxes increased from 27.4% in fiscal 1995 to 39.5% in
fiscal 1996. The lower income tax rate for fiscal 1995 was attributable to the
recognition of a nonrecurring deferred tax benefit of $638,000 when the Company
acquired certain of its subsidiaries which then ceased to be treated as S
corporations. The effective income tax rate for fiscal 1995, excluding the
deferred tax benefit, would have been 38.0%.
EXTRAORDINARY ITEM. In August 1994, the Company recorded a write-off of
deferred debt discount of $172,000 (net of deferred income tax benefit of
$96,000) as an extraordinary item on the repayment of John Hine Limited
acquisition-related debt using proceeds from the Company's initial public
offering.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The Company's business has experienced, and is expected to continue to
experience, significant seasonal fluctuations in sales and net income. The
Company's net sales generally are highest in the September and December quarters
and historically have been lower in the March and June quarters. Management
believes that the seasonal effect is due primarily to customer buying patterns,
particularly in holiday purchases, and is typical of the home decorative
accessories, collectibles and gift products industries. The Company expects
these seasonal trends to continue in the foreseeable future; therefore,
quarterly results are not necessarily indicative of results for an entire year
and will fluctuate significantly from quarter to quarter. See "Risk
Factors--Seasonality."
The following table sets forth certain unaudited statement of operations
data for the eight quarters ended September 30, 1997 (restated to reflect the
discontinuance of John Hine Limited), as well as such data expressed as a
percentage of the Company's total net sales for the periods indicated. This data
has been derived from unaudited financial statements that, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such information when read in
conjunction with the Company's annual audited consolidated statements and notes
thereto.
18
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1996 1996 1996 1996 1997 1997
--------- ----------- ----------- --------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.............................. $ 12,189 $ 10,397 $ 8,718 $ 11,323 $ 15,471 $ 11,506 $ 13,189
Cost of sales.......................... 3,941 3,525 3,697 4,057 5,228 3,778 4,208
--------- ----------- ----------- --------- --------- ----------- ---------
Gross profit........................... 8,248 6,872 5,021 7,266 10,243 7,728 8,981
Operating expenses
Selling and marketing expenses....... 2,619 3,131 3,098 3,031 3,502 3,153 3,342
General and administrative expenses.. 2,705 2,217 2,274 2,474 2,833 3,102 2,794
--------- ----------- ----------- --------- --------- ----------- ---------
Total operating expenses........... 5,324 5,348 5,372 5,505 6,335 6,255 6,136
--------- ----------- ----------- --------- --------- ----------- ---------
Operating income (loss)................ 2,924 1,524 (351) 1,761 3,908 1,473 2,845
Interest expense (loss)................ (393) (601) (516) (564) (669) (599) (688)
Gain on sale and leaseback............. -- -- -- -- -- -- --
Foreign exchange gains (losses)........ (180) 120 (62) -- (146) 177 (61)
--------- ----------- ----------- --------- --------- ----------- ---------
Income (loss) before income taxes...... 2,351 1,043 (929) 1,197 3,093 1,051 2,096
Provision for income taxes............. 929 412 (365) 470 1,289 374 765
--------- ----------- ----------- --------- --------- ----------- ---------
Income (loss) from continuing
operations before extraordinary
loss................................. 1,422 631 (564) 727 1,804 677 1,331
Discontinued operations................ (740) (1,226) (791) (12,839) -- -- --
--------- ----------- ----------- --------- --------- ----------- ---------
Net income (loss)...................... $ 682 $ (595) $ (1,355) $ (12,112) $ 1,804 $ 677 $ 1,331
--------- ----------- ----------- --------- --------- ----------- ---------
--------- ----------- ----------- --------- --------- ----------- ---------
Income (loss) from continuing
operations before extraordinary loss
per share............................ $ 0.14 $ 0.06 $ (0.06) $ 0.07 $ 0.18 $ 0.06 $ 0.12
--------- ----------- ----------- --------- --------- ----------- ---------
--------- ----------- ----------- --------- --------- ----------- ---------
Net income (loss) per share............ $ 0.07 $ (0.06) $ (0.14) $ (1.23) $ 0.18 $ 0.06 $ 0.12
--------- ----------- ----------- --------- --------- ----------- ---------
--------- ----------- ----------- --------- --------- ----------- ---------
Shares used in computation of net
income per share..................... 9,909 9,869 9,867 9,867 9,932 10,638 11,294
--------- ----------- ----------- --------- --------- ----------- ---------
--------- ----------- ----------- --------- --------- ----------- ---------
<CAPTION>
SEPT. 30,
1997
-----------
<S> <C>
Net sales.............................. $ 17,224
Cost of sales.......................... 5,684
-----------
Gross profit........................... 11,540
Operating expenses
Selling and marketing expenses....... 4,424
General and administrative expenses.. 3,120
-----------
Total operating expenses........... 7,544
-----------
Operating income (loss)................ 3,996
Interest expense (loss)................ (475)
Gain on sale and leaseback............. 997
Foreign exchange gains (losses)........ 45
-----------
Income (loss) before income taxes...... 4,563
Provision for income taxes............. 1,690
-----------
Income (loss) from continuing
operations before extraordinary
loss................................. 2,873
Discontinued operations................ --
-----------
Net income (loss)...................... $ 2,873
-----------
-----------
Income (loss) from continuing
operations before extraordinary loss
per share............................ $ 0.25
-----------
-----------
Net income (loss) per share............ $ 0.25
-----------
-----------
Shares used in computation of net
income per share..................... 11,298
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................... 32.3 33.9 42.4 35.8 33.8 32.8 31.9
--------- ----------- ----------- --------- --------- ----------- ---------
Gross margin........................... 67.7 66.1 57.6 64.2 66.2 67.2 68.1
Operating expenses
Selling and marketing expense........ 21.5 30.1 35.5 26.8 22.6 27.4 25.3
General and administrative expense... 22.2 21.3 26.1 21.8 18.3 27.0 21.2
--------- ----------- ----------- --------- --------- ----------- ---------
Total operating expenses........... 43.7 51.4 61.6 48.6 40.9 54.4 46.5
--------- ----------- ----------- --------- --------- ----------- ---------
Operating income (loss)................ 24.0 14.7 (4.0) 15.6 25.3 12.8 21.6
Interest expense (loss)................ (3.2) (5.8) (5.9) (5.0) (4.3) (5.2) (5.2)
Gain on sale and leaseback............. -- -- -- -- -- -- --
Foreign exchange gains (losses)........ (1.5) 1.2 (0.7) -- (0.9) 1.5 (0.5)
--------- ----------- ----------- --------- --------- ----------- ---------
Income (loss) before income taxes...... 19.3 10.1 (10.6) 10.6 20.1 9.1 15.9
Provision for income taxes............. 7.6 4.0 (4.2) 4.2 8.3 3.3 5.8
--------- ----------- ----------- --------- --------- ----------- ---------
Income (loss) from continuing
operations before extraordinary
loss................................. 11.7 6.1 (6.4) 6.4 11.8 5.8 10.1
Discontinued operations................ (6.1) (11.8) (9.1) (113.4) -- -- --
--------- ----------- ----------- --------- --------- ----------- ---------
Net income (loss)...................... 5.6% (5.7)% (15.5)% (107.0)% 11.8% 5.8% 10.1%
--------- ----------- ----------- --------- --------- ----------- ---------
--------- ----------- ----------- --------- --------- ----------- ---------
<CAPTION>
<S> <C>
Net sales.............................. 100.0%
Cost of sales.......................... 33.0
---------
Gross margin........................... 67.0
Operating expenses
Selling and marketing expense........ 25.7
General and administrative expense... 18.1
---------
Total operating expenses........... 43.8
---------
Operating income (loss)................ 23.2
Interest expense (loss)................ (2.8)
Gain on sale and leaseback............. 5.8
Foreign exchange gains (losses)........ 0.3
---------
Income (loss) before income taxes...... 26.5
Provision for income taxes............. 9.8
---------
Income (loss) from continuing
operations before extraordinary
loss................................. 16.7
Discontinued operations................ --
---------
Net income (loss)...................... 16.7%
---------
---------
</TABLE>
Net sales during the quarter ended March 31, 1996 included the shipment of a
number of orders which the Company had originally scheduled for the following
quarter. In addition, the Company accelerated the production of some
higher-priced products during that quarter. This resulted in lower sales for the
June 1996 quarter as the Company had shipped most of its backlog in the previous
quarter. As a result, cost of sales, selling and
19
<PAGE>
marketing expenses and general and administrative expenses all increased
significantly as a percentage of sales as compared to other quarters.
The Company discontinued the operations of John Hine Limited during the
quarter ended September 30, 1996, resulting in an after-tax loss of $12.2
million in addition to net losses of discontinued operations of $594,000 for
that quarter.
The Company's quarterly operating results have fluctuated significantly in
the past and may continue to fluctuate as a result of numerous factors,
including demand for the art of Thomas Kinkade and the Company's Thomas Kinkade
products (including new product categories and series), the Company's ability to
achieve its expansion plans, the timing, mix and number of new product releases,
the timing of the opening of new Thomas Kinkade Stores and the expensing of the
associated pre-opening costs, the successful implementation of the Signature
Gallery program and expansion of distribution generally, the Company's ability
to implement strategic business alliances, the Company's ability to hire and
train new manufacturing, sales and administrative personnel, continued
implementation of manufacturing efficiencies, timing of product deliveries and
the incurrence of other operating costs. In addition, since a significant
portion of the Company's net sales are generated from orders received in the
quarter, net sales in any quarter are substantially dependent on orders booked
in that quarter. The Company's results of operations may also fluctuate based on
extraordinary events. For example, the Company's net income fluctuated
significantly as a result of the Company's acquisition and subsequent
discontinuance of the operations of John Hine Limited. As a result of the
expected repayment of the outstanding subordinated debt due to Levine Leichtman
of $5.4 million using the net proceeds of this offering, the Company will record
an extraordinary expense in relation to the write-off of deferred debt discount
associated with that debt. Deferred debt discount aggregated $2.4 million as of
September 30, 1997. Accordingly, the results of operations in any quarter will
not necessarily be indicative of the results that may be achieved for a full
fiscal year or any future quarter. In addition, since a significant portion of
the Company's revenues are generated from orders received in the quarter, sales
in any quarter are substantially dependent on orders booked in that quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds have been from the issuance of stock,
incurrence of debt and more recently, from its operations. The Company had
working capital of $10.1 million at the end of September 1997 compared to $7.9
million at the end of March 1997.
Net cash provided by operations for the six months ended September 30, 1997
was $10.7 million consisting of $9.8 million provided by continuing operations
and $890,000 provided by discontinued operations. Net cash provided by
continuing operations consisted primarily of income from continuing operations
adjusted by an increase in income taxes payable, receipt of an income tax refund
and increases in other accrued expenses and compensation costs. Net cash
provided by operations for the six months ended September 30, 1996 was $562,000
consisting of $1.3 million provided by continuing operations which was partly
offset by $761,000 used in discontinued operations. Net cash provided by
continuing operations consisted primarily of income from continuing operations
adjusted by an increase in accounts receivable and a decrease in accounts
payable. Net cash provided by operations for fiscal 1997 was $3.2 million
consisting of $785,000 provided by continuing operations and $2.4 million
provided by discontinued operations. Net cash provided by continuing operations
consisted primarily of income from continuing operations and adjusted by
increases in accounts receivable partly offset by increases in prepaid expenses
and income tax assets. Net cash used in operations for fiscal 1996 was $6.9
million consisting of $388,000 used in operations and $6.5 million used in
discontinued operations. Net cash used in continuing operations consisted
primarily of adjustments for increases in accounts receivable and payments to
related parties which were offset in part by income from continuing operations.
Net cash used in investing activities was $841,000 and $271,000 for the six
months ended September 30, 1997 and 1996, respectively, and was $719,000 and
$364,000 in fiscal 1997 and 1996, respectively. The Company's investing
activities have primarily related to capital expenditures for property and
equipment. The Company anticipates that total capital expenditures in fiscal
1998 will be approximately $3.0 million, and will
20
<PAGE>
relate to continued manufacturing and infrastructure investments as well as to
the opening of new retail locations and upgrades to management information
systems.
Net cash used in financing activities was $5.0 million and $673,000 in the
six months September 30, 1997 and 1996, respectively and $2.5 million in fiscal
1997. Net cash provided by financing activities was $6.1 million in fiscal 1996.
Cash used in financing activities has been primarily for the repayment of
borrowings under credit lines and notes payable, while cash provided by
financing activities has been primarily from the issuance of $5.4 million in
subordinated notes and and borrowings of $1.8 million in credit lines.
The Company has a $10.0 million secured line-of-credit facility with CIT
Group/Business Credit, Inc. (the "Senior Debt"). Borrowing capacity under the
Senior Debt is based on eligible accounts receivable and inventory and
aggregated $8.2 million as of September 30, 1997. The Company's indebtedness
under bank lines of credit was $2.7 million as of March 31, 1997. As of
September 30, 1997, the Company had fully repaid its outstanding borrowings
under the Senior Debt and had cash on hand of $5.2 million. In February 1997,
the Company renegotiated and issued a $7.4 million secured note payable to
Levine Leichtman (the "Subordinated Debt"), $2.0 million of which was repaid as
of July 31, 1997. The Company expects to use a portion of the proceeds from this
Offering to repay the remaining outstanding Subordinated Debt of $5.4 million,
which will result in a write-off of deferred debt discount associated with that
debt as an extraordinary expense in the quarter in which it is repaid. Deferred
debt discount aggregated $2.4 million as of September 30, 1997. As of November
30, 1997, the Company had repaid $1.6 million of debt to a former shareholder of
John Hine Limited.
The Company's working capital requirements in the foreseeable future will
change depending on the rate of the Company's expansion, the Company's operating
results and any other adjustments in its operating plan as needed in response to
competition, acquisition opportunities or unexpected events. The Company
believes that existing borrowing capacity under lines of credit, together with
the proceeds from the offering and revenues from operations, will be sufficient
to meet the Company's working capital requirements through fiscal 1999. However,
there can be no assurance that the Company will not seek additional capital in
the future as a result of expansion or otherwise.
INFLATION
The Company does not believe that inflation has had a material adverse
effect on net sales or results of operations. However, there can be no assurance
that the Company's business will not be affected by inflation in the future.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to Consolidated Financial Statements for a discussion of
the impact of new accounting pronouncements.
21
<PAGE>
BUSINESS
OVERVIEW
Media Arts is a leading designer, manufacturer, marketer and branded
retailer of art-based home decorative accessories, collectibles and gift
products based upon the works of the artist Thomas Kinkade, Painter of Light.
The Company's primary products are canvas and paper lithographs that feature Mr.
Kinkade's unique use of light and his peaceful and inspiring themes. The Company
believes the Thomas Kinkade lifestyle brand appeals to a wide range of consumers
because its message celebrates home, family, nature and traditions and its
products help to create positive environments in which to live and work. The
Company strives to reach a broad consumer base by offering products at a variety
of price points, controlling its distribution through its branded Company-owned
retail stores ("Thomas Kinkade Stores") and independently owned and operated
Thomas Kinkade Signature Galleries ("Signature Galleries") and developing
strategic marketing relationships with companies such as Hallmark, Avon and QVC.
The Company's products generally sell at retail price points ranging from $50
for small gift prints to between $150 and $15,000 for paper and canvas
lithographs. The Company distributes Thomas Kinkade products through an
extensive distribution network which as of November 30, 1997 included 18 Thomas
Kinkade Stores, 60 Signature Galleries and approximately 2,200 other independent
gift and collectible retailers and through strategic relationships with
companies such as Hallmark, Avon and QVC. The Company believes that this broad
distribution network has allowed it to develop Thomas Kinkade into a leading
art-based brand.
INDUSTRY OVERVIEW
The home decorative accessories and collectibles market is a multi-billion
dollar industry which includes products such as artwork, vases, trays, mugs,
picture frames and ornaments sold by specialty stores, art and gift galleries,
department stores and catalog retailers. This market is expected to grow 33%
from $6.9 billion in 1996 to $9.2 billion by the year 2001, according to a
January 1997 report on the U.S. giftware market (the "Report") by Packaged
Facts, a consumer research organization. According to the Report, key drivers of
this growth include an increase in the homeowner population and an accompanying
trend towards enhancing the home environment, or "nesting." According to the
U.S. Census Bureau, the population of homeowners ages 35-64 is expected to grow
from 55.4 million in 1997 to more than 60.5 million by the year 2001. Typically,
homeowners have a greater sense of permanency and are more interested in
purchasing household goods and decorating than those who view their living
arrangements as temporary. The Report also notes that collectibles, which
generally focus on positive themes with sentimental appeal, are growing in
popularity both as an investment and as a way of creating a warm living
environment. According to the Report, consumers tend to purchase decorative
accessories, collectibles, and other giftware from specialty stores where they
can rely on superior customer service and focused product knowledge. The Report
states that in 1997, specialty stores accounted for approximately 65% of retail
sales for the overall giftware market, with department stores and mass merchants
accounting for only 13% of such sales. The Company believes that the increased
demand for decorative and collectible products and the preference of consumers
to purchase giftware through specialty retail stores present a significant
business opportunity.
BUSINESS STRATEGY
The Company's goal is to develop Thomas Kinkade into a leading art-based
brand with widespread consumer appeal. To achieve this goal, the Company has
adopted the following strategy:
PROVIDE A WIDE ARRAY OF BRANDED ART-BASED HOME ACCESSORIES. The Company
seeks to increase awareness of the Thomas Kinkade brand and lifestyle message by
creating products that appeal to a broad range of consumers. The Company's
Thomas Kinkade images are released first in its higher margin limited edition
lithographs and are the foundation of its product lines. By leveraging these new
images and its existing library of over 160 Thomas Kinkade images into a wide
array of art-based home accessories with accessible price points, the Company
hopes to reach a broad consumer base and to build brand awareness.
22
<PAGE>
EXPAND CONTROLLED DISTRIBUTION THROUGH DEDICATED STORES AND GALLERIES. The
Company seeks to enhance the Thomas Kinkade brand by developing its network of
Company-owned Thomas Kinkade Stores and independently owned Signature Galleries,
which exclusively sell Thomas Kinkade products. This controlled distribution
strategy enables the Company to have its products presented in environments
designed to showcase the Thomas Kinkade brand and convey the Thomas Kinkade
lifestyle message. Furthermore, many Thomas Kinkade Store managers and Signature
Gallery owners have completed a sales, marketing and management program at
Thomas Kinkade University, the Company's training facility. In the first six
months of fiscal 1998, sales through Thomas Kinkade Stores and Signature
Galleries accounted for approximately 50% of net sales compared to 40% in fiscal
1997. The Company intends to continue to expand its network of Thomas Kinkade
Stores and Signature Galleries.
EXPAND DEALER NETWORK AND PROMOTE EXISTING DEALERS. The Company seeks to
increase sales and build brand awareness by continuing to expand its dealer
network and promoting existing dealers to higher incentive and commitment
levels. The Company currently distributes its products through approximately
2,200 independent dealers organized into four levels of varying minimum
purchases. As dealers upgrade to higher levels, they receive increasing benefits
such as access to a wider range of the Company's products. In the first six
months of fiscal 1998, the Company added over 500 new independent dealers.
DEVELOP STRATEGIC BUSINESS RELATIONSHIPS TO EXPAND PRODUCT LINES AND
AUDIENCE REACH. The Company intends to continue to develop strategic business
relationships with leading consumer marketing companies in order to build brand
awareness and generate additional sales and to leverage the expertise of these
companies in sales and marketing, manufacturing and distribution. The Company
currently has such strategic business relationships with Hallmark for stationery
items, ornaments and other gift products; Avon for gift products; and QVC for
paper lithographs and other gift products.
PROVIDE HIGH QUALITY PRODUCTS. The Company believes that manufacturing high
quality products is essential to enhancing the Thomas Kinkade brand image. While
the Company expects demand for these products to increase, the Company remains
committed to providing high quality products. Accordingly, the Company plans to
continue to improve quality control, increase capacity and shorten production
time by automating certain of its manufacturing processes.
PRODUCTS
The Company's products include collectible framed canvas and paper
lithographs, books, stationery items and other home accessories and gift
products that feature Mr. Kinkade's unique use of light and his peaceful, warm
and inspiring themes. Mr. Kinkade's subjects often include gardens, cityscapes,
cottages, lighthouses and country villages. The following paragraphs describe
the Company's product categories, product strategy and creative process.
PRODUCT CATEGORIES. The Company's products are categorized generally as
limited editions or open editions. Limited editions are high quality canvas and
paper lithographs produced in limited quantities, each of which is accompanied
by a certificate of authenticity stating the size of the edition. Open editions
are products that may be produced in greater quantities and sold by the Company
indefinitely. In fiscal 1997, limited editions and open editions represented 72%
and 21% of the Company's net sales, respectively.
The limited edition product line currently consists of canvas and paper
lithographs. Canvas lithographs are paper prints transferred to canvas and
hand-highlighted to have the appearance of an original oil painting. The
Company's paper lithographs are high quality lithographs reproduced on acid-free
paper. Both canvas and paper lithographs feature Thomas Kinkade's signature,
applied in DNA-infused ink through a double authentication signing process. The
Company markets its limited edition canvas lithographs in eight sub-editions and
its paper lithographs in seven sub-editions with various edition sizes and
attributes to provide levels of collectibility at multiple price points. When
determining edition sizes, the Company seeks to balance anticipated market
demand and the desire to maintain collectibility.
23
<PAGE>
The Company's open edition products include gift prints, gift products and
home accessories based on popular Thomas Kinkade images. Gift prints are smaller
versions of previously released images, reproduced in a number of formats with
varying sizes and attributes. The Company's current gift and home accessory
products include books, ceramic mugs, mini-prints on easels, magnets, small
framed inspirational prints, decorative tins, gift baskets, photograph frames,
candles and stationery items. The Company plans to introduce new products which
may include craft and activity kits, decorative home accessories and home
textiles. The Company's gift and home accessory products are produced primarily
by third party manufacturers under license agreements with the Company.
PRODUCT STRATEGY. The Company's product strategy focuses on creating high
perceived value by limiting edition sizes and creating collectibility. The
Company's strategy also includes providing a broad range of products at a
variety of price points. The following paragraphs describe the key elements of
this strategy.
- CREATE HIGH PERCEIVED VALUE THROUGH LIMITED EDITIONS. The Company seeks to
create high perceived value by producing its lithographs in numbered
limited editions accompanied by certificates of authenticity.
Historically, secondary market prices for the Company's sold-out editions
have exceeded original offering prices. Although the Company does not
promote the potential economic advantages of purchasing its limited
edition artwork, the Company believes that the existence of this secondary
market is an important consideration for some of its customers.
- CREATE COLLECTIBILITY THROUGH PRODUCT SERIES. The Company seeks to promote
collectibility and successive purchases by consumers by introducing many
of its products in series rather than as single offerings. Most of Mr.
Kinkade's works are marketed as part of a series, such as the series of
cabin and wilderness scenes entitled "End of A Perfect Day." The Company
has found that releasing pieces in series has allowed it to generate
pre-release orders from retailers anticipating collector demand.
- LEVERAGE THOMAS KINKADE IMAGES INTO A BROAD ARRAY OF PRODUCTS. The Company
plans to leverage its library of Thomas Kinkade images, particularly its
most successful limited edition releases, into a wide array of home
accessories and gift products. Through this strategy, the Company seeks to
reach a broad consumer base, to build brand awareness and to increase
demand for Thomas Kinkade products.
- TIERED PRICING. In order to appeal to a broad range of consumers with
varying budgets and address the needs of different retail formats, the
Company offers its products at a variety of price points. Retail prices
for reproductions of Thomas Kinkade wall art range from $50 to $250 for a
small framed gift print, $175 to $300 for an unframed paper lithograph,
$300 to $1,200 for a canvas lithograph, $1,500 to $6,000 for a canvas
lithograph hand signed by Thomas Kinkade and $5,000 to $15,000 for a
canvas lithograph hand signed and highlighted by Thomas Kinkade. The
Company's gift and home accessory products generally sell for under $50.
CREATIVE PROCESS. The Company's products are based on the artwork of Thomas
Kinkade, who has won multiple awards from The National Association of Limited
Edition Dealers, including Artist of the Year and Graphic Artist of the Year.
Mr. Kinkade paints in his Northern California studio and on location while
traveling. Mr. Kinkade is known for his unique use of light and the manner in
which his paintings reflect changes in the intensity of the ambient lighting.
Under the terms of the New License Agreement, Mr. Kinkade will provide 150
paintings to the Company during the period commencing December 3, 1997 and
ending 15 years thereafter, with at least 10 paintings to be delivered during
each of the first five years. The Company also has rights to produce and sell
additional products based on an existing library of over 160 Thomas Kinkade
images. The Company has an active product development department that works with
Mr. Kinkade, dealers of the Company's products, the Company's in-house sales
force and strategic business partners to create new products. The Company seeks
to gauge demand for proposed new products by pre-marketing prior to product
introductions. The Company is dependent upon continued customer demand for
products based upon the artwork of Thomas Kinkade. Any decline in sales of such
products in existing markets or any failure of such products to gain consumer
acceptance as the Company expands its distribution would have a material adverse
effect on the Company. See "--License With Thomas Kinkade," "Risk
Factors--Dependence on Thomas Kinkade; Lack of Product Revenue Diversification"
and "--Dependence on Consumer Preferences."
24
<PAGE>
DISTRIBUTION
As of November 30, 1997, the Company distributed its products through Thomas
Kinkade Stores, Signature Galleries, a network of other independent dealers
consisting of gift and collectible retailers and strategic relationships with
Hallmark, Avon and QVC. The Company seeks to strengthen its brand and increase
sales by expanding its network of Thomas Kinkade Stores and Signature Galleries,
promoting independent dealers to higher incentive and commitment levels and
expanding distribution through strategic business relationships.
THOMAS KINKADE STORES. Thomas Kinkade Stores provide warm and inviting
environments that convey Thomas Kinkade's lifestyle message and display Thomas
Kinkade lithographs and other products as they might appear in a customer's
home. Strategically located rheostatic lighting enables the retail staff to
showcase Mr. Kinkade's unique use of light and the effect of varying ambient
lighting on the appearance of the artwork. Thomas Kinkade Stores range in size
generally from 1,000 to 2,200 square feet and generated average sales of $1,133
per square foot in fiscal 1997. Sales through Thomas Kinkade Stores were
approximately $15.5 million in fiscal 1997. As of November 30, 1997, the Company
owned and operated 18 Thomas Kinkade Stores in California, Hawaii, Illinois,
Minnesota and Missouri, all of which exclusively sell Thomas Kinkade products.
The Company is seeking to expand this network of Thomas Kinkade Stores through
the opening of new stores and possibly through the selective acquisition of
certain of its independent dealers. The Company plans to locate its new Thomas
Kinkade Stores in strategic mall locations, downtown shopping areas and high
traffic tourist areas to reach the greatest number of consumers and build brand
awareness. The Company currently plans to open two additional Thomas Kinkade
Stores in fiscal 1998 and approximately 10 new Thomas Kinkade Stores in fiscal
1999. There can be no assurance that the Company will be able to open its
planned Thomas Kinkade Stores or that such stores will operate on a profitable
basis. See "Risk Factors--Risks Associated With Expansion."
SIGNATURE GALLERIES. In 1996, the Company initiated its Signature Gallery
program, a network of stores owned and operated by individual entrepreneurs that
exclusively sell Thomas Kinkade products. The Company believes that the
Signature Gallery program enables it to benefit from the regional knowledge of
local Signature Gallery owners, strengthen the Thomas Kinkade brand and broaden
the Company's distribution network, all without significant investment by the
Company. As of November 30, 1997, 60 Signature Galleries had been opened or
converted from existing independent dealers. Sales to Signature Galleries were
approximately $3.1 million in fiscal 1997. The Company intends to expand the
Signature Gallery program aggressively and has identified target areas within
its United States sales districts for potential placement of Signature
Galleries. The Company identifies new Signature Gallery owners through referrals
generated by its in-house sales force, direct inquiries and referrals from
existing dealers and Signature Gallery owners. The Company currently plans to
add 12 additional Signature Galleries in fiscal 1998 and approximately 100 in
fiscal 1999.
Potential Signature Gallery owners must submit a comprehensive business plan
and satisfy certain financial criteria including minimum start-up capital and
net worth requirements in order to qualify for the Signature Gallery program.
Signature Gallery owners agree to, among other things, purchase at least
$100,000 in Company products annually, maintain minimum inventory of $25,000 per
location and display a broad collection of Thomas Kinkade images. Signature
Gallery owners have the opportunity to attend comprehensive training programs at
Thomas Kinkade University. In return, the Company allows Signature Gallery
owners to sell Thomas Kinkade products in environments similar to those of the
Company's Thomas Kinkade Stores and grants Signature Gallery owners limited use
of the Thomas Kinkade name. Signature Galleries also receive automatic shipment
of each new limited edition release and have rights to purchase certain limited
edition inventory otherwise available only to Thomas Kinkade Stores. There can
be no assurance that the Company will be able to identify suitable owners for
its planned Signature Galleries expansion or that such owners will become
effective distributors for the Company's products. See "Risk Factors--Risks
Associated With Expansion."
25
<PAGE>
The following map shows the locations of each of the 18 Thomas Kinkade
Stores and 60 Signature Galleries as of November 30, 1997:
[Graphic art map showing U.S. States which have stores or galleries are shaded
and an arabic number indicates number of store sites in each state.]
<TABLE>
<S> <C> <C>
CALIFORNIA (23, *13) CONNECTICUT (1) Charlotte
Bakersfield Farmington Raleigh
Burlingame HAWAII (*2) OHIO (1)
Calistoga Lahaina, Maui (*2) Cincinnati
Cambria ILLINOIS (*1) OREGON (3)
Carmel (*3) Schaumberg Ashland
Catalina INDIANA (1) Newburg
Costa Mesa Zionsville Portland
Escondido MAINE (1) SOUTH CAROLINA (2)
Folsom Kennebunkport Charleston
Fresno MASSACHUSETTS (1) Columbia
MontClair Mashpee TENNESSEE (2)
Monterey (*4) MICHIGAN (1) Cleveland
Morro Bay Birmingham Nashville
Newport MINNESOTA (*1) TEXAS (4)
Northridge Bloomington Dallas
Palm Springs MISSOURI (*1) Fort Worth
Pleasanton Kansas City Houston (2)
Riverside NEBRASKA (2) UTAH (1)
Sacramento (2) Omaha (2) Salt Lake
San Diego NEVADA (2) WASHINGTON (5)
San Francisco (*3) Carson City Bonnylake
San Rafael Henderson Edmonds
Santa Barbara (*1) NEW JERSEY (2) La Conner (2)
Santa Clara (*1) Cape May Tacoma
Santa Rosa Stone Harbor WISCONSIN (2)
Sonoma NORTH CAROLINA (3) Greendale
Walnut Creek (*1) Asheville Hales Corners
Yontville
COLORADO (3)
Aspen
Denver (2)
</TABLE>
* indicates Thomas Kinkade Stores
26
<PAGE>
OTHER INDEPENDENT DEALERS. The Company's products currently are sold to
approximately 2,200 independent dealers, including independent gift retailers,
collectible retailers, art galleries and frame stores located principally in the
United States and, to a lesser extent, in Canada. The Company has organized
these dealers into four levels designed to encourage dealers to increase
purchase commitments by offering increased benefits such as access to a wider
range of the Company's products, automatic shipments of new product releases and
other benefits not available to lower level dealers. Dealer levels range from
Open Edition Accounts, which are authorized to purchase only open edition
products and for which only a $500 initial purchase is required, to Showcase
Dealers, which are stores-within-stores committed to purchase a minimum of
$15,000 annually in limited edition canvas products. By promoting lower level
dealers to higher incentive and commitment levels, the Company believes it is
able to strengthen its dealer network, increase sales and build brand awareness
by leveraging productive dealers. The Company also has been able to identify
potential Signature Gallery owners through its dealer program. As of November
30, 1997, there were approximately 180 Showcase Dealers, 380 Premier Dealers,
950 Authorized Dealers and 740 Open Edition Accounts.
The substantial majority of the Company's product distribution, as well as
its interaction with the ultimate customer, is conducted by independent dealers,
including Signature Gallery owners, whose stores may bear the Thomas Kinkade
name. The Company is in the process of entering into formal licensing agreements
with Signature Gallery owners. Failure by the Company to achieve its planned
expansion of its distribution through Thomas Kinkade Stores, Signature Galleries
and other independent dealers or to do so on a profitable basis could have a
material adverse effect on the Company. In addition, the failure of these
dealers to properly represent the Company's products could damage the reputation
of the Company or Thomas Kinkade and adversely affect the ability of the Company
to build the Thomas Kinkade brand. See "Risk Factors--Risks Associated With
Expansion" and "--Reliance on Third Parties."
STRATEGIC BUSINESS RELATIONSHIPS
The Company has entered into agreements with leading consumer marketing
companies to build brand awareness, to generate additional sales by reaching a
larger audience of consumers and to leverage the expertise of these companies in
sales and marketing, manufacturing and distribution. For example, the Thomas
Kinkade brand has received substantial publicity under a strategic licensing
agreement with Hallmark, including in-store promotion and a feature in
Hallmark's Christmas 1997 television and print advertising campaign. The Company
also sells Thomas Kinkade brand products through direct marketing on QVC and
through direct mail catalogs, such as Avon. The Company's paper lithographs,
open edition gift prints and other home accessory and gift products were
featured on QVC shows totaling 12 hours in 1996 and 15 hours in 1997. The
Company intends to continue to develop strategic business relationships with
leading consumer marketing companies in the United States and abroad.
SALES AND MARKETING
The Company's sales and marketing efforts include an in-house sales force
that sells to and services wholesale accounts, training programs for in-house
and retail sales personnel and Signature Gallery owners through Thomas Kinkade
University, marketing and promotional programs and a consumer-oriented Thomas
Kinkade Collectors' Society, each of which is described below.
IN-HOUSE SALES FORCE. As of November 30, 1997 the Company's sales force
consisted of a Vice President supported by four Regional Sales Directors, a
Director of Sales Operations and 28 District Sales Managers. The sales force is
generally compensated on a salary plus commission basis. Many of these sales
personnel are experienced in both the gift and collectibles and direct sales
industries. District Sales Managers call on Signature Galleries, the Company's
independent dealers and other potential dealers. Certain of the Company's
in-house sales personnel support the Signature Gallery program through review
and approval of applications and ongoing on-site and telephone support to
Signature Gallery owners.
27
<PAGE>
TRAINING. The Company conducts training programs for its in-house sales
personnel, retail consultants and other Company employees, as well as Signature
Gallery owners, at Thomas Kinkade University, a training facility located in
Monterey, California. Thomas Kinkade University consists of a week-long training
program that emphasizes product knowledge and selling techniques, marketing,
accounting, inventory management and administration. All District Sales Managers
and Thomas Kinkade Store managers attend training sessions at Thomas Kinkade
University and participate in an annual national sales meeting and quarterly
regional sales meetings.
MARKETING PROGRAMS. Each Thomas Kinkade Store keeps a customer list from
which it targets direct mailings, including postcards introducing new product
releases. The Company designs and sells promotional materials including
postcards, catalogs and videotapes to Signature Galleries and independent
dealers for sale or direct marketing to consumers. In addition, the Company
produces print advertising available to Signature Galleries on a co-op basis.
Signature Galleries and other high level independent dealers may pay to
participate in regional events (including appearances by Thomas Kinkade)
organized by the Company from time to time. In addition, the Company benefits
from advertising funded by its strategic business partners, such as Hallmark's
Christmas 1997 television and print advertising campaign and a number of
exclusive shows on QVC.
THOMAS KINKADE COLLECTORS' SOCIETY. The Company sponsors and operates a
collector's club for consumers of Thomas Kinkade products. As of November 30,
1997, the Thomas Kinkade Collectors Society had over 16,500 members. Members pay
an annual membership fee of $45 and receive quarterly newsletters that keep them
informed about Mr. Kinkade's artwork, including upcoming releases and events.
Members also have the opportunity to purchase "members only" product offerings.
MANUFACTURING AND PRODUCTION
The Company manufactures canvas lithographs and assembles, warehouses and
ships its lithograph products from its production facility in San Jose,
California. Most of the Company's three-dimensional products and gift items, as
well as its paper lithographs, are manufactured by third parties under
manufacturing or licensing arrangements.
The Company's proprietary manufacturing process for a canvas lithograph
begins with an original Thomas Kinkade painting. An independent photographer
photographs the painting and produces a transparency. The transparency then goes
to a digitizing facility for the creation of a color separation. The color
separation is reviewed and approved by Thomas Kinkade, who works with an
independent printer and the Company's artistic team, to develop a paper
lithograph that best represents the original painting. The paper lithographs are
then printed and sent to the Company's warehouse facilities, where they are sent
through a double authentication signing process, inspected, transferred to
canvas and hand-highlighted. The manufacturing process takes approximately five
days to complete. The Company then frames and ships finished canvas lithographs
in accordance with order specifications. Third party vendors supply the frames,
paper, canvas, paint and other raw materials and components used by the Company
in its lithograph production process. The failure of any of these third party
vendors to produce products that meet the Company's specifications could result
in lower sales or otherwise adversely affect consumer perceptions of the
Company's brand and products. There can be no assurance that the Company will
not encounter shortages in the future, and any prolonged shortage in frames or
other materials could have a material adverse effect on the Company. See "Risk
Factors--Reliance on Third Parties" and "--Need for Further Automation."
The Company is committed to assuring that its products meet its quality
standards and continually evaluates its manufacturing processes to maintain
quality control. Systematic quality control procedures are in place at various
points in the manufacturing process, including spot inspections and regular
inspection check stations. In order to improve quality control, shorten
production time and increase capacity, the Company intends to automate certain
portions of its production process, invest in packaging, conveyance, barcoding
and MIS equipment and develop further improvements in the lithograph
manufacturing process. In addition, the
28
<PAGE>
Company is considering vertically integrating certain of its manufacturing
processes. The majority of the Company's inventory is comprised of paper
lithographs and frames.
SYSTEMS
The Company uses JD Edwards software on an IBM AS/400 computer system in
order to provide integrated order processing, production, manufacturing,
financial management and distribution functions for the Company's business. The
Company plans to upgrade its JD Edwards software application suite within the
next six months. In addition, the Company recently began installation of a new
retail management software system in its Thomas Kinkade Stores to process
point-of-sale transactions, provide real-time information and enhance inventory
and office management.
BACKLOG
Because the Company generally ships its products within a short period after
receipt of an order, the Company does not have a material backlog of unfilled
orders, and sales in any quarter are substantially dependent on orders booked in
that quarter.
LICENSE WITH THOMAS KINKADE
The Company entered into the New License Agreement with Thomas Kinkade,
effective as of December 3, 1997, under which Thomas Kinkade granted the Company
perpetual and exclusive rights to each image produced by Mr. Kinkade under the
New License Agreement, as well as to the library of over 160 existing Thomas
Kinkade images, subject to certain exceptions. In particular, the Company has
the exclusive right to produce, sell, distribute and promote reproductions of
Mr. Kinkade's artwork in any form and the right to use the name and likeness of
the artist in promoting the sale of its products and development of any brand
name associated with Mr. Kinkade. The New License Agreement requires Mr. Kinkade
to deliver 150 paintings to the Company during the period commencing December 3,
1997 and ending 15 years thereafter, with at least 10 paintings to be delivered
during each of the first five years.
The New License Agreement permits Mr. Kinkade to reproduce up to two pieces
annually to raise money for the City of Placerville, California. Mr. Kinkade
also retained the right to use his name, likeness and certain artwork in
association with non-profit organizations. In addition, Mr. Kinkade retained the
right to use his name in connection with for-profit ventures with the Company's
prior consent, provided that he first offers the opportunity to the Company.
The principal terms of the New License Agreement are as follows: Mr. Kinkade
is entitled to 4.5% of the Company's net sales through May 8, 2000, and 5.0% of
the Company's net sales thereafter, provided that if the Company's net sales
should exceed $500 million, Mr. Kinkade would also be entitled to receive 1.0%
of any excess amount. To encourage timely delivery of paintings, commencing
April 1, 1998, Mr. Kinkade will receive 25.0% of the Company's consolidated
operating margin in excess of 23.0%, if any, if Mr. Kinkade delivers all
paintings at least 12 weeks ahead of the applicable scheduled release date
during the subject fiscal year. Mr. Kinkade also will receive 65.0% of the
wholesale gross profit margin of any Studio Proof products through May 8, 2000
and 35.0% of such margin thereafter. In addition, Mr. Kinkade is entitled to
receive 50.0% of the retail value of any Masters Edition products. The Company
must pay Mr. Kinkade $25,000 for each new painting and pay for his studio rent
and office support. The Company receives all of the licensing income from the
licensing of products that incorporate Thomas Kinkade's images. Subject to
stockholder approval, Mr. Kinkade was granted a 15-year option to purchase
600,000 shares of Common Stock at $12.375, the closing price of the Common Stock
on December 3, 1997.
The New License Agreement is terminable by either party after failure by the
other party for 90 days to cure a material breach of the agreement. In addition,
Mr. Kinkade may terminate the New License Agreement in the event of the
Company's insolvency or upon a change of control of the Company. A change in
control is defined to occur on the date when any person or group (as defined in
Rule 13(d)(3) under the Securities
29
<PAGE>
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 then beneficially owned
by Mr. Kinkade. The computation excludes stockholders as of December 3, 1997 to
the extent of their beneficial holdings of Common Stock as of such date. The
right of termination may not be invoked by Mr. Kinkade if it is triggered as a
result of Mr. Kinkade's transfer of shares.
The New License Agreement superseded the Company's previous license and
royalty arrangements with Mr. Kinkade. See "Certain Transactions."
COMPETITION
The art-based home decorative accessories, collectibles and gift products
industries are highly fragmented and competitive. Participants in these
industries compete generally on the basis of product and brand appeal, quality,
price and service. The Company's products compete with products marketed by
numerous regional, national and foreign companies that are distributed through a
variety of retail formats including department stores, mass merchants, art and
gift galleries and frame shops, bookstores, mall-based specialty retailers,
direct response marketing programs, catalogs, and furniture and home decor
stores. The number of marketers and retail outlets selling home decorative
accessories, collectibles and gift products has increased in recent years, and
the entry of these companies together with the lack of significant barriers to
entry may result in increased competition. The Company intends to open Thomas
Kinkade Stores and/or add Signature Galleries in geographic markets where it has
little or no experience and, as a result, it may encounter competitive
challenges that it has not experienced to date. Such competition could have a
material adverse effect on the Company. Some of the Company's competitors have
substantially greater resources than the Company, including name recognition and
capital resources, have more diversified product offerings and sell their
products through broader distribution channels than the Company. The Company's
business depends substantially on its ability to produce on an ongoing basis a
wide variety of products that appeal to a broad range of consumers who can gain
ready access to such products. See "Risk Factors--Competition."
EMPLOYEES
As of November 30, 1997, the Company had 300 full-time and 94 part-time and
temporary employees, including 119 in manufacturing and distribution, 109 in
sales and marketing, 117 in retail sales and administration and 49 in corporate
administration. The Company believes that its labor relations are satisfactory
and has never experienced a work stoppage.
PROPERTIES
The Company's manufacturing, distribution, sales and marketing,
administration and executive offices are located in four leased facilities in
San Jose and Monterey, California with an aggregate of 113,000 square feet. As
of November 30, 1997, the Company's retail operations were located in 18 leased
sites throughout the United States ranging from 144 to 2,700 square feet, with
an aggregate of approximately 18,000 square feet. In addition to new retail
sites, the Company expects to lease an additional 25,000 square feet of
manufacturing space prior to the end of fiscal 1998. The Company otherwise
believes that its properties are adequate to support the Company's needs through
fiscal 1998.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings which, individually or
in the aggregate, are believed to be material to the Company's business.
30
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
Directors and officers of the Company, and their ages as of December 15,
1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ----------------------------------------- --- ----------------------------------------------------------------
<S> <C> <C>
Kenneth E. Raasch........................ 37 Chairman
Thomas Kinkade........................... 39 Creative Director and Director
Craig A. Fleming......................... 42 President and Chief Executive Officer
Raymond A. Peterson...................... 52 Senior Vice President and Chief Financial Officer
John Lackner............................. 57 Senior Vice President and Chief Operating Officer
Daniel P. Byrne.......................... 35 Senior Vice President of Product Development and Marketing
Greg H. L. Nash.......................... 38 Corporate Controller and Principal Accounting Officer
James F. Landrum, Jr..................... 33 Vice President, General Counsel and Corporate Secretary
Dean O. Bard............................. 47 Vice President of Human Resources
Richard F. Barnett....................... 44 Vice President of Retail Development
Harry B. Boyd............................ 58 Vice President of Operations
G. Eric Kuskey........................... 35 Vice President of Licensing
Brian P. Mahoney......................... 41 Vice President of Sales
Kevin M. Sacher.......................... 37 Vice President of Marketing
Michael L. Kiley (1)..................... 52 Director, Vice Chairman and Independent Consultant
Norman T. Mahoney (2).................... 67 Director
Norman A. Nason (1)(2)................... 56 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
KENNETH E. RAASCH co-founded the Company in 1990 and has been the Chairman
of the Company since its inception in March 1990. In addition, he was President
of the Company from March 1990 to May 1997 and Chief Executive Officer from
March 1996 until October 1997. Mr. Raasch's responsibilities as Chairman include
formulating and executing the Company's strategic plan, developing new strategic
business relationships and representing the Company to the financial community,
among other things. Prior to joining the Company, 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.
THOMAS KINKADE co-founded the Company and has been the Creative Director and
a member of the Board of Directors of the Company since its inception in March
1990. Mr. Kinkade has provided artwork to the Company for its productions since
the Company's inception. In addition, Mr. Kinkade's role includes providing
strategic vision for the Thomas Kinkade brand, assisting in product development
and communicating the Company's brand message through public appearances and
books. Prior to March 1990, Mr. Kinkade was a self-employed artist.
CRAIG A. FLEMING has been the President of the Company since May 1997 and
the President and Chief Executive Officer since October 1997 and was Vice
President of Sales for the Company from November 1996 to
31
<PAGE>
May 1997. Prior to joining the Company, Mr. Fleming was an independent
consultant from March 1996 to October 1996, as well as the Executive Vice
President of Sales for Home Cable Concepts, Inc., a direct TV satellite dish
company from October 1995 to March 1996. Prior to employment with Home Cable
Concepts, Mr. Fleming was the Vice President of Sales for Dorling Kindersley
Family Library, a direct seller of children's books, from July 1994 through
October 1995. Prior thereto, Mr. Fleming was Director of Sales for Melaleuca,
Inc., a direct selling organization, from June 1992 to July 1994.
RAYMOND A. PETERSON has been Senior Vice President and Chief Financial
Officer of the Company 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 thereto, Mr. Peterson was the Corporate Tax
Manager for Raychem Corporation, multi-national manufacturing corporation and a
Senior Tax Accountant with Peat Marwick & Mitchell (currently KPMG Peat
Marwick).
JOHN LACKNER has been the Senior Vice President and Chief Operating Officer
of the Company since October 1997. Prior to joining the Company, Mr. Lackner was
employed for over 25 years with the Kirby Company, an established manufacturer
and retailer of quality vacuum cleaners. His most recent position with the Kirby
Company was as Senior Vice President of Research, Product Development and
Technology, which position he had held since 1990. Mr. Lackner also served as a
Vice President in manufacturing and production for the Kirby Company from 1981
to 1990.
DANIEL P. BYRNE has been the Senior Vice President of Product Development
and Marketing of the Company since June 1996. He was the Vice President of
Marketing of the Company from March 1993 to June 1996. Prior thereto, he was a
Vice President with Commemorative Press, an art retailing company co-founded by
Kenneth E. Raasch and Thomas Kinkade. He was employed as Manager of Product
Development and Manager of Concept Development by the Bradford Exchange, Ltd.,
an established manufacturer and marketer of collectible giftware, from October
1988 until February 1992. 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.
GREG H. L. NASH has been the Corporate Controller of the Company since May
1995 and also has been Principal Accounting Officer since November 1997. From
August 1988 until April 1995 he was employed by Price Waterhouse LLP, most
recently as an Audit and Business Services Manager. Prior to August 1988 he held
various management positions with companies in the investment and retail
industries.
JAMES F. LANDRUM, JR. has been the General Counsel for the Company since
February 1995 and was appointed Vice President and Corporate Secretary on April
30, 1997. He was self employed as an attorney and business consultant for two
years prior to joining the Company.
DEAN O. BARD has been the Vice President of Human Resources for the Company
since August 1997. From September 1993 to May 1996, he was the Manager of
Benefit Planning at Occidental Petroleum, an energy and chemical corporation.
Prior thereto, Mr. Bard was the Director of Compensation and Benefits at Island
Creek Coal, a coal mining company.
RICHARD F. BARNETT has been Vice President of Retail Development for the
Company since October 1995. Prior thereto, Mr. Barnett owned a number of
galleries which sold Thomas Kinkade products.
HARRY B. BOYD has been the Vice President of Operations for the Company
since August 1996. Prior thereto, he was the Vice President of Operations for
Diversey Tech, a chemical pumping company, from July 1988 to August 1996.
G. ERIC. KUSKEY has been the Vice President of Licensing for the Company
since January 1997 and was the Director of Licensing for the Company from
September 1995 to January 1997. Prior to joining the Company, from January 1994
to September 1995 Mr. Kuskey worked as an independent agent negotiating
licensing, product development and distribution agreements for publishers and
intellectual property owners in the United
32
<PAGE>
States and abroad. From January 1990 to January 1994, he was the Licensing
Director at Pemberton & Oakes, an art publishing company.
BRIAN P. MAHONEY has been the Vice President of Sales for the Company since
July 1997. Prior to joining the Company, from August 1994 to July 1997, Mr.
Mahoney was the Vice President of Sales for Natural World, a direct sales
company. From July 1992 to August 1994 he was a Region Vice President for
Melaleuca, Inc., a direct sales company. For the 13 years prior to that, he was
an independent contractor for the Kirby Company, serving as a sales person,
Assistant Divisional Supervisor and Factory Distributor.
KEVIN M. SACHER has been with the Company since October 1993 and has been
Vice President of Marketing since April 1996. Prior thereto, Mr. Sacher was Vice
President of the Company's Entertainment Division from April 1995 to April 1996,
and Senior Product Manager from October 1993 to April 1995. Prior to joining the
Company, he was a Product Manager at Franklin Mint, a direct response seller of
collectibles, from October 1992 to October 1993.
MICHAEL L. KILEY has been a director of the Company since January 1997 and
Vice Chairman of the Board since June 1997. Mr. Kiley has been an independent
consultant to the Company since April 1997. In 1978, he founded Home Church and
has served as Pastor since that time. Prior to founding Home Church, Mr. Kiley
co-owned Business Exchange, Inc., a cooperative buying company servicing over
400 business owners.
NORMAN T. MAHONEY has been a director of the Company since March 1997. From
1988 to 1995 he served as a consultant to Scott Fetzer Corporation, a
diversified manufacturer whose product lines include Kirby brand vacuum
cleaners, encyclopedias and educational materials. Mr. Mahoney was previously
President and CEO of the Kirby Company, a division of Scott Fetzer Corporation.
NORMAN A. NASON has been a director of the Company since April 1993. Mr.
Nason is President of Saratoga Commercial Real Estate Brokerage Corporation and
Saratoga Management Corporation, companies that he founded in 1976.
DIRECTOR COMPENSATION
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 $2,000 per meeting as compensation for
their services as Directors. In addition, one of the outside directors, Norman
A. Nason, received $15,000 for serving as a board member in fiscal 1997.
In addition to cash compensation, the Company's nonemployee directors are
entitled to participate in the Company's Directors' Stock Option Plan. The Board
of Directors and the stockholders of the Company approved the Directors' Stock
Option Plan on February 15, 1994 and reserved 50,000 shares of Common Stock for
issuance thereunder. On the approval date of the Directors' Stock Option Plan,
the Company's then current nonemployee directors 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 Directors' Stock Option 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 Directors' Stock Option 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 Directors' Stock Option 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 Directors' Stock Option 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; or (iv) the first anniversary of the
participant's
33
<PAGE>
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.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of
the Chief Executive Officer of the Company and the other highly compensated
executive officers of the Company whose salary and incentive compensation
exceeded $100,000 for the year ended March 31, 1997. Since March 31, 1997, Craig
A. Fleming has replaced Kenneth E. Raasch as President and Chief Executive
Officer, with Mr. Raasch remaining as Chairman, and John Lackner has joined the
Company as Chief Operating Officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------
------------------------ SHARES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#)
- ------------------------------------------------------------- --------- ----------- ----------- ---------------------
<S> <C> <C> <C> <C>
Kenneth E. Raasch, Chairman 1997 427,586 -- --
1996 381,119 -- --
1995 363,075
Daniel P. Byrne, Senior Vice President of Marketing 1997 163,816 6,798 --
1996 162,542 -- --
1995 136,992 --
Raymond A. Peterson, Chief Financial Officer and Senior Vice 1997 133,995 6,798 25,000
President 1996 129,080 10,000 5,000
1995 122,917 -- --
</TABLE>
34
<PAGE>
OPTION GRANTS
The following table provides specific information concerning grants of
options to purchase the Company's Common Stock made during the fiscal year ended
March 31, 1997 to the persons named in the Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES STOCK PRICE
UNDERLYING % OF TOTAL APPRECIATION FOR
OPTIONS OPTIONS GRANTED EXERCISE OPTION TERM (3)
GRANTED TO EMPLOYEES IN PRICE EXPIRATION --------------------
NAME (1) (#) FISCAL YEAR (2) ($/ SH) DATE 5% ($) 10% ($)
- ------------------------------------------- ----------- ----------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Kenneth E. Raasch.......................... -- -- -- -- -- --
Daniel P. Byrne............................ -- -- -- -- -- --
Raymond A. Peterson........................ 25,000 17% 2.437 2/3/07 38,315 97,099
</TABLE>
- ------------------------
(1) Generally, the right to exercise an option under the Employees Stock Option
Plan vests as to one-fifth of the shares subject to the option on each
anniversary of the date of grant. The Employees Stock Option Plan permits
the grant of both incentive stock options within the meaning of Section 422
of the Internal Revenue Code, as amended and nonstatutory stock options. The
exercise price of incentive stock options and non-qualified 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 incentive stock options or
non-qualified 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) The option was 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-holder's
continued employment through the vesting period. The amounts reflected in
this table may not necessarily be achieved.
35
<PAGE>
The following table provides the specified information concerning options
held as of March 31, 1997, 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, 1997 and no stock appreciation rights
were outstanding at March 31, 1997.
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS HELD AT MARCH 31, VALUE OF UNEXERCISED IN-THE-MONEY
1997 OPTIONS AT MARCH 31, 1997 (2)
------------------------------------- -----------------------------------
EXERCISABLE UNEXERCISABLE (1) EXERCISABLE UNEXERCISABLE (1)
NAME (1)(#) (#) ($) ($)
- ------------------------------------- ---------------- ------------------- -------------- -------------------
<S> <C> <C> <C> <C>
Kenneth E. Raasch.................... 15,000 -- -- --
Daniel P. Byrne...................... 107,725 -- 235,201 --
Raymond A. Peterson.................. 86,725 49,000 195,826 105,875
</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, 1997 ($4.875 per share) and
is net of the exercise price of such options.
EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS
The Company has entered into employment agreements with certain of its
executive officers. In January 1994, the Company entered into a five-year
Employment Agreement with Kenneth E. Raasch to serve as Chairman of the Board,
President and Chief Executive Officer of the Company. This agreement, as amended
in March 1997, provides for an annual base salary of $360,000. In addition, Mr.
Raasch is entitled to receive incentive bonuses based upon (i) annual growth in
earnings per share; (ii) past enhanced performance (with penalties for poor
performance); (iii) operating income generated by new business ventures; and
(iv) early retirement of the Company's subordinated debt. In May 1997, he
relinquished the position of President and became Chairman and Chief Executive
Officer of the Company; in October 1997, Mr. Raasch also relinquished the
position of Chief Executive Officer.
In the event Mr. Raasch's employment is terminated by the Company prior to a
"Change in Control" other than for cause or disability (as defined in the
agreement), he is entitled to (i) receive salary, bonus and vested benefits for
the remaining term of the agreement at his then current compensation; and (ii)
continuation of indemnification and insurance coverage in effect at the time of
the termination, until any possible law suit against him is time barred by the
statute of limitation.
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 January 1,
1994 employment agreement 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 pre-tax operating income for
the year bears to the forecast amount 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 "Business--License with Thomas
Kinkade" and "Certain Transactions."
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
($150,000 effective January 1, 1997) pursuant to Mr. Peterson's employment
agreement with the Company. Mr. Peterson is also eligible to participate in the
Company's bonus plan adopted for the benefit of senior executives.
Mr. Lackner was engaged by the Company pursuant to a written employment
agreement as Senior Vice President, Chief Operating Officer effective October 1,
1997. His employment agreement is effective for a period of five years at an
annual base salary of $175,000. In addition to his base salary, Mr. Lackner is
entitled to
36
<PAGE>
an art allowance of $5,000, a temporary living allowance, relocation and moving
expense payments, participation in the Company's bonus plan adopted for the
benefit of senior executives and other benefits. The agreement also provides
that Mr. Lackner will receive a bonus payment of $25,000 in 1998. The Company
granted to Mr. Lackner pursuant to the agreement an option to purchase 15,000
shares of the Company's Common Stock on the date of agreement and an option to
purchase 26,000 shares of the Company's Common Stock at fair market value on
October 29, 1997.
Mr. Fleming, President and Chief Executive Officer of the Company, entered
into a three-year employment agreement with the Company effective as of May 8,
1997 that supersedes a prior employment agreement. The agreement provides for an
annual base salary of $225,000, the opportunity to participate in any bonus plan
adopted for the benefit of senior executives, a monthly living allowance through
December 1997, a $10,000 art allowance, a relocation expense payment and a
twelve-month living allowance in the event of relocation of Mr. Fleming's
immediate family to Santa Clara County, California, in addition to other
benefits. The Company also granted to Mr. Fleming pursuant to the agreement an
option to purchase 50,000 shares of the Company's Common Stock at fair market
value on the date of formal Board approval of such options; an option to
purchase 25,000 shares of the Company's Common Stock at fair market value on
July 1, 1998; and an option to purchase 25,000 shares of the Company's Common
Stock at fair market value on July 1, 1999.
Mr. Byrne was engaged by the Company as Vice President of Marketing for a
period of three years (with an automatic two year renewal) effective January 1,
1994 at an annual base salary of $138,000 ($181,560 effective April 1, 1997)
pursuant to Mr. Byrne's employment agreement with the Company. Mr. Byrne is also
eligible to participate in the Company's bonus plan adopted for the benefit of
senior executives.
The employment agreements of Messrs. Raasch, Peterson, Kinkade, Byrne and
Fleming each provide for the officer to receive all salary and bonus payments
that would have been payable to him for the remaining term of the agreement
after a "Change in Control" which provides "Good Reason" for the officer to
terminate his employment. "Good Reason" is defined to include, among other
things, 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.
37
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of November 30, 1997,
with respect to the Common Stock beneficially owned by (i) each person known by
the Company to be the beneficial owner of more than 5% of the shares of Common
Stock; (ii) each stockholder who is selling Common Stock in this offering (the
"Selling Stockholders"); (iii) each director individually; (iv) certain named
executive officers individually; and (v) all directors and executive officers as
a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OWNED AFTER THE
(1) SHARES OFFERING (1)(2)(3)
----------------------- OFFERED -----------------------
NUMBER PERCENT (3) NUMBER PERCENT
---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
NAME AND ADDRESS OF 5% STOCKHOLDERS
- ---------------------------------------------------------
Kenneth E. Raasch (3)(4)(5) ............................. 3,851,875 34.2% -- 3,851,875 30.2%
521 Charcot Avenue
San Jose, CA 95131
Thomas Kinkade (3)(6) ................................... 3,312,043 29.9% -- 3,312,043 26.3%
521 Charcot Avenue
San Jose, CA 95131
Levine Leichtman Capital Partners, L.P. (7) ............. 980,000 8.9% 700,000 280,000 2.2%
345 North Maple Drive, Suite 304
Beverly Hills, CA 90210
CERTAIN OTHER EXECUTIVE OFFICERS AND DIRECTORS
- ---------------------------------------------------------
Raymond A. Peterson (8).................................. 122,725 1.1% 20,000 102,725 *
Daniel P. Byrne (9)...................................... 108,725 * 15,000 93,725 *
Michael L. Kiley (10).................................... 76,500 * -- 76,500 *
Norman A. Nason (11)..................................... 32,682 * -- 32,682 *
Norman T. Mahoney (12)................................... 7,500 * -- 7,500 *
All directors and executive officers as a group (11
persons) (13).......................................... 7,536,100 64.9% 37,500 7,498,600 57.3%
OTHER SELLING STOCKHOLDERS
- ---------------------------------------------------------
Robert Wallace........................................... 200,370 1.8% 160,000 40,370 *
Other Selling Stockholders (7 persons or entities)
holding less than 1% of the Common Stock outstanding
prior to the offering.................................. 53,872 * 25,000 28,872 *
</TABLE>
- ------------------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power
and/or investment power with respect to those securities and includes shares
of common stock issuable pursuant to the exercise of stock options that are
immediately exercisable or exercisable within 60 days. Unless otherwise
indicated, the persons or entities identified in this table have sole voting
and investment power with respect to all shares shown as beneficially owned
by them. Percentage ownership calculations prior to and after the offering
are based on 11,071,942 shares and 12,571,942 shares, respectively, of
Common Stock outstanding.
(2) Gives effect to the issuance of a total of 1,500,000 shares sold in the
offering.
38
<PAGE>
(3) In the event that the Underwriters exercise the over-allotment option, up to
an additional 363,000 shares of Common Stock may be sold as follows: Kenneth
E. Raasch, 190,575 shares; Thomas Kinkade, 172,425 shares. In the event that
the over-allotment option is exercised in full, Mr. Raasch will own
beneficially approximately 28.7% and Mr. Kinkade will own beneficially
approximately 25.0% of the Common Stock outstanding upon the completion of
the offering.
(4) 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.
(5) Includes 165,517 shares of Common Stock which may be acquired upon the
conversion of a $1,200,000 promissory note issued to Linda Raasch, the wife
of Mr. Raasch, on June 30, 1995. Also includes 15,000 shares subject to
options held by Mr. Raasch.
(6) Does not include an option to purchase 600,000 shares of the Company's
Common Stock granted as of December 3, 1997 in connection with the New
License Agreement, subject to stockholder approval.
(7) The general partner of the named stockholder is LLCP California Equity
Partners, L.P.
(8) Includes 119,725 shares subject to options held by Mr. Peterson.
(9) Includes 107,725 shares subject to options held by Mr. Byrne.
(10) Includes 76,500 shares subject to options held by Mr. Kiley.
(11) Includes 27,682 shares subject to options held by Mr. Nason.
(12) Includes 6,500 shares subject to options held by Mr. Mahoney.
(13) Includes an aggregate of 374,382 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.
39
<PAGE>
CERTAIN TRANSACTIONS
LICENSE AGREEMENT WITH THOMAS KINKADE. Effective December 3, 1997, the
Company entered into the New License Agreement with Thomas Kinkade, a director,
employee and principal stockholder of the Company. See "Business--License With
Thomas Kinkade." The New License Agreement supersedes a previous license
agreement under which Mr. Kinkade received a flat fee of $18,750 per painting
delivered to the Company for reproduction, a royalty agreement pursuant to which
the Company paid Mr. Kinkade a royalty of 5% of net sales of Company-owned
stores using his name and certain other arrangements. In addition, Mr. Kinkade
received approximately $1.7 million in fiscal 1997 under an arrangement with the
Company for personally hand finishing master editions and supervising the hand
finishing of studio proof editions, services for which Mr. Kinkade is now
compensated under the New License Agreement. Mr. Kinkade is also employed by the
Company as Creative Director. See "Management--Employment and Change of Control
Arrangements." Mr. Kinkade and Mr. Raasch have an understanding whereby Mr.
Kinkade has in the past and will through May 8, 2000 pay to Mr. Raasch 50% of
royalty payments payable to Mr. Kinkade by the Company from the sale of studio
proofs. In fiscal 1997, Mr. Kinkade and Mr. Raasch shared approximately $1.2
million in royalty payments from the sale of studio proofs.
MANAGEMENT AGREEMENT. Under the Amended and Restated Management Agreement
dated as of April 1, 1994, the Company had the right to receive 50% of the gross
revenues received by Mr. Kinkade from third party licensing activity. For the
year ended March 31, 1997, the Company received $362,000 pursuant to this
arrangement. The New License Agreement has superseded this arrangement.
OWNERSHIP AND SALE OF THOMAS KINKADE GALLERY, VALLEY FAIR. On June 30,
1995, the Company purchased the Thomas Kinkade Gallery, Valley Fair from Linda
L. Raasch, spouse of Kenneth E. Raasch, President, Chairman and Chief Executive
Officer of the Company, 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 is convertible into
Common Stock of the Company at a 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.
COMERICA BANK--CALIFORNIA. Lowell W. Morse, a director of the Company from
December 31, 1993 to August 29, 1996, is also a director of Comerica
Bank--California. All of the commercial banking facilities of the Company,
excluding its former subsidiary John Hine Limited, were provided by Comerica
Bank--California from the Company's inception until February 1997.
LEVINE LEICHTMAN. Effective July 26, 1995, Levine Leichtman entered into a
credit agreement with the Company pursuant to which Levine Leichtman purchased
$8.0 million principal amount of promissory notes of the Company due June 30,
2002, $3.0 million of 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, Levine
Leichtman became a beneficial owner of 880,000 shares of Common Stock, making it
a greater than five percent stockholder of the Company. Effective March 13,
1996, the Company entered into an agreement with Levine Leichtman for the
restructuring of the $8.0 million notes held by Levine Leichtman. Under the
agreement, the interest rate on the debt was raised to 13.5% effective October
1, 1995, and Levine Leichtman received a subordinated security interest in the
Company's assets. Of the $8.0 million principal amount, $960,000 was convertible
into Common Stock at a conversion price of $2.00 per share and $810,000 was
convertible into Common Stock at a conversion price of $3.00 per share. The
exercise price of Levine Leichtman's warrant for 400,000 shares of Common Stock
was reduced to $2.00 per share. As a result of the restructuring agreement,
Levine Leichtman became the beneficial owner of 1,150,000 shares of Common
Stock. In addition, Levine Leichtman waived all defaults then existing under the
credit agreement and certain financial ratios and other covenants were modified.
Effective February 21, 1997, the Company renegotiated the credit agreement
to restructure its obligation to Levine Leichtman, totaling $7.4 million after a
payment of $592,500 pursuant to the restructuring. The interest
40
<PAGE>
rate on the debt remained at 13.5%. As part of the renegotiation, the warrant
price was amended to $0.01 per share and Levine Leichtman fully exercised these
warrants through a cashless exercise, resulting in the issuance of 398,693
shares of Common Stock. The conversion rights initially provided under the $3.0
million note were amended to provide that $7,500 of principal amount would be
convertible into Common Stock at a conversion price of $.01 per share, and such
amount was converted into 750,000 shares of Common Stock. As of November 30,
1997, Levine Leichtman owned 980,000 shares of Common Stock. See "Principal and
Selling Stockholders." In addition, Levine Leichtman waived all defaults then
existing under the credit agreement and certain financial ratios and other
covenants were modified pursuant to the restructuring.
On September 10, 1996, the Company entered into an Investment Monitoring
Agreement with Levine Leichtman Capital Partners, Inc., an affiliate of Levine
Leichtman, pursuant to which Levine Leichtman Capital Partners, Inc., agreed to
monitor Levine Leichtman's investment in the Company in exchange for a
monitoring fee of $12,500 per month. The agreement is terminable by the Company
or Levine Leichtman Capital Partners, Inc., upon 30 days written notice at any
time from and after March 31, 1998. The Investment Monitoring Agreement was
amended as of February 21, 1997 in connection with the renegotiation of the
credit agreement between the Company and Levine Leichtman to provide for a
reduced monthly monitoring fee of $11,500 beginning February 28, 1997. The
Company's obligation to pay monthly monitoring fees to Levine Leichtman Capital
Partners, Inc., terminated on July 31, 1997 as a result of the outstanding
principal balance of the Company's note payable to Levine Leichtman being
reduced to $5.4 million.
In addition, the Company has agreed to reimburse Levine Leichtman for up to
$600,000 for any underwriting discounts and commissions relating to Levine
Leichtman's sale of 700,000 shares of Common Stock in this offering.
OTHER AGREEMENTS WITH DIRECTORS. Steve Gordon, a director of the Company
until March 18, 1997, was engaged part-time by the Company as Head of Operations
(resigned June 30, 1997) 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
advice to the Company for approximately one year for a monthly fee of $12,500.
On April 1, 1997, the Company entered into a one-year Consulting Agreement
with Michael L. Kiley, a director of the Company. Pursuant to the Consulting
Agreement, Mr. Kiley agreed to act as a liaison between Thomas Kinkade and the
Company and to provide various other consulting services in exchange for a fee
of $6,000 per month and an option to purchase 25,000 shares of the Company's
Common Stock priced at the then-fair market value of the shares. Effective
August 1, 1997, the Consulting Agreement was amended to provide for consulting
fees of $10,000 per month. In June 1997 and September 1997, the Company granted
to Mr. Kiley options to purchase 20,000 and 30,000 shares of Common Stock,
respectively, at the then-fair market value of the Common Stock. In October
1997, the Board of Directors awarded Mr. Kiley a consulting bonus of $90,000
(payable in the amount of $45,000 immediately and $45,000 in April 1998) in
connection with various consulting services provided by Mr. Kiley.
41
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 12,571,942 shares of
Common Stock outstanding, based on shares outstanding at November 30, 1997. Of
these shares, 6,928,701 are held by "affiliates" of the Company as that term is
used under the Securities Act, and are subject to restriction under Rule 144
under the Securities Act (the "Restricted Shares"). In addition, certain of such
affiliates also hold options, convertible notes and warrants to purchase an
aggregate of 1,423,649 shares of Common Stock.
Stockholders holding an aggregate of 8,372,293 shares or securities
exercisable or exchangeable therefor have agreed with the Underwriters that they
will not, without the prior written consent of Hambrecht & Quist LLC, offer to
sell, contract to sell or otherwise sell (including without limitation in a
short sale) or otherwise dispose of, for a period of 90, 120 and 150 days after
the effective date of the Registration Statement of which this Prospectus is a
part (the "lock-up period"), 100%, 66 2/3% and 33 1/3%, respectively, of the
shares of Common Stock of the Company or any options or warrants to purchase any
shares of Common Stock of the Company owned or thereafter acquired by them or
with respect to which they have the power of disposition. The Company has also
agreed with the Underwriters that it will not, without the prior written consent
of Hambrecht & Quist LLC, (i) sell, offer, contract to sell, make any short
sale, pledge, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase, or otherwise
transfer or dispose of, any share of Common Stock or any securities convertible
into or exercisable or exchangeable for or any rights to purchase or acquire
Common Stock; or (ii) enter into any swap or similar arrangement that transfers,
in whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in the above clause (i) or (ii) is
to be settled by delivery of such Common Stock or such other securities, in cash
or otherwise, during the 120 days after the effective date of this Registration
Statement of which this Prospectus is part, other than (a) the sale by the
Company to the Underwriters of the shares of Common Stock pursuant to the
Underwriting Agreement; (b) the issuance by the Company of shares of Common
Stock upon exercise of warrants or options granted pursuant to the Company's
stock plans or otherwise, in each case as outstanding or reserved for issuance
on the date of this Prospectus; and (c) options to purchase Common Stock granted
under the Company's stock plans and reserved for such purpose on the date of
this Prospectus. Upon the expiration of the lock-up period (or earlier upon the
consent of Hambrecht & Quist LLC), such shares and shares issuable upon
exercise, conversion or exchange of certain of such securities will become
eligible for sale in the open market under Rule 144 or otherwise.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year (including the holding period of certain prior owners) is entitled to sell
in "brokers' transactions" or to market makers, within any three-month period, a
number of shares that does not exceed the greater of: (i) 1% of the number of
shares of Common Stock then outstanding (approximately 125,719 shares
immediately after this offering); or (ii) the average weekly trading volume in
the Common Stock during the four calendar weeks preceding the required filing of
a Form 144 with respect to such sale. Sales under Rule 144 are subject to the
availability of current public information about the Company.
The Company has filed registration statements on Form S-8 under the
Securities Act to register shares of Common Stock reserved for issuance under
the Company's stock option plans, including, in some cases, shares for which an
exemption under Rule 144 would also be available, thus permitting the resale of
shares issued under those plans or options by non-affiliates in the public
market without restriction under the Securities Act. At November 30, 1997, stock
options to purchase an aggregate of 1,078,266 shares of Common Stock were
outstanding.
Certain security holders of the Company have the right to cause the Company
to register the sale of their shares of Common Stock or shares underlying their
warrants under the Securities Act. If such registration rights are exercised,
the shares can be sold without any holding period or sales volume limitation.
See "Description of Capital Stock--Registration and Other Rights."
Sales of substantial amounts of Common Stock in the public market following
this offering (including shares issued upon the exercise of stock options) by
current holders of large share blocks of the Company's Common Stock and stock
options or warrants exercisable therefor, or the perception that such sales
might occur, could adversely affect the market price of the Common Stock and the
Company's ability to raise additional equity capital.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of November 30, 1997, the authorized capital stock of the Company
consisted of 20,000,000 shares of Common Stock, $0.01 par value per share, of
which 12,571,942 shares will be outstanding upon the completion of this
offering, and 1,000,000 shares of preferred stock, $0.01 par value per share
(the "Preferred Stock"), none of which will be outstanding. The following
description of the capital stock of the Company and certain provisions of the
Company's Amended and Restated Certificate of Incorporation and Bylaws are
qualified in their entirety by reference to such documents, copies of which have
been filed with the Securities and Exchange Commission. As of November 30, 1997,
the Company's Common Stock was held of record by 196 stockholders.
COMMON STOCK
Each holder of Common Stock is entitled to one vote per share in the
election of Directors and for all other purposes. All shares of Common Stock are
entitled to participate pro rata in distributions and in such dividends as may
be declared by the Board of Directors out of funds legally available therefor,
subject to any preferential dividend rights of outstanding shares of Preferred
Stock. Subject to the prior rights of creditors, all shares of Common Stock are
entitled in the event of liquidation to participate ratably in the distribution
of all the remaining assets of the Company after distribution in full of
preferential amounts, if any, to be distributed to holders of Preferred Stock.
The rights, preferences and privileges of holders of Common Stock are subject
to, and may be adversely affected by, the rights of any series of Preferred
Stock which the Company may designate and issue in the future. Each outstanding
share of Common Stock is fully paid and non-assessable.
PREFERRED STOCK
The Preferred Stock is divisible into and issuable in one or more series.
The rights and preferences of the different series may be established by the
Board of Directors without further action by the stockholders. The Board of
Directors is authorized with respect to each series to fix and determine, among
other things, (i) its dividend rate; (ii) its liquidation preference; (iii)
whether or not such shares will be convertible into, or exchangeable for, any
other securities; and (iv) whether or not such shares will have voting rights,
and, if so, the conditions under which such shares will vote as a separate
class.
The Company believes that the Board of Directors' ability to issue Preferred
Stock on such a wide variety of terms will enable the Preferred Stock to be used
for important corporate purposes, such as financing acquisitions or raising
additional capital. However, were it inclined to do so, the Board of Directors
could issue all or part of the Preferred Stock with (among other things)
substantial voting power or advantageous conversion rights. Such stock could be
issued to persons deemed by the Board of Directors likely to support current
management in a contest for control of the Company, either as a precautionary
measure or in response to a specific takeover threat. The Company has no current
plans to issue Preferred Stock for any purpose.
REGISTRATION AND OTHER RIGHTS
The Company currently has five registration rights agreements in effect.
Under its Registration Rights Agreement with Hyprom, S.A., with respect to a
warrant to purchase 298,952 shares of Common Stock issued to Hyprom S.A. on
August 10, 1994, the holder has the right (a "demand right"), exercisable on two
occasions, to cause the Company to file a registration statement to register
such shares. In addition, in connection with the first two filings of a
registration statement by the Company after its initial public offering, Hyprom,
S.A. has the right to include its shares in the subject offering (a "piggyback
right"), in each case subject to certain limitations. The rights of Hyprom, S.A.
expire when its shares may be sold pursuant to Rule 144(k) promulgated under the
Securities Act. Under the Company's Registration Rights Agreement with Levine
Leichtman, which as of November 30, 1997 held 980,000 shares of Common Stock,
700,000 of which are expected to be sold in this offering, such stockholder has
two demand rights and unlimited piggyback rights with respect to such shares, in
each case subject to certain limitations; these rights expire on July 26, 2002.
Under the Company's Registration Rights Agreement with Richard Barnett, a vice
president of the Company, and his wife Lori Barnett, who owned 444,483 shares of
Common Stock as joint tenants as of November 30, 1997, the Company granted Mr.
and
43
<PAGE>
Mrs. Barnett piggyback rights with respect to such shares, subject to certain
limitations; these rights expire on March 31, 1998. Under the Company's
Underwriter's Warrant Agreement executed on August 10, 1994 in connection with
its initial public offering of its Common Stock, the holders of warrants
exercisable for an aggregate of 125,000 shares of Common Stock were granted the
holders one demand right and unlimited piggyback rights; these rights expire on
August 2, 1999. Under the Company's Registration Rights Agreement with a series
of bridge investors with respect to warrants to purchase an aggregate of 27,353
shares of Common Stock, the Company granted the investors one demand right; this
right will expire when the shares subject to the warrants may be sold under Rule
144(k).
The underwriters in the Company's initial public offering of its Common
Stock in August 1994 received the right to appoint a nominee to the Company's
Board of Directors. This right will terminate on August 10, 1998.
Under the terms of the Company's Credit Agreement with Levine Leichtman,
such lender has a right of first refusal with respect to any private placements
of equity securities by the Company for cash to the extent necessary for the
lender to maintain its fully diluted equity interest in the Company. The Company
expects to repay all remaining debt outstanding under the Credit Agreement using
the proceeds of this offering, whereupon the lender's right of first refusal
will terminate.
CERTAIN CERTIFICATE OF INCORPORATION, BYLAW AND STATUTORY PROVISIONS AFFECTING
STOCKHOLDERS
STOCKHOLDER MEETINGS. Advance notice of stockholder nominations and any
other matter to be brought before a meeting of stockholders is required to be
given in writing to the Secretary of the Company within the time periods set
forth in the Bylaws. The Bylaws provide that Special Meetings of Stockholders of
the Company may be called by the Chairman or Vice Chairman of the Board of
Directors, the President, any Vice President, the Secretary or any Assistant
Secretary. In addition, Special Meetings of Stockholders may be called by any
such officer at the request in writing of a majority of the Board of Directors
or at the request in writing of stockholders owning a majority of the capital
stock that is entitled to vote. Any action required or permitted to be taken at
any Annual or Special Meeting of the Stockholders may be taken without a
meeting, without prior notice and without a vote, if signed consent is given by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted.
SECTION 203 OF DELAWARE CORPORATION LAW. The Company is a Delaware
corporation and is subject to Section 203 of the Delaware General Corporation
Law, which generally prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the time that the person became an interested
stockholder, unless (i) prior to such time the Board of Directors of the
corporation approved either the business combination or the transaction in which
the person became an interested stockholder; (ii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
the interested person owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding shares owned by
persons who are directors and also officers of the corporation and by certain
employee stock plans; or (iii) at or after such time the business combination is
approved by the Board of Directors of the corporation and authorized at an
annual or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock of the
corporation that is not owned by the interested stockholder. A "business
combination" generally includes mergers, asset sales and similar transactions
between the corporation and the interested stockholder, and other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns 15% or more of
the corporation's outstanding voting stock or who is an affiliate or associate
of the corporation and, together with his or her affiliates and associates, has
owned 15% or more of the corporation's outstanding voting stock within three
years.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services is the transfer agent and registrar for the
Common Stock.
44
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, Hambrecht
& Quist LLC and Needham & Company, Inc. (the "Underwriters") have severally
agreed to purchase from the Company and the Selling Stockholders the following
respective number of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ------------------------------------------------------------------------------------------ ------------
<S> <C>
Hambrecht & Quist LLC.....................................................................
Needham & Company, Inc....................................................................
------------
Total.....................................................................................
------------
------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligations is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may allow, a
concession not in excess of $ per share to certain other dealers. After the
public offering of the shares, the offering price and other selling terms may be
changed by the Representatives.
Certain other Selling Stockholders have granted to the Underwriters an
option, exercisable no later than 30 days after the date of this Prospectus, to
purchase up to an aggregate of 363,000 additional shares of Common Stock at the
public offering price, less the underwriting discount set forth on the cover
page of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the above table bears to the total number
of shares of Common Stock offered hereby. Such Selling Stockholders will be
obligated, pursuant to the option, to sell such shares to the Underwriters to
the extent the option is exercised. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of shares of
Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The Company's executive officers and directors and certain of the Selling
Stockholders have agreed that they will not, without the prior written consent
of Hambrecht & Quist LLC, offer to sell, contract to sell or otherwise sell
(including without limitation in a short sale) or otherwise dispose of, for a
period of 90, 120 and 150 days after the effective date of the Registration
Statement of which this Prospectus is a part, 100%, 66 2/3% and 33 1/3%,
respectively, of the shares of Common Stock of the Company or any options or
warrants to purchase any shares of Common Stock of the Company owned or
thereafter acquired by them or with respect to which
45
<PAGE>
they have the power of disposition. The Company has also agreed with the
Underwriters that it will not, without the prior written consent of Hambrecht &
Quist LLC, (i) sell, offer, contract to sell, make any short sale, pledge, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer or dispose
of, any share of Common Stock or any securities convertible into or exercisable
or exchangeable for or any rights to purchase or acquire Common Stock; or (ii)
enter into any swap or similar arrangement that transfers, in whole or in part,
any of the economic consequences of ownership of the Common Stock, whether any
such transaction described in the above clause (i) or (ii) is to be settled by
delivery of such Common Stock or such other securities, in cash or otherwise,
during the 120 days after the effective date of the Registration Statement of
which this Prospectus is part, other than (a) the sale by the Company to the
Underwriters of the shares of Common Stock pursuant to the Underwriting
Agreement; (b) the issuance by the Company of shares of Common Stock upon
exercise of warrants or options granted pursuant to the Company's stock plans or
otherwise, in each case as outstanding or reserved for issuance on the date of
this Prospectus; and (c) options to purchase Common Stock granted under the
Company's stock plans and reserved for such purpose on the date of this
Prospectus.
In general, the rules of the Securities and Exchange Commission (the
"Commission") will prohibit the Underwriters from making a market in the
Company's Common Stock during the "cooling-off" period immediately preceding the
commencement of sales in this offering. The Commission has, however, adopted
exemptions from these rules that permit passive market making under certain
conditions. These rules permit an Underwriter to continue to make a market
subject to the conditions among others, that its bid not exceed the highest bid
by a market maker not connected with this offering and that its net purchases on
any one trading day not exceed prescribed limits. Pursuant to these exemptions,
certain Underwriters, selling group members (if any) or their respective
affiliates intend to engage in passive market making in the Common Stock during
the "cooling-off" period.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids or effecting syndicate covering
transactions. A stabilizing bid means the placing of any bid or effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of the
Common Stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the offering. Such transactions may
be effected on the Nasdaq Stock Market, in the over-the-counter market, or
otherwise. Such stabilizing, if commenced, may be discontinued at any time.
The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Latham & Watkins, Menlo Park, California. Certain legal
matters will be passed upon for the Underwriters by Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, Menlo Park, California.
EXPERTS
The Consolidated Financial Statements of the Company as of March 31, 1996
and 1997 and for each of the three years in the period ended March 31, 1997
included in this Prospectus and the Registration Statement (including a schedule
incorporated by reference) have been included and incorporated in reliance upon
the reports of Price Waterhouse LLP, independent accountants, given on authority
of said firm as experts in auditing and accounting.
46
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C., a Registration Statement on Form S-1 under
the Securities Act with respect to the shares of Common Stock offered by this
Prospectus. This Prospectus does not contain all the information set forth in
the Registration Statement, certain portions of which are omitted as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the shares offered by this Prospectus, reference is
made to the Registration Statement, including the exhibits and schedules filed
therewith. Statements contained in this Prospectus regarding the contents of any
contract or any other document referred to herein or therein are not necessarily
complete, and in each instance reference is made to the copy of such contract or
document filed as an exhibit to the registration statement or such other
document, each such statement being qualified in all respects by such reference.
Copies of the Registration Statement (of which this Prospectus is a part),
together with such exhibits and schedules, may be obtained upon payment of the
fee prescribed by the Commission or may be examined without charge at the office
of the Commission.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith, files annual and quarterly reports, proxy
statements and other information with the Commission. The Registration
Statement, including the exhibits thereto, as well as such reports and other
information filed by the Company with the Commission, can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549; 7 World Trade Center, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material may also be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Commission also maintains a site on the World Wide Web at
http:// www.sec.gov that contains reports and other information regarding
registrants that file electronically with the Commission, and certain of the
Company's filings are available at such web site.
47
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets at March 31, 1996 and 1997 and September 30, 1997 (unaudited).................. F-3
Consolidated Statements of Operations for the years ended March 31, 1995, 1996 and 1997 and for the six
months ended September 30, 1996 and 1997 (unaudited)..................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1995, 1996 and 1997 and for
the six months ended September 30, 1997 (unaudited)...................................................... F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1995, 1996 and 1997 and for the six
months ended September 30, 1996 and 1997 (unaudited)..................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Media Arts Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Media Arts
Group, Inc. and its subsidiaries at March 31, 1996 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1997 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
San Jose, California
June 6, 1997
F-2
<PAGE>
MEDIA ARTS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1996 1997
------------ ------------ SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 382,000 $ 374,000 $ 5,180,000
Accounts receivable, net of allowance for doubtful accounts and sales
returns of $1,154,000, $2,825,000 and $2,474,000................... 8,262,000 7,394,000 8,258,000
Receivable from related parties...................................... 99,000 114,000 --
Inventories (Note 5)................................................. 5,006,000 5,415,000 6,040,000
Net assets of discontinued operations................................ 17,398,000 890,000 --
Prepaid expenses and other current assets............................ 438,000 1,464,000 1,891,000
Deferred income taxes (Note 9)....................................... 1,059,000 1,581,000 1,630,000
Income taxes refundable.............................................. -- 2,002,000 34,000
------------ ------------ -------------
Total current assets............................................... 32,644,000 19,234,000 23,033,000
Property and equipment, net (Note 5)................................... 3,794,000 3,562,000 3,883,000
Other assets........................................................... 220,000 265,000 260,000
------------ ------------ -------------
$ 36,658,000 $ 23,061,000 $27,176,000
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 2,801,000 $ 2,065,000 $ 1,797,000
Commissions payable.................................................. 185,000 403,000 401,000
Accrued royalties.................................................... 345,000 1,213,000 1,396,000
Accrued compensation costs........................................... 865,000 714,000 1,731,000
Accrued expenses..................................................... 2,198,000 2,250,000 3,325,000
Income taxes payable................................................. -- -- 2,459,000
Borrowings under line of credit (Note 6)............................. 4,375,000 2,655,000 --
Current portion of long-term debt (Note 6)........................... 586,000 2,062,000 1,789,000
------------ ------------ -------------
Total current liabilities.......................................... 11,355,000 11,362,000 12,898,000
Long-term debt, less current portion (Note 6).......................... 8,410,000 4,609,000 2,969,000
Convertible notes payable to related parties (Note 2).................. 1,200,000 1,200,000 1,200,000
------------ ------------ -------------
Total liabilities.................................................. 20,965,000 17,171,000 17,067,000
------------ ------------ -------------
Minority interest...................................................... 115,000 -- --
------------ ------------ -------------
Commitments and contingencies (Notes 6 and 7)
Stockholders' equity: (Note 8)
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none
issued or outstanding.............................................. -- -- --
Common stock, $0.01 par value; 20,000,000 shares authorized;
9,867,032, 11,025,527 and 11,031,527 shares issued and
outstanding........................................................ 58,000 69,000 69,000
Additional paid-in capital........................................... 15,725,000 17,176,000 17,191,000
Cumulative translation adjustment.................................... 164,000 -- --
Accumulated deficit.................................................. (369,000) (11,355,000) (7,151,000)
------------ ------------ -------------
Total stockholders' equity......................................... 15,578,000 5,890,000 10,109,000
------------ ------------ -------------
$ 36,658,000 $ 23,061,000 $27,176,000
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
MEDIA ARTS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
----------------------------------- -----------------------
1995 1996 1997 1996 1997
---------- ---------- ----------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales...................... $33,485,000 $39,752,000 $47,018,000 $20,041,000 $30,413,000
Cost of sales.................. 10,330,000 13,343,000 16,760,000 7,754,000 9,892,000
---------- ---------- ----------- ----------- ----------
Gross profit................. 23,155,000 26,409,000 30,258,000 12,287,000 20,521,000
---------- ---------- ----------- ----------- ----------
Operating expenses
Selling and marketing........ 6,685,000 10,028,000 12,784,000 6,129,000 7,766,000
General and administrative... 10,073,000 10,834,000 10,683,000 4,748,000 5,914,000
---------- ---------- ----------- ----------- ----------
Total operating expenses... 16,758,000 20,862,000 23,467,000 10,877,000 13,680,000
---------- ---------- ----------- ----------- ----------
Operating income............... 6,397,000 5,547,000 6,791,000 1,410,000 6,841,000
Interest expense............... (870,000) (1,447,000) (2,348,000) (1,080,000) (1,163,000)
Gain on sale and leaseback..... -- -- -- -- 997,000
Foreign exchange losses........ -- (42,000) (31,000) (62,000) (16,000)
---------- ---------- ----------- ----------- ----------
Income before income taxes..... 5,527,000 4,058,000 4,412,000 268,000 6,659,000
Provision for income taxes..... 1,513,000 1,603,000 1,768,000 105,000 2,455,000
---------- ---------- ----------- ----------- ----------
Income from continuing
operations before
extraordinary loss........... 4,014,000 2,455,000 2,644,000 163,000 4,204,000
Loss from discontinued
operations, net of income
taxes........................ (53,000) (3,128,000) (1,385,000) (1,385,000) --
Loss on disposal of
discontinued operations, net
of income taxes.............. -- -- (12,245,000) (12,245,000) --
Extraordinary loss, net of
income taxes................. (172,000) -- -- -- --
---------- ---------- ----------- ----------- ----------
Net income (loss).............. $3,789,000 $ (673,000) $(10,986,000) $(13,467,000) $4,204,000
---------- ---------- ----------- ----------- ----------
---------- ---------- ----------- ----------- ----------
Income from continuing
operations before
extraordinary loss per common
share........................ $ 0.42 $ 0.25 $ 0.26 $ 0.02 $ 0.37
Discontinued operations........ -- (0.32) (1.35) (1.38) --
Extraordinary loss............. (0.02) -- -- -- --
---------- ---------- ----------- ----------- ----------
Net income (loss) per common
share........................ $ 0.40 $ (0.07) $ (1.09) $ (1.36) $ 0.37
---------- ---------- ----------- ----------- ----------
---------- ---------- ----------- ----------- ----------
Weighted average common and
common equivalent shares
outstanding.................. 9,481,000 9,875,000 10,076,000 9,867,000 11,296,000
---------- ---------- ----------- ----------- ----------
---------- ---------- ----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
MEDIA ARTS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL CUMULATIVE EARNINGS
--------------------- PAID-IN TRANSLATION (ACCUMULATED
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT) TOTAL
--------- ---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994........... 7,794,647 $ 40,000 $1,058,000 $ -- $1,464,000 $ 2,562,000
Reclassification of retained
earnings on conversion of certain
subsidiaries from S Corporations
to C Corporations................. -- -- 2,685,000 -- (2,685,000) --
Issuance of Common Stock for cash... 1,437,500 14,000 8,046,000 -- -- 8,060,000
Issuance of Common Stock for
license........................... 223,600 2,000 1,675,000 -- -- 1,677,000
Issuance of Common Stock in exchange
for retirement of debt............ 249,626 2,000 1,668,000 -- -- 1,670,000
Issuance of Common Stock on exercise
of options........................ 13,502 -- 21,000 -- -- 21,000
Cumulative translation adjustment... -- -- -- 439,000 -- 439,000
Distributions to S Corporation
stockholders...................... -- -- -- -- (358,000) (358,000)
Adjustment for acquisition of a
gallery from a related party (Note
2)................................ -- -- -- -- 173,000 173,000
Net income.......................... -- -- -- -- 3,789,000 3,789,000
--------- ---------- ---------- ----------- ------------ -----------
Balance at March 31, 1995........... 9,718,875 58,000 15,153,000 439,000 2,383,000 18,033,000
Adjustment for acquisition of a
gallery from a related party (Note
2)................................ -- -- -- -- (1,530,000) (1,530,000)
Issuance of warrants to
noteholders....................... -- -- 570,000 -- -- 570,000
Issuance of Common Stock on exercise
of options........................ 527 -- 2,000 -- -- 2,000
Issuance of Common Stock on exercise
of warrants....................... 147,630 -- -- -- -- --
Cumulative translation adjustment... -- -- -- (275,000) -- (275,000)
Distributions to S Corporation
stockholders...................... -- -- -- -- (549,000) (549,000)
Net loss............................ -- -- -- -- (673,000) (673,000)
--------- ---------- ---------- ----------- ------------ -----------
Balance at March 31, 1996........... 9,867,032 58,000 15,725,000 164,000 (369,000) 15,578,000
Issuance of warrants to
noteholders....................... -- -- 1,424,000 -- -- 1,424,000
Issuance of Common Stock to
noteholders for cash.............. 748,693 7,000 -- -- -- 7,000
Issuance of Common Stock on exercise
of warrants....................... 400,000 4,000 -- -- -- 4,000
Issuance of Common Stock on exercise
of options........................ 9,802 -- 27,000 -- -- 27,000
Cumulative translation adjustment... -- -- -- (164,000) -- (164,000)
Net loss............................ -- -- -- -- (10,986,000) (10,986,000)
--------- ---------- ---------- ----------- ------------ -----------
Balance at March 31, 1997........... 11,025,527 69,000 17,176,000 -- (11,355,000) 5,890,000
Issuance of Common Stock on exercise
of options (unaudited)............ 6,000 -- 15,000 -- -- 15,000
Net income (unaudited).............. -- -- -- -- 4,204,000 4,204,000
--------- ---------- ---------- ----------- ------------ -----------
Balance at September 30, 1997
(unaudited)....................... 11,031,527 $ 69,000 $17,191,000 $ -- $(7,151,000) $10,109,000
--------- ---------- ---------- ----------- ------------ -----------
--------- ---------- ---------- ----------- ------------ -----------
</TABLE>
F-5
<PAGE>
MEDIA ARTS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
----------------------------------- ------------------------
1995 1996 1997 1996 1997
---------- ---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $3,789,000 $ (673,000) $(10,986,000) $(13,467,000) $4,204,000
Adjustments to reconcile net income to net cash
provided by (used in) continuing operating
activities:
Losses from discontinued operations........... 53,000 3,128,000 13,630,00 13,630,000 --
Depreciation.................................. 326,000 530,000 951,000 485,000 520,000
Amortization of intangibles................... 292,000 126,000 459,000 162,000 486,000
Deferred income taxes......................... (469,000) 82,000 (522,000) 89,000 (49,000)
Extraordinary write-off of debt discount...... 172,000 -- -- -- --
Provision for returns and allowances.......... 248,000 391,000 827,000 (10,000) 403,000
Provision for losses on accounts receivable... 171,000 (229,000) 844,000 334,000 (429,000)
Changes in assets and liabilities net of
effects from acquisition of companies:
Accounts receivable......................... (3,003,000) (2,744,000) (803,000) 766,000 (838,000)
Receivables from related parties............ (263,000) 143,000 -- (11,000) 114,000
Inventories................................. (2,083,000) (555,000) (215,000) (537,000) (625,000)
Prepaid expenses and other current assets... (692,000) 767,000 (1,048,000) (107,000) (427,000)
Income taxes refundable..................... -- -- (2,002,000) -- 1,968,000
Other assets................................ (30,000) (63,000) (127,000) (9,000) (2,000)
Accounts payable............................ 554,000 (189,000) (487,000) 508,000 (268,000)
Payables to related parties................. (106,000) (1,069,000) -- -- --
Commissions payable......................... (112,000) (593,000) 216,000 (149,000) (2,000)
Accrued compensation costs.................. -- -- (151,000) (107,000) 1,017,000
Income taxes payable........................ 828,000 (695,000) -- -- 2,459,000
Accrued royalties........................... -- 345,000 690,000 -- 183,000
Accrued expenses............................ 821,000 910,000 (491,000) (254,000) 1,075,000
---------- ---------- ----------- ----------- -----------
Net cash provided by (used in) continuing
operating activities...................... 496,000 (388,000) 785,000 1,323,000 9,789,000
Net cash provided by (used in) discontinued
operations...................................... (2,091,000) (6,473,000) 2,398,000 (761,000) 890,000
---------- ---------- ----------- ----------- -----------
Net cash provided by (used in ) operations........ (1,595,000) (6,861,000) 3,183,000 562,000 10,679,000
---------- ---------- ----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment........... (927,000) (468,000) (719,000) (271,000) (841,000)
Proceeds from disposals of property and
equipment..................................... -- 104,000 -- -- --
---------- ---------- ----------- ----------- -----------
Net cash used in investing activities............. (927,000) (364,000) (719,000) (271,000) (841,000)
---------- ---------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from (repayment of) line of credit..... 23,000 1,817,000 (1,135,000) (362,000) (2,655,000)
Proceeds from (repayment of) notes payable...... (968,000) 5,427,000 (700,000) (311,000) (2,392,000)
Proceeds from (repayment of) notes payable to
related parties............................... (450,000) (58,000) -- -- --
Repayment of lease liabilities.................. (152,000) (602,000) (675,000) -- --
Proceeds from issuance of Common Stock, net..... 8,345,000 -- 38,000 -- 15,000
Payment of accrued license fees................. (1,323,000) -- -- -- --
Payments of distributions to S Corporation
stockholders.................................. (2,248,000) (529,000) -- -- --
---------- ---------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities...................................... 3,227,000 6,055,000 (2,472,000) (673,000) (5,032,000)
---------- ---------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents..................................... 705,000 (1,170,000) (8,000) (382,000) 4,806,000
Cash and cash equivalents at beginning of
period.......................................... 847,000 1,552,000 382,000 382,000 374,000
---------- ---------- ----------- ----------- -----------
Cash and cash equivalents at end of period........ $1,552,000 $ 382,000 $ 374,000 $ -- $5,180,000
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
Supplemental cash flow disclosures:
Income taxes paid (refunded).................... $1,037,000 $1,597,000 $ 128,000 $ 128,000 ($1,968,000)
Interest paid................................... 1,172,000 1,151,000 1,816,000 568,000 918,000
Noncash investing activities (Note 10)
</TABLE>
F-6
<PAGE>
MEDIA ARTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
The consolidated financial statements of Media Arts Group, Inc. (the
"Company") include the accounts of Media Arts Group, Inc. ("MAGI") (incorporated
in Delaware on April 28, 1993), its wholly owned subsidiary Thomas Kinkade
Stores, Inc. ("TK Stores") (incorporated in California on May 1, 1990) and its
majority owned subsidiary John Hine Limited (a United Kingdom corporation) from
the date of acquisition (Note 2). The Company disposed of John Hine Limited
during the year ended March 31, 1997 (Note 3). The Company designs,
manufactures, markets and retails branded art-based home accessories,
collectibles and gift products based upon the works of the artist Thomas
Kinkade.
Through March 31, 1994, the Company's business was principally operated
through Lightpost Publishing, Inc. (a wholly owned subsidiary which was merged
into MAGI in March 1997) and John Hine Limited and to a minor degree through TK
Stores. In order to organize the Company for future growth, on April 1, 1994,
all outstanding shares of Common Stock of Lightpost Publishing, Inc. and TK
Stores were exchanged for 6,970,250 shares of Common Stock of MAGI. The Company
accounted for this transaction in a manner similar to a pooling of interests due
to the companies being under common control. In May 1994, the Company effected a
1.054-for-1 stock split. All share and per share amounts have been adjusted to
retroactively reflect these transactions.
PRINCIPLES OF COMBINATION AND CONSOLIDATION
All intercompany transactions and accounts have been eliminated.
MANAGEMENT ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment. Reserves for
estimated future returns, exchanges and credits for marketing and other sales
incentives are provided upon shipment.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments purchased with a
maturity from the date of purchase of three months or less.
CONCENTRATION OF CREDIT RISKS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
The Company offers credit terms on the sale of its products to distributors and
retail dealers who operate primarily in the collectible art industry in the
United States. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
The Company maintains an allowance for uncollectible accounts receivable based
upon the expected collectibility of all accounts receivable.
F-7
<PAGE>
MEDIA ARTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVENTORIES
Inventories are recorded at the lower of cost or market; cost is determined
on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed on a
straight-line basis over the following estimated useful lives:
<TABLE>
<S> <C>
Machinery and equipment................................ 5 years
Furniture and fixtures................................. 7 years
7 years or life of
Leasehold improvements................................. lease
Computer equipment..................................... 5 years
Automobiles............................................ 4 or 5 years
</TABLE>
LONG-LIVED ASSETS
On April 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be
Disposed Of." This statement established accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill. The
adoption of this statement had no effect on the Company's financial position or
results of operations.
INCOME TAXES
The Company accounts for income taxes using the asset and liability approach
which recognizes deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the book and tax basis of assets
and liabilities. A valuation allowance is established for any deferred assets
for which realization is uncertain.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost
is recognized based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the amount an employee must pay to acquire
the stock.
FOREIGN CURRENCY TRANSLATION
The functional currency of John Hine Limited was the local currency.
Accordingly, all assets and liabilities for this operation were translated at
the current exchange rate at the end of each operating period and revenue and
expenses were translated at average exchange rates in effect during the period.
The gains and losses from foreign currency translation of this subsidiary's
financial statements were recorded directly into a separate component of
stockholders' equity.
F-8
<PAGE>
MEDIA ARTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NET INCOME (LOSS) PER SHARE
Net income per share is computed using the weighted average number of shares
of Common Stock and dilutive Common Stock equivalent shares outstanding. Common
Stock equivalents include shares from the exercise of stock options and warrants
(using the treasury stock method).
UNAUDITED INTERIM RESULTS FOR SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1997
The accompanying consolidated balance sheets at September 30, 1997, the
accompanying consolidated statements of operations and of cash flows for the six
month periods ended September 30, 1996 and 1997 and the accompanying
consolidated statement of stockholders' equity for the six month period ended
September 30, 1997, are unaudited. In the opinion of management, the interim
data has been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair statement of the results for the interim periods.
PRESENTATION
Certain prior year amounts have been reclassified to conform to fiscal 1997
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." SFAS 128 specifies the computation, presentation and
disclosure requirements for earnings per share, is effective for financial
statements issued for periods ending after December 15, 1997, and requires
restatement of all prior period earnings per share data previously presented.
Reported earnings per share of the Company will not change materially when the
provisions of this statement are applied.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company will be required to adopt
both statements for the year ending March 31, 1999. Under SFAS No. 130,
companies are required to report in the financial statements, in addition to net
income, comprehensive income including, as applicable, foreign currency items,
minimum pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. SFAS No. 131 requires that companies
report separately, in the financial statements, certain financial and
descriptive information about operating segments, if applicable. The Company is
currently assessing its disclosure requirements under SFAS No. 130 and SFAS No.
131.
NOTE 2--ACQUISITIONS:
In December 1993, the Company acquired 51% of the outstanding stock of John
Hine Limited in exchange for consideration aggregating $7,426,000. In August
1994, the Company acquired an additional 46% of the outstanding stock of John
Hine Limited in exchange for consideration of $6,370,000. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
purchase price was allocated to
F-9
<PAGE>
MEDIA ARTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS: (CONTINUED)
the assets acquired based on their estimated fair values at the date of
acquisition. Total consideration for these acquisitions consisted of:
<TABLE>
<S> <C>
Notes and convertible notes.................................... $4,129,000
Cash........................................................... 7,468,000
Common stock (223,600 shares).................................. 1,677,000
Expenses of the transaction.................................... 522,000
----------
Total purchase price........................................... $13,796,000
----------
----------
</TABLE>
The assets acquired consisted of:
<TABLE>
<S> <C>
Current assets................................................. $8,999,000
Property and equipment......................................... 2,775,000
Goodwill....................................................... 5,980,000
Other assets................................................... 4,566,000
----------
Minority interest.............................................. 2,245,000
----------
$24,565,000
----------
----------
</TABLE>
The liabilities assumed consisted of:
<TABLE>
<S> <C>
Current liabilities............................................ $5,950,000
Long-term debt, less current portion........................... 1,555,000
Other liabilities.............................................. 770,000
Minority interest.............................................. 2,494,000
----------
10,769,000
----------
Net assets acquired............................................ $13,796,000
----------
----------
</TABLE>
On September 27, 1996, the Company decided to dispose of John Hine Limited,
and accordingly the results of John Hine Limited have been accounted for as a
discontinued operation (Note 3).
The convertible notes outstanding at March 31, 1997 aggregate $1,555,000 and
are payable on demand. The notes bear interest at 5% above LIBOR (11.1% as of
March 31, 1997) and are payable in cash or, at the noteholder's option,
convertible into shares of Common Stock at $7.25 per share.
Effective June 1, 1995, the Company acquired a gallery located in San Jose,
California (the "Valley Fair Gallery"), owned and operated by the spouse of a
founder. Consideration for this acquisition consisted of cash of $31,000, an 8%
promissory note in the amount of $299,000 which was repaid in July 1996 and an
8% convertible note in the amount of $1,200,000 due in October 2002. The
convertible note is convertible into Common Stock of the Company at a conversion
price of $7.25 per share (as adjusted in accordance with the terms of the
convertible note).
The Company has accounted for this transaction in a manner similar to a
pooling of interests due to the Company and the Valley Fair Gallery being under
common control. Accordingly, the results of the Valley Fair Gallery are included
in the consolidated statement of operations commencing from April 1, 1995. The
results of
F-10
<PAGE>
MEDIA ARTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS: (CONTINUED)
the Valley Fair Gallery prior to April 1, 1995 were not significant and have
been recorded as an adjustment to the Company's consolidated retained earnings
as of March 31, 1995. The consideration paid for the acquisition in excess of
net assets acquired recorded on an historical basis of $1,530,000 has been
recorded as a reduction of retained earnings.
Effective March 31, 1996, the Company acquired six galleries ("the Monterey
Galleries") located in Monterey and Carmel, California. Consideration for this
acquisition consisted of 444,483 shares of Common Stock of MAGI. The Company has
accounted for this transaction as a pooling of interests. Accordingly, the
Company's financial statements have been restated to include the results of the
Monterey Galleries for all periods presented.
Adjustments have been made to eliminate the impact of sales by the Company
to the Valley Fair Gallery and the Monterey Galleries, as well as the related
profit in inventory. Combined and separate results of the Company and the
Monterey Galleries for the periods preceding the acquisition are as follows:
<TABLE>
<CAPTION>
MONTEREY
COMPANY GALLERIES ADJUSTMENTS COMBINED
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1995
Net sales............................................ $ 31,872,000 $ 3,398,000 $ (1,785,000) $ 33,485,000
Income from continuing operations before
extraordinary items................................ 3,894,000 377,000 (257,000) 4,014,000
Net income........................................... 3,669,000 377,000 (257,000) 3,789,000
Distributions to S Corporation stockholders.......... -- 358,000 -- 358,000
YEAR ENDED MARCH 31, 1996
Net sales............................................ 37,095,000 4,594,000 (1,937,000) 39,752,000
Income from continuing operations before
extraordinary items................................ 2,165,000 345,000 (55,000) 2,455,000
Net income (loss).................................... (963,000) 345,000 (55,000) (673,000)
Distributions to S Corporation stockholders.......... $ -- $ 549,000 $ -- $ 549,000
</TABLE>
NOTE 3--DISCONTINUED OPERATIONS
On January 10, 1994, the Company adopted a plan to dispose of the assets and
operations of TK Stores which consisted of seven art galleries. The anticipated
disposal was accounted for as a discontinued operation and accordingly the
assets held for disposal and operating results of TK Stores were segregated and
reported as discontinued operations. As the Company expected to realize a net
gain from the sale of the galleries, all losses incurred by TK Stores subsequent
to January 10, 1994 were deferred until the anticipated sale of the galleries.
On December 16, 1994, the Company decided to retain the assets and
operations of TK Stores as the Company had not received any purchase offers that
met criteria established in the formal plan of disposal and accordingly the
Company ceased accounting for TK Stores as a discontinued operation. Deferred
losses of TK Stores at March 31, 1994, of $211,000 have been recognized in the
year ended March 31, 1995.
On September 27, 1996, the Company decided to dispose of the assets and
operations of John Hine Limited, a United Kingdom company which was acquired in
December 1993 and which manufactured and distributed collectible miniature
cottages and similar products. On November 11, 1996, a Receiver was appointed by
Natwest, John Hine Limited's lender in the United Kingdom. The Receiver ceased
operations of
F-11
<PAGE>
MEDIA ARTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--DISCONTINUED OPERATIONS (CONTINUED)
John Hine Limited on December 31, 1996, and a Liquidator was appointed on
February 7, 1997 to dispose of the remaining assets of John Hine Limited. The
disposal has been accounted for as a discontinued operation and accordingly the
assets held for disposal and operating results of John Hine Limited have been
segregated and reported as discontinued operations in the accompanying
consolidated balance sheets and statements of operations. Prior year financial
statements have been restated to reflect the discontinuance of the John Hine
Limited operations. The net assets of the discontinued operations at March 31,
1997 consist primarily of accounts receivable and inventory related to United
States operations, and at March 31, 1996 also include goodwill, licenses and
customer lists aggregating $8,389,000 together with the assets and liabilities
of the United Kingdom operation.
Operating results of discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Net sales of discontinued operations................................ $ 20,900,000 $ 14,249,000 $ 6,788,000
------------- ------------- --------------
------------- ------------- --------------
Loss from discontinued operations before income taxes............... $ (142,000) $ (5,008,000) $ (2,253,000)
Benefit from income tax reduction................................... 89,000 1,880,000 868,000
------------- ------------- --------------
Loss from discontinued operations................................... $ (53,000) $ (3,128,000) $ (1,385,000)
------------- ------------- --------------
------------- ------------- --------------
Loss on disposal of discontinued operations before income taxes..... $ -- $ -- $ (14,664,000)
Benefit from income tax reduction................................... -- -- 2,419,000
------------- ------------- --------------
Loss on disposal of discontinued operations......................... $ -- $ -- $ (12,245,000)
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
The income tax benefit attributable to discontinued operations differs from
the federal statutory rate due principally to state income taxes for all years
presented, and to net operating loss carryforwards not currently recognized for
the year ended March 31, 1997.
NOTE 4--RELATED PARTY TRANSACTIONS:
Certain original art works used for reproductions by the Company have been
supplied by a founder of the Company and remain the property of the founder.
Royalties paid to the founder for sales of reproductions of the founder's art
works by the Company aggregated $320,000, $808,000 and $1,159,000, for the years
ended March 31, 1995, 1996 and 1997, and aggregated $342,000 (unaudited) and
$780,000 (unaudited) for the six months ended September 30, 1996 and 1997,
respectively.
In March 1996, the Company acquired six galleries in Monterey and Carmel,
California. The owner of those galleries became a vice president of the Company
and retained ownership of a gallery in Catalina.
Expenses of the acquisition of John Hine Limited include $326,000 which the
Company agreed to pay to certain minority stockholders of the Company for
services rendered in connection with that acquisition (Note 2).
F-12
<PAGE>
MEDIA ARTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--DETAILS OF BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1996 1997
------------ ------------ SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C> <C>
Inventories:
Raw materials.............................................. $ 863,000 $ 843,000 $ 564,000
Work in process............................................ 44,000 12,000 9,000
Finished goods............................................. 4,099,000 4,560,000 5,467,000
------------ ------------ -------------
$ 5,006,000 $ 5,415,000 $ 6,040,000
------------ ------------ -------------
------------ ------------ -------------
<CAPTION>
MARCH 31,
--------------------------
1996 1997
------------ ------------
SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C> <C>
Property and equipment:
Machinery and equipment.................................... $ 186,000 $ 266,000 $ 390,000
Furniture and fixtures..................................... 1,101,000 1,124,000 1,219,000
Leasehold improvements..................................... 1,402,000 1,666,000 2,014,000
Computer hardware and software............................. 2,384,000 2,722,000 2,878,000
Automobiles................................................ 79,000 93,000 196,000
------------ ------------ -------------
5,152,000 5,871,000 6,697,000
Less accumulated depreciation.............................. 1,358,000 2,309,000 2,814,000
------------ ------------ -------------
$ 3,794,000 $ 3,562,000 $ 3,883,000
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
Automobiles, machinery and equipment and computer hardware and software
acquired under capital leases aggregated $1,845,000 at March 31, 1996 and 1997
and September 30, 1997. Accumulated amortization at March 31, 1996 and 1997 and
September 30, 1997 aggregated $224,000, $579,000 and $764,000 (unaudited)
respectively.
NOTE 6--DEBT:
Long-term debt:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1996 1997
------------ ------------ SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C> <C>
Secured notes, net of unamortized debt discount at March 31,
1996 and 1997 and September 30, 1997 of $1,609,000,
$2,843,000 and $2,431,000, respectively.................... $ 6,391,000 $ 4,557,000 $ 2,969,000
Convertible notes............................................ 1,482,000 1,555,000 1,571,000
Capital leases (Note 7)...................................... 1,123,000 559,000 218,000
------------ ------------ -------------
8,996,000 6,671,000 4,758,000
Less current portion......................................... 586,000 2,062,000 1,789,000
------------ ------------ -------------
$ 8,410,000 $ 4,609,000 $ 2,969,000
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-13
<PAGE>
MEDIA ARTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--DEBT: (CONTINUED)
On February 21, 1997, the Company entered into a two year financing
agreement with a bank for the provision of an $8,000,000 line of credit ("the
Senior Debt"). The financing agreement also provided a facility for the
provision of up to $2,000,000 in support of trade letters of credit. The total
amount available under the line, based on the Company's eligible accounts
receivable and inventory, was $6,180,000 at March 31, 1997. Borrowings under the
line bear interest at the bank's prime rate plus 1 percent (9.25% at March 31,
1997). Interest payments are due monthly and the principal is due in February,
1999. Outstanding borrowings under the line of credit aggregated $2,655,000 at
March 31, 1997. Borrowings under previous lines of credit aggregated $4,375,000
at March 31, 1996.
In conjunction with the acquisition of John Hine Limited, the Company
borrowed $2,225,000 in December 1993 from investors (the "Investors") in
exchange for unsecured notes (the "Investor Notes") with an interest rate of 18%
per annum. In consideration for accepting the Investor Notes the Company sold to
the Investors, for total consideration of $4,000, warrants to purchase 164,239
shares of the Company's Common Stock at $0.68 per share. A portion of the
proceeds of the Investor Notes attributable to the warrants was accounted for as
additional paid-in capital and debt discount in the amount of $658,000. Debt
discount was amortized over the anticipated term of the related notes (13
months) using the interest method. Amortization of the debt discount aggregated
$154,000 for the year ended March 31, 1995.
In conjunction with the Company's initial public offering in August 1994,
the Company exchanged $1,670,000 of the Investor Notes for 249,626 shares of
Common Stock and warrants to purchase approximately 299,000 shares of Common
Stock at $7.50 per share, and exchanged the balance of the Investor Notes for
cash of $555,000. The Company also agreed to waive the exercise price of 147,630
shares under the warrants previously issued to the Investors. The extinguishment
of the Investor Notes prior to their scheduled maturity date resulted in the
recognition of an extraordinary loss of $172,000 (net of income tax benefit of
$96,000) attributable to the write-off of unamortized debt discount and prepaid
interest.
On July 25, 1995 the Company issued a $3,000,000 12.5% convertible
redeemable note (the "Convertible Note"), a $4,000,000 12.375% promissory note
and a $1,000,000 12.375% promissory note (together the "Notes") and a warrant to
purchase 400,000 shares of the Company's Common Stock at an exercise price of
$5.9375 (the "Warrant") to an investor in exchange for cash of $8,000,000 (the
"Subordinated Debt"). The Convertible Note was convertible into Common Stock of
the Company at a conversion price of $6.25 per share (as adjusted in accordance
with the terms of the Convertible Note).
On March 12, 1996, the Company changed the interest rate on the Subordinated
Debt to 13.5% effective October 1, 1995 and changed the per share exercise price
of the Warrant to $2.00 in exchange for modification of certain financial
covenants. The Company also amended the conversion price of the Convertible Note
such that $960,000 was convertible at $2.00 per share and $810,000 was
convertible at $3.00 per share with the balance of $1,230,000 having no right of
conversion.
Effective February 21, 1997, in conjunction with entering into the Senior
Debt Agreement, the Company renegotiated the terms and covenants of the Senior
Subordinated Debt and restructured the Notes to a single note aggregating $7.4
million (the "New Note"), after a payment of $592,000 pursuant to the
renegotiation. As part of the renegotiation, the Warrant exercise price was
amended to $0.01 per share which was fully exercised through a cashless
exercise, resulting in the issuance of 398,693 shares of Common Stock. The
conversion rights under the Notes were also amended to provide that
approximately $8,000 of principal amount would be convertible into Common Stock
at an exercise price of $0.01 per share. These conversion rights were also fully
exercised in conjunction with the renegotiation resulting in the issuance of
750,000 shares of Common Stock.
F-14
<PAGE>
MEDIA ARTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--DEBT: (CONTINUED)
The Senior Debt and the Subordinated Debt are secured by substantially all
of the assets of the Company.
The Notes are repayable at 102% of their principal in the event of a Change
in Management or Control of the Company (as defined under the terms of the
Notes), including any event or transaction whereby (i) Thomas Kinkade (Art
Director) and Ken Raasch (Chairman) cease to collectively beneficially own more
than 35 percent of the voting power of the Company; (ii) any person or group
acquires beneficial ownership of voting power of the Company greater than the
collective beneficial ownership of Thomas Kinkade and Ken Raasch; or (iii) Ken
Raasch ceases to remain in the office of Chairman.
Debt issuance costs related to the issuance of the Notes and the New Note
aggregated approximately $3,420,000 (including $2,005,000 attributable to the
Warrants and Common Stock issued in conjunction with the Notes and New Note) and
are being amortized over the term of the Notes using the interest method.
Interest on the New Note is due monthly, and principal payments are due from
December 1998 through September 2002.
On June 30, 1997, the Company repaid $1.3 million of the New Note, and on
July 7, 1997 repaid a further $700,000 of the New Note. The payments were made
using the proceeds of a federal income tax refund. The remaining principal
balance of $5.4 million is due between December 28, 1998 and December 31, 2001.
The aggregate maturities for long-term debt, including convertible notes due
to related parties, and capital lease obligations outstanding at March 31, 1997
are as follows:
<TABLE>
<CAPTION>
YEAR
- -------------------------------------------------------------------------------
<S> <C>
1998........................................................................... $ 4,045,000
1999........................................................................... 552,000
2000........................................................................... 1,067,000
2001........................................................................... 2,200,000
2002........................................................................... 2,850,000
-------------
10,714,000
Unamortized debt discount at March 31, 1997.................................... (2,843,000)
-------------
$ 7,871,000
-------------
-------------
</TABLE>
The Senior Debt and the Subordinated Debt prohibit the payment of cash
dividends and require the maintenance of various financial covenants. Without
the prior consent of the lenders, the Company is also prohibited from incurring
debt and lease commitments in excess of specified amounts or entering into
acquisitions, sales of business, merger or joint venture agreements in excess of
certain amounts.
F-15
<PAGE>
MEDIA ARTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--COMMITMENTS:
The Company has certain noncancellable operating leases for facilities and
equipment and noncancellable capital leases for machinery and equipment and
automobiles. Future minimum lease commitments under noncancellable leases as of
March 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR CAPITAL OPERATING
- -------------------------------------------------------------------- ---------- ------------
<S> <C> <C>
1998................................................................ $ 528,000 $ 1,577,000
1999................................................................ 57,000 1,496,000
2000................................................................ 18,000 1,236,000
2001................................................................ -- 970,000
2002................................................................ -- 533,000
Thereafter.......................................................... -- 410,000
---------- ------------
Total minimum lease payments........................................ 603,000 $ 6,222,000
------------
------------
Less amounts representing interest.................................. 44,000
----------
Present value of future minimum lease payments...................... 559,000
Less amounts due within one year.................................... 507,000
----------
$ 52,000
----------
----------
</TABLE>
Rent expense under operating leases was $2,014,000, $1,714,000 and
$2,006,000 for the years ended March 31, 1995, 1996 and 1997, respectively and
was $1,092,000 (unaudited) and $1,465,000 (unaudited) for the six months ended
September 30, 1996 and 1997, respectively. TK Stores maintains leases for
certain art galleries which stipulate that additional rent will be payable if
the revenues of those galleries exceed a certain amount.
Certain officers and stockholders have entered into employment agreements
with the Company ranging from three to five years. Compensation payable under
the agreements excluding performance bonuses, aggregates $460,000 and $345,000
for the years ending March 31, 1998 and 1999, respectively. Each of the
agreements 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 three to
five years after a change in control of the Company which provides "Good Reason"
for the officer to terminate his employment. "Good Reason" is defined in the
agreements 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 benefit plans in which he was eligible to
participate.
The Company has entered into various licensing agreements which stipulate
certain minimum royalty amounts. The minimum payments due for royalties
aggregate $212,000 and $369,000 for the years ending March 31, 1998 and 1999,
respectively, $60,000 for the years ending March 31, 2000, 2001 and 2002, and
$155,000 thereafter.
NOTE 8--COMMON STOCK:
On August 10, 1994 and September 9, 1994, the Company issued an aggregate of
1,437,500 shares of Common Stock at a price of $7.25 per share in an
underwritten public offering and received proceeds of $8,060,000 (net of
underwriting and offering costs of $2,362,000). The principal purpose of the
offering was to obtain additional working capital, to repay certain
indebtedness, to purchase an additional 46% interest in John Hine Limited and to
pay an S corporation distribution to the Company's existing shareholders. In
conjunction
F-16
<PAGE>
MEDIA ARTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMON STOCK: (CONTINUED)
with the offering, the Company issued 223,600 shares of Common Stock to an
artist in consideration for entering into a license agreement with John Hine
Limited (Note 2), and issued warrants to purchase 125,000 shares of Common Stock
at $9.06 per share to the offering Underwriters.
In conjunction with the acquisition of John Hine Limited the Company sold to
certain noteholders (the "Investors"), at a price of $0.03 per warrant, warrants
to purchase 164,239 shares of the Company's Common Stock at $0.68 per share
(Note 6). The warrants are transferable and are exercisable through December 31,
1998, except that if the closing price of the Company's Common Stock equals or
exceeds $10.50 for a period of 20 consecutive trading days, the Company has the
right to accelerate the exercise date of the warrants to 60 days from the
exercise of that right.
In conjunction with the initial public offering in August 1994, the Company
extinguished debt aggregating $1,670,000 by issuing to the Investors 249,626
shares of Common Stock and warrants to purchase approximately 299,000 shares of
Common Stock at $7.50 per share. The Company also agreed to pay the $0.68
exercise price of 147,630 shares of the warrants previously issued to the
Investors. In fiscal 1996, 147,630 shares of the Company's Common Stock were
issued upon exercise of those warrants. The remaining warrants are exercisable
through August 10, 2004.
Effective March 31, 1996, the Company acquired six galleries in Monterey and
Carmel, California, in exchange for 444,483 shares of the Company's Common
Stock.
On February 21, 1997, the Company issued 1,148,693 shares of Common Stock to
the holders of the Subordinated Debt (Note 6). In conjunction with the
negotiation of a new License Agreement with Thomas Kinkade in December 1997, the
Company issued to Thomas Kinkade an option to purchase 600,000 shares of the
Company's Common Stock at an exercise price of $12.375 per share.
In February 1994, the Company adopted the Employee Stock Option Plan (the
"Employee Plan") and the Stock Option Plan for Outside Directors (the "Directors
Plan") under which 1,124,863 shares and 50,000 shares, respectively, of Common
Stock are reserved for issuance to employees and outside directors.
Options granted under the Employee Plan may be either incentive stock
options or non-qualified stock options. The exercise price of options granted
under the Employee Plan may not be less than the fair market value of the shares
of the Company's Common Stock on the date of grant. However, in the case of
options granted to an optionee who owns stock representing more than 10% of the
voting power of all classes of the Company's stock, the exercise price must not
be less than 110% of the fair market value on the date of grant and the maximum
term of such options may not exceed five years.
Incentive stock options generally expire on the earlier of three months
after termination of employment, or ten years after date of grant. Non-qualified
stock options generally expire on the earlier of six months after termination of
employment, or ten years after date of grant.
Under the terms of the Directors Plan the Company's two outside directors at
the date of adoption of the Directors Plan were each granted options to purchase
7,909 shares. Outside directors subsequently appointed are entitled to receive
an option to purchase 5,000 shares of Common Stock. Outside directors are
entitled to receive an option to purchase 1,500 shares of Common Stock after
each year of service as an outside director. All such options vest immediately
and generally expire three months after termination of office, or 10 years after
date of grant.
F-17
<PAGE>
MEDIA ARTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMON STOCK: (CONTINUED)
The following table summarizes option activities:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING WEIGHTED
OPTIONS -------------------------- AVERAGE
AVAILABLE EXERCISE PRICE EXERCISE
FOR GRANT SHARES PER SHARE PRICE
--------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
Balance at March 31, 1994..................................... 609,045 240,955 $ 2.37 - $7.11 $ 2.71
Granted....................................................... (434,950) 434,950 3.00 - 8.13 7.05
Exercised..................................................... -- (13,502) 2.50 2.50
--------- ----------
Balance at March 31, 1995..................................... 174,095 662,403 2.37 - 8.13 5.56
Reserved...................................................... 250,000 -- --
Granted....................................................... (37,000) 37,000 2.75 - 6.38 5.82
Exercised..................................................... -- (527) 2.37 2.37
Expired....................................................... 15,005 (15,005) 2.37 - 7.11 4.15
--------- ----------
Balance at March 31, 1996..................................... 402,100 683,871 2.37 - 8.13 5.55
Granted....................................................... (152,000) 152,000 1.31 - 4.93 3.07
Exercised..................................................... -- (9,802) 1.31 - 3.00 2.74
Expired....................................................... 118,878 (118,904) 2.37 - 8.13 3.29
--------- ----------
Balance at March 31, 1997..................................... 368,978 707,165 1.31 - 8.13 3.15
--------- ----------
--------- ----------
</TABLE>
On August 21, 1996, the Company canceled 395,450 options with exercise
prices between $5.50 and $7.25 (a weighted average exercise price of $7.02) and
reissued those options with an exercise price of $3.00. As of March 31, 1996 and
1997, options to purchase 510,827 and 510,727 shares, respectively, of Common
Stock were fully vested.
The following table summarizes information regarding stock options
outstanding at March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
NUMBER NUMBER
RANGE OF OUTSTANDING WEIGHTED AVERAGE WEIGHTED EXERCISABLE
EXERCISE AT MARCH 31, REMAINING CONTRACTUAL AVERAGE AT MARCH 31, WEIGHTED AVERAGE
PRICES 1997 LIFE (YEARS) EXERCISE PRICE 1997 EXERCISE PRICE
- -------------- ------------ --------------------- --------------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
$ 1.31 - $2.75 341,341 6.9 $ 2.35 238,677 $ 2.37
3.00 - 4.00 287,483 6.6 3.08 204,450 3.01
4.93 - 8.13 78,341 7.2 6.91 67,600 7.02
------------ ------------
707,165 6.8 3.15 510,727 3.24
------------ ------------
------------ ------------
</TABLE>
F-18
<PAGE>
MEDIA ARTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMON STOCK: (CONTINUED)
The Company applies the provisions of APB No. 25 and related Interpretations
in accounting for compensation expense under the Company's option plans. Had
compensation expense under these plans been determined pursuant to SFAS No. 123,
the Company's net income and net income per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1996 1997
------------ --------------
<S> <C> <C>
Income from continuing operations before extraordinary loss
As reported................................................... $ 2,455,000 $ 2,644,000
Pro forma..................................................... 2,422,000 2,387,000
Net loss
As reported................................................... (673,000) (10,986,000)
Pro forma..................................................... (706,000) (11,243,000)
Income from continuing operations before extraordinary loss per
share
As reported................................................... 0.25 0.26
Pro forma..................................................... 0.22 0.22
Net loss per share
As reported................................................... (0.07) (1.09)
Pro forma..................................................... (0.07) (1.03)
</TABLE>
The fair value of the shares granted under the Company's option plans was
estimated using the Black-Scholes model with the following assumptions: zero
dividend yield; an expected life of four years; expected volatility of 75%; and
a risk-free interest rate of 6.0% and 6.4% for the years ended March 31, 1996
and 1997, respectively. The pro forma amounts reflect compensation expense
related to stock options granted during the years ended March 31, 1996 and 1997
only. In future years, the annual compensation expense computed in accordance
with SFAS No. 123 will increase relative to the fair value of stock options
granted in those years.
F-19
<PAGE>
MEDIA ARTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal..................................................... $ 499,000 $ 1,195,000 $ 1,975,000
State....................................................... 1,483,000 326,000 315,000
------------ ------------ ------------
1,982,000 1,521,000 2,290,000
------------ ------------ ------------
Deferred:
Federal..................................................... (147,000) 82,000 (467,000)
State....................................................... (322,000) -- (55,000)
------------ ------------ ------------
(469,000) 82,000 (522,000)
------------ ------------ ------------
$ 1,513,000 $ 1,603,000 $ 1,768,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
A reconciliation of income taxes computed at the federal statutory income
tax rate to income taxes reported in the statement of operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
1995 1996 1997
--- --- ---
<S> <C> <C> <C>
Federal statutory income tax rate............................................. 34% 34% 34%
S Corporation income not subject to federal income taxes...................... (1) (2) --
State income taxes............................................................ 6 5 3
Recognition of deferred tax benefit on conversion of certain subsidiaries from
S Corporations to C Corporations............................................ (11) -- --
Other......................................................................... (1) 2 3
-- -- --
27% 39% 40%
-- -- --
-- -- --
</TABLE>
Deferred income tax assets consisted of:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Allowances for sales returns and doubtful accounts.......................... $ 607,000 $ 1,051,000
Inventory reserves.......................................................... 261,000 235,000
State income taxes.......................................................... 27,000 48,000
Other....................................................................... 164,000 247,000
------------ ------------
Net deferred income tax assets.......................................... $ 1,059,000 $ 1,581,000
------------ ------------
------------ ------------
</TABLE>
Net deferred tax assets aggregating $638,000 and an income tax benefit in an
equal amount were recorded in the financial statements of the Company on April
1, 1994, when Lightpost and TK Stores ceased to be treated as S corporations.
Gross deferred income tax assets at March 31, 1996 and 1997 also relate to John
Hine Limited and its U.S. subsidiary, John Hine Studios, Inc. Goodwill arising
from the acquisition of John Hine Limited was
F-20
<PAGE>
MEDIA ARTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--INCOME TAXES: (CONTINUED)
reduced by $749,000 during the year ended March 31, 1995 to reflect the
recognition of a reduction in the valuation allowance for deferred tax assets
acquired as part of the acquisition of John Hine Limited for which a full
valuation allowance was provided at the time of acquisition.
NOTE 10--NON CASH INVESTING AND FINANCING ACTIVITIES:
On February 21, 1997, the Company refinanced its Senior Debt and
renegotiated the terms of its Subordinated Debt. In conjunction with the
refinancing and renegotiation of that debt the Company issued 1,148,693 shares
of Common Stock to the holder of the Subordinated Debt (Note 6).
The Company acquired the Valley Fair Gallery effective June 1, 1996 in
exchange for cash of $31,000 and notes aggregating $1,494,000. The Company
acquired the Monterey Galleries effective March 31, 1996 in exchange for 444,483
shares of the Company's Common Stock.
Asset acquisitions under capital leases aggregated $388,000 and $1,212,000
for the years ended March 31, 1996 and 1995, respectively, and were not
significant for any other period presented.
Consideration for the acquisition of 51% of John Hine Limited in December
1993 included notes aggregating $496,000 and accrued liabilities aggregating
$1,480,000 (Note 2). Consideration for the acquisition of 46% of John Hine
Limited in August 1994 included convertible notes aggregating $2,310,000 and
202,667 shares of Common Stock issued in conjunction with the Company's initial
public offering (Note 2). The Company issued an additional 20,933 shares of
Common Stock in conjunction with the offering to repay $157,000 of the accrued
liabilities incurred for the acquisition of the 51% interest in John Hine
Limited.
In conjunction with the Company's initial public offering in August 1994,
the Company exchanged $1,670,000 of notes for 249,626 shares of Common Stock and
warrants to purchase approximately 299,000 shares of Common Stock at $7.50. The
extinguishment of the notes prior to their scheduled maturity date resulted in
the recognition of an extraordinary loss of $172,000 (net of income tax benefit
of $96,000) attributable to the write-off of unamortized debt discount and
prepaid interest.
Goodwill arising from the acquisition of John Hine Limited was reduced by
$749,000 during the year ended March 31, 1995 to reflect the recognition of a
reduction in the valuation allowance for deferred tax assets acquired as part of
the acquisition of John Hine Limited for which a full valuation allowance was
provided at the time of acquisition.
NOTE 11--GAIN ON SALE AND LEASEBACK:
In July 1997, the Company exercised an option to purchase its San Jose
leasehold facility. The Company subsequently sold the facility and entered into
a four year lease agreement with the purchaser. The gain on the sale and
leaseback of the facility, after transaction costs of $110,000 (unaudited) and
deferral of $650,000 (unaudited) to offset future rent increases as compared to
the previous lease, aggregated $997,000 (unaudited).
F-21
<PAGE>
- -------------------------------------------------
-------------------------------------------------
- -------------------------------------------------
-------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY
SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................... 3
Risk Factors..................................... 5
Use of Proceeds.................................. 10
Price Range of Common Stock...................... 10
Dividend Policy.................................. 10
Capitalization................................... 11
Selected Consolidated Financial Data............. 12
Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 14
Business......................................... 22
Management....................................... 31
Principal and Selling Stockholders............... 38
Shares Eligible for Future Sale.................. 42
Description of Capital Stock..................... 43
Underwriting..................................... 45
Legal Matters.................................... 46
Experts.......................................... 46
Available Information............................ 47
Index to Consolidated Financial Statements....... F-1
</TABLE>
2,420,000 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
NEEDHAM & COMPANY, INC.
, 1998
- -------------------------------------------------
-------------------------------------------------
- -------------------------------------------------
-------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the Company in connection with the distribution
of the securities being registered are as set forth in the following table:
<TABLE>
<S> <C>
Securities and Exchange Commission Fee.......................... $ 12,520
NASD Filing Fee................................................. 4,744
Nasdaq National Market Listing Fee.............................. 17,500
*Legal Fees and Expenses........................................ 150,000
*Accounting Fees and Expenses................................... 175,000
*Printing Expenses.............................................. 100,000
*Blue Sky Fees and Expenses..................................... 5,000
*Registrar and Transfer Agent Fees and Expenses................. 5,000
*Underwriting Discounts and Commissions (1)..................... 600,000
*Miscellaneous.................................................. 30,236
---------
*Total.......................................................... $1,100,000
---------
---------
</TABLE>
- ------------------------
* Estimated.
(1) The Company has agreed to reimburse Levine Leichtman for up to $600,000 for
underwriting discounts and commissions relating to Levine Leichtman's sale
of 700,000 shares of Common Stock in the offering.
The Company will bear certain expenses in connection with the registration
and offering of shares by the Selling Stockholders, other than the underwriting
discounts and commissions except as provided above and the fees and expenses of
any separate counsel, advisors or accountants retained by the Selling
Stockholders.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law (the
"DGCL"), the Company's Amended and Restated Certificate of Incorporation
includes a provision that eliminates the personal liability of its directors for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (iii) pursuant to
Section 174 of the DGCL; or (iv) for any transaction from which the director
derived an improper personal benefit.
In addition, the Bylaws of the Company provide that (i) the Company shall
indemnify any person who was or is a party or is threatened to be made a party
to any action, suit or proceeding by reason of the fact that he or she is or was
a director or officer of the Company, or is or was serving in certain capacities
of other enterprises (including, for example, subsidiaries of the Company) at
the Company's request, including those circumstances in which indemnification
would otherwise be discretionary; (ii) expenses incurred by a director or
officer arising from a threatened or pending action, suit or proceeding shall be
paid by the Company in advance of final disposition of the action upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if ultimately he is not entitled to indemnification; and (iii) the rights
conferred in the Bylaws are not exclusive and the Company is authorized to enter
into indemnification agreements with its directors, officers and employees. The
Bylaws permit the Company to maintain director and officer liability insurance
for its directors and officers whether or not the Company would have the power
or the obligation to indemnify them against such liability under the
indemnification provisions of the Bylaws.
The Company has obtained a policy of directors' and officers' liability
insurance for its directors and officers to insure directors and officers
against the costs of defense, settlement or payment of a judgment under certain
circumstances. The Company has entered into employment agreements with certain
of its executive officers and indemnity agreements with certain of its directors
that provide indemnity as allowed by Section 145 of the DGCL and the Bylaws.
II-1
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement.
4.1(1) Amended and Restated Certificate of Incorporation.
4.2 Bylaws.
4.3(1) Form of Specimen Common Stock Certificate.
5.1 Opinion of Latham & Watkins.
10.1 Employees Stock Option Plan.
10.2(1) Stock Option Plan for Outside Directors.
10.3(1) Employment Agreement entered into between the Company and Kenneth E. Raasch,
dated as of January 1, 1994.
10.4 Amendment to Employment Agreement between the Company and Kenneth E. Raasch,
entered into as of October 29, 1997.
10.5 Amended Employment Agreement between the Company and John Lackner, made and
entered into as of October 10, 1997.
10.6(6) Employment Agreement entered into between the Company and James F. Landrum,
Jr., dated as of May 1, 1997.
10.7(6) Employment Agreement entered into between the Company and Craig Fleming, dated
as of May 8, 1997.
10.8(5) Employment Agreement entered into between the Company and Richard F. Barnett,
dated as of March 31, 1996.
10.9(1) Employment Agreement entered into between the Company and Daniel P. Byrne,
dated as of January 1, 1994.
10.10(1) Employment Agreement entered into between the Company and Raymond A. Peterson,
dated as of January 1, 1994.
10.11(1) Employment Agreement entered into between the Company and Thomas Kinkade, dated
as of January 1, 1994.
10.12 License Agreement entered into by the Company and Thomas Kinkade, effective as
of December 3, 1997.
10.13(1) Contribution Agreement between the Company and Kenneth E. Raasch, Thomas
Kinkade, Dennis McCarthy and Robert Wallace, dated as of April 1, 1994.
10.14(1) Sublease Agreement between Pillsbury, Madison & Sutro and the Lightpost Group,
dated as of June 15, 1993.
10.15(1) Lease Agreement between South Bay/Crip 3 and the Company, dated February 17,
1994 and First Amendment to Lease dated as of April 15, 1994.
10.16(2) Securities Purchase Agreement dated July 7, 1995 by and among Levine Leichtman,
as Purchaser, and the Company, Lightpost Publishing, Inc., Thomas Kinkade
Stores, Inc., MAGI Entertainment Products, Inc. and John Hine Studios, Inc.,
as Issuers.
10.17(3) First Amendment to the Securities Purchase Agreement dated March 12, 1996, by
and among Levine Leichtman, as Purchaser and the Company, Lightpost
Publishing, Inc., Thomas Kinkade Stores, Inc., MAGI Entertainment Products,
Inc. and John Hine Studios, Inc., as Issuers.
10.18(4) Financing Agreement dated as of February 21, 1997 by and among CIT
Group/Business Credit, Inc., the Company, Thomas Kinkade Stores, Inc. and
California Coast Galleries, Inc.
10.19(4) Credit Agreement dated as of February 21, 1997 by and among Levine Leichtman,
the Company, MAGI Entertainment Products, Inc., California Coast Galleries,
Inc. and MAGI Sales, Inc.
10.20(6) Lease Agreement between Limar Realty Corp. #36 and the Company, dated as of May
22, 1997.
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.21 Investment Monitoring Agreement by and among Levine Leichtman, the Company,
Thomas Kinkade Stores, Inc., MAGI Entertainment Products, Inc. and MAGI Sales,
Inc., dated as of September 10, 1996.
10.22 First Amendment to Investment Monitoring Agreement by and among Levine
Leichtman, the Company, Thomas Kinkade Stores, Inc., MAGI Entertainment
Products, Inc., MAGI Sales, Inc. and California Coast Galleries, dated as of
February 21, 1997.
10.23 Consulting Agreement between the Company and Mike Kiley, dated as of April 1,
1997.
10.24 Amendment to Consulting Agreement between the Company and Mike Kiley, dated as
of August 1, 1997.
10.25 Purchase and Sale Agreement by and between the Company and Limar Realty Corp.
#36, dated as of June 3, 1997.
10.26 Form of Director Indemnity Agreement.
11.1 Statement regarding Computation of Per Share Earnings.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Latham & Watkins (included in Exhibit 5.1).
24.1 Powers of Attorney (contained on the signature page of this Registration
Statement).
</TABLE>
- ------------------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-79744).
(2) Incorporated by reference from the Company's Form 8-K dated July 26, 1995
(File No. 0-24294).
(3) Incorporated by reference from the Company's Form 8-K dated March 12, 1996
(File No. 0-24294).
(4) Incorporated by reference from the Company's Form 8-K dated February 21,
1997 (File No. 0-24294).
(5) Incorporated by reference from the Company's Form 10-K for the fiscal year
ended March 31, 1997 (File No. 0-24294).
(6) Incorporated by reference from the Company's Form 10-Q for the quarterly
period ended September 30, 1997 (File No. 0-24294).
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN JOSE, STATE OF
CALIFORNIA, ON DECEMBER 11, 1997.
MEDIA ARTS GROUP, INC.
By:/s/ CRAIG FLEMING
------------------------------------
Name: Craig Fleming
Title: President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below does hereby constitute and appoint Raymond A. Peterson and James F.
Landrum, Jr., and each of them, with full power of substitution and full power
to act without the other, his true and lawful attorney-in-fact and agent to act
for him in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to file this Registration Statement, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in order to effectuate the same as fully, to
all intents and purposes, as they or he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue hereof. Pursuant to the
requirements of the Securities Act of 1933, this Registration Statement has been
signed by each of the following persons in the capacities and on the dates
indicated:
NAME TITLE DATE
- -------------------- ------------------------------ -------------------
/s/ CRAIG FLEMING President and Chief Executive
- -------------------- Officer (Principal Executive December 11, 1997
CRAIG FLEMING Officer)
/s/ RAYMOND A.
PETERSON Chief Financial Officer
- -------------------- (Principal Financial December 10, 1997
RAYMOND A. PETERSON Officer)
Corporate Controller and
/s/ GREG NASH Principal Accounting Officer
- -------------------- (Principal Accounting December 10, 1997
GREG NASH Officer)
/s/ KENNETH E.
RAASCH
- -------------------- Chairman December 10, 1997
KENNETH E. RAASCH
/s/ THOMAS KINKADE
- -------------------- Director December 10, 1997
THOMAS KINKADE
/s/ MICHAEL L.
KILEY
- -------------------- Director December 10, 1997
MICHAEL L. KILEY
/s/ NORMAN T.
MAHONEY
- -------------------- Director December 11, 1997
NORMAN T. MAHONEY
/s/ NORMAN A.
NASON
- -------------------- Director December 11, 1997
NORMAN A. NASON
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement.
4.1(1) Amended and Restated Certificate of Incorporation.
4.2 Bylaws.
4.3(1) Form of Specimen Common Stock Certificate.
5.1 Opinion of Latham & Watkins.
10.1 Employees Stock Option Plan.
10.2(1) Stock Option Plan for Outside Directors.
10.3(1) Employment Agreement entered into between the Company and Kenneth E. Raasch, dated
as of January 1, 1994.
10.4 Amendment to Employment Agreement between the Company and Kenneth E. Raasch,
entered into as of October 29, 1997.
10.5 Amended Employment Agreement between the Company and John Lackner, made and entered
into as of October 10, 1997.
10.6(6) Employment Agreement entered into between the Company and James F. Landrum, Jr.,
dated as of May 1, 1997.
10.7(6) Employment Agreement entered into between the Company and Craig Fleming, dated as
of May 8, 1997.
10.8(5) Employment Agreement entered into between the Company and Richard F. Barnett, dated
as of March 31, 1996.
10.9(1) Employment Agreement entered into between the Company and Daniel P. Byrne, dated as
of January 1, 1994.
10.10(1) Employment Agreement entered into between the Company and Raymond A. Peterson,
dated as of January 1, 1994.
10.11(1) Employment Agreement entered into between the Company and Thomas Kinkade, dated as
of January 1, 1994.
10.12 License Agreement entered into by the Company and Thomas Kinkade, effective as of
December 3, 1997.
10.13(1) Contribution Agreement between the Company and Kenneth E. Raasch, Thomas Kinkade,
Dennis McCarthy and Robert Wallace, dated as of April 1, 1994.
10.14(1) Sublease Agreement between Pillsbury, Madison & Sutro and the Lightpost Group,
dated as of June 15, 1993.
10.15(1) Lease Agreement between South Bay/Crip 3 and the Company, dated February 17, 1994
and First Amendment to Lease dated as of April 15, 1994.
10.16(2) Securities Purchase Agreement dated July 7, 1995 by and among Levine Leichtman, as
Purchaser, and the Company, Lightpost Publishing, Inc., Thomas Kinkade Stores,
Inc., MAGI Entertainment Products, Inc. and John Hine Studios, Inc., as Issuers.
10.17(3) First Amendment to the Securities Purchase Agreement dated March 12, 1996, by and
among Levine Leichtman, as Purchaser and the Company, Lightpost Publishing, Inc.,
Thomas Kinkade Stores, Inc., MAGI Entertainment Products, Inc. and John Hine
Studios, Inc., as Issuers.
10.18(4) Financing Agreement dated as of February 21, 1997 by and among CIT Group/Business
Credit, Inc., the Company, Thomas Kinkade Stores, Inc. and California Coast
Galleries, Inc.
10.19(4) Credit Agreement dated as of February 21, 1997 by and among Levine Leichtman, the
Company, MAGI Entertainment Products, Inc., California Coast Galleries, Inc. and
MAGI Sales, Inc.
10.20(6) Lease Agreement between Limar Realty Corp. #36 and the Company, dated as of May 22,
1997.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.21 Investment Monitoring Agreement by and among Levine Leichtman, the Company, Thomas
Kinkade Stores, Inc., MAGI Entertainment Products, Inc. and MAGI Sales, Inc.,
dated as of September 10, 1996.
10.22 First Amendment to Investment Monitoring Agreement by and among Levine Leichtman,
the Company, Thomas Kinkade Stores, Inc., MAGI Sales, Inc. and California Coast
Galleries, dated as of February 21, 1997.
10.23 Consulting Agreement between the Company and Mike Kiley, dated as of April 1, 1997.
10.24 Amendment to Consulting Agreement between the Company and Mike Kiley, dated as of
August 1, 1997.
10.25 Purchase and Sale Agreement by and between the Company and Limar Realty Corp. #36,
dated as of June 3, 1997.
10.26 Form of Director Indemnity Agreement.
11.1 Statement regarding Computation of Per Share Earnings.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Latham & Watkins (included in Exhibit 5.1).
24.1 Powers of Attorney (contained on the signature page of this Registration
Statement).
</TABLE>
- ------------------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-79744).
(2) Incorporated by reference from the Company's Form 8-K dated July 26, 1996
(File No. 0-24294).
(3) Incorporated by reference from the Company's Form 8-K dated March 12, 1996
(File No. 0-24294).
(4) Incorporated by reference from the Company's Form 8-K dated February 21,
1997 (File No. 0-24294).
(5) Incorporated by reference from the Company's Form 10-K for the fiscal year
ended March 31, 1997 (File No. 0-24294).
(6) Incorporated by reference from the Company's Form 10-Q for the quarterly
period ended September 30, 1997 (File No. 0-24294).
* To be filed by amendment.
<PAGE>
BY LAWS
OF
MEDIA ARTS GROUP, INC.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the
Corporation shall be in the City of Dover, County of Kent, State of Delaware.
SECTION 2. OTHER OFFICES. The Corporation may also have offices at
such other places both within and outside the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS. Meetings of the stockholders for the
election of Directors or for any other purpose shall be held at such time and
place, either within or outside the State of Delaware as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
<PAGE>
SECTION 2. ANNUAL MEETINGS. The Annual Meetings of Stockholders
shall be held on such date and at such time as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting, at which
meetings the stockholders shall elect by a plurality vote a Board of Directors,
and transact such other business as may properly be brought before the meeting.
SECTION 3. NOTICE OF MEETING. Written notice of the Annual Meeting
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten (10) nor more
than sixty (60) days before the date of the meeting. When a meeting is adjourned
to another place, date or time, written notice need not be given of the
adjourned meeting if the place, date and time thereof are announced at the
meeting at which the adjournment is taken; provided, however, that if the date
of any adjourned meeting is more than thirty (30) days after the date for which
the meeting was originally noticed, or if a new record date is fixed for the
adjourned meeting, written notice of the place, date and time of the adjourned
meeting shall be given in conformity herewith. At any adjourned meeting, any
business may be transacted which might have been transacted at the original
meeting.
SECTION 4. SPECIAL MEETINGS. Unless otherwise prescribed by law or
by the Certificate of Incorporation, Special Meetings of Stockholders, for any
purpose or purposes, may be called by either (i) the Chairman, if there be one,
or (ii) the Vice Chairman, if there be one, or (iii) the President, ( iv) any
Vice President, if there be one, (v) the Secretary or (vi) any Assistant
Secretary, if there be one, and shall be called by any such officer at the
request in writing of a majority of the Board of Directors or at the request in
writing of stockholders owning a majority of the capital stock of the
Corporation issued and outstanding and entitled to vote. Such request shall
state the purpose or purposes of the proposed meeting. Written notice of a
Special Meeting stating the place, date and hour of the meeting and the purpose
or purposes for which the meeting is called shall be given not less than ten
(10) nor more than sixty (60) days before the date of the meeting to each
stockholder entitled to vote at such a meeting.
2
<PAGE>
SECTION 5. BUSINESS MATTER OF A SPECIAL MEETING. Business transacted
at any special meeting of stockholders shall be limited to the purposes stated
in the notice.
SECTION 6. ORGANIZATION AND CONDUCT OF BUSINESS. The Chairman of the
Board or, in his or her absence, the Vice Chairman or the President of the
Corporation, or in their absence, such person as the Board may have designated
or, in the absence of such a person, such person as may be chosen by the holders
of a majority of the shares entitled to vote who are present, in person or by
proxy, shall call to order any meeting of the stockholders and act as Chairman
of the meeting. In the absence of the Secretary of the Corporation, the
Secretary of the meeting shall be such person as the Chairman or Vice Chairman
appoints. The Chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seems to him or her in order.
SECTION 7. QUORUM AND ADJOURNMENTS. Except as otherwise provided by
law or by the Certificate of Incorporation, the holders of a majority of the
capital stock issued and outstanding and entitled to vote thereat, present in
person or represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If however, such quorum shall not
be present or represented at any meeting of the stockholders, the stockholders
entitled to vote thereat, present in person or represented by proxy, shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. If the adjournment is for more than thirty (30) days or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the place, date and time of adjourned meeting shall be given in
conformity herewith, to each stockholder entitled to vote at the meeting.
3
<PAGE>
SECTION 8.1 MAJORITY VOTING. Unless otherwise required by law, the
Certificate of Incorporation or these By-Laws, any question brought before any
meeting of stockholders shall be decided by the vote of the holders of a
majority of the stock represented and entitled to vote thereat.
SECTION 8.2. VOTING RIGHTS. Each stockholder represented at a meeting
of stockholders shall be entitled to cast one vote for each share of the capital
stock entitled to vote thereat held by such stockholder. Such votes may be cast
in person or by proxy. The Board of Directors, in its discretion, or the
officer of the Corporation presiding at the meeting of stockholders, in his or
her discretion, may require that any votes cast at such meeting shall be cast by
written ballot.
SECTION 9. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Unless
otherwise provided in the Certificate of Incorporation, any action required or
permitted to be taken at any Annual or Special Meeting of Stockholders of the
Corporation, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
SECTION 10. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer of the
Corporation who has charge of the stock ledger of the Corporation or the
Corporation's transfer agent shall prepare and make, at least ten (10) days
before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days
4
<PAGE>
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting, or, if not
so specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present in person thereat.
SECTION 11. STOCK LEDGER. The stock ledger of the Corporation shall
be the only evidence as to who are the stockholders entitled to examine the
stock ledger, the list required by Section 10 of Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
SECTION 12. PROXIES. Every person entitled to vote for directors or
on any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with
the Secretary of the Corporation. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i)
revoked by the person executing it, before the vote pursuant to that proxy is
revoked or by a subsequent proxy executed by, or attendance at the meeting and
voting in person by, the person executing the proxy; or (ii) written notice of
the death or incapacity of the maker of that proxy is received by the
Corporation before the vote pursuant to that proxy is counted; provided,
however, that no proxy shall be valid after the expiration of three (3) years
from the date of the proxy.
SECTION 13. INSPECTORS OF ELECTION. Before any meeting of
stockholders the Board may appoint any person other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the Chairman of the meeting may, or at
the request of any stockholder or a stockholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request
of one or more stockholders or
5
<PAGE>
proxies, the holders of a majority of shares or their proxies present at the
meeting shall determine whether one (1) or three (3) are to be appointed. If
any person appointed as inspector fails to appear or fails or refuses to act,
the Chairman of the meeting may, and upon the request of any stockholder or a
stockholder's proxy shall, appoint a person to fill that vacancy.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND ELECTION OF DIRECTORS. The Board of Directors
shall consist of not less than one nor more than fifteen members, the exact
number of which shall initially be fixed by the Incorporator and thereafter from
time to time by the Board of Directors. Except as provided in Section 2 of this
Article, directors shall be elected by a plurality of the votes cast at Annual
Meetings of Stockholders, and each director elected shall hold office until the
next Annual Meeting and until his or her successor is duly elected and
qualified, or until his or her earlier resignation or removal. Directors need
not be stockholders.
SECTION 2. RESIGNATIONS AND VACANCIES. A vacancy or vacancies on the
Board shall be deemed to exist in the case of the death, resignation or removal
of any director, or if the authorized number of directors is increased.
Vacancies may be filled by a majority vote of the directors then in office,
though less than a quorum, or by a sole remaining director, and the directors so
chosen shall hold office until the next annual election and until their
successors are duly elected and qualified, or until their earlier resignation or
removal. The stockholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors. If the Board accepts the
resignation of a director tendered to take effect at a future time, the
Board shall have power to elect a successor to take office when the resignation
is to become effective. If there are no directors in office, then an election
of directors may be held in the manner provided by statute. Any director may
resign at any time upon notice to the Corporation.
6
<PAGE>
SECTION 3. DUTIES AND POWERS. The business of the Corporation shall
be managed by or under the direction of the Board of Directors, which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
By-Laws directed or required to be exercised or done by the stockholders.
Without prejudice to these general powers, and subject to the same limitations,
the directors shall have the power to:
(a) Select and remove all officers, agents, and employees of the
Corporation; prescribe any powers and duties for them that are consistent with
law, with the Certificate of Incorporation, and with these By-Laws; fix their
compensation and require from them security for faithful service;
(b) Confer upon any office the power to appoint, remove and suspend
subordinate officers, employees and agents;
(c) Change the principal executive office or the principle business office
in the State of California or any other state from one location to another;
cause the Corporation to be qualified to do business in any other state,
territory, dependency or country and conduct business within or outside the
State of California; and designate any place within or outside the State of
California for the holding of any stockholders meeting, or meetings, including
annual meetings;
(d) Adopt, make, and use a corporate seal; prescribe the forms of
certificates of stock; and alter the form of the seal and certificates;
(e) Authorize the issuance of shares of stock of the Corporation on any
lawful terms, in consideration of money paid, labor done, services actually
rendered, debts or securities canceled, tangible or intangible property actually
received;
(f) Borrow money and incur indebtedness on behalf of the Corporation, and
cause to be executed and delivered for the Corporation's purposes, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations and other evidences of debt and securities;
(g) Declare dividends from time to time in accordance with law;
(h) Adopt from time to time such stock option, stock purchase, bonus or
other compensation plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and
7
<PAGE>
(i) Adopt from time to time regulations not inconsistent with these
By-Laws for the management of the Corporation's business and affairs.
SECTION 4.1. PLACE OF MEETINGS. The Board of Directors of the
Corporation may hold meetings, both regular and special, either within or
outside of the State of Delaware.
SECTION 4.2. ANNUAL MEETINGS OF BOARD OF DIRECTORS. The Annual Meetings
of the Board of Directors shall be held immediately following the Annual Meeting
of Stockholders, and no notice of such meeting shall be necessary to the Board,
provided a quorum shall be present. The Annual Meetings of the Board of
Directors shall be for the purpose of organization, and the election of officers
and the transaction of other business.
SECTION 4.3. REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held without notice at such time and at such place as may from
time to time be determined by the Board of Directors.
SECTION 4.4. SPECIAL MEETINGS. Special meetings of the board of
Directors may be called by the Chairman, if there be one, the Vice Chairman, if
there be one, the President or any director. Notice thereof stating the place,
date and hour of the meeting shall be given to each director either by mail or
not less than forty-eight (48) hours before the date of the meeting, by
telephone, fax or telegram on twenty four (24) hours' notice, or on such shorter
notice as the person or persons calling such meeting may deem necessary or
appropriate in the circumstances.
SECTION 5. QUORUM AND ADJOURNMENTS. Except as may be otherwise
specifically provided by law, the Certificate of Incorporation or these By-Laws,
at all meetings of the Board of Directors, a majority of the entire Board of
Directors shall constitute a quorum for the transaction of business and the act
of a majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors. If the quorum shall not be present
at any meeting of the Board of Directors, the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall
8
<PAGE>
be present. A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved of by at least a majority of the required quorum for that
meeting.
SECTION 6. ACTION WITHOUT MEETING. Unless otherwise provided by the
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 7. MEETING BY MEANS OF CONFERENCE TELEPHONE. Unless otherwise
provided by the Certificate of Incorporation or these By-Laws, members of the
Board of Directors of the Corporation, or any committee designated by the Board
of Directors, may participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section 7 shall constitute
presence in person at such meeting.
SECTION 8. FEES AND COMPENSATION OF DIRECTORS. Unless otherwise
restricted by the Certificate of Incorporation or these By-Laws, the Board of
Directors shall have the authority to fix the compensation of directors. The
directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors and may be paid a fixed sum for attendance at each
meeting of the Board of Directors or a stated salary as director. No such
payment shall preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
9
<PAGE>
SECTION 9. INTERESTED DIRECTORS. No contract or transaction between
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or her or their
votes are counted for such purpose if (i) the material facts as to his or her or
their relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and the Board
of Directors or committee in good faith authorizes the contract or transaction
by the affirmative votes of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum; or (ii) the material
facts as to his or her or their relationship or interest and as to the contract
or transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by vote of the stockholders; or (iii) the contract or transaction is fair as to
the Corporation as of the time it is authorized, approved or ratified, by the
Board of Directors, a committee thereof or the stockholders. Common or
interested directors may be counted in determining the presence of a quorum at a
meeting of the Board of Directors or of a committee which authorizes the
contract or transaction.
SECTION 10.1 SELECTION OF COMMITTEES. The Board of Directors may,
by resolution passed by a majority of the entire Board of Directors, designate
one or more committees, each committee to consist of one or more of the
directors of the Corporation. The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of any such committee. In the absence or
disqualification of a member of a committee, and in the absence of a designation
by the Board of Directors of an alternate member to replace the absent or
disqualified member, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or she or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any absent or disqualified member.
10
<PAGE>
SECTION 10.2. POWER OF COMMITTEES . Any committee, to the extent
allowed by law and provided in the resolution establishing such committee, shall
have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the corporation.
SECTION 10.3 COMMITTEE MINUTES. Each committee shall keep regular
minutes of its meetings and report the same to the Board when required.
ARTICLE IV
OFFICERS
SECTION 1. GENERAL. The officers of the Corporation shall be chosen
by the Board of Directors and shall be a President, a Secretary and a Treasurer.
The Board of Directors, in its discretion, may also choose a Chairman of the
Board of Directors (who must be a director), a Vice Chairman of the Board and
one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and
other officers. Any number of offices may be held by the same person, unless
otherwise prohibited by law, the Certificate of Incorporation or these By-Laws.
The officers of the Corporation need not be stockholders of the Corporation nor,
except in the case of the Chairman of the Board of Directors, need such officers
be directors of the Corporation.
SECTION 2.1 ELECTION OF OFFICERS. The Board of Directors at its first
meeting held after each Annual Meeting of Stockholders shall elect the officers
of the Corporation who shall hold their offices for such terms and shall
exercise such power and perform such duties as shall be determined from time to
time by the Board of Directors; and all officers of the Corporation shall hold
office until their successors are chosen and qualified, or until their earlier
resignation or removal.
11
<PAGE>
SECTION 2.2 REMOVAL AND RESIGNATION OF OFFICERS. Subject to the
rights, if any, of an officer under any contract of employment, any officer may
be removed, either with or without cause, by an affirmative vote of the majority
of the Board, at any regular or special meeting of the Board by any officer upon
whom such power of removal may be conferred by the Board. Any officer may
resign at any time by giving written notice to the Corporation. Any resignation
shall take effect at the date of the receipt of that notice or at any later time
specified in that notice; and, unless otherwise specified in that notice, the
acceptance of the resignation shall not be necessary to make it effective. Any
resignation is without prejudice to the rights, if any, of the Corporation under
any contract to which the officer is a party.
SECTION 2.3 VACANCIES IN OFFICES. A vacancy in any office because of
death, designation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these By-Laws for regular election to that office.
SECTION 2.4 COMPENSATION. The salaries of all officers of the
Corporation shall be fixed from time to time by the Board of Directors and no
officer shall be prevented from receiving a salary because he is also a director
of the Corporation.
SECTION 3. VOTING SECURITIES OWNED BY THE CORPORATION. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the President or any Vice President and any
such officer may, in the name of and on behalf of the Corporation, take all such
action as such officer may deem advisable to vote in person or by proxy at any
meeting of security holders of any corporation in which the Corporation may own
securities and at any such meeting shall possess and may exercise any and all
rights and power incident to the ownership of such securities and which, as the
owner thereof, the Corporation might have exercised and possessed if present.
The Board of Directors may, by resolution, from time to time confer like powers
upon any other person or persons.
12
<PAGE>
SECTION 4. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the
Board of Directors shall perform such duties and may exercise such other powers
as from time to time may be assigned to him or her by the Board of Directors.
The Chairman shall preside at all meetings of the Board and the Stockholders.
SECTION 5. VICE CHAIRMAN OF THE BOARD OF DIRECTORS. The Vice
Chairman of the Board of Directors shall perform such duties and may exercise
such other powers as from time to time may be assigned to him or her by the
Board of Directors. In the absence of the Chairman or in the event of his or
her disability or refusal to act, the Vice Chairman shall (i) perform the duties
of the Chairman, and when so acting, shall have all the powers of and be subject
to all the restrictions upon the Chairman and (ii) preside at all meetings of
the Board and the Stockholders.
SECTION 6. PRESIDENT. The President shall be the Chief Executive
Officer of the Corporation. In addition, to such duties and powers as may be
assigned to him or her from time to time by the Board, the President shall,
subject to the control of the Board of Directors, have general and active
management of the business of the Corporation and shall see that all orders and
resolutions of the Board of Directors are carried into effect. The President
shall execute all bonds, mortgages, contracts and other instruments of the
Corporation requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed or except where
the signing and execution thereof shall be expressly delegated by the Board to
some other officer or agent of the Corporation.
SECTION 7. VICE PRESIDENTS. At the request of the President or in
his or her absence or in the event of his or her inability or refusal to act the
Vice President or the Vice Presidents if there are more than one (in the order
designated by the Board of Directors or in the absence of any designation, in
the order of their election) shall perform the duties of the President, and when
so acting, shall have all the powers of and be subject to all the restrictions
upon the President. Each Vice President shall perform such other duties and
have such other powers as the Board of Directors and the President from time to
time may prescribe. If there is no Chairman or Vice Chairman of the Board of
Directors and no Vice President, the Board of Directors shall designate
13
<PAGE>
the officer of the Corporation who, in the absence of the President or in the
event of the inability or refusal of the President to act, shall perform the
duties of the President, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the President.
SECTION 8. SECRETARY. The Secretary shall attend all meetings of the
Board of Directors and all meetings of stockholders and record all votes and the
proceedings of the meetings in a book or books to be kept for that purpose; the
Secretary shall also perform like duties for the standing committees when
required. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or President, under whose supervision he or she shall be. If the Secretary is
unable or shall refuse to cause to be given notice of all meetings of the
stockholders and special meetings of the Board of Directors, and if there be no
Assistant Secretary, then either the Board of Directors or the President may
choose another officer to cause such notice to be given. The Secretary shall
have custody of the seal of the Corporation and the Secretary or any Assistant
Secretary, if there be one, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by the signature
of the Secretary or by the signature of the Assistant Secretary. The Board of
Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing by his or her signature. The
Secretary shall see that all books, reports, statements, certificates and other
documents and records required by law to be kept or filed are properly kept or
filed as the case may be.
SECTION 9. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so
14
<PAGE>
requires, an account of all his or her transactions as Treasurer and of the
financial condition of the Corporation. If required by the Board of Directors,
the Treasurer shall give the Corporation a bond in such sum and with such surety
or sureties as shall be satisfactory to the Board of Directors for the faithful
performance of the duties of his or her office and for the restoration to the
Corporation, in case of his or her death, resignation, retirement or removal
from office, of all books, papers, vouchers, money and other property of
whatever kind in his or her possession or under his or her control belonging to
the Corporation.
SECTION 10. ASSISTANT SECRETARIES. Except as may be otherwise
provided in these By-Laws, Assistant Secretaries, if there be any, shall perform
such duties and have such powers as from time to time may be assigned to them by
the Board of Directors, the President, and Vice President, if there be one, or
the Secretary, and in the absence of the Secretary or in the event of his or her
disability or refusal to act, shall perform the duties of the Secretary, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Secretary.
SECTION 11. ASSISTANT TREASURERS. Assistant Treasurers, if there be
any, shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Treasurer, and in the absence of the Treasurer or in the
event of his or her disability or refusal to act, shall perform the duties of
the Treasurer, and when so acting, shall have all the powers of and be subject
to all the restrictions upon the Treasurer. If required by the Board of
Directors, an Assistant Treasurer shall give the Corporation a bond in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of his or her office and
for the restoration to the Corporation, in case of his or her death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his or her possession or under his
or her control belonging to the Corporation.
15
<PAGE>
SECTION 12. OTHER OFFICERS. Such other officers as the Board of
Directors may choose shall perform such duties and have such powers as from time
to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
SECTION 1. FORM OF CERTIFICATE. Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman of the Board of Directors, the President or a
Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation, certifying the number of
shares owned by him in the Corporation.
SECTION 2. SIGNATURES. Where a certificate is countersigned by (i) a
transfer agent other than the Corporation or its employee, or (ii) a registrar
other than the Corporation or its employee, any other signature on the
certificate may be a facsimile. In the case where any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent or registrar at the date
of issue.
SECTION 3. LOST CERTIFICATES. The Board of Directors may direct a
new certificate to be issued in place of any certificate theretofore issued by
the Corporation alleged to have been lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming the certificate of stock to
be lost, stolen or destroyed. When authorizing such issue of a new certificate,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his or her legal
16
<PAGE>
representative, to advertise the same in such manner as the Board of Directors
shall require and/or to give the Corporation a bond in such sum as to it may
direct as indemnity against any claim that may be made against the Corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
SECTION 4. TRANSFERS. Stock of the Corporation shall be transferable
in the manner prescribed by law and in these By-Laws. Transfers of stock shall
be made on the books of the Corporation only by the person named in the
certificate or by his or her attorney lawfully constituted in writing and upon
the surrender of the certificate therefore, which shall be canceled before a new
certificate shall be issued.
SECTION 5. RECORD DATE. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or entitled to express consent to corporate action
in writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a record date, which shall not be more than sixty (60) days nor less than ten
(10) days before the date of such meeting, nor more than sixty (60) days prior
to any other action. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may in its
discretion fix a new record date for the adjourned meeting and if the date of
any adjourned meeting is more than thirty (30) days after the date for which the
meeting was originally noticed, or if a new record date is fixed for the
adjourned meeting, written notice of the place, date and time of the adjourned
meeting shall be given in conformity herewith.
SECTION 6. REGISTERED STOCKHOLDERS. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its
17
<PAGE>
books as the owner of shares, and shall not be bound to recognize any equitable
or other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by law.
ARTICLE VI
NOTICES
SECTION 1. NOTICE. Whenever written notice is required by law, the
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholders, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at his or her
address as it appears on the records of the Corporation, with postage thereon
prepaid, and such notice shall be deemed to be given at the time when the same
shall be deposited in the United States mail. Written notice may also be given
personally or by telegram, fax or cable.
SECTION 2. WAIVERS OF NOTICE. Whenever any notice is required by
law, the Certificate of Incorporation or these By-Laws, to be given to any
director, member of a committee or stockholder, a waiver thereof in writing,
signed, by the person or persons entitled to said notice, whether before or
after the time stated therein, shall be deemed equivalent thereto.
ARTICLE VII
GENERAL PROVISIONS
SECTION 1.1 DIVIDENDS. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, and may be paid in cash, in property, or in shares of the capital
stock.
18
<PAGE>
SECTION 1.2 DIVIDEND RESERVE. Before payment of any dividend, there
may be set aside out of any funds of the Corporation available for dividends
such sum or sums as the Board of Directors from time to time, in its absolute
discretion, deems proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for any proper purpose, and the Board of Directors may modify or
abolish any such reserve.
SECTION 2. DISBURSEMENTS. All checks or demands for money and notes
of the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.
SECTION 3. FISCAL YEAR. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
SECTION 4. CORPORATE SEAL. The corporation seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
SECTION 5. EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS. The Board,
except as otherwise provided in these By-Laws, may authorize any officer or
officers, or agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the Corporation; such authority may
be general or confined to specific instances. Unless so authorized or ratified
by the Board or within the agency power of an officer, no officer, agent or
employee shall have the power or authority to bind the Corporation by any
contract or engagement or to pledge its credit or to render it liable for any
purpose or for any amount.
19
<PAGE>
ARTICLE VIII
INDEMNIFICATION
SECTION 1. POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS OTHER
THAN THOSE BY or IN THE RIGHT OF THE CORPORATION. Subject to Section 3 of
this Article VIII, the Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative other than an action by or in the right of the Corporation by
reason of the fact that he or she is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director or officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonable incurred by him or her in
connection with such action, suit or proceeding if he or she acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The termination of any action, suit or proceeding by judgment order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he or she reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, and reasonable cause to believe that his or her conduct was
unlawful.
SECTION 2. POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS BY OR IN
THE RIGHT OF THE CORPORATION. Subject to Section 3 of this Article VIII, the
Corporation shall indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the Corporation to procure a judgment in its favor by reason of
the fact that he or she is or was a director or officer of the Corporation, or
is or was a director or officer of the Corporation serving at the request of the
Corporation as director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan
20
<PAGE>
or other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection with the defense or settlement
of such action or suit if he or she acted in good faith and in good manner he or
she reasonably believed to be in or not opposed to the best interests of the
Corporation; except that no indemnification shall be made in respect of any
claim, issue or matter as to such which person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
SECTION 3. AUTHORIZATION OF INDEMNIFICATION. Any indemnification under
this Article VIII (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in
Section 1 or Section 2 of this Article VIII, as the case may be. Such
determination shall be made (i) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable,
a quorum of disinterested directors so directs, by independent legal counsel in
a written opinion, or (iii) by the stockholders. To the extent, however, that a
director or officer of the Corporation has been successful on the merits or
otherwise in defense of any action suit or proceeding described above, or in
defense of any claim, issue or matter therein, he or she shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him or her in connection therewith, without the necessity of authorization in
the specific case.
SECTION 4. GOOD FAITH DEFINED. For purposes of any determination under
Section 3 of this Article VIII, a person shall be deemed to have acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the Corporation, or, with respect to any criminal action
or proceeding, to have had no reasonable cause to believe his or
21
<PAGE>
her conduct was unlawful, if his or her action is based on the records or books
of account of the Corporation or another enterprise or on information supplied
to him by the officers of the Corporation or another enterprise in the course of
their duties, or on the advise of legal counsel for the Corporation or another
enterprise or on information or records given or reports made to the Corporation
or another enterprise by an independent certified public accountant or by an
appraiser or other experts selected with reasonable care by the Corporation or
another enterprise. The term "another enterprise" as used in this Section 4
shall mean any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise of which such person is or was serving
at the request of the Corporation as a director, officer, employee or agent.
The provisions of this Section 4 shall not be deemed to be exclusive or to limit
in any way the circumstances in which a person may be deemed to have met the
applicable standard or conduct set forth in Sections 1 or 2 of this Article
VIII, as the case may be.
SECTION 5. INDEMNIFICATION BY A COURT. Notwithstanding any contrary
determination in the specific case under Section 3 of this Article VIII, and
withstanding the absence of any determination thereunder, any director or
officer may apply to any court of competent jurisdiction in the State of
Delaware for indemnification to the extent otherwise permissible under Sections
1 and 2 of this Article VIII. The basis of such indemnification by a court
shall be a determination by such court that indemnification of the director or
officer is proper in the circumstances because he has met the application
standards of conduct set forth in Sections 1 or 2 of this Article VIII, as the
case may be. Neither a contrary determination in the specific case under
Section 3 of this Article VIII nor the absence of any determination
thereunder shall be a defense to such application or create a presumption that
the director or officer seeking indemnification has not met any applicable
standard of conduct. Notice of any application for indemnification pursuant to
this Section 5 shall be given to the Corporation promptly upon the filing of
such application. If successful, in whole or in part, the director or officer
seeking indemnification shall also be entitled to be paid the expense of
prosecuting such application.
22
<PAGE>
SECTION 6. EXPENSES PAYABLE IN ADVANCE. Expenses incurred by a
director or officer in defending or investigating a threatened or pending
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition to such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he or she is not entitled to be
indemnified by the Corporation as authorized in this Article VIII.
SECTION 7. NONEXCLUSIVITY OF INDEMNIFICATION AND ADVANCEMENT OF
EXPENSES. The indemnification and advancement of expenses provided by or
granted pursuant to this Article VIII shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any By-Law, agreement, contract, vote of stockholders or
disinterested directors or pursuant to the direction (howsoever embodied) of any
court of competent jurisdiction of otherwise, both as to action in his or her
official capacity and as to action in another capacity while holding such
office, it being the policy of the Corporation that indemnification of the
persons specified in Sections 1 and 2 of this Article VIII shall be made to the
fullest extent permitted by law. The provisions of this Article VIII shall not
be deemed to preclude the indemnification of any person who is not specified in
Sections 1 or 2 of this Article VIII but whom the Corporation has the power or
obligation to indemnify under the provisions of the General Corporation Law of
the State of Delaware, or otherwise.
SECTION 8. INSURANCE. The Corporation shall purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his or her status as such, whether or
not the Corporation would have the power or the obligation to indemnify him or
her against such liability under the provisions of this Article VIII.
23
<PAGE>
SECTION 9. CERTAIN DEFINITIONS. For purposes of this Article VIII,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors or officers, so that any person who is or was a director or officer of
such constituent corporation or is or was a director or officer of such
constituent corporation serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
shall stand in the same position under the provisions of this Article VIII with
respect to the resulting or surviving corporation as he or she would have with
respect to such constituent corporation if its separate existence had continued.
For purposes of this Article VIII references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director or officer with
respect to an employee benefit plan, its participants or beneficiaries; and a
person who acted in good faith and in a manner he or she reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan shall be deemed to have acted in a manner "not opposed to the interests of
the Corporation" as referred to in this Article VIII.
SECTION 10. SURVIVAL OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.
The indemnification and advancement of expenses provided by, or granted pursuant
to, this Article VIII shall, unless otherwise provided, continue as to a person
who has ceased to be a director or officer and shall inure to the benefit of the
heirs, executors and administrators of such a person.
24
<PAGE>
SECTION 11. LIMITATION OF INDEMNIFICATION. Notwithstanding anything
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 5 hereof),
the Corporation shall not be obligated to indemnify any director or officer in
connection with a proceeding (or part thereof) initiated by such person unless
such proceeding (or part thereof) was authorized or consented to by the Board of
Directors of the Corporation.
SECTION 12. INDEMNIFICATION OF EMPLOYEES AND AGENTS. The Corporation
may, to the extent authorized from time to time by the Board of Directors,
provide rights to indemnification and to the advancement of expenses to
employees and agents of the Corporation similar to those conferred in this
Article VIII to directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
SECTION 1. AMENDMENTS. These By-Laws may be altered, amended or
repealed, in whole or on part, or new By-Laws may be adopted by the stockholders
or by the Board of Directors. All such amendments must be approved by either
the holders of a majority of the outstanding capital stock entitled to vote
thereon or by a majority of the entire Board of Directors then in office.
SECTION 2. ENTIRE BOARD OF DIRECTORS. As used in this Article IX and
in these By-Laws generally, the term "entire Board of Directors" means the total
number of directors which the Corporation would have if there were no vacancies.
25
<PAGE>
EXHIBIT 5.1
December 19, 1997
Media Arts Group, Inc.
521 Charcot Avenue
San Jose, California 95131
Ladies and Gentlemen:
This opinion is rendered in connection with the filing by Media Arts Group,
Inc., a Delaware corporation (the "Company"), of its Registration Statement on
Form S-1 (the "Registration Statement") with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act"), with
respect to the offer and sale of up to 2,783,000 shares (the "Offering") of the
Company's Common Stock, par value of $0.01 per share (the "Common Stock"), and
any subsequent registration statement the Company may hereafter file with the
Commission pursuant to Rule 462(b) under the Act to register additional shares
of Common Stock in connection with the Offering (collectively, the "Shares").
1,500,000 Shares will be sold by the Company and the remaining Shares will be
sold by the Company's stockholders. We have acted as counsel to the Company in
connection with the preparation of the Registration Statement.
In our capacity as such counsel, we are familiar with the proceedings taken
and to be taken by the Company in connection with the authorization, issuance,
and sale of the Common Stock. In addition, we have made such legal and factual
examinations and inquiries, including an examination of originals (or copies
certified or otherwise identified to our satisfaction as being true
reproductions of originals) or such documents, corporate records and other
instruments, and have obtained from officers of the Company and agents thereof
such certificates and other representations and assurances, as we have deemed
necessary or appropriate for the purposes of this opinion.
In such examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the legal capacity
of natural persons executing such documents and the authenticity and conformity
to original documents of documents submitted to us as certified or photostatic
copies.
Based on the foregoing and the proceedings to be taken by the Company as
referred to above, we are of the opinion that (i) the Shares to be sold by the
Company have been duly authorized, and upon issuance, delivery and payment
therefor in the manner described in the Registration Statement, such Shares will
be validly issued, fully paid and nonassessable; and (ii) the Shares to be sold
by the Selling Stockholders are duly authorized, validly issued, fully paid and
non-assessable.
Our opinion herein is limited to the effect on the subject transaction of
United States Federal law and the General Corporation Law of the State of
Delaware. We assume no responsibility regarding the applicability to, or the
effect thereon, of the laws of any other jurisdiction.
We consent to your filing this opinion as an exhibit to the Registration
Statement and to the reference to our firm contained under the heading "Legal
Matters" of the prospectus included therein, and to the incorporation by
reference of this opinion and consent into a registration statement filed with
the Commission pursuant to Rule 462(b) under the Act relating to the Offering.
Very truly yours,
/s/ LATHAM & WATKINS
<PAGE>
EXHIBIT 10.1
MEDIA ARTS GROUP, INC.
EMPLOYEES STOCK OPTION PLAN
Amended and Restated as of June 18, 1997
MEDIA ARTS GROUP, INC. hereby adopts a stock option plan for the benefit of
certain persons and subject to the terms and provisions set forth below.
1. DEFINITIONS. The following terms shall have the meanings set forth
below whenever used in this instrument:
(a) The word "Board" shall mean the Board of Directors of the
Company.
(b) The word "Code" shall mean the United States Internal Revenue
Code of 1986, as amended, or successor provisions of future
United States revenue laws (Title 26 of the United States Code).
(c) The word "Committee" shall mean the Compensation Committee of the
Board, which committee shall satisfy the requirements of (i) Rule
16b-3((c)(2)(i) under the Exchange Act, as such Rule may be
amended in the future and (ii) Section 162(m) of the Code, as
such Section may be amended in the future.
(d) The words "Common Stock" shall mean the common stock, $.01 par
value, of the Company.
(e) The word "Company" shall mean Media Arts Group, Inc., a Delaware
corporation, and any successor thereto which shall maintain this
Plan.
(f) The word "Disability" shall mean the Optionee's inability to
engage in substantial gainful activity for the Company by reason
of any medically determinable physical or mental impairment which
can be expected to result in death or which has lasted or can be
expected to last for a continuous period of not less than 12
months, as determined by the Committee pursuant to written
certificate of such Disability from a physician acceptable to the
Committee.
(g) The word "Employee" shall mean any person who is determined by
the Committee to be a high-level executive officer or other
valuable managerial or technical employee of either the Company
or any Subsidiary.
(h) The words "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
Page 1
<PAGE>
(i) The words "Incentive Stock Option" shall mean any option which
qualifies as an Incentive Stock Option under terms of Section 422
of the Code.
(j) The word "Officer" shall mean an officer of the Company or any
Subsidiary, as defined in Rule 16a-1(f) under the Exchange Act,
as such Rule may be amended in the future.
(k) The word "Optionee" shall mean any Employee to whom a stock
option has been granted pursuant to this Plan.
(l) The word "Plan" shall mean this instrument, the Media Arts Group,
Inc. Employees Stock Option Plan, as it is originally adopted and
as it may be amended hereafter.
(m) The word "Subsidiary" shall mean any corporation at least 50% of
the common stock of which is owned directly or indirectly by the
Company.
(n) The words "Substantial Shareholder" shall mean any Employee who
owns directly and through attribution more than 10% of the total
combined voting power of all classes of stock of either the
Company or any Subsidiary. Ownership shall be determined in
accordance with Section 424(d) of the Code and lawful applicable
regulations.
2. PURPOSE OF THE PLAN. The purpose of the Plan is to provide Employees
of the Company and its Subsidiaries with greater incentive to serve and promote
the interests of the Company and its shareholders. The premise of the Plan is
that, if such persons acquire a proprietary interest in the business of the
Company or increase such proprietary interest as they may already hold, then the
incentive of such persons to work toward the Company's continued success will be
commensurably increased. Accordingly, the Company will, from time to time during
the effective period of the Plan, grant to such Employees as may be selected to
participate in the Plan options to purchase Common Shares on the terms and
subject to the conditions set forth in the Plan. Options may be either
Incentive Stock Options or non-qualified stock options.
3. EFFECTIVE DATE OF THE PLAN. The Plan shall become effective on
February 1, 1994, subject to approval by holders of a majority of the
outstanding shares of voting capital stock of the Company. In the event that
the foregoing condition is not satisfied within twelve (12) months after the
date the Plan is adopted, the Plan and any options granted hereunder shall be
null and void. If, however, the Plan is so approved, subject to the provisions
of Section 8, no further shareholder approval shall be required with respect to
the granting of any options pursuant to the Plan.
4. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Compensation Committee of the Board. A majority of the Committee shall
constitute a quorum, and the acts of a majority of the members present at any
meeting at which a quorum is present, or acts approved in
Page 2
<PAGE>
writing by all of the members, shall be acts of the Committee. Subject to
the terms and conditions of the Plan, the Committee shall have full and final
authority in its absolute discretion:
(a) To select the Employees to whom options will be granted;
(b) To determine the number of shares of Common Stock subject to any
option;
(c) To determine the time or times when options will be granted;
(d) To determine the option price of shares of Common Stock subject
to an option;
(e) To determine the time or times when each option may be exercised
and the duration of the exercise period;
(f) To determine at the time of grant of an option whether and to
what extent such option is an Incentive Stock Option under
Section 422 of the Code and regulations thereunder as the same or
any successor statute or regulations may at the time be in
effect;
(g) To determine whether stock appreciation rights shall be made part
of any option grant pursuant to Section 9 hereof (such
determination to be made after the Committee has consulted with
the Chief Financial Officer of the Company regarding the impact
of such a grant upon the earnings of the Company), the method of
valuing the stock appreciation rights and whether the stock
appreciation rights may be exercised in lieu of or in addition to
the related option;
(h) To prescribe the form of the option agreements governing the
options which are granted under the Plan and to set the
provisions of such option agreements as the Committee may deem
necessary or desirable provided such provisions are not contrary
to the terms and conditions of either the Plan or, where the
option is an Incentive Stock Option, Section 422 of the Code and
regulations thereunder as the same or any successor statute or
regulations may at the time be in effect;
(i) To adopt, amend and rescind such rules and regulations as, in the
Committee's opinion, may be advisable in the administration of
the Plan; and
(j) To construe and interpret the Plan, the rules and regulations and
the instruments evidencing options granted under the Plan and to
make all other determinations deemed necessary or advisable for
the administration of the Plan.
Page 3
<PAGE>
Any decision made or action taken by the Committee in connection with the
administration, interpretation, and implementation of the Plan and of its rules
and regulations, shall, to the extent permitted by law be conclusive and binding
upon all Optionees under the Plan and upon any person claiming under or through
such an Optionee. Neither the Committee nor any of its members shall be liable
for any act taken by the Committee pursuant to the Plan. No member of the
Committee shall be liable for the act of any other member.
5. PERSONS ELIGIBLE FOR OPTIONS. Subject to the restrictions herein
contained, options may be granted from time to time in the discretion of the
Committee only to such Employees, as designated by the Committee, whose
initiative and efforts contribute or may be expected to contribute to the
continued growth and future success of the Company and/or its Subsidiaries.
Notwithstanding the preceding sentence, an Employee who renounces in writing any
right he may have to receive stock options under the Plan shall not be eligible
to receive any stock options under the Plan. No option shall be granted to any
Employee during any period of time when he is on leave of absence. The
Committee may grant more than one option, with or without stock appreciation
rights, to the same Employee.
6. SHARES SUBJECT TO THE PLAN. Subject to the provisions of Section 9
concerning payment for stock appreciation rights in shares of Common Stock and
subject to the provisions of the next succeeding paragraph of this Section 6,
the aggregate number of shares of Common Stock for which options may be granted
under the Plan shall be 1,124,863 shares of Common Stock. Either treasury or
authorized and unissued shares of Common Stock, or both, in such amounts, within
the maximum limits of the Plan, as the Committee shall from time to time
determine, may be so issued. All shares of Common Stock which are the subject
of any lapsed, expired or terminated options may be made available for
reoffering under the Plan to any Employee. If an option granted under this Plan
is exercised pursuant to the terms and conditions determined by the Committee
under Subsection 7(d), and a stock appreciation right is not granted in
conjunction with the option pursuant to Section 9, any shares of Common Stock
which are the subject thereof shall not thereafter be available for reoffering
under the Plan to any Employee. If a stock appreciation right is granted in
conjunction with an option pursuant to Section 9, and if the option agreement
with the Optionee provides that exercise of the stock appreciation right shall
be in lieu of exercise of the options, and the stock appreciation right is
thereafter exercised in whole or in part, then the option or the portion thereof
with respect to which the stock appreciation right was exercised shall be deemed
to have been exercised and the shares of Common Stock which otherwise would have
been issued upon exercise of such option, to the extent not used in payment for
the stock appreciation rights, may be made available for reoffering under the
Plan to any Employee.
In the event that subsequent to the date of adoption of the Plan by the
Board, the outstanding shares of Common Stock are, as a result of a stock split,
stock dividend, combination or exchange of shares, exchange for other
securities, reclassification, reorganization, redesignation, merger,
consolidation, recapitalization, spin-off, split-off, split-up or other such
change (including, without limitation, any transaction described in Section
424(a) of the Code) or a special dividend or other distribution to the Company's
shareholders, increased or decreased or changed into or exchanged for a
different number or kind of shares of stock or other securities of the Company,
then (i) there shall automatically be substituted for each share of Common Stock
subject to an unexercised
Page 4
<PAGE>
option granted under the Plan and each share of Common Stock available for
additional grants of options under the Plan the number and kind of shares of
stock or other securities into which each outstanding share of Common Stock
shall be exchanged, (ii) the option price per share of Common Stock or unit
of securities shall be increased or decreased proportionately so that the
aggregate purchase price for the securities subject to the option shall
remain the same as immediately prior to such event, and (iii) the Committee
shall make such other adjustments to the securities subject to options, the
provisions of the Plan, and option agreements as may be appropriate,
equitable, in order to prevent dilution or enlargement of option rights and
in compliance with the provisions of Section 424(a) of the Code to the extent
applicable and any such adjustment shall be final, binding and conclusive as
to each Optionee. Any such adjustment may, in the discretion of the
Committee, provide for the elimination of fractional shares.
7. OPTION PROVISIONS.
(a) OPTION PRICE. The option price per share of Common Stock which
is the subject of an option under the Plan shall be determined by the Committee
at the time of grant but shall not be less than one hundred percent (100%) of
the fair market value of a share of Common Stock on the date the option is
granted; provided, however, that if an Employee to whom an Incentive Stock
Option is granted is at the time of the grant a Substantial Shareholder, the
option price per share of Common Stock shall be determined by the Committee but
shall never be less than one hundred ten percent (110%) of the fair market value
of a share of Common Stock on the date the option is granted. Such fair market
value shall be determined in accordance with procedures to be established by the
Committee. The date on which the Committee approves the granting of an option
shall be deemed for all purposes hereunder the date on which the option is
granted.
(b) PERIOD OF OPTION. The Committee shall determine when each option
is to expire but no option shall be exercisable after ten (10) years have
elapsed from the date upon which the option is granted; provided, however, that
no Incentive Stock Option granted to a person who is a Substantial Shareholder
at the time of the grant of such option shall be exercisable after five (5)
years have elapsed from the date upon which the option is granted. Each option
shall be subject to earlier termination as provided in Subsection 7(e)
hereunder.
(c) LIMITATION ON EXERCISE AND TRANSFER OF OPTION. Except as the
Committee may otherwise provide with respect to Options granted to Employees who
are not Officers, no Option (or any related stock appreciation right described
in Section 9) may be exercised in whole or in part during the six months after
the Option is granted. Except as otherwise provided in the event of an
Optionee's death, only the Optionee may exercise an option, provided that a
guardian or other legal representative who has been duly appointed for such
Optionee may exercise an option on behalf of the Optionee. No option granted
hereunder shall be transferable other than (i) by the Last Will and Testament of
the Optionee or, if the Optionee dies intestate, by the applicable laws of
descent and distribution, or (ii) to the extent approved by the Committee,
pursuant to a qualified domestic relations order as defined by the Code or the
rules thereunder. No option granted hereunder may be pledged or hypothecated,
nor shall any such option be subject to execution, attachment or similar
process.
Page 5
<PAGE>
(d) CONDITIONS GOVERNING EXERCISE OF OPTION. The Committee may, in
its absolute discretion, either require that, prior to the exercise of any
option granted hereunder, the Optionee shall have been an employee for a
specified period of time after the date such option was granted, or make any
option granted hereunder immediately exercisable. Each option shall be subject
to such additional restrictions or conditions with respect to the right to
exercise and the time and method of exercise as shall be prescribed by the
Committee. Upon satisfaction of any such conditions, the option may be
exercised in whole or in part at any time during the option period, but this
right of exercise shall be limited to whole shares, unless the Committee shall
otherwise provide. Options shall be exercised by the Optionee giving written
notice to the Secretary of the Company at its principal office, by certified
mail, return receipt requested, of the Optionee's exercise of the option and the
number of shares with respect to which the option is being exercised,
accompanied by full payment of the purchase price either in cash or, with the
consent of the Committee, in whole or in part in shares of Common Stock having a
fair market value on the date the option is exercised equal to that portion of
the purchase price for which payment in cash is not made, or with the consent of
the Committee, in whole or in part pursuant to a loan, which the Company may
make available, evidenced by a promissory note, the terms and conditions of
which shall be determined by the Committee in its sole and absolute discretion.
Such notice shall be deemed delivered when deposited in the mails.
Notwithstanding anything in the foregoing to the contrary, in the event of a
"change in control" the Committee shall have the authority and power: (i) to
cause all outstanding options to be immediately exercisable notwithstanding any
vesting limitation otherwise previously imposed on such options; and (ii) to
accelerate the termination date of all such options. Thereafter, upon such
determination, an Optionee may exercise any and all outstanding options (in
whole or in part), whether or not such options are by their terms fully
exercisable at such time and the Committee may authorize the acceptance of the
surrender of the right to exercise such option or any portion thereof, but in no
event after the expiration of the term of the option. The term "change in
control" shall include, but not be limited to: (i) the first purchase of shares
pursuant to a tender offer or exchange (other than a tender offer or exchange by
the Company) for all or part of the Company's common stock of any class or any
securities convertible into such common stock; (ii) the receipt by the Company
of a Schedule 13D or other advise indicating that a person is the "beneficial
owner" (as that term is defined in Rule 13d-3 under the Securities Exchange Act
of 1934) of twenty percent (20%) or more of the Company's Common Stock
calculated as provided in paragraph (d) of said Rule 13d-3; (iii) the date of
approval by shareholders of the Company of an agreement providing for any
consolidation or merger of the Company in which the Company will not be the
continuing or surviving corporation or pursuant to which shares of capital
stock, of any class or any securities convertible into such capital stock, of
the Company would be converted into cash, securities, or other property, other
than a merger of the Company in which the holders of common stock of all classes
of the Company immediately prior to the merger would have the same proportion of
ownership of common stock of the surviving corporation immediately after the
merger; (iv) the date of the approval by shareholders of the Company of any
sale, lease, exchange, or other transfer (in one transaction or a series of
related transactions) of all or substantially all the assets of the Company; (v)
the adoption of any plan or proposal for the liquidation (but not a partial
liquidation) or dissolution of the Company; or (vi) such other event as the
Committee shall, in its sole and absolute discretion, deem to be a "change in
control." The manner of application and interpretation of the foregoing
provisions shall be determined by the Committee in its sole and absolute
discretion.
Page 6
<PAGE>
(e) TERMINATION OF EMPLOYMENT, ETC. If an Optionee ceases to be an
employee of the Company and all Subsidiaries, his or her option shall, unless
otherwise provided in the option agreement between the Optionee and the Company,
terminate on the date he or she ceases to be an employee and neither he or she
nor any other person shall have any rights after the date he or she ceases to be
an employee to exercise all or any part of the option. An Optionee's employment
shall not be deemed to have terminated while he or she is on a temporary
military, sick or other bone fide leave of absence from the Company or a
Subsidiary approved in writing by the Company, such as a leave of absence as is
described in Section 1.421-7(h) of the Federal Income Tax Regulations or any
lawful successor regulations thereto; provided, however, that the Committee may
impose such terms and conditions with respect to such leaves as it deems proper
as are consistent with such regulations.
If the stock option is an Incentive Stock Option, no option agreement shall
(i) permit any Optionee to exercise any Incentive Stock Option more
than three (3) months after the date the Optionee ceased to be an employee of
the Company and all Subsidiaries (but not beyond the original term of the
option) if the reason for the Optionee's cessation as an employee was other than
his death or his Disability; or
(ii) permit any Optionee to exercise any Incentive Stock Option more
than one (1) year after the date the Optionee ceased to be an employee of the
Company and all Subsidiaries (but not beyond the original term of the option) if
the reason for the Optionee's cessation as an employee was the Optionee's
Disability; or
(iii) permit any person to exercise any Incentive Stock Option more
than one (1) year after the date the Optionee ceased to be an employee of the
Company and all Subsidiaries (but not beyond the original term of the option)
if either (A) the reason for the Optionee's cessation as an employee was his
death or (B) the Optionee died within three (3) months after ceasing to be an
employee of the Company and all Subsidiaries.
If the stock option is a non-qualified stock option, no option agreement shall
(i) permit any Optionee to exercise any non-qualified stock option
more than six (6) months after the date the Optionee ceased to be an employee of
the Company and all Subsidiaries (but not beyond the original term of the
option) if the reason for the Optionee's cessation as an employee was other than
his death or his Disability; or
(ii) permit any Optionee to exercise any non-qualified stock option
more than one (1) year after the date the Optionee ceased to be an employee of
the Company and all Subsidiaries (but not beyond the original term of the
option) if the reason for the Optionee's cessation as an employee was the
Optionee's Disability; or
(iii) permit any person to exercise any non-qualified stock option more
than one (1) year after the date the Optionee ceased to be an employee of the
Company and all Subsidiaries (but not beyond the original term of the option) if
either (A) the reason for the Optionee's cessation as an
Page 7
<PAGE>
employee was his death or (B) the Optionee died within three (3) months after
ceasing to be an employee of the Company and all Subsidiaries.
If any option is by the terms of the option agreement exercisable following the
Optionee's death, then such option shall be exercisable by the Optionee's
estate, or the person designated in the Optionee's Last Will and Testament, or
the person to whom the option was transferred by the applicable laws of descent
and distribution.
(f) LIMITATIONS ON GRANT OF INCENTIVE STOCK OPTIONS. During the
calendar year in which any Incentive Stock Options granted by the Company or any
Subsidiary first became exercisable by any Optionee, the aggregate fair market
value of the shares of Common Stock which are subject to such Incentive Stock
Options (determined as of the date the Incentive Stock Options were granted)
shall not exceed the sum of One Hundred Thousand Dollars ($100,000.00). Options
which are not designated as Incentive Stock Options shall not be subject to the
limitation described in the preceding sentence and shall not be counted when
applying such limitation.
(g) PROHIBITION OF ALTERNATIVE OPTIONS. It is intended that
Employees may be granted, simultaneously or from time to time, Incentive Stock
Options or other stock options, but no Employees shall be granted alternative
rights in Incentive Stock Options and other stock options so as to prevent
options granted as Incentive Stock Options under the Plan from qualifying as
such within the meaning of Section 422 of the Code.
(h) WAIVER BY COMMITTEE OF CONDITIONS GOVERNING EXERCISE OF OPTION.
The Committee may, in its discretion, waive any restrictions or conditions set
forth in an option agreement concerning an Optionee's right to exercise any
option and/or the time and method of exercise.
8. AMENDMENTS TO THE PLAN. The Committee is authorized to interpret the
Plan and from time to time adopt any rules and regulations for carrying out the
Plan that it may deem advisable. Subject to the approval of the Board, the
Committee may at any time amend, modify, suspend or terminate the Plan. In no
event, however, without the approval of the Company's shareholders, shall any
action of the Committee or the Board result in:
(a) Amending, modifying or altering the eligibility requirements
provided in Section 5 hereof;
(b) Increasing or decreasing, except as provided in Section 6 hereof,
the maximum number of shares for which options may be granted;
(c) Decreasing the minimum option price per share at which options
may be granted under the Plan, as provided in Section 7(a)
hereof;
(d) Extending either the maximum period during which an option is
exercisable as provided in Section 7(b) hereof or the date on
which the Plan shall terminate as provided in Section 13 hereof;
Page 8
<PAGE>
(e) Changing the requirements relating to the Committee; or
(f) Making any other change which would cause any option granted
under the Plan as an Incentive Stock Option not to qualify as an
Incentive Stock Option within the meaning of Section 422 of the
Code;
except as necessary to conform the Plan and the option agreements to changes in
the Code or other governing law. No option may be granted during any suspension
of this Plan or after this Plan has terminated and no amendment, suspension or
termination shall, without the Optionee's consent, alter or impair any of the
rights or obligations under an option theretofore granted to such Optionee under
this Plan.
9. STOCK APPRECIATION RIGHTS. The Committee may provide, at the time of
the grant of a stock option and upon such terms and conditions as it deems
appropriate, that an Optionee shall have the right with respect to all or a
portion of the options granted to him to elect to surrender such options in
exchange for the consideration set forth in this Section 9 in lieu of exercising
such options. Alternatively, the Committee may provide, at the time of the
grant of a stock option and upon such terms and conditions as it deems
appropriate, that an Optionee shall have the right with respect to all or a
portion of the options granted to him to receive the considerations set forth in
this Section 9 upon exercising such options in addition to any Common Stock
purchased upon exercise thereof. Stock appreciation rights must be specifically
granted by the Committee; provided, however, the Committee shall have no
authority to grant stock appreciation rights except in connection with the grant
of a stock option pursuant to the Plan, and no Optionee shall be entitled to
such rights solely as a result of the grant of an option to him. Stock
appreciation rights, if granted, may be exercised either with respect to all or
a portion of the option to which they relate. Stock appreciation rights shall
not be transferable separate from the option with respect to which they were
granted and shall be subject to all of the restrictions on transfer applicable
to the said options. Stock appreciation rights shall be exercisable only at
such times and by such persons as are specified in the option agreement
governing the stock option with respect to which the stock appreciation rights
were granted. A stock appreciation right shall provide that an Optionee shall
have the right to receive a percentage, not greater than One Hundred Percent
(100%), of the excess over the option price, if any, of the fair market value of
the shares of Common Stock covered by the option, as determined by the Committee
as of the date of exercise of the stock appreciation right, in the manner
provided for herein. Such amount shall be payable in one or more of the
following manners, as shall be determined by the Committee;
(a) in cash;
(b) in shares of Common Stock having a fair market value equal to
such amount; or
(c) in a combination of cash and Common Stock;
Page 9
<PAGE>
provided, however, that stock appreciation rights may be settled only in cash
unless the Company shall have been subject to the reporting requirements of
Section 13(a) of the Exchange Act (and complied therewith) for at least a
one-year period prior to the settlement.
If payment is made in whole or in part in shares of Common Stock, such payment
shall thereby reduce the number of shares available for the grant of options
under this Plan.
In no event may any Optionee exercise any stock appreciation rights granted
hereunder unless such Optionee is then permitted to exercise the option or the
portion thereof with respect to which such stock appreciation rights relate. If
the option agreement with the Optionee provides that exercise of the stock
appreciation right shall be in lieu of exercise of the option, then (i) upon the
exercise of any stock appreciation rights, the option or that portion thereof to
which the stock appreciation rights relate shall be canceled, and (ii) upon the
exercise of the option or that portion thereof to which the stock appreciation
rights relate, the stock appreciation rights shall be canceled, and the option
agreement governing such option shall be deemed amended as appropriate without
any further action by the Committee or the Optionee. If the option agreement
with the Optionee provides that exercise of the stock appreciation right shall
be in addition to exercise of the option, then (i) upon the exercise of any
stock appreciation rights, the option or that portion thereof to which the stock
appreciation rights relate shall be deemed exercised and (ii) upon the exercise
of the option, the stock appreciation rights corresponding thereto shall be
deemed exercised to the extent the option is exercised. The terms of any stock
appreciation rights granted hereunder shall be incorporated into the option
agreement which governs the option with respect to which the stock appreciation
rights are granted, and shall be such terms as the Committee shall prescribe
which are not inconsistent with this Plan. The granting of an option or stock
appreciation right shall impose no obligation upon the Optionee to exercise such
option or right. The Company's obligation to satisfy stock appreciation rights
shall not be funded or secured in any manner.
10. CERTAIN TIMING REQUIREMENTS.
Unless the Committee determines that Rule 16b-3 is not applicable to the
participant, shares of Common Stock issuable to the Optionee upon exercise of
the Option may be used to satisfy the Option price (or if applicable, the tax
withholding consequences of such exercise) only (i) during the period beginning
on the third business day following the date of release of the quarterly or
annual summary statement of sales and earnings of the Company and ending on the
twelfth business day following such date or (ii) pursuant to an irrevocable
written election by the Optionee to use shares of Common Stock issuable to the
Optionee upon exercise of the Option to pay all or part of the Option price or
the withholding taxes (subject to the approval of the Committee) made at least 6
months prior to the payment of such Option price or withholding taxes.
Unless the Committee determines that Rule 16b-3 is not applicable to the
participant, any exercise by a participant of a stock appreciation right for
cash shall be made only (i) during the period beginning on the third business
day following the date of release of the quarterly or annual summary statement
of sales and earnings of the Company and ending on the twelfth business day
following such date or (ii) pursuant to an irrevocable written election by the
participant to receive
Page 10
<PAGE>
cash, in whole or in part, upon exercise of his stock appreciation right
(subject to the approval of the Committee) made at least 6 months prior to
the exercise of the stock appreciation right.
11. INVESTMENT REPRESENTATION, APPROVALS AND LISTING. The Committee may
condition its grant of any option hereunder upon receipt of an investment
representation from the Optionee which shall be substantially similar to the
following:
"Optionee agrees that any shares of Common Stock of Media Arts Group,
Inc. which Optionee may acquire by virtue of the exercise of this option shall
be acquired for investment purposes only and not with a view to distribution or
resale; provided, however, that this restriction shall become inoperative in the
event the shares of Common Stock of Media Arts Group, Inc. which are subject to
this option shall be registered under the Securities Act of 1933, as amended, or
in the event Media Arts Group, Inc. is otherwise satisfied that the offer or
sale of the shares of Common Stock which are subject to this option may lawfully
be made without registration under the Securities Act of 1933, as amended".
The Company shall not be required to issue any certificates for shares of Common
Stock upon the exercise of an option or a stock appreciation right granted under
the Plan prior to (i) obtaining any approval from any governmental agency which
the Committee shall, in its sole discretion, determine to be necessary or
advisable, (ii) the admission of such shares of Common Stock to listing on any
national securities exchange on which the shares of Common Stock may be listed,
(iii) completion of any registration or other qualification of the shares of
Common Stock under any state or federal law or ruling or regulations of any
governmental body which the Committee shall, in its sole discretion, determine
to be necessary or advisable, or the determination by the Committee, in its sole
discretion, that any registration or other qualification of the shares of Common
Stock is not necessary or advisable, and (iv) obtaining an investment
representation from the Optionee in the form set forth above or in such other
form as the Committee, in its sole discretion, shall determine to be adequate.
12. GENERAL PROVISIONS.
(a) OPTION AGREEMENTS NEED NOT BE IDENTICAL. The form and substance
of option agreements and grants of stock appreciation rights, whether granted at
the same or different times, need not be identical.
(b) NO RIGHT TO BE EMPLOYED, ETC. Nothing in the Plan or in any
option agreement shall confer upon any Optionee any right to continue in the
employ or to be a consultant of the Company or a Subsidiary, or to serve as a
member of the Board, or to be entitled to receive any remuneration or benefits
not set forth in the Plan or such option agreement, or to interfere with or
limit either the right of the Company or a Subsidiary to terminate his or her
employment at any time or the right of the shareholders of the company to remove
him or her as a member of the Board with or without cause.
(c) OPTIONEE DOES NOT HAVE RIGHTS OF SHAREHOLDER. Nothing contained
in the Plan or in any option agreement shall be construed as entitling any
Optionee to any rights of a
Page 11
<PAGE>
shareholder as a result of the grant of an option until such time as shares
of Common Stock are actually issued to such Optionee pursuant to the exercise
of an option or stock appreciation right.
(d) SUCCESSORS IN INTEREST. The Plan shall be binding upon the
successors and assigns of the Company.
(e) NO LIABILITY UPON DISTRIBUTION OF SHARES. The liability of the
Company under the Plan and any distribution of Common Stock made hereunder is
limited to the obligations set forth herein with respect to such distribution
and no term or provision of the Plan shall be construed to impose any liability
on the Company or the Committee in favor of any person with respect to any loss,
cost or expense which the person may incur in connection with or arising out of
any transaction in connection with the Plan, including, but not limited to, any
liability to any Federal, state, or local tax authority and/or any securities
regulatory authority.
(f) TAXES. Appropriate provisions shall be made for all taxes
required to be withheld and/or paid in connection with the options or the
exercise thereof, and the transfer of shares of Common Stock pursuant thereto,
under the applicable laws or other regulations of any governmental authority,
whether Federal, state or local and whether domestic or foreign.
(g) USE OF PROCEEDS. The cash proceeds received by the Company from
the issuance of shares of Common Stock pursuant to the Plan will be used for
general corporate purposes or in such other manner as the Board of Directors
deems appropriate.
(h) EXPENSES. The expenses of administering the Plan shall be borne
by the Company.
(i) CAPTIONS. The captions and section numbers appearing in the Plan
are inserted only as a matter of convenience. They do not define, limit,
construe or describe the scope or intent of the provisions of the Plan.
(j) NUMBER. The use of the singular or plural herein shall not be
restrictive as to number and shall be interpreted in all cases as the context
may require.
(k) GENDER. The use of the feminine, masculine or neuter pronoun
shall not be restrictive as to gender and shall be interpreted in all cases as
the context may require.
13. TERMINATION OF THE PLAN. The Plan shall terminate on February 1,
2004, and thereafter no options shall be granted under the Plan.
Notwithstanding the foregoing and subject to the approval of the Board, the
Committee may at any earlier time terminate the Plan and thereafter no options
shall be granted under the Plan. All options outstanding at the time of
termination of the Plan shall continue in full force and effect according to the
terms of the option agreements governing such options and the terms and
conditions of the Plan.
14. GOVERNING LAW. The Plan shall be governed by and construed in
accordance with the laws of the State of Delaware and any applicable federal
law.
Page 12
<PAGE>
15. VENUE. The venue of any claim brought hereunder by an Employee shall
be San Jose, California.
16. CHANGES IN GOVERNING RULES AND REGULATIONS. All references herein to
the Code or sections thereof, or to rules and regulations of the Department of
Treasury or of the Securities and Exchange Commission, shall mean and include
the Code sections thereof and such rules and regulations as are now in effect or
as they may be subsequently amended, modified, substituted or superseded.
IN WITNESS WHEREOF, MEDIA ARTS GROUP, INC., by its appropriate officers
duly authorized, has executed this instrument as of June 18, 1997.
MEDIA ARTS GROUP, INC.
By: /s/ KENNETH E. RAASCH
-------------------------------
And: /s/ JAMES F. LANDRUM, JR.
-------------------------------
Page 13
<PAGE>
EXHIBIT 10.4
AMENDMENT TO EMPLOYMENT AGREEMENT
On January 1, 1994, Media Arts Group, Inc. ("Employer") and Kenneth E. Raasch
("Employee") entered into an employment agreement ("Employment Agreement"),
which is attached hereto. The Employment Agreement, except as modified below,
shall be incorporated by reference into and made part of this Amendment as if
written directly into this Amendment. Employer and Employee now wish to amend
the Employment Agreement as follows:
SECTION 1 - EMPLOYMENT
Shall be amended to REPLACE "President and Chief Executive Officer" with
"Chairman of the Board".
SECTION 2 - RESPONSIBILITIES AND DUTIES OF EMPLOYEE
Shall be amended to REPLACE entire section with the following language:
It is agreed that Employee is employed on a full-time basis, which is defined to
mean Employee's entire productive time, ability and attention. It is further
agreed that for so long as the Employee is employed with the Employer, Employee
shall not engage in any other business duties or pursuits without the express
written consent of the Board. In his capacity as Chairman of the Board,
Employee shall have such duties and responsibilities as listed below:
a. Represent the Corporation externally to the investment banking
community, analysts, banks, investors, industry and government groups,
public relations, etc .;
b. Be responsible for overseeing new business development, new channel
development and licensing, as directed by the Board of Directors;
c. Coordinate the day-to-day activities of the Board of Directors;
d. Be the Corporation's spokesperson for the business and financial
opportunities the Corporation creates;
e. Provide strategic input in formulating the Business Plan;
f. Help Thomas Kinkade in any way to accomplish his goals internally
and externally;
g. Lead negotiations on an as-appropriate basis and execute
appropriate documentation
h. Be available in areas where the Chief Executive Officer and
President requests his experience and expertise, and in this
capacity, seek only to be a support as any other Board member
would.
In addition, Employee shall perform such other duties and responsibilities as
the Board shall designate as are not inconsistent with Employee's position with
the Employer, including the performance of duties with respect to any
subsidiaries of the Employer.
Employee shall at all times perform the duties set forth herein faithfully,
industriously, and to the best of Employee's ability, experience and talent.
1
<PAGE>
SECTION 3 - LOCATION OF EMPLOYEE'S WORK
Shall be amended to REPLACE "principal executive offices" with "New Business
Development offices, currently located at 333 W. Santa Clara Street, Suite 1000,
San Jose, CA 95113".
SECTION 5(C)(I) - COMPENSATION TO EMPLOYEE, BONUSES, SENIOR MANAGEMENT BONUS
BASED ON PROFITABILITY
The title of this section shall be amended to REPLACE entire title with the
following language: COMPENSATION TO EMPLOYEE, BONUSES
Further, this section of the Employment Agreement shall be amended to REPLACE
sections 5(c)(i) and 5(c)(ii):
(i) An Earnings Per Share (EPS) Bonus based on the annual growth in EPS for
the fiscal year over the Base EPS. Base EPS is defined as the prior
fiscal year published EPS. Base EPS for year one (Fiscal 1998) will be
$0.30. A predetermined cash bonus will be paid if established levels of
published EPS growth are achieved. The cash bonus amounts are equivalent
to approximately 15% of the growth in net income, measured in 10%
increments of EPS growth. This bonus will be paid twice per year based on
the year to date performance in comparison to the Employer's business
plan.
(ii) A Trailing Twelve Months (TTM) Bonus, contingent upon continued employment
and paid pro-rata every pay period during the following fiscal year. The
bonus will be cumulative and equal to a) the prior year TTM Bonus plus b)
the annual growth rate of the published EPS for the fiscal year times the
sum of i) the base salary plus ii) the prior year TTM Bonus paid during
the fiscal year. In the event that EPS growth is negative, it will result
in a negative adjustment to the prior year TTM bonus, but not below the
base salary amount.
(iii) A New Business Bonus equal to 5% of the operating income contributed by
the New Business venture before reduction by this bonus. The New Business
Bonus is subject to the following criteria:
A. The Pro Forma will be based on the Business Plan projected P&L ratios
for the year, adjusted either positively or negatively for major
functional areas of operating expenses which may be used or not used
in the new business.
B. The bonus will be paid based upon actual results with an updated Pro
Forma for significant changes in circumstances, which will include the
following:
(i) Actual sales and returns;
(ii) Standard costs of goods adjusted for actual variances, whether
positive or negative;
(iii) The addition or deletion of significant costs attributable to
operating expenses of the major functional areas used in the
new business;
(iv) An allocation of interest and other direct financing costs
based upon the average period of unrecovered costs;
(v) Other significant changes in circumstances
(iv) A Debt Bonus as an incentive to retire Employer's senior subordinated debt
as quickly as possible. To the extent that the Employer prepays principal
installments to Levine Leichtman Capital Partners, L.P., Employee will
receive 50% of the interest saved as a result of such prepayment.
2
<PAGE>
(v) If Employer achieves the business plan projection in fiscal year 1998, and
realizes a 20% or a 40% growth rate the following two years, ignoring the
possibility of growth in New Business Bonus, Employee's compensation under
the above plan would be as follows:
(Tables below in 000's)
Fiscal Year Fiscal Year Fiscal Year
20% Growth 1998 1999 2000
---------------------------------------------------------------------
Base Salary 360 360 360
TTM Bonus 0 180 288
EPS Bonus 253 152 182
New Business 31 31 31
Debt Bonus 118 143 204
---------------------------------------------------------------------
Total 762 866 1,065
40% Growth 1998 1999 2000
---------------------------------------------------------------------
Base Salary 360 360 360
TTM Bonus 0 180 396
EPS Bonus 253 304 425
New Business 31 31 31
Debt Bonus 118 143 204
---------------------------------------------------------------------
Total 762 1,018 1,416
SECTION 5(C)(II) -DISCRETIONARY BONUS
This entire section 5(c)(ii) shall be removed.
ENTIRE AGREEMENT:
This Amendment, and through incorporation by reference, the Employment
Agreement, represent the entire employment agreement of the parties hereto. No
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by any of the parties which
are not expressly set forth in this Amendment or the Employment Agreement.
ACCEPTED AND AGREED:
/s/ Kenneth E. Raasch /s/ Michael Kiley
- ---------------------- -------------------------
Kenneth E. Raasch Michael Kiley
Employee Director, Compensation Committee Chairman
Media Arts Group, Inc
Attest: /s/ James F. Landrum, Jr. 10/29/97
------------------------------------
James F. Landrum, Jr.
Secretary
3
<PAGE>
EXHIBIT 10.5
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (this "Agreement") is made and entered
into as of October 10, 1997 by and between MEDIA ARTS GROUP, INC. (the "Company"
or "Employer") and JOHN LACKNER ("Employee"). This Agreement is intended to
replace the October 1, 1997 employment agreement between the parties in its
entirety.
RECITALS
A. The Company desires to engage Employee to perform certain services for the
Company on the terms and conditions set forth herein.
B. The Employee desires to perform certain services for the Company on the
terms and conditions set forth herein.
C. The Parties desire to amend their agreement, but for purposes of this
Agreement, the effective date for the agreement shall remain the original
effective date of October 1, 1997 (hereafter, the "Effective Date") so as
not to affect certain rights which may already be accruing or accrued.
NOW, THEREFORE, the parties agree as follows:
AGREEMENT
1. TERM OF EMPLOYMENT:
1.1 TERM: For the term and subject to the conditions set forth in this
Agreement, the Company hereby employs Employee, for a period which shall begin
on the Effective Date and shall end on October 1, 2002 or such earlier date of
termination as provided in this Agreement, and Employee hereby accepts such
employment. As used herein, the phrase "Employment Term" refers to the entire
period of employment by the Company hereunder.
1.2 EXTENSION OF TERM: The term set forth in Section 1.1 may be extended
by written amendment to this Agreement signed by both parties. Any continued
employment after the expiration of the Employment Term without such written
amendment shall be on an "at will" basis and not be construed to be part of this
Agreement.
2. TITLE AND RESPONSIBILITIES:
2.1 TITLE: Subject to the provisions of this Agreement, Employee shall
serve the Company during the Employment Term as Senior Vice President, Chief
Operating Officer of the Company. In this role, Employee shall have (i) oversee
limited Company operations, which shall include Manufacturing, Customer Service
and MIS, and (ii) perform such other duties and responsibilities as may from
time to time be assigned to Employee by the Company's Board of Directors or by
the President.
2.2 EMPLOYEE RESPONSIBILITIES: During the Employment Term, Employee shall:
(i) devote 100% of his business time, energy and skill to the affairs of
the Company as shall be necessary to perform the duties of such position and at
all times during the Employment Term shall have the powers and authority which
are necessary to enable him to discharge his duties in the office which he holds
and which are commonly incident to such office. Employee shall promptly and
faithfully
1
<PAGE>
observe, comply with and conform to the policies, instructions, directions,
and requests of applicable senior management and the policies, rules and
regulations of the Company; and
(ii) serve the Company on a full-time, exclusive basis during the
Employment Term;
(iii) Employee shall work in the Company headquarters, currently
located at 521 Charcot Ave., San Jose, CA 95131.
2.3 COMPANY RESPONSIBILITIES: The Company shall provide Employee with
the compensation, bonuses, benefits and business expense reimbursement
specified elsewhere in this Agreement.
3. SALARY, BENEFITS AND BONUS COMPENSATION:
During the Employment Term, as full compensation for all services to be
performed by Employee pursuant to this Agreement, the Company agrees to pay
Employee compensation and provide Employee with benefits as set forth in this
Section 3.
3.1 BASE COMPENSATION: The Company shall pay Employee base compensation
of $175,000 per annum (the "BASE COMPENSATION") during the Employment Term, with
such salary to be increased, at such times, if any, as the Board may deem
appropriate, to an amount determined by the Board, which increases shall be
consistent with the normal historical practices of Employer and the salary
adjustments for other senior managers of Employer. The Base Compensation will
be paid in equal installments in conformity with the Company's normal payroll
period.
3.2 ARTWORK BONUS: Employee shall receive from the Company an artwork
bonus of $5,000 at wholesale cost, from which to purchase any of the Company's
products. Employee shall receive one framed lithograph (S/N), which is produced
and distributed by the Employer and which the Employee shall select, per year of
employment, commencing after the first twelve months of employment.
3.3 ADDITIONAL BENEFITS: In addition to his Base Compensation and Artwork
Bonus, Employee shall:
(i) Be granted the following options:
a. 15,000 shares of Media Arts Group, Inc. common stock at fair
market value on the Effective Date, such options to be based on
the terms of the Employee Stock Option Plan and vesting over 3
years of employment (34% at one year from the Effective Date, 33%
at two years from the Effective Date, and 33% at three years from
the Effective Date);
b. 18,000 shares of Media Arts Group, Inc. common stock at fair
market value on October 29, 1997, such options to be based on the
terms of the Employee Stock Option Plan and vesting over 3 years
of employment (34% at one year from the Effective Date, 33% at
two years from the Effective Date, and 33% at three years from
the Effective Date);
(ii) Receive a temporary living allowance of $2,500.00 per month, until the
earlier of either a) when Employee's home sells or b) four (4) months
from the Effective Date;
(iii) Receive $500.00 auto allowance per full month of service;
(iv) Receive $17,500.00 in relocation costs, related commissions and
closing costs;
(v) Receive a one-time moving allowance of $7,500.00;
2
<PAGE>
(vi) Participate in the Senior Manager Bonus Program or equivalent
substitute program. In 1998, Employee shall receive a bonus payment
of $25,000.00;
(vii) Participate in the Company Profit Sharing Plan, if any, pursuant
to the conditions of the plan;
(viii) Receive medical, dental and vision insurance coverage for Employee and
his dependents under the Company's group medical insurance plan, at a
cost as set forth in the plan;
(ix) Receive $250,000 of life insurance coverage under a life insurance
plan selected by the Employer, towards which Employer will contribute
the lowest cost of coverage (i.e. the cost of coverage for someone of
Employee's same age, without any pre-existing conditions or other risk
factors which would increase premiums above the best rate available
for that age);
(x) Be entitled to vacation, sick time and personal time off under the
Company's Flexible Time Off (FTO) plan at an accrual of 13.33 hours
per full month of service; and
(xi) Receive such additional benefits as the Company may from time to time
in its sole discretion determine.
4. TERMINATION OF EMPLOYMENT:
4.1 DEATH, DISABILITY, TERMINATION FOR JUSTIFIABLE CAUSE: Employee's
employment pursuant to this Agreement may be terminated at any time upon thirty
(30) days written notice by the Company upon the occurrence of any of the
following events;
(i) Death of employee;
(ii) Disability of Employee (as defined below). For purposes of this
Agreement, the term "Disability" shall mean mental incapacity to perform his
duties in a normal manner for a total of three (3) months (whether or not
consecutive) in any twelve (12) month period during the term of this Agreement;
or
(iii) Justifiable Cause (as defined below) for such termination. For
purposes of this Agreement, the term "Justifiable Cause" shall mean any of the
following:
(a) If Employee shall fail to (i) perform any of his material
obligations under this Agreement and/or (ii) comply with reasonable directions
from the Board, which failure continues after the Company gives Employee written
notice of such failure and an opportunity for thirty (30) days to remedy such
failure;
(b) If Employee shall have engaged in willful misconduct in any
material matter affecting the Company or;
(c) If Employee shall be convicted of, or shall plead guilty or nolo
contendere to, a felony where such crime materially interferes with Employee's
ability to fulfill his duties under this Agreement or is otherwise materially
injurious to the Company.
4.2 CORPORATE REORGANIZATION: This Agreement shall not be terminated
by any voluntary or involuntary dissolution of the Company resulting from either
a merger or consolidation in which the Company is not the consolidated or
surviving corporation, or a transfer of all or substantially all of the stock or
assets of the Company. In the event of any such merger or consolidation or
transfer of stock or assets, the Company's rights, benefits, and obligations
hereunder may be assigned to the surviving or resulting corporation or the
transferee of the Company's assets.
3
<PAGE>
4.3 EFFECT OF TERMINATION: Upon any termination of this Agreement by the
Company pursuant to Section 4.1, the Company shall pay Employee (or in the event
of his death, his designated beneficiary) at the end of applicable notice period
the accrued and unpaid amount of the Base Compensation and Additional Benefits
payable pursuant to Section 3.1 3.2 and 3.3, prorated through the date of such
termination, and the Company shall have no further liability to Employee or his
estate pursuant to this Agreement, including without limitation, severance
compensation. If this Agreement terminates for any reason other than by the
Company pursuant to Section 4.1, then, effective upon the termination of this
Agreement, the Company shall pay Employee such compensation as provided in
sections 3.1, 3.2, and 3.3 of this Agreement, prorated through the date of
termination on a fair and equitable basis. The Company shall pay Employee all
amounts due under this paragraph upon Employee's termination or as soon
thereafter as is reasonably practicable.
5. RIGHT TO COMPANY MATERIALS: Employee agrees that all styles, designs,
lists, materials, books, files, reports, correspondence, and other documents
("COMPANY MATERIALS") used, prepared, or made available to the Employee, shall
be and shall remain the property of the Company. Upon termination of employment
or the expiration of this Agreement, all Company Materials shall be returned
immediately to the Company; provided, however, that Employee shall be entitled
to make and retain any copies thereof with respect to matters involving
Employee.
6. ANTISOLICITATION: Employee promises and agrees that while this Agreement
continues in effect, he will not influence or attempt to influence customers or
suppliers of the Company or any of its present or future affiliates, either
directly or indirectly, to divert their business to any individual, partnership,
firm, corporation, or other entity then in competition with the business of the
Company, or any affiliates of the Company.
7. SOLICITING EMPLOYEES: Employee promises and agrees that while this
Agreement continues in effect and for one year thereafter, he will not directly
or indirectly solicit any of the employees of the Company or its affiliates to
work for or invest in, as the case may be, any business, individual,
partnership, firm, or corporation, that is in direct competition with the
Company or any of its affiliates.
8. RESTRICTION ON USE OR DISCLOSURE OF TRADE SECRETS: It is expressly
understood that Employee may be dealing with trade secrets of the Company and
its affiliates, including but not limited to information system(s), inventions
and processes, all of a confidential nature, that concern the operations of the
Company or its affiliates and that are the Company's property and are used in
the course of the Company's business or that of its affiliates. Employee
promises and agrees that he will not disclose to anyone, directly or indirectly,
either while this Agreement is in effect or at any time thereafter any trade
secrets learned in the course of his employment with the Company or its
affiliates. Employee acknowledges that the Company may use all remedies,
including injunctive relief, in order to enforce the provisions of this
paragraph 8.
9. CHOICE OF LAW AND JURISDICTION: The validity, interpretation and effect
of this Agreement shall be governed by the laws of the State of California
applicable to agreements to be performed wholly within California by California
residents.
10. COUNTERPARTS: This Agreement may be executed in counterparts, each of
which shall be an original, and all of which together shall constitute one and
the same instrument.
11. NOTICES: Any notices, requests, demands and other communications under
this Agreement shall be in writing and shall be delivered to the person or sent
commercial courier service or postage prepaid, and addressed as follows:
The Company: MEDIA ARTS GROUP, INC.
Attention: James F. Landrum, Jr.
521 CHARCOT AVE.
SAN JOSE, CA 95131
4
<PAGE>
To Employee: JOHN LACKNER
31493 Bishop Gate
Westlake, OH 44145
Any party may from time to time change its address for the purposes of notices
to that party by a similar notice specifying a new address, but no such change
shall be deemed to have been given until actually received by the party sought
to be charged with its contents. All notices and other communications required
or permitted under this Agreement which are addressed as provided in this
Section 11 if delivered personally, shall be effective upon delivery and if
delivered by mail or by commercial courier service, shall be effective five (5)
days after deposit in the United States mail, postage prepaid, registered or
certified, return receipt requested or upon receipt by such party from the
commercial courier service, as the case may be.
12. REPRESENTATIONS OF EMPLOYEE: Employee represents and warrants that he is
now (and will continue to be during the entire term of this Agreement) legally
free to enter into this Agreement and to perform the duties required hereunder
and that neither the execution and delivery of this Agreement nor the
performance of his obligations hereunder will result in any breach or violation
of any other agreement or instrument to which he is a party.
13. ENTIRE AGREEMENT ; AMENDMENTS; ASSIGNMENTS: This Agreement constitutes
the entire agreement and understanding of the parties with respect to the
matters dealt with herein (including the compensation and employment benefits to
which Employee is entitled for periods from and after the Effective Date), and
supersedes all negotiations, representations or agreements and all other oral,
written and other communication between them concerning the subject matter
hereof, and all prior arrangements with the Company concerning employment
compensation and benefits for periods from and after the Effective Date. This
Agreement may be amended in whole or in part only by an agreement in writing
signed by all parties hereto. This Agreement and the rights and obligations
hereunder shall be deemed personal to Employee and Employee may not transfer,
pledge, encumber, assign, or alienate all or any part of this Agreement.
14 WAIVER: The waiver by one party of a breach of any of the terms or
conditions of this Agreement shall not operate or be construed as a continuing
waiver or as a consent to or waiver of any other subsequent breach thereof.
15. FEES: Should an action be instituted by either of the parties hereto in
any court of law or equity pertaining to the enforcement or interpretation of
this Agreement, the prevailing party shall be entitled to recover, in addition
to any judgment or decree rendered therein, all court costs and reasonable
attorneys' and experts' fees and expenses.
16. FURTHER ASSURANCES: From and after the date of this Agreement, the parties
hereto shall cooperate in good faith to accomplish the objectives of this
Agreement and to that end agree to execute and/or deliver from time to time such
further instruments and documents as may be necessary and convenient to the
fulfillment of these purposes. Should any documents conflict with this
Agreement, this Agreement shall control, unless such other document specifically
modifies or replaces this Agreement.
17. CAPTIONS: The Section captions inserted in this Agreement are for
convenience of reference and are not intended to influence the interpretation of
this Agreement.
18. SEVERABILITY: Should any part or portion of this Agreement or any
provision thereof be held invalid, illegal or void, the remainder of such part
or portion of this Agreement of provision thereof shall continue in full force
and effect as if the void, illegal or invalid part, portion, or provision had
been deleted therefrom or never included herein. In the event that any portion
of this Agreement is declared invalid, the parties hereto agree to use their
best efforts to reform this Agreement in a manner consistent with their original
intentions.
5
<PAGE>
19. GENDER: The use of the masculine pronoun hereunder shall not be
restrictive as to gender and shall be interpreted in all cases as the context
may require.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
October 10, 1997.
MEDIA ARTS GROUP, INC.
/s/ Craig A. Fleming
- --------------------------------------
Craig A. Fleming, President
EMPLOYEE:
/s/ John Lackner
- --------------------------------------
JOHN LACKNER
6
<PAGE>
LICENSE AGREEMENT
This License Agreement, dated effective December 3, 1997 (the
"Effective Date"), is made between Thomas Kinkade ("Artist") and Media Arts
Group, Inc. ("Publisher" or the "Company"), a Delaware corporation.
RECITALS
WHEREAS, the Artist desires the Publisher to be, and the
Publisher desires to be, a company with a business strategy focused upon the
brand name Thomas Kinkade and/or the artwork of Artist;
WHEREAS, the Artist desires the Publisher to be, and the
Publisher desires to be, the exclusive manufacturer, sub-licensor, marketer
and distributor of reproductions of the Artist's original artwork in all
available derivative art-based products, such products to include but not be
limited to wall art, calendars, stationery items, three-dimensional
derivatives and books;
WHEREAS, Artist desires the Publisher to, and Publishers
desires to, develop the brand name of Thomas Kinkade, through the exclusive
manufacturing, sub-licensing, marketing and distributing of art-based and
non-art-based Products, with such non-art-based products to include but not
be limited to furniture, apparel, home decor and household furnishings;
WHEREAS, Artist desires Publisher to, and Publisher desires
to, continue to develop Company-owned and independently-owned galleries which
carry art-based and non-art-based Products relating to Artist, on an
exclusive or non-exclusive basis;
NOW THEREFORE, the parties agree as follows:
1. DEFINITIONS
As used herein, the terms listed below shall have the following meanings:
"AFFILIATE" shall mean, with respect to any Person, any other
Person directly or indirectly controlling, controlled by, or under common
control with such Person.
"AGREEMENT" shall mean this License Agreement, as amended and
modified from time to time.
1
<PAGE>
"ARTIST" shall mean Thomas Kinkade and his heirs, agents,
estate and personal representatives.
"ARTWORK" shall mean any and all original sketches, drawings,
writings (including but not limited to books, advertising copy, slogans and
painting titles), paintings and any other works of art created by Artist
which are (i) completed as of the Effective Date and which are used for any
commercial purpose by Publisher at any time heretofore or hereafter, and (ii)
created after the Effective Date and delivered to Publisher under this
Agreement as the One Hundred Twenty (120) studio works and Thirty (30)
Plein-Air works.
"NEW PRODUCT TERM" shall mean the time period required for
Artist to create and provide to Publisher no less than One Hundred Fifty
(150) pieces of Artwork, One Hundred Twenty (120) of which Artwork shall be
"studio works" and Thirty (30) of which shall be Plein-Air works, such period
not to exceed Fifteen (15) years.
"PERSON" shall mean any person or entity, whether an
individual, trustee, corporation, general partnership, limited partnership,
trust, unincorporated organization, business association, firm, joint
venture, governmental agency or authority.
"PLACERVILLE PROJECT" shall mean the reproduction,
manufacture, marketing, distribution and sale of any products based upon one
or two pieces of Artwork annually, which art products are sold in and around
the City of Placerville, California, and shall also include the sale of
Products purchased from Publisher or its licensees.
"PRODUCTS" shall mean any and all art-based or non-art-based
products or services associated directly or indirectly with the Artwork or
the Artist, whether such Artwork or Products are known or unknown, and
whether or not currently in existence at the beginning of this Agreement,
such Products including, but not limited to, wall art, calendars, stationery
items, ornaments, three-dimensional derivatives (e.g. sculptures based on
Artwork), books, furniture, media properties, themed real estate, apparel,
home decor products and household furnishings.
"PUBLISHER" shall mean Media Arts Group, Inc., a Delaware
corporation, and its subsidiaries, successors and assigns.
2. EXCLUSIVE LICENSE
a. Commencing on the Effective Date of this Agreement,
Artist hereby grants to Publisher the complete, unencumbered, exclusive and
perpetual rights to reproduce, adapt, manufacture, sub-license, publish,
market, distribute, sell and display all Products based on Artwork for all
manners of commercial use, excluding such rights with respect to the Artwork
used in the Placerville Project or for works of art created after the New
Product Term which are not defined as Artwork.
2
<PAGE>
b. In addition to such rights, the Artist hereby grants
the Publisher:
1. the perpetual right to print, vend, sell,
reproduce, distribute and otherwise use the
Artwork or image thereof in any manner and by
any means, whether or not now known, invented,
used or contemplated, to promote and advertise
the sale of the Products,
2. the perpetual right to use and publish, and to
permit others to use and publish, Artist's name
(including any professional name heretofore or
hereinafter adopted by Artist), likeness,
signature and biographical material or any
reproduction or simulation thereof, in order to
promote and advertise the sale of the Products
and/or develop any brand name associated with
Artist, and
3. the perpetual right, but not the obligation, to
assert, and to defend against any actual or
threatened infringement of the Artwork,
copyrights and/or trademarks.
c. The perpetual aspects of this Agreement shall in no
way be construed to restrict the entering of any Artwork into the public
domain by operation of the Copyright Act or other State or Federal laws,
shall not be rendered invalid due to the operation of such laws, and in
perpetuity, shall be upheld to the maximum extent possible within the
parameters of such laws.
d. Artist shall own the original Artwork produced under
this Agreement and shall, without limitation, have all rights to the original
Artwork, except as otherwise provided in this Agreement.
e. Notwithstanding the grants under this Section 2,
Artist reserves the right to use or license, on a royalty free basis, the
name "Thomas Kinkade" and Artist's likeness in association with non-profit
organizations and activities, including but not limited to the development of
museums and Artist's founding or support of organizations with religious
and/or secular missions. This right shall include the right to display,
promote and exhibit Artwork in connection with these non-profit organizations
or activities and, after the New Product Term, the right to permit such
non-profit organizations to sell products based on works of art created after
the New Product Term which have not otherwise been used commercially by
Publisher. Artist shall not derive any economic benefit as a result of such
non-profit activities (except for tax benefits related to charitable
contributions). If Artist desires to permit use of the name "Thomas Kinkade"
in association with a for-profit venture (which shall include a non-profit
from which Artist derives an economic benefit), Artist shall first present
the opportunity to Publisher. If Publisher does not wish to participate in
the for-profit venture, Artist shall then seek Publisher's approval to permit
Artist the right to participate in such for-profit venture, and such approval
shall not be unreasonably withheld by Publisher. If approval permitting
Artist to participate in the for-profit venture is granted, Publisher shall
in good faith negotiate an arms length license arrangement with Artist to
allow for the use of the Thomas Kinkade name. Reservation of the right to use
the name "Thomas Kinkade" in association with a for-profit venture as
described
3
<PAGE>
above does not include the right to manufacture, distribute sell, or
otherwise use Artwork or other works of art created after the New Product
Term in any for-profit venture, except for promotional purposes.
3. ARTWORK CREATION AND DELIVERY
a. Artist agrees to create and provide to Publisher no
less than One Hundred Fifty (150) pieces of Artwork during the New Product
Term, One Hundred Twenty (120) of which Artwork shall be "studio works" and
Thirty (30) of which shall be Plein-Air works. Artwork shall be regularly
delivered during each 12 month period following this Agreement based upon a
schedule to be reasonably agreed to between Artist and Publisher, but which
shall not exceed 12 studio works per year and which shall require a minimum
of at least ten (10) studio works per year for at least the first five (5)
years of this Agreement. For purposes of clarification, in addition to the
Artwork delivered under this section 3(a), Publisher shall also have
exclusive rights to any and all original sketches, drawings, writings,
paintings and any other works of art created by Artist prior to the date of
this Agreement, including any "archive" images to which Artist secures access
to, during the New Product Term and which Publisher uses for commercial
purposes during the New Product Term. Size, subject, titles, color,
composition, style, method of execution and themes of Artwork delivered to
Publisher pursuant to this paragraph shall be determined exclusively by the
Artist after consultation with the Publisher; further, while Artist shall
take into consideration the reasonable requests of the Publisher, Artist
shall, in his sole discretion, determine all manners of an artistic nature,
including but not limited to size, subject, titles, color, composition,
style, method of execution and themes of the Artwork.
b. The Artist (i) shall cause his signature to be
affixed to the Artwork by the Artist's actual hand signing of the Artwork,
and (ii) shall, as determined by Artist, cause his signature to be affixed to
Products either by the Artist's actual hand signing of the Products or by the
use of an official signature block, which the Artist shall undertake promptly
to develop, or by a mechanical means such as the DNA signature method
currently utilized by the Publisher. In the event of the incapacity of the
Artist to sign the Products, the Artist's spouse, namely Nanette Kinkade,
shall have the right to sign the Artwork and/or Products on behalf of the
Artist. Artist shall keep supervision and creative control of all Artwork and
Products produced under this License Agreement.
c. Artist shall at all times be the sole owner of all
copyrights associated with the Artwork. Publisher will take all necessary
steps to protect Artist's copyright in and to Artwork created and utilized
under this Agreement. Publisher may develop, and if applicable, register in
any jurisdiction, any trademark (including both words and designs), service
marks, trade dress, etc, based on the name "Thomas Kinkade", any Artwork,
Artwork titles, or Products, and Publisher shall own all right, title and
interest in such trademarks.
4. ARTIST APPROVAL RIGHTS
Artist shall have the reasonable right to review and approve
any master copies of any Product bearing his name, likeness or Artwork, which
is manufactured, marketed, licensed, used and/or sold by Publisher. Artist
shall also have the right to review and approve any advertising,
4
<PAGE>
advertising copy, slogans, sales information, Product marketing and/or
business plans, ethical and moral codes, corporate vision and mission
statements, and strategic relationships relating to the Products or use of
Artist's name or likeness. Artist will have 30 days to review and approve any
such information sent to Artist, such approval not to be unreasonably
withheld. Artist must disapprove of any item in writing within said 30 day
period or such item will be considered approved. Artist shall also have the
reasonable right to review and approve any market in which any Product shall
be sold, including but not limited to approval of Products manufactured or
licensed for sale into the Christian market and the mass markets, such
approval not to be unreasonably withheld. Artist and the Company shall
mutually agree on the number of reproductions included in any limited edition
Product.
5. ARTIST PAYMENTS
a. PERCENTAGE OF CONSOLIDATED NET REVENUES.
1. From the Effective Date of this Agreement
through May 8, 2000, Artist shall receive 4.5%
of Consolidated Net Revenues, calculated and
payable 20 days from the last day of the month
in which such Consolidated Net Revenue is
earned, as determined in accordance with
Generally Accepted Accounting Principles
(GAAP);
2. Commencing May 9, 2000, Artist shall receive
5.0% of Consolidated Net Revenues, calculated
and payable 20 days from the last day of the
month in which such Consolidated Net Revenue is
earned, as determined in accordance with GAAP;
and
3. Should Consolidated Net Revenues of Publisher
exceed $500 million dollars, Artist shall
receive an additional 1% of all Consolidated
Net Revenues in excess of $500 million
calculated and payable 20 days from the last
day of the month in which such Consolidated Net
Revenue is earned.
4. Consolidated Net Revenues shall be all revenues
of any Product relating, in any degree, to any
use of Artist's name, Artwork, copyrights,
slogans, painting titles, and/or trademarks,
less any returns and allowances. Artist shall
not be entitled to receive a percentage of
Consolidated Net Revenues from products,
business divisions or other enterprises which
do not relate to Artist in any manner. Use of
the name "Thomas Kinkade" or any other names,
titles, or other Artwork related uses on any
products, business divisions or other
enterprises shall be deemed related to such
products, business divisions or other
enterprises.
5
<PAGE>
b. PAYMENTS BASED ON STUDIO PROOF PRODUCT.
From the Effective Date of this Agreement through May 8, 2000,
Artist shall receive 65% of Wholesale Gross Profit Margin of Studio Proof
("S/P") product, as determined in accordance with GAAP. Commencing May 9,
2000, Artist shall receive 35% of Wholesale Gross Profit Margin of S/P
product, calculated and payable 20 days from the last day of the month in
which such S/P product is delivered, as determined in accordance with GAAP.
c. PAYMENTS BASED ON MASTERS EDITION PRODUCT.
From the Effective Date of this Agreement, Artist shall
receive 50% of Retail Value of Masters Edition ("M/E") product, calculated
and payable 20 days from the last day of the month in which such M/E product
is delivered, as determined in accordance with GAAP.
d. INCENTIVE BASED COMPENSATION.
The Publisher and the Artist recognize the extreme importance
of timely delivery of the Artwork. As a result, the Publisher wishes to
offer incentives to encourage timely delivery of Artwork. Commencing April 1,
1998, provided that:
1. The Company's Consolidated Operating Margin
exceeds a 23% Consolidated Operating Margin (as
determined in accordance with GAAP), AND
2. Artist delivers all Artwork at least twelve
(12) weeks ahead of each of the Company's
scheduled release date during that fiscal year,
then Artist shall receive 25% of any additional Consolidated Operating Margin
in excess of the 23% Consolidated Operating Margin. For example, should the
Company achieve a 27% Consolidated Operating Margin, and should Artist
deliver all Artwork on time, Artist shall receive 1% of the Consolidated
Operating Margin, calculated and payable 20 days from the last day of each
quarter in which such additional Consolidated Operating Margin is earned, as
determined in accordance with GAAP.
e. PAINTING PAYMENTS
Artist shall be paid Twenty Five Thousand Dollars ($25,000.00)
for each piece of Artwork delivered (the "Price") pursuant to section 3(a)
above. The Price shall be reviewed annually by the Publisher, and may be
increased by Publisher based upon such review. As an advance toward the
price, Artist shall be paid the sum of Twelve Thousand Five Hundred Dollars
($12,500.00) per month, payable semi-monthly. Upon delivery of Artwork to
the Publisher pursuant to paragraph 3 hereof, the Artist shall be paid the
difference between the total amount advanced to Artist as of the date and the
Price of such Artwork. If the amount advanced to such date exceeds the Price
for such Artwork, there shall be no payment made to Artist and no amount
owing toward such Artwork.
6
<PAGE>
f. PER SIGNATURE FEE
Except for S/P products, Master Edition or original Artwork,
Artist shall receive a fee of One Hundred Dollars ($100.00) per signature
for each signature applied by Artist with Artist's own hand, provided such
hand signature is applied at the request of the Publisher. Such amount shall
be reviewed periodically. Signing of any Products, except original Artwork,
shall be at Artist's own discretion. This section shall apply to signing of
Products and will not include signings relating to collector or employee
events.
g. STOCK OPTIONS
Artist shall be granted an option, for a period of fifteen
(15) years, to purchase 600,000 shares of Media Arts Group, Inc. stock at the
closing share price of the stock on the Effective Date. Subject to
applicable corporate law, the Publisher agrees that the shares subject to the
options may be purchased from Publisher with an agreed upon promissory note,
payable to the Publisher. It is understood that should Artist exercise with a
promissory note, Artist will still be obligated to pay par value ($0.01 per
share) of the stock at the time of exercise.
h. LICENSING REVENUE
Artist shall receive no revenue generated from Publisher's
licensing activities, except as part of the payments set forth above.
i. STAFF SUPPORT AND STUDIO FOR ARTIST
Publisher shall provide reasonable support staff for Artist,
including secretarial assistance and other support staff required to make
Artist's time as efficient as possible, as is reasonably determined by
Artist. Publisher shall also pay reasonable rent, utilities and other
miscellaneous expenses related to Artist's studio and the performance of his
duties. Publisher agrees to pay reasonable costs related to preparation of
Artist's tax returns.
j. PROMOTIONAL ACTIVITY
Artist shall be available to appear at and participate in
activities in connection with the promotion of the Products, provided that
Artist's schedule of painting production and family activities allows, as
determined solely by the Artist. Publisher shall reimburse Artist for all
reasonable expenses incurred in connection with such activities, including
the travel and accommodation costs of his family.
6. COVENANTS AND REPRESENTATIONS AND WARRANTIES THE ARTIST
a. Artist represents and warrants to Publisher that he
is the owner of all copyrights in the Artwork and is the sole author of the
Artwork furnished to Publisher, that said copyrights have not in any way been
previously assigned or granted away, that said Artwork is original, is not
copied from any other copyrighted artwork or photographs, does not violate any
7
<PAGE>
rights, including trademark, copyrights, or other licensed rights of any
Person, and that Artist has no knowledge of any claim to the contrary.
b. Artist has not and will not during the term of this
Agreement, grant the rights described in this Agreement to any other Person.
Artist agrees, during and after the term of this Agreement, to keep
confidential the terms of this Agreement, information related to the
performance hereof, the business practices and marketing strategy of
Publisher or its Affiliates, and any concepts disclosed by Publisher or its
Affiliates for prospective Products. Artist acknowledges that Publisher owns
significant trade secrets in connection with its business practices and
marketing strategies.
c. Artist hereby agrees to indemnify Publisher, its
Affiliates, agents, assigns and licensees from all costs, losses, liabilities
and damages (including reasonable attorneys' fees) arising from or related to
any misrepresentation or breach of any of the foregoing representations and
warranties or any of his agreements or covenants contained in this Agreement.
Artist acknowledges that Artist's failure to provide Artwork as provided
herein, may result in lost sales and damages to the Publisher.
d. These representations and warranties shall survive
the termination of this Agreement.
7. COVENANTS AND REPRESENTATIONS AND WARRANTIES OF THE COMPANY
a. The Publisher represents and warrants to the Artist
that it has full corporate power and authority to enter into and perform this
Agreement and that this Agreement has been fully and validly authorized by
all necessary corporate action.
b. Publisher agrees to use reasonable efforts to
market, distribute and promote the Products. Publisher will take all
necessary steps to protect Artist's copyright in and to Artwork created and
utilized under this Agreement. Publisher agrees to conduct itself in a manner
which reflects positively upon Artist, the Thomas Kinkade brand name and the
family oriented values represented in his Artwork, writings and other message
based Products. Publisher acknowledges that, because of Artist's close
relationship with Publisher, Publisher's association with certain products,
individuals, companies or enterprises could reflect poorly upon Artist and,
if such associations were unreasonable, would constitute a breach of this
Agreement.
c. Publisher agrees that Artist shall not be liable for
any legal actions arising from Publisher's marketing, financial or business
activities. Publisher hereby agrees to indemnify Artist from all costs,
losses, liabilities and damages (including reasonable attorneys' fees)
arising from or related to any misrepresentations or breach of any of the
foregoing representations and warranties or any of its agreements or
covenants contained in this Agreement.
d. These representations and warranties shall survive
the termination of this Agreement.
8
<PAGE>
8. TERMINATION OF THE AGREEMENT
a. This Agreement is a perpetual license for the
Artwork, and may be terminated only by one of the following events:
1. by Publisher upon the material breach of any
agreement, covenant or representation or
warranty of Artist, if such breach has not been
cured 90 days after written notice to Artist of
such breach.
2. by Artist upon the material breach of any
agreement, covenant or representation or
warranty of Publisher, if such breach has not
been cured 90 days after written notice to
Publisher of such breach:
3. by Artist if any Person or group (as defined in
Rule 13(d)(3) under the Securities Exchange Act
of 1934), but excluding present shareholders to
the extent of their ownership as of the
Effective Date, beneficially owns (as defined
in Rule 13(d)(3) under the Securities Exchange
Act of 1934) a number of shares of common stock
of Media Arts Group, Inc. in excess of the
number of shares of common stock of Media Arts
Group, Inc. beneficially owned by Artist;
notwithstanding the preceding language, Artist
shall not be permitted to terminate this
Agreement if any Person or group owns a number
of shares of common stock of Media Arts Group,
Inc. in excess of the number of shares of
common stock of Media Arts Group, Inc.
beneficially owned by Artist as a result of
Artist's transfer or selling of shares;
4. by Artist upon the bankruptcy or insolvency of the
Publisher.
b. The parties acknowledge that Artist has granted an
exclusive, perpetual license for the Artwork and Products to Publisher in
part due to the Publisher's expressed business strategy being to focus upon
the name brand Thomas Kinkade and/or the artwork of Artist. Should
Publisher, without the prior consent of Artist, engage in any material
business enterprises unrelated to the Artwork, Artist or the Thomas Kinkade
brand name, then Artist shall have 90 days from the date he becomes aware of
such enterprise to object to that particular material business enterprise.
Artist's objection must be reasonable and Artist's consent to any material
business enterprise shall not be unreasonably withheld. Should Artist make a
timely objection to the material business enterprise, Artist may terminate
the perpetual aspects of this Agreement if such breach has not been cured
within 90 days of written notice to Publisher. It is agreed that Publisher's
participation in any material business enterprises unrelated to the Artwork,
Artist or the Thomas Kinkade brand name shall not in and of itself constitute
a material breach permitting immediate termination of this Agreement. In the
event of termination under this section 8(b), the termination date of the
Agreement shall instead become the later of either:
1. 15 years from the Effective Date, or
9
<PAGE>
2. 5 years from the date of written notice by Artist of
his objection to such material business enterprise.
c. Terminations under this paragraph 8(a) shall be
effective 90 days following written notice to a party of the other party's
election to terminate this Agreement. Upon the termination of this Agreement
under section 8(a), the Publisher shall nor undertake to produce any
additional Products; provided however, that the Publisher may dispose of any
then existing inventory of Products.
d. Upon the termination of this Agreement under section
8(b), the Publisher shall retain all rights until the end of the termination
date as modified; after such termination date, the Publisher shall nor
undertake to produce any additional Products but may dispose of any then
existing inventory of Products.
e. In the event of termination for any reason, all
rights for Product and Artwork shall revert back to the Artist.
9. NO ASSIGNMENT
a. Except as stated hereunder, neither this Agreement
nor any of the rights or obligations hereunder may be assigned by Artist or
Publisher without the prior written consent of the other, except that
Publisher may, without such consent, assign this Agreement and its rights and
obligations hereunder to an Affiliate, provided such affiliate shall continue
to be an Affiliate of Publisher. Subject to the foregoing, this Agreement
shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns, and no other Person shall have any
right, benefit or obligation hereunder, except that the Persons entitled to
indemnification under paragraphs 6 and 7 hereof.
b. This Agreement shall inure to the benefit of
and be enforceable by the Artist and his personal or legal representatives,
executors, administrators. successors, heirs, distributees, devisees and
legatees. If Artist should die while any amount would still be payable to him
hereunder had he continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement
to his devisee, legatee or other designee, if there is no such designee, to
his estate. Death or disability shall not be construed as a breach of this
Agreement by Artist.
10. NOTICES
For the purpose of this Agreement, notices provided for in
this Agreement shall be in writing and shall be deemed to have been duly
given when delivered or mailed by United States certified or registered mail,
return receipt requested, postage prepaid, addressed to the respective
addresses set forth below, or to such other address as any party may have
provided to the other in writing in accordance herewith, except that notice
of a change of address shall be effective only upon actual receipt:
10
<PAGE>
Publisher: Artist:
MEDIA ARTS GROUP, INC. THOMAS KINKADE
521 Charcot Ave. 521 Charcot Ave.
San Jose, CA 95131 San Jose, CA 95131
Attn.: Corporate Secretary
11. AMENDMENTS, ADDITIONS, MODIFICATIONS, WAIVERS OR DISCHARGE.
No amendments or additions to this Agreement shall be binding
unless in writing and signed by all parties hereto. No provision of this
Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and signed by all parties
hereto.
12. GOVERNING LAW
This Agreement shall be governed by, construed and enforced in
accordance with the laws of the State of California and any applicable
federal laws.
13. CAPTIONS AND SECTION NUMBERS
The captions and numbers to the sections and paragraphs of
this Agreement are inserted for convenience only and shall not affect the
construction or interpretation hereof.
14. DUPLICATE ORIGINALS
This Agreement and all amendments shall be fully executed in
duplicate and each duplicate shall constitute an original of the same
instrument.
15. ARBITRATION
Any controversy or claim arising out of or relating to this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three (3) arbitrators in San Jose, California, with Artist and
Publisher each selecting one (1) arbitrator and those two arbitrators
selecting the third arbitrator. Such arbitration shall be conducted in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrators award in any court having
jurisdiction. The prevailing party, as determined by the arbitrators, shall
be entitled to recover reasonable attorneys' fees.
16. ANTISOLICITATION
Artist promises and agrees that while this Agreement continues
in effect, he will not influence or attempt to influence customers or
suppliers of the Publisher or any of its present or future subsidiaries or
affiliates, either directly or indirectly, to divert their business to any
individual, partnership, firm, corporation or other entity then in
competition with any business of Publisher, or any subsidiary or affiliate of
the Publisher.
11
<PAGE>
17. SOLICITING EMPLOYEES
Artist promises and agrees that while this Agreement continues
in effect, and for five years thereafter, he will not directly or indirectly
solicit any of the employees of the Publisher, its subsidiaries or its
affiliates to work for or invest in, as the case may be, any business,
individual, partnership, firm, corporation, or other entity then in
competition with the business of the Publisher or any subsidiary or affiliate
of the Publisher.
18. COVENANT NOT TO COMPETE
Artist agrees that, unless this Agreement is terminated, he
will not, directly or indirectly, without the prior written consent of the
Publisher, provide consultative service with or without pay, own, manage,
operate, join, control, participate in, or be connected as a stockholder,
partner, or otherwise with any business, individual, partner, firm,
corporation, or other entity which is then in competition with the Publisher
or any subsidiary or affiliate of the Publisher, or directly or indirectly
participate in any business utilizing any works of art by Artist, except as
provided otherwise herein at section 2(e). It is further expressly agreed
that the Publisher will or would suffer irreparable injury if Artist were to
compete with the Publisher or any subsidiary or affiliate of the Publisher in
violation of this Agreement, except as provided otherwise herein, and that
the Publisher would by reason of such competition be entitled to injunctive
relief in a court of appropriate jurisdiction. The Artist further consents
and stipulates to the entry of such injunctive relief in such a court
prohibiting the Artist from competing with the Publisher or any subsidiary or
affiliate of the Publisher, in the areas set forth above, in violation of
this Agreement.
19. SEVERABILITY
The provisions of this Agreement shall be deemed severable and
the invalidity or unenforceability of any provision shall not affect the
validity or enforceability of the other provisions hereof
20. NUMBERS
Unless the context clearly indicates otherwise, words used
herein in the singular include the plural and words in the plural include the
singular.
21. GENDER
The use of the feminine, masculine or neuter pronoun shall not
be restrictive as to gender and shall be interpreted in all cases as the
context may require.
22. ENTIRE AGREEMENT
This Agreement represents the entire agreement of the parties
hereto. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by any of
the parties which are not expressly set forth in this Agreement. With
12
<PAGE>
the exception of the employment agreement between Publisher and Artist, any
and all agreements between the Parties, in existence as of the Effective Date
of this Agreement, shall terminate upon the signing of this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has executed
this Agreement on the date first indicated above.
MEDIA ARTS GROUP, INC.
BY: /s/ Bud Peterson BY: /s/ Thomas Kinkade
---------------------------------- -------------------------
BUD PETERSON, C.F.O. THOMAS KINKADE
Artist
13
<PAGE>
EXHIBIT 10.21
INVESTMENT MONITORING AGREEMENT
This INVESTMENT MONITORING AGREEMENT (this "Agreement"), is entered
into as of September 10, 1996 by and between Levine Leichtman Capital Partners,
Inc., a California corporation ("LLCP"), on the one hand and Media Arts Group,
Inc., a Delaware corporation ("MEDIA ARTS" or the "COMPANY"), Thomas Kinkade
Stores, Inc., a California corporation ("TKSI"), MAGI Entertainment Products,
Inc. a California corporation ("MAGI ENTERTAINMENT") and MAGI Sales, Inc., a
California corporation ("MAGI SALES"), on the other hand. TKSI, MAGI
Entertainment and MAGI Sales are collectively referred to herein as the
"SUBSIDIARIES" and are sometimes referred to as a "SUBSIDIARY."
BACKGROUND
A. LLCP is an affiliate of Levine Leichtman Capital Partners, L.P.,
a California limited partnership ("Investor"). Investor has entered into that
certain Security Purchase Agreement dated July 7, 1995 which was amended
pursuant to that certain First Amendment To Securities Purchase Agreement dated
March 12, 1996 (as the same from time to time may be amended, "Securities
Purchase Agreement") by which Investor has made an investment in the Company.
Investor desires to have LLCP monitor its investment pursuant to the terms and
conditions set forth herein.
B. The Company acknowledges Investor's desire to monitor its
investment and also desires to have the benefits to be derived from LLCP's
review of the Company's financial condition and performance as provided in this
Agreement, including, without limitation, the benefits of establishing an
Operating Committee as provided herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, and for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. TERM. This Agreement may be terminated, at any time from and
after March 31, 1998, upon thirty (30) days prior written notice by either the
Company or LLCP, effective as of the last day of any month; provided, however,
that the termination of this Agreement shall not affect in any way the Company's
obligation to pay any fees payable pursuant to Section 5, to the extent such
obligation arose prior to such termination, or its obligation to indemnify LLCP
and its employees, officers, partners, affiliates, agents, attorneys,
accountants and representatives pursuant to Section 6.
<PAGE>
2. OPERATING COMMITTEE. The Company hereby establishes an
Operating Committee (the "Operating Committee") to, among other things, (i)
review the Company's and the Subsidiaries' annual operating and capital
budget; (ii) compare budgeted versus actual performance; (iii) review
strategic planning for the Company and the Subsidiaries ; (iv) analyze
working capital management; (v) review cash flow performance in relationship
to the Company's and the Subsidiaries' financial arrangements; (vi) monitor
compliance with all outstanding financial obligations; (vii) review all
employee compensation and incentives; (viii) review operating expenses; and
(ix) review employee agreements and policies. The Operating Committee shall
also consider such additional matters concerning the operations of the
Company or the Subsidiaries as the Operating Committee shall deem advisable.
The Operating Committee shall not constitute a committee designated by the
Board of Directors pursuant to Article 3 Section 8 of the Company's Bylaws or
Section 311 of the General Corporation Law of the State of California or
Section 141 of the General Corporation Law of the State of Delaware, and
shall not have any authority to act in the name of or on behalf of the
Company or the Subsidiaries, but the Operating Committee shall have the right
to make suggestions and to recommend actions to the Board of Directors of the
Company or of any Subsidiary of the Company or to any committee of any such
Board of Directors, either in writing or by attending, through a
representative, a meeting of such Board of Directors or such committee. The
Operating Committee shall at all times be comprised of two members of the
senior management of the Company and up to two representatives of LLCP. The
initial members of the Operating Committee shall be: Ken Raasch and Bud
Peterson (from the Company) and Mark Mickelson (from LLCP). The Company
shall use reasonable efforts to make the financial officers of the Company
and the Subsidiaries and other members of senior management available, when
required, to attend each meeting of the Operating Committee to review the
financial package and discuss other matters.
3. MEETINGS; QUORUM; FINANCIAL INFORMATION TO BE DELIVERED. Regular
meetings of the Operating Committee shall take place on or about 20th of each
month (or the next succeeding Business Day, if the 20th is not a Business Day),
commencing on September 20, 1996. In addition to such regular meetings, special
meetings may be called by any member of the Operating Committee if such member
reasonably believes that there are matters which are appropriate for
consideration by the Operating Committee which it is necessary or desirable to
address prior to the next scheduled meeting of the Operating Committee.
Meetings may be conducted by telephone so long as each of the persons attending
can hear each of the other persons attending the meeting. The Company's
financial officers shall use reasonable efforts to prepare a financial package
for delivery to all Operating Committee members at least 72 hours prior to each
regularly scheduled monthly meeting. The financial package shall include, among
other things, (i) a consolidated and consolidating balance sheet, statement of
operations and statement of cash flows for the Company for the most recent
one-month period, and for the year-to-date period, (ii) a comparison of the
actual results of operations for such periods to the same periods in the prior
year and to the Company's and the Subsidiaries' budget and forecast, (iii) an
explanation of any variances in such actual results of operations from such
budget and forecast, (iv) an analysis of the Company's and the Subsidiaries'
personnel (headcount) along functional lines indicating the
2.
<PAGE>
number of sales and marketing personnel and administrative personnel, and (v)
such other financial information as any member of the Operating Committee may
from time to time reasonably request.
4. OTHER MONITORING ACTIVITIES. During the term of this Agreement,
the Company and the Subsidiaries shall provide LLCP with any financial or other
information reasonably requested by LLCP, and shall make available to LLCP an
opportunity to meet with officers, directors and other employees of the Company
or any Subsidiary upon reasonable request of LLCP. In addition, LLCP shall,
with prior notice to the Company, be free to meet with the Company's or the
Subsidiaries' lenders at any time and from time to time. Such notice shall
include the topics to be discussed and shall provide an opportunity for a
representative of the Company to participate in such meeting.
5. COMPENSATION. For services rendered by LLCP under this
Agreement, the Company shall pay to LLCP a monthly monitoring fee of $12,500,
which shall be paid monthly by wire transfer to: Bank of America, Century City,
Private Banking, 2049 Century Park East, Los Angeles, California 90067, ABA No.
121000358, Account No. 1154501726, Attention: Cheryl Stewart (or such other
account as LLCP shall designate in writing) on the last Business Day of each
month, during the term of this Agreement, commencing September 30, 1996. In no
event shall LLCP be obligated to refund any portion of the monitoring fee paid
to it for any reason.
6. INDEMNIFICATION. In the event that LLCP becomes involved in any
capacity in any action, proceeding or investigation brought by or against any
person or entity in connection with any matter involving the Operating Committee
or LLCP's role in monitoring Investor's investment in the Company or any
Subsidiary, the Company and each Subsidiary shall indemnify and hold LLCP
harmless from and against any and all costs, expenses, liabilities, claims,
damages and losses, including attorneys' fees and the cost of any investigation
and preparation, incurred in connection therewith other than as a result of
LLCP's wilful misconduct or gross negligence. If for any reason the foregoing
indemnification is not available for any reason or is not sufficient to hold
LLCP harmless, then the Company and each Subsidiary shall contribute to the
amount of all costs, expenses, liabilities, claims, damages and losses paid or
payable by such LLCP in such proportion as is appropriate to reflect not only
the relative benefits received by the Company or any Subsidiary, on the one
hand, and LLCP, on the other hand, but also the relative fault of each, as well
as any other equitable considerations. The Company's and each Subsidiary's
reimbursement, indemnity and contribution and compensatory obligations shall be
in addition to any liability the Company or any Subsidiary may otherwise have at
law or under any other agreement, and such obligations shall extend, upon the
same terms, to all of LLCP's employees, officers, partners, affiliates, agents,
attorneys, accountants and representatives. This Section 6 shall survive
indefinitely the termination of this Agreement.
7. CONFIDENTIALITY. LLCP shall keep confidential any information
provided to it in its capacity as a member of the Operating Committee and shall
not use any such information except in connection with Investor's investment in
the Company and the Subsidiaries; provided, however, that LLCP may disclose any
such confidential information (i) to any of LLCP's
3.
<PAGE>
employees, officers, partners, affiliates, agents, attorneys, accountants and
representatives, (ii) upon the order of any court or administrative agency or as
otherwise required by law, (iii) upon the request, order or demand of a
governmental or administrative agency to provide information to it, (iv) that is
in the public domain by reason of prior publication not attributable to any act
or omission of LLCP or any of its employees, officers, partners, affiliates,
agents, attorneys, accountants and representatives, and (v) in connection with
the exercise of any remedy under the Securities Purchase Agreement or any
related agreement; provided, however, that with respect to Section 7(v) such
confidential information obtained under this Agreement could have been obtained
under the Securities Purchase Agreement. LLCP acknowledges that, to the extent
any of the Company's securities are at any time publicly traded, possession of
the information obtained pursuant to this Agreement may constitute the
possession of material non-public information and may preclude LLCP from buying
or selling such publicly traded securities.
8. NON-EXCLUSIVE. Nothing in the Agreement shall restrict LLCP or
any person affiliated with LLCP from any other activity, including, without
limitation, the providing of services similar to those provided to the Company
or any Subsidiary hereunder to other persons or entities.
9. MODIFICATION. No waiver or modification of this Agreement shall
be binding unless it is in writing signed by both of the parties hereto.
10. 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 and the same Agreement.
11. GOVERNING LAW. In all respects, including all matters of
construction, validity and performance, this Agreement and the rights and
obligations arising hereunder shall be governed by, and construed and enforced
in accordance with, the laws of the State of California applicable to contracts
made and performed in such state, without regard to principles thereof regarding
conflicts of laws.
12. 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, AND UNDERSTANDING THEY ARE WAIVING A CONSTITUTIONAL RIGHT, THE
PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER IN CONTRACT, TORT, OR
OTHERWISE, ARISING OUT OF, CONNECTIED WITH, RELATED TO, OR INCIDENTAL TO, THIS
AGREEMENT, THE
4.
<PAGE>
SECURITIES PURCHASE AGREEMENT AND/OR ANY RELATED AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY.
IN WITNESS WHEREOF, the parties have caused this Investment Monitoring Agreement
to be executed and delivered by their duly authorized representatives as of the
date first above written.
MEDIA ARTS GROUP, INC., MAGI SALES, INC.
a Delaware corporation a California corporation
By: /s/ Illegible By: /s/ Illegible
------------------------------- -------------------------------------
Name: Name:
------------------------------ -----------------------------------
Title: Title:
----------------------------- ----------------------------------
THOMAS KINKADE STORES, INC., MAGI ENTERTAINMENT
a California corporation PRODUCTS, INC., California corporation
By: /s/ Illegible By: /s/ Illegible
------------------------------- ------------------------------------
Name: Name:
------------------------------ -----------------------------------
Title: Title:
----------------------------- ----------------------------------
Acknowledged:
LEVINE LEICHTMAN CAPITAL PARTNERS, INC.,
a California corporation
By: /s/ Arthur E. Levine
-------------------------------
Arthur E. Levine, President
5.
<PAGE>
EXHIBIT 10.22
FIRST AMENDMENT TO INVESTMENT MONITORING AGREEMENT
THIS FIRST AMENDMENT TO INVESTMENT MONITORING AGREEMENT ("FIRST
AMENDMENT") is entered into as of February 21, 1997 by and among LEVINE
LEICHTMAN CAPITAL PARTNERS, INC., a California corporation ("LLCP"), on the
one hand, and MEDIA ARTS GROUP, INC., a Delaware corporation ("MEDIA ARTS" or
the "COMPANY"), THOMAS KINKADE STORES, INC., a California corporation
("TKSI"), MAGI ENTERTAINMENT PRODUCTS, INC., a California corporation ("MAGI
ENTERTAINMENT"), MAGI SALES, INC., a California corporation ("MAGI SALES"),
and CALIFORNIA COAST GALLERIES, a California corporation ("CCG," and together
with TKSI, MAGI Entertainment and MAGI Sales being referred to collectively
as the "SUBSIDIARIES" and individually as a "SUBSIDIARY"), on the other hand,
with reference to the following facts:
RECITALS
A. LLCP, Media Arts and the Subsidiaries (other than CCG) are
parties to that certain Investment Monitoring Agreement entered into as of
September 10, 1996 (the "MONITORING AGREEMENT"), pursuant to which LLCP is
monitoring the investment of Levine Leichtman Capital Partners, L.P., a
California limited partnership ("INVESTOR"), in the Company, which investment
was made in connection with that certain Securities Purchase Agreement dated as
of July 26, 1995, as amended (the "Securities Purchase Agreement"). Capitalized
terms not otherwise defined herein are as defined in the Monitoring Agreement.
B. Concurrently herewith, Investor, Media Arts and the Subsidiaries
are amending and restating the terms of the Securities Purchase Agreement, and
pursuant to such amendment and restatement the parties wish to amend certain
terms of the Monitoring Agreement as set forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the receipt and adequacy of which are hereby
acknowledged, it is agreed as follows:
1. AMENDMENT OF MONITORING AGREEMENT. The Monitoring Agreement is hereby
amended as follows:
1.1 ADDITIONAL SUBSIDIARY. From and after the date hereof, CCG shall be a
"Subsidiary" under and as defined in the Monitoring Agreement, and CCG hereby
agrees to be bound by all of the terms and conditions applicable to the
"Subsidiaries" as set forth in the Monitoring Agreement as amended by this First
Amendment.
<PAGE>
1.2 SECURITIES PURCHASE AGREEMENT. Each reference in the Monitoring
Agreement to the Securities Purchase Agreement shall hereafter be deemed to be a
reference to that certain Credit Agreement of even date herewith among Investor,
Media Arts and the Subsidiaries.
1.3 COMPENSATION. The monthly monitoring fee set forth is Section 5 of
the Monitoring Agreement (a) shall be reduced from $12,500 to $11,500 beginning
with the monitoring fee payable on February 28, 1997, and (b) shall be
discontinued beginning with the monitoring fee otherwise payable in the month
immediately following the month in which the outstanding principal amount under
the Consolidated Note (as defined in the Credit Agreement referred to above) is
equal to or less than $5,400,000.
2. MISCELLANEOUS.
2.1 HEADINGS. The various headings of this First Amendment are inserted
for convenience of reference only and shall not affect the meaning or
interpretation of this First Amendment or any provisions hereof.
2.2 COUNTERPARTS. This First Amendment may be executed by the parties
hereto in several counterparts, each of which shall be deemed to be an original
and all of which together shall be deemed to be one and the same instrument.
2.3 INTERPRETATION. No provision of this First Amendment shall be
construed against or interpreted to the disadvantage of any party hereto by any
court or other governmental or judicial authority by reason of such party's
having or being deemed to have structured, drafted or dictated such provision.
2.4 COMPLETE AGREEMENT. The Monitoring Agreement, as amended by this
First Amendment, constitutes the complete agreement between the parties with
respect to the subject matter hereof, and supersedes any prior written or oral
agreements, writings, communications or understandings of the parties with
respect thereto.
2.5 GOVERNING LAW. This First Amendment shall be governed by, and
construed and enforced in accordance with, the laws of the State of California
applicable to contracts made and performed in such state, without regard to the
principles thereof regarding conflict of laws.
2.6 EFFECT. Upon the effectiveness of this First Amendment, each
reference in the Monitoring Agreement to "this Agreement," "hereunder," "hereof"
or words of like import, shall mean and be a reference to the Monitoring
Agreement as amended hereby.
2.7 CONFLICT OF TERMS. In the event of any inconsistency between the
provisions of this First Amendment and any provision of the Monitoring
Agreement, the terms and provisions of this First Amendment shall govern and
control.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment to Monitoring Agreement as of the day and year first above written.
MEDIA ARTS GROUP, INC., a THOMAS KINKADE STORES, INC., a
Delaware corporation California corporation
By: /s/ Kenneth E. Raasch By: /s/ Kenneth E. Raasch
--------------------------- ---------------------------
Kenneth E. Raasch Kenneth E. Raasch
President and CEO President and CEO
MAGI ENTERTAINMENT PRODUCTS, MAGI SALES, INC., a
INC., a California corporation California corporation
By: /s/ Kenneth E. Raasch By: /s/ Kenneth E. Raasch
--------------------------- ---------------------------
Kenneth E. Raasch Kenneth E. Raasch
President and CEO President and CEO
CALIFORNIA COAST GALLERIES,
INC., a California corporation
By: /s/ Kenneth E. Raasch
---------------------------
Kenneth E. Raasch
President and CEO
Acknowledged:
LEVINE LEICHTMAN CAPITAL PARTNERS, INC.
By: /s/ Arthur E. Levine
--------------------------------
Arthur E. Levine, President
3
<PAGE>
EXHIBIT 10.23
MEDIA ARTS GROUP, INC.
CONSULTING AGREEMENT
This Consulting Agreement, including the attached Exhibits
("Agreements") is made and entered into as of the 1st day of April, 1997, by
and between MEDIA ARTS GROUP, INC.("MAGI"), a Delaware company, and Mike
Kiley ("Consultant"). MAGI desires to retain Consultant as an independent
contractor to perform consulting services for MAGI as set forth below and
Consultant is willing to perform such services, on terms set forth more fully
below. In consideration of the mutual promises contained herein, the parties
agree as follows:
1. SERVICES AND COMPENSATION any proprietary information or
trade secrets of any former or
(a) Consultant agrees to current employer or any other
perform for MAGI the services person or entity with which
described in the attached Consultant has an agreement or a
EXHIBIT A ("Services"). duty to keep in confidence
information acquired by
(b) MAGI agrees to pay Consultant Consultant in confidence and
the compensation set forth in that Consultant will not bring
the attached EXHIBIT B for the onto the premises of MAGI any
performance of the Services. unpublished document or
proprietary information
2. CONFIDENTIALITY belonging to such an employer,
person, or entity unless
(a) "Confidential Information" consented to in writing by such
means any MAGI proprietary employer, person, or entity.
information, technical data, Consultant will indemnify MAGI
trade secrets or know-how, and hold it harmless from and
including, but not limited to, against all claims, liabilities,
research, product plans, damages and expenses, including
products, services, suppliers, reasonable attorneys' fees and
supplier lists, customers, costs of suit, arising out of or
customer lists, markets, in connection with any violation
software, developments, or claimed violation of a third
Developments, processes, party's rights resulting in
formulas, technology, designs, whole or in part from MAGI's use
drawings, engineering, of the work product of
marketing, finances or other Consultant under this Agreement.
business information disclosed
by MAGI either directly or (d) Consultant recognizes that
indirectly in writing, orally, MAGI has received and in the
electronically, or by drawings future will receive from third
or inspection of parts or parties their confidential or
equipment. proprietary information subject
to a duty on MAGI's part to
(b) Consultant will not, during maintain the confidentiality of
or subsequent to the term of such information and use it
this Agreement, use Confidential only for certain limited
Information for any purpose purposes. Consultant agrees
whatsoever other than the that Consultant owes MAGI and
performance of the Services on such third parties, during the
behalf of MAGI or disclose term of this Agreement and
Confidential Information to any thereafter, a duty to hold all
third party. Consultant agrees such confidential or
that Confidential Information proprietary information in the
shall remain the sole property strictest confidence and not to
of MAGI. Consultant agrees to disclose it to any person, firm
take all reasonable precautions or corporation or to use it
to prevent unauthorized except as necessary in carrying
disclosure of Confidential out the Services for MAGI
Information. Notwithstanding consistent with MAGI's
the above, Consultant's agreement with such third party.
obligation under this Section
2(b) relating to Confidential (e) Upon the termination of
Information shall not apply to this Agreement, or upon MAGI's
information which earlier request, Consultant
will deliver to MAGI all of
(i) is known to Consultant MAGI's property relating to,
at the time of disclosure to and all tangible and electronic
Consultant by MAGI as evidenced embodiments of, Confidential
by written records of Information in Consultant's
Consultant, possession or control.
(ii) has become publicly (f) Consultant represents and
known and made generally warrants that each employee of
available through no wrongful Consultant, and each
act of Consultant, or independent contractor of
Consultant, if any, has
(iii) has been rightfully executed an agreement with
received by Consultant from a Consultant containing
third party authorized to make provisions in MAGI's favor
such a disclosure. substantially similar to this
Section 2.
(c) Consultant agrees that
Consultant will not, during the 3. OWNERSHIP
term of this Agreement,
improperly use or disclose Consultant agrees that all
copyrightable material, notes,
records, drawings, designs,
developments,
1
<PAGE>
improvements, developments, (f) Consultant represents and
discoveries and trade secrets warrants that each employee of
(collectively, "Developments") Consultant, and each independent
conceived, made or discovered by contractor of Consultant, if
Consultant in performing the any, has executed an agreement
Services, solely or in with Consultant containing
collaboration with others, provisions in MAGI's favor
during the term of this substantially similar to this
Agreement relating to the Section 3.
business of MAGI shall be the
sole property of MAGI. In (g) Notwithstanding any other
addition, to the extent allowed provision of this Section 3, the
by law, any Developments which provisions of this Section 3
constitute copyrightable subject shall not apply to any Invention
matter shall be considered that qualifies in all respects
"works made for hire" as that under Section 2870 of the
term is defined in the United California Labor Code, which
States Copyright Act. provides: "(a) Any provision in
Consultant further agrees to an employment agreement which
assign (or cause to be assigned) provides that an employee shall
and does hereby assign fully to assign, or offer to assign, any
MAGI all such Developments and of his or her rights in an
any copyrights, patents, mask invention to his or her employer
work rights, or other shall not apply to an invention
intellectual property rights that the employee developed
relating thereto. entirely on his or her own time
without using the employer's
(b) Upon the termination of equipment, supplies, facilities
this Agreement, or upon MAGI's or trade secret information,
earlier request, Consultant will except for those Developments
deliver to MAGI all of MAGI's that either:
property relating to, and all
embodiments of, Developments in (1) Relate at the time of
Consultant's possession and conception or reduction to
control. practice of the invention to the
employer's business, or actual
(c) Consultant agrees to assist demonstrably anticipated
MAGI, or its authorized research or development of the
representative, at MAGI's employer.
expense, to obtain and from time
to time enforce and defend (2) Result from any
MAGI's rights in the work performed by the employee
Developments and any copyrights, for the employer. (b) To the
patents, mask work rights or extent a provision in an
other intellectual property employment agreement purports to
rights relating thereto in any require an employee to assign an
and all countries, and to invention otherwise excluded
execute all documents reasonably from being required to be
necessary for MAGI to do so. assigned under subdivision (a),
the provision is against the
(d) MAGI agrees that if in the public policy of this state and
course of performing the is unenforceable." Consultant
Services, Consultant shall advise MAGI promptly and
incorporates into any in writing of any of his or her
Development developed hereunder previous or future works or
any invention, improvement, Developments which he believes
development, concept, discovery qualify under the California
or other proprietary information Labor Code Section 2870. MAGI
owned by Consultant or in which agrees to receive such
Consultant has an interest information in confidence.
("Item"), MAGI is hereby granted
and shall have a nonexclusive, 4. CONFLICTING OBLIGATIONS
royalty-free, perpetual,
irrevocable worldwide license to (a) Consultant certifies that
make, have made, modify, Consultant has no outstanding
reproduce, display, use and sell agreement or obligation that is
such Item as part of or in in conflict with any of the
connection with such Invention. provisions of this Agreement, or
that would preclude Consultant
(e) Consultant agrees that if from complying with the
MAGI is unable because of provisions hereof, and further
Consultant's unavailability, certifies that Consultant will
dissolution, mental or physical not enter into any such
incapacity, or for any other conflicting agreement during the
reason, to secure Consultant's term of this Agreement.
signature to apply for or to
pursue any application for any (b) Consultant represents and
United States or foreign patents warrants that each employee of
or mask work or copyright Consultant, and each independent
registrations covering the contractor of Consultant, if
Developments assigned to MAGI any, has executed an agreement
above, then Consultant hereby with Consultant containing
irrevocably designates and provisions in MAGI's favor
appoints MAGI and its duly substantially similar to this
authorized officers and agents Agreement.
as Consultant's agent and
attorney-in-fact, to act for and 5. TERM AND TERMINATION
in Consultant's behalf and stead
to execute and file any such (a) This Agreement will
applications and to do all other commence on the date first
lawfully permitted acts to written above and will continue
further the prosecution and for twelve (12) months or
issuance of patents, copyright termination as provided below.
and mask work registrations
thereon with the same legal (b) MAGI, upon a majority vote
force and effect as if executed by its Board of Directors, may
by Consultant. terminate this Agreement upon
giving sixty (60) days prior
written notice thereof to
2
<PAGE>
Consultant. Any such notice jurisdiction. In the event that
shall be addressed to Consultant any legal action or arbitration
at the address shown below or is brought by any party
such address as Consultant may hereunder, the prevailing party
notify MAGI of and shall be shall be entitled to recover
deemed given upon delivery if from the other party all
personally delivered, or reasonable costs, expenses and
forty-eight (48) hours after attorneys fees incurred therein.
being deposited in the United
States mail, postage prepaid, (b) Consultant agrees that it
registered or certified mail, would be impossible or
return receipt requested. MAGI inadequate to measure and
may terminate this Agreement calculate MAGI's damages from
immediately and without prior any breach of the covenants set
notice if Consultant refuses or forth in Sections 2 or 3 herein.
is unable to perform the Accordingly, Consultant agrees
Services, or is in breach of any that if Consultant breached
material provision of this Section 2 or 3, MAGI has, in
Agreement. addition to any other right or
remedy available, the right to
(c) Upon such termination all obtain from any court of
rights and duties of the parties competent jurisdiction an order
shall cease except: (i) that restraining such breach or
MAGI shall be obligated to pay, threatened breach and specific
within thirty (30) days of the performance of any such
effective date of termination, provision. Consultant further
all amounts owing to Consultant agrees to the extent provided by
for unpaid services and related law that no bond or other
expenses, if any, in accordance security shall be required in
with the provisions of Section 1 obtaining such equitable relief
(Services and Compensation and Consultant hereby consents
hereof; and (ii) Sections 2 to the issuance of such
(Confidentiality), 3 injunction and the ordering of
(Ownership), 7 (Independent such specific performance.
Contractors) shall survive
termination of this Agreement. 9. GOVERNING LAW
6. ASSIGNMENT This Agreement shall be governed
by, and construed and
Neither this Agreement nor any interpreted under, the laws of
right hereunder or interest the State of California without
herein may be assigned or reference to conflict of laws
transferred by Consultant principles.
without the express written
consent of MAGI. 10. ENTIRE AGREEMENT
7. INDEPENDENT CONTRACTORS This Agreement and the Exhibits
hereto form the entire agreement
Nothing in this Agreement shall of the parties and supersedes
in any way be construed to any prior agreements between
constitute Consultant as an them with respect to the subject
agent, employee or matter hereof.
representative of MAGI, but
Consultant shall perform the 11. WAIVER
Services hereunder as an
independent contractor. Waiver of any term or provision
Consultant acknowledges and of this Agreement or forbearance
agrees that Consultant is to enforce any term or provision
obligated to report as income by either party shall not
all compensation received by constitute a waiver as to any
Consultant pursuant to this subsequent breach or failure of
Agreement, and Consultant agrees the same term or provision or a
to indemnify MAGI and hold it waiver of any other term or
harmless to the extent of any provision of this Agreement.
obligation imposed on MAGI (i)
to pay withholding taxes or 12. MODIFICATION
similar items or (ii) resulting
from Consultant's being No modification to this
determined not to be an Agreement, nor any waiver of any
independent contractor. rights, shall be effective
unless assented to in writing by
8. ARBITRATION, EQUITABLE the party to be charged.
RELIEF AND ATTORNEYS FEES
13. COUNTERPARTS
(a) Except as provided in
Section 8(b) below, MAGI and This Agreement may be executed
Consultant agree that any in counterpart, each of which
dispute or controversy arising shall be deemed an original, but
out of or relating to any both of which together shall
interpretation, construction, constitute one and the same
performance or breach of this instrument.
Agreement, shall be settled by
arbitration to be held in San 14. INTERPRETATION
Jose, California, by the
American Arbitration Association Consultant and MAGI agree that
and in accordance to the then this Agreement was the product
current rules thereof. The of negotiation, with each party
arbitrator may grant injunctions having the
or other relief in such dispute
or controversy. The decision of
the arbitrator shall be final,
in any court of competent
3
<PAGE>
opportunity to propose 15. SEVERABILITY
modification of terms. Should any provision of this
Accordingly, any ambiguity in Agreement be found to be void
this Agreement shall not be or unenforceable, the remainder
construed for or against any of this Agreement shall remain
party based upon who prepared in full force and effect.
such terms; the parties hereby
expressly waive California Civil
Code Section 1654 with respect
thereto.
IN WITNESS WHEREOF, the undersigned are duly authorized to execute this
Agreement on behalf of Consultant and MAGI as of the day and year written
above.
CONSULTANT: MEDIA ARTS GROUP INC.
521 Charcot Ave.
San Jose, CA 95131
By: /s/ Mike Kiley By: /s/ Kenneth Raasch
------------------------------- --------------------------------
Mike Kiley Print Name: Kenneth Raasch
------------------------
Title: Chairman/CEO
Address: 6415 Beusy Ct. -----------------------------
San Jose,CA 95123
4
<PAGE>
EXHIBIT A
Services to be performed by Consultant:
a. Act as a liaison between Thomas Kinkade and Company management
b. Interface with Company employees in any or all areas to identify issues
c. Work with the management team to develop a Company mission statement
d. Evaluate performance of various departments and/or Company divisions
e. Advise Company and Thomas Kinkade on issues relating to Company
f. Perform other functions as directed by the Company's Board of Directors
5
<PAGE>
EXHIBIT B
Compensation of Consultant:
(a) Rate of Pay: $6,000.00 per month, with payment to be made on the
first day of every month
(b) Options: Grant of 25,000 options at $3.75, vesting pro rata
over the term of this agreement. Should this agreement be terminated
without cause, the balance of the options shall immediately vest.
6
<PAGE>
EXHIBIT 10.24
MEDIA ARTS GROUP, INC.
AMENDMENT TO CONSULTING AGREEMENT
On the 1st day of April, 1997, a Consulting Agreement, including the attached
Exhibits ("Agreements") was made and entered into by and between MEDIA ARTS
GROUP, INC.("MAGI"), a Delaware company, and Mike Kiley ("Consultant"). MAGI
desires to continue to retain Consultant as an independent contractor to
perform consulting services for MAGI, but the parties seek to amend and
modify certain provisions of Consultant's Agreements based on the scope and
nature of work to be performed. All amendments and modifications to the
Agreements shall be effective as of August 1, 1997. Unmodified portions of
the Agreements shall remain in full force and effect, and modified portions
shall be modified only as set forth below. In consideration of the mutual
promises contained herein, the parties agree to amend and modify the
Agreements as follows:
1. On Exhibit B, Section (a), the following language:
(a) Rate of Pay: $6,000.00 PER MONTH, with payment to be made on
the first day of every month
shall be AMENDED AND MODIFIED to read:
(a) Rate of Pay: $10,000.00 PER MONTH, with payment to be made on
the first day of every month
2. The following language shall be ADDED in Section 1 (Services and
Compensation) as Section 1(c):
1(c) MAGI agrees to reimburse Consultant for all reasonable expenses
incurred by Consultant as are reasonably related to the execution
of his duties hereunder.
IN WITNESS WHEREOF, the undersigned are duly authorized to execute this
Agreement on behalf of Consultant and MAGI as of the day and year written
above.
CONSULTANT: MEDIA ARTS GROUP INC.
521 Charcot Ave.
San Jose, CA 95131
By: /s/ Mike Kiley By: /s/ Kenneth E. Raasch
------------------------------- -------------------------------
Mike Kiley Kenneth E. Raasch
CHAIRMAN OF THE BOARD & CEO
Address: 6415 Beusy Ct
San Jose, CA 95123
<PAGE>
EXHIBIT 10.25
PURCHASE AND SALE AGREEMENT
By and Between
MEDIA ARTS GROUP, INC.
("SELLER")
and
LIMAR REALTY CORP. #36
("BUYER")
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. PURCHASE AND SALE..................................................... 1
1.1 PROPERTY........................................................ 1
1.2 REAL PROPERTY................................................... 2
1.3 ASSIGNMENT...................................................... 2
2. PURCHASE PRICE........................................................ 2
2.1 INITIAL DEPOSIT................................................. 2
2.2 ADDITIONAL DEPOSIT.............................................. 2
2.3 INTEREST ON DEPOSIT............................................. 3
2.4 DISPOSITION OF DEPOSIT.......................................... 3
2.5 LOAN AMOUNT..................................................... 3
2.6 CASH BALANCE.................................................... 3
3. TITLE: NEW LEASES..................................................... 3
3.1 VESTING OF TITLE................................................ 3
3.2 BUYER'S TITLE INSURANCE......................................... 3
3.3 NEW LEASE....................................................... 3
4. ESCROW................................................................ 4
4.1 OPENING OF ESCROW............................................... 4
4.2 INSTRUCTIONS TO TITLE COMPANY................................... 4
5. CLOSING: LOAN......................................................... 4
5.1 CLOSING......................................................... 4
5.2 FAILURE TO CLOSE................................................ 4
5.3 LOAN............................................................ 4
6. DUE DILIGENCE......................................................... 5
6.1 DUE DILIGENCE PERIOD............................................ 5
6.2 AVAILABLE INFORMATION........................................... 5
6.2.1 REQUESTED MATERIALS...................................... 5
6.2.2 PROPERTY FILES........................................... 5
6.3 TITLE REPORT: PERMITTED EXCEPTIONS.............................. 5
6.4 INSPECTION: RIGHT OF ENTRY...................................... 6
6.4.1 PHASE I ENVIRONMENTAL AUDIT.............................. 7
6.4.2 ENVIRONMENTAL CONDITIONS................................. 7
6.5 INDEMNITY: RETURN............................................... 7
6.6 GENERAL CONDITIONS.............................................. 7
7. CONDITIONS TO CLOSING................................................. 7
7.1 SELLER'S CONDITIONS............................................. 7
i
<PAGE>
7.1.1 BUYER'S DELIVERIES....................................... 8
7.1.2 BUYER'S REPRESENTATIONS.................................. 8
7.1.3 BUYER'S PERFORMANCE...................................... 8
7.1.4 SELLER'S PURCHASE........................................ 8
7.1.5 NEW LEASE................................................ 8
7.2 BUYER'S CONDITIONS.............................................. 8
7.2.1 SELLER'S DELIVERIES...................................... 8
7.2.2 SELLER'S REPRESENTATIONS................................. 8
7.2.3 SELLER'S PERFORMANCE..................................... 8
7.2.4 BUYER'S TITLE POLICY..................................... 8
7.2.5 DUE DILIGENCE MATERIALS.................................. 8
7.2.6 MATERIAL ADVERSE CHANGE.................................. 8
7.2.7 SELLER'S PURCHASE........................................ 8
7.2.8 LEASEBACK................................................ 8
7.3 FAILURE OF CONDITIONS........................................... 9
7.4 SATISFACTION OF CONDITIONS...................................... 9
8. DELIVERIES INTO ESCROW................................................ 9
8.1 DELIVERIES BY SELLER............................................ 9
8.1.1 DEED..................................................... 9
8.1.2 BILL OF SALE............................................. 9
8.1.3 ASSIGNMENT............................................... 9
8.1.4 FIRPTA................................................... 9
8.1.5 FORM 590................................................. 9
8.1.6 NEW LEASE................................................ 9
8.1.8 SELLER'S AUTHORITY....................................... 9
8.2 DELIVERIES BY BUYER............................................. 9
8.2.1 CASH..................................................... 10
8.2.2 ASSIGNMENT............................................... 10
8.2.3 BUYER'S AUTHORITY........................................ 10
8.2.4 NEW LEASE................................................ 10
8.2.5 REQUEST FOR RECONVEYANCE................................. 10
8.2.6 PROMISSORY NOTE.......................................... 10
8.2.7 OTHER DOCUMENTS.......................................... 10
8.3 DELIVERY TO BUYER UPON CLOSING.................................. 10
8.4 DELIVERY FOLLOWING CLOSING...................................... 10
9. PRORATIONS; CLOSING COSTS; SECURITY DEPOSIT........................... 10
9.1 PRORATIONS...................................................... 10
9.1.1 TAXES AND ASSESSMENTS.................................... 10
9.1.2 OPERATING EXPENSES....................................... 11
9.1.3 CALCULATION OF PRORATIONS................................ 11
9.2 CLOSING COSTS................................................... 11
9.2.1 SELLER'S COSTS........................................... 11
9.2.2 BUYER'S COSTS............................................ 11
ii
<PAGE>
9.3 SECURITY DEPOSITS............................................... 11
9.4 OTHER EXPENSES.................................................. 11
10. OPERATION OF PROPERTY PENDING THE CLOSING............................. 11
10.1 NORMAL COURSE OF BUSINESS....................................... 12
10.2 FURTHER ENCUMBRANCES............................................ 12
10.3 ADDITIONAL NEW LEASES........................................... 12
10.4 ENVIRONMENTAL MATTERS........................................... 12
11. REPRESENTATIONS AND WARRANTIES........................................ 12
11.1 NO REPRESENTATIONS OR WARRANTIES BY SELLER...................... 12
11.2 SELLER'S REPRESENTATIONS AND WARRANTIES......................... 12
11.2.1 AUTHORITY............................................... 12
11.2.2 PENDING ACTIONS......................................... 13
11.2.3 GOVERNMENT REGULATIONS.................................. 13
11.2.4 LICENSES................................................ 13
11.2.5 TAXES................................................... 13
11.2.6 UTILITIES............................................... 13
11.2.7 PHYSICAL DEFECTS........................................ 13
11.2.8 SOIL DEFECTS............................................ 13
11.2.9 INSURANCE NOTICE........................................ 13
11.2.10 HAZARDOUS MATERIALS..................................... 14
11.2.11 MATERIAL FACTS.......................................... 14
11.2.12 LEASES.................................................. 14
11.2.13 SERVICE CONTRACTS....................................... 15
11.2.14 FINANCIAL RECORDS....................................... 15
11.2.15 ACCESS.................................................. 15
11.2.16 FOREIGN PERSON.......................................... 15
11.2.17 SQUARE FOOTAGE.......................................... 15
11.2.18 GOOD TITLE.............................................. 15
11.2.19 CORRECT COPIES.......................................... 15
11.2.20 OPTION TO PURCHASE...................................... 15
11.2.21 TRUE AS OF CLOSING...................................... 15
11.2.22 MATERIAL CHANGES........................................ 15
11.2.23 SELLER'S KNOWLEDGE...................................... 16
11.3 BUYER'S REPRESENTATIONS AND WARRANTIES.......................... 16
11.3.1 AUTHORITY TO EXECUTE; ORGANIZATION...................... 16
11.3.2 FINANCIAL CONDITION..................................... 16
11.3.3 NO ENCUMBRANCE.......................................... 16
12. INDEMNIFICATION....................................................... 16
12.1 INDEMNIFICATION OF BUYER........................................ 16
12.2 DEFENSE OF CLAIMS AGAINST BUYER................................. 16
12.3 INDEMNIFICATION OF SELLER....................................... 17
12.4 DEFENSE OF CLAIMS AGAINST SELLER................................ 17
iii
<PAGE>
13. CASUALTY OR CONDEMNATION.............................................. 17
13.1 CASUALTY........................................................ 17
13.2 CONDEMNATION.................................................... 18
14. COMMISSIONS........................................................... 18
14.1 PAYMENT OF THE SALES COMMISSION................................. 18
14.2 LEASING COMMISSION.............................................. 19
15. NOTICES............................................................... 19
16. MISCELLANEOUS......................................................... 20
16.1 TIME............................................................ 20
16.2 ATTORNEYS' FEES................................................. 20
16.3 NO WAIVER....................................................... 20
16.4 ENTIRE AGREEMENT................................................ 20
16.5 SURVIVAL........................................................ 20
16.6 SUCCESSORS AND ASSIGNS.......................................... 20
16.7 SEVERABILITY.................................................... 20
16.8 PURCHASE PRICE ALLOCATION....................................... 20
16.9 CAPTIONS........................................................ 21
16.10 EXHIBITS........................................................ 21
16.11 RELATIONSHIP OF THE PARTIES..................................... 21
16.12 GOVERNING LAW................................................... 21
16.13 REVIEW BY COUNSEL............................................... 21
16.14 CONFIDENTIALITY................................................. 21
16.15 COUNTERPARTS.................................................... 21
16.16 LICENSED REAL ESTATE BROKERS.................................... 21
17. LIQUIDATED DAMAGES.................................................... 21
18. DEFINITIONS........................................................... 22
</TABLE>
iv
<PAGE>
STANDARD FORM
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT ("AGREEMENT") is made and entered into
as of the 3rd day of June, 1997 (the "EFFECTIVE DATE") by and between Media
Arts Group, Inc., a Delaware corporation ("SELLER"), and Limar Realty Corp.
#36, a California corporation ("BUYER").
RECITALS
This Agreement is made with respect to the following facts and
circumstances:
A. Seller will own prior to the Closing (as defined in Section 5.1
below), certain real property commonly known as the Media Arts Building, with
the street address of 521 Charcot Avenue, San Jose, California, which real
property is referred to in this Agreement as the "Property" and is more
particularly defined below.
B. Seller is currently the lessee of the Property and pursuant to the
lease ("EXISTING LEASE") dated February 7, 1994, by and between Seller as
lessee and South Bay/Crip III Associated Joint Venture ("SOUTH BAY") as
landlord, as thereafter amended. Seller has an option to purchase the
Property.
C. An escrow ("SELLER ESCROW") for the purchase of the Property by
Seller from South Bay has, or will be established, at the Title Company (as
defined in Section 4.1 below).
D. Subject to the terms and conditions of this Agreement, and
immediately following purchase of the Property by Seller pursuant to its
option, Seller desires to sell and Buyer desires to purchase the Property
through an Escrow (as defined in Section 4.1 below) to be established at the
Title Company, which Escrow is to close simultaneously with the Seller Escrow
as more particularly described in this Agreement.
E. In connection with the Seller Escrow and in order to facilitate the
purchase of the Property by Seller, Buyer will, subject to the provisions of
this Agreement, loan to Seller certain funds as more particularly described
in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, Seller and Buyer agree as follows:
1. PURCHASE AND SALE.
1.1 PROPERTY. Subject to the terms and conditions hereof, Seller
hereby agrees to sell, convey and assign to Buyer, and Buyer hereby agrees to
purchase and accept from Seller on the Closing Date (as defined below) the
following (collectively, the "PROPERTY"):
<PAGE>
1.1.1. The real property consisting of approximately 6.58 acres
which is legally described on EXHIBIT 1.1.1 attached hereto, together with
any and all rights, privileges and easements, rights of way, and other
appurtenances used or connected with the beneficial use or enjoyment of such
land (the "LAND");
1.1.2 All buildings and other improvements and fixtures of
every kind and description located in, on, over, or under the Land including
without limitation that certain building consisting of approximately 90,000
square feet of net rentable area, any apparatus, equipment and appliances
incorporated therein and used in connection with the operation and occupancy
thereof, such as heating and air conditioning systems, facilities used to
provide any utility service, ventilation, or other services thereto, parking
lots or structures, landscaping and roadways (all of which are collectively
referred to as the "IMPROVEMENTS"); and
1.1.3 All right, title and interest of Seller in and to all
tangible personal property, if any, conveyed to Seller by South Bay in
connection with the Seller Escrow (the "PERSONAL PROPERTY").
1.2 REAL PROPERTY. The Land and Improvements are collectively
referred to as the "REAL PROPERTY".
1.3 ASSIGNMENT. In addition, Seller shall convey and assign to
Buyer all of the right, title and interest of Seller in and to (i) all
current licenses, permits, certificates of occupancy, approvals and
entitlements issued or granted in connection with the Real Property as well as
any and all development rights and any other intangible rights, interests or
privileges relating to or used in connection with the Real Property; (ii) the
right to use the current names of the Real Property, logos, trademarks,
tradenames and symbols and promotional materials; and (iii) all transferrable
warranties, guarantees or sureties relating to the Real Property. Such
assignment shall be made pursuant to the form described in Section 8.1.3
below ("ASSIGNMENT") and all of the above interests as described in this
Section 1.3 shall be referred to collectively as the "INTANGIBLE PROPERTY".
2. PURCHASE PRICE.
Buyer shall pay as the total purchase price for the Property
("PURCHASE PRICE") the sum of Seven Million Six Hundred Thousand Dollars
($7,600,000.00). The Purchase Price shall be paid as follows:
2.1 INITIAL DEPOSIT. Within three (3) business days of the
Effective Date, Buyer shall cause Two Hundred Fifty Thousand Dollars
($250,000.00)(the "INITIAL DEPOSIT) to be delivered into Escrow.
2.2 ADDITIONAL DEPOSIT. No later than the Due Diligence Date (as
defined in Section 6.1 below) and provided Buyer has waived or approved the
due diligence condition set forth in Section 7.2.5, Buyer will cause an
additional Two Hundred Fifty Thousand Dollars ($250,000.00)(the "ADDITIONAL
DEPOSIT") to be delivered into Escrow.
2
<PAGE>
2.3 INTEREST ON DEPOSIT. The Initial Deposit and the Additional
Deposit shall be held by the Title Company as an earnest money deposit
towards the Purchase Price. The Initial Deposit and thereafter the Additional
Deposit, if made, shall be held in Escrow in a federally insured interest
bearing account or other investment suitable for daily investment with any
interest accruing thereon to be paid or credited to Buyer. The Initial
Deposit shall sometimes be referred to as the "DEPOSIT" until the Additional
Deposit is delivered into Escrow, at which time the term "Deposit" shall
refer to the sum of the Initial Deposit and the Additional Deposit.
2.4 DISPOSITION OF DEPOSIT. At the Closing (as defined in Section
5.1 below) the Deposit shall be applied and credited toward the payment of
the Purchase Price. If Escrow does not close, and the Agreement is terminated
in a manner governed by Section 7.3 or 13, the Deposit will be disbursed to
Buyer as provided in such Sections. If the Escrow does not close and neither
Section 7.3 nor Section 13 applies, the Deposit together with interest
accrued thereon shall be promptly returned to Buyer unless the provisions of
Section 17 are applicable, in which case the disposition of the Deposit shall
be governed by the provisions of Section 17.
2.5 LOAN AMOUNT. As more particularly described in Section 5.3
below, Buyer shall be entitled to a credit against the Purchase Price in the
amount equal to the outstanding principal balance of the Loan (as defined in
Section 5.3 below) together with accrued and unpaid interest, if any.
2.6 CASH BALANCE. On or before the Closing, Buyer shall deliver
into Escrow in immediately available funds the balance of the Purchase Price.
3. TITLE; NEW LEASES.
3.1 VESTING OF TITLE. At Closing, Seller shall convey good and
marketable fee simple absolute title to the Real Property to Buyer by grant
deed (as further described in Section 8.1.1 below), free and clear of all
liens, encumbrances, easements, restrictions, rights, covenants and
conditions of any kind or nature whatsoever save and except only for the
Permitted Exceptions (as defined in Section 6.3 below). At Closing, Seller
shall further (i) convey to Buyer good title to the Personal Property, if
any, by bill of sale (as further described in Section 8.1.2 below) and (ii)
assign to Buyer good title to the Intangible Property by the Assignment, all
of which shall be conveyed and assigned free and clear of all liens,
encumbrances, security interests and adverse claims of any kind or nature
whatsoever.
3.2 BUYER'S TITLE INSURANCE. At Closing, the Title Company shall
issue to Buyer an ALTA extended coverage owner's form of title insurance
policy in the amount of the Purchase Price insuring that fee simple title to
the Real Property is vested in Buyer subject only to the Permitted Exceptions
("BUYER'S TITLE POLICY"). Buyer shall be entitled to request that the Title
Company provide, at Buyer's cost and expense, such additional endorsements to
the Buyer's Title Policy as Buyer may reasonably require, provided that such
endorsements shall be at no cost or additional liability to Seller and the
Closing shall not be delayed as a result of Buyer's request.
3.3 NEW LEASE. Following the Closing, the Seller will occupy the
Property as a tenant pursuant to a lease (the "NEW LEASE") to be entered into
by Seller as tenant and Buyer as landlord, which New Lease is to be effective
as of the Closing and is to be in the form attached
3
<PAGE>
hereto as EXHIBIT 3.3. Each of the Seller and Buyer agree to execute the New
Lease to be effective as of, and subject to the Closing. The Existing Lease
will terminate as of the closing of the Seller Escrow and Seller will deliver
to Buyer as of the Closing of the Escrow a Certificate of Termination in a
form reasonably acceptable to Buyer warranting the termination of the
Existing Lease.
4. ESCROW.
4.1 OPENING OF ESCROW. Seller shall deliver a fully executed
counterpart of this Agreement into escrow ("ESCROW") to be established at
Santa Clara Land Title Company, San Jose, California ("TITLE COMPANY") within
three (3) business days following the Effective Date. The Buyer shall cause
the Initial Deposit to be delivered into Escrow as provided in Section 2.1.
4.2 INSTRUCTIONS TO TITLE COMPANY. Seller and Buyer shall each be
entitled to submit escrow instructions to the Title Company in connection
with the Closing of the Escrow. Seller and Buyer shall in addition execute
such further escrow instructions as the Title Company may reasonably require
in connection with the Closing. In the event of any conflict between the
terms and conditions of this Agreement and the provisions of any escrow
instructions prepared by Seller, Buyer or the Title Company, the terms and
conditions of this Agreement shall control.
5. CLOSING LOAN.
5.1 CLOSING. The purchase and sale of the Property as contemplated
by this Agreement, including but not limited to the recordation of the Deed
(as defined in Section 8.1.1 below) and the completion of the other matters
required by this Agreement to be done contemporaneously (the "CLOSING") shall
occur no later than five (5) business days following the Due Diligence Date
or such earlier date as is selected by Buyer upon at least two (2) business
days prior written notice to Seller and the Title Company. The date on which
the Closing actually occurs shall be referred to as the "CLOSING DATE". It is
acknowledged that the Closing pursuant to this Agreement shall be
simultaneous with the closing of the Seller Escrow.
5.2 FAILURE TO CLOSE. If the Closing does not occur on or before
the date set forth in Section 5.1 above, then in the absence of a written
agreement between the parties to extend the Closing Date, either party hereto
may elect to terminate this Agreement upon giving written notice of such
termination to the other and to the Title Company. In such event, except in a
case where the provisions of Section 17 are applicable, the Deposit together
with interest accrued thereon shall be promptly returned to Buyer.
5.3 LOAN. In connection with the closing of the Seller Escrow, and
provided that as of the Closing hereunder, Seller is not in default pursuant
to this Agreement, Seller has delivered into Escrow all the matters required
to be delivered by Seller to effect the Closing and Buyer is otherwise
obligated to perform pursuant to this Agreement, then Buyer hereby agrees to
loan to Seller (the "LOAN") an amount sufficient to allow Seller to purchase
the Property and close the Seller Escrow in accordance with the provisions of
Seller's option provided that, in no event shall the Loan be in excess of the
sum of Five Million Nine Hundred Thousand Dollars ($5,900,000). The amount of
the Loan shall be funded by Buyer into the Seller Escrow in
4
<PAGE>
immediately available funds on or before the Closing Date. The Loan shall be
evidenced by a Promissory Note in the form attached hereto as EXHIBIT 5.3-1.
The Loan shall provide for an interest rate of 10% per annum, for accrual of
interest to commence on the date that Buyer places the Loan amount into the
Seller Escrow and for payment of the entire unpaid principal balance together
with any accrued and unpaid interest on or before 30 days following the close
of the Seller Escrow. The loan shall be secured by a Deed of Trust with
assignment of rents ("DEED OF TRUST") in the form attached hereto as EXHIBIT
5.3-2. As a condition of the obligation of Buyer to make the Loan, the Title
Company shall be unconditionally prepared to issue to Buyer, in connection
with the Seller Escrow, an ALTA Lender's Title Insurance Policy in the amount
of the Loan, insuring the lien of the Deed of Trust subject only to the
Permitted Exceptions (as defined below). In connection with the Close of the
Escrow, the lien of the Deed of Trust shall be reconveyed and Buyer shall be
entitled to a credit against the Purchase Price in the full amount of the
outstanding principal balance of the Loan, together with accrued and unpaid
interest, if any.
6. DUE DILIGENCE.
6.1 DUE DILIGENCE PERIOD. The period commencing as of the
Effective Date and continuing through the date ("DUE DILIGENCE DATE") which
is fifteen (15) business days following the Effective Date shall be referred
to as the "DUE DILIGENCE PERIOD".
6.2 AVAILABLE INFORMATION. Seller shall make available to Buyer
the following documents and materials (collectively, the "DUE DILIGENCE
MATERIALS"):
6.2.1 REQUESTED MATERIALS. Following the Effective Date
Buyer will deliver to Seller a list of documents and materials (e.g.
structural reports, environmental reports, building plans, property tax
bills, etc.) relating to the Property. Seller shall promptly furnish to Buyer
for its review copies of all such documents and materials in the possession
of Seller, reasonably accessible to Seller or in the possession of or
reasonably accessible to Seller's property manager, if any. The obligation of
Seller, as described in this Section 6.2.1 shall be limited to providing
copies of existing documents and materials and Seller shall have no
obligation to obtain any additional reports or incur any costs in connection
with any additional reports. Seller shall, however, immediately provide
copies to Buyer of any reports or similar documents, if any, as provided to
Seller by South Bay or its representative(s). Seller shall, in addition,
reasonably cooperate with Buyer in connection with obtaining any reports or
like documents from South Bay.
6.2.2 PROPERTY FILES. Seller shall make available to Buyer
and Buyer's agents and representatives, upon reasonable notice and during
normal business hours, all files in the possession of Seller, reasonably
accessible to Seller or in possession of or reasonably accessible to Seller's
property manager, if any, relating to the ownership, operation, construction,
use or occupancy of the Property, or any portion of the Property. Seller
shall furnish Buyer copies of such material relative to the Property as Buyer
may request. Seller shall, in addition, reasonably cooperate with Buyer in
providing Buyer with access to all files with respect to the Property made
available by or obtainable from South Bay or its representative(s).
6.3 TITLE REPORT; PERMITTED EXCEPTIONS. Within five (5) business
days after the Effective Date, Seller shall obtain and deliver to Buyer a
current preliminary title report ("TITLE REPORT") for the Real Property
prepared by the Title Company, together with a legible copy of
5
<PAGE>
the documents listed as exceptions therein. If Buyer does not receive the
Title Report and a legible copy of all such documents within five (5)
business days after the Effective Date, each of the other dates provided in
this Agreement, including, but not limited to the Due Diligence Date and the
Closing Date, shall be extended by one (1) day for each day that Buyer's
receipt of the Title Report and a legible copy of all such documents is
delayed. Seller shall, within ten (10) business days after the Effective
Date, obtain and deliver to Buyer and the Title Company a survey ("SURVEY")
prepared by a licensed engineer which Survey shall be reasonably current and
sufficient to provide the basis for an ALTA extended coverage owner's policy
of title insurance without boundary, encroachment or survey exceptions. In
connection with the Survey, Seller shall cause the Title Company to issue an
ALTA supplement to the Title Report reflecting any and all exceptions, if
any, indicated by the Survey ("ALTA SUPPLEMENT") or, in the alternative,
written confirmation ("NO SUPPLEMENT NOTICE") that no supplement to the Title
Report is necessary by reason of the Title Company's review of the Survey.
Within five (5) business days following receipt by Buyer of the Title Report,
copies of the documents listed as exceptions and the ALTA Supplement, or, in
the alternative, the No Supplement Notice (but in any event not later than
three (3) business days prior to the Due Diligence Date), Buyer shall give
notice ("TITLE NOTICE") to Seller of the exceptions to title as shown on the
Title Report and the ALTA Supplement, if any, approved by Buyer and those
disapproved by Buyer. Seller shall have three (3) business days after the
date on which the Title Notice is given (but no later than 5:00 p.m. on the
day one (1) business day prior to the Due Diligence Date) to have the
objected to title exceptions removed to the reasonable satisfaction of Buyer,
if Seller so elects. If within such time, Seller declines or fails to have
all of such title exceptions removed, Buyer shall have the option to either
(i) terminate this Agreement by notice to Seller, in which case all rights
and obligations hereunder of each party shall be at an end (except those
matters which are specifically stated in this Agreement to survive the
termination) and the Deposit together with interest accrued thereon shall be
promptly returned to Buyer; or (ii) elect to accept title to the Property as
it then is, but Buyer shall have no other option or remedy. Notwithstanding
any provisions to the contrary contained in this Agreement, Seller shall pay
(or cause to be paid) and remove all liens at or prior to the Closing
evidencing delinquent property taxes, deeds of trust or other contractual
monetary obligations. The title exceptions as shown on the Title Report (and
the ALTA Supplement, if any) approved by Buyer, as well as those title
exceptions, if any, initially disapproved by Buyer but thereafter accepted
shall be referred to herein as the "PERMITTED EXCEPTIONS". The Permitted
Exceptions shall include the possessory rights of Seller as tenant pursuant
to the New Lease. If Buyer fails to timely give the Title Notice to Seller or
fails to make the elections set forth in (i) or (ii) above on or before the
Due Diligence Date, then Buyer shall be deemed to have elected to terminate
this Agreement in which event all rights and obligations hereunder of each
party shall be at an end (except those matters which are specifically stated
in this Agreement to survive the termination) and the Deposit together with
interest thereon shall be promptly returned to Buyer.
6.4 INSPECTION; RIGHT OF ENTRY. Buyer shall have the right,
during the Due Diligence Period and subject to the terms and conditions of
Section 6.5 below, (i) to enter the Real Property to inspect the same
(including the performance of environmental audits of the Real Property in
accordance with the terms of Section 6.4.1 and 6.4.2 below), upon reasonable
notice to Seller, provided that Buyer does not unreasonably disturb any
business or other tenant operations or activities on the Real Property, and
(ii) to contact representatives of tenants and/or third parties who have
executed service contracts with Seller or Seller's representatives regarding
6
<PAGE>
the Real Property. Seller shall cooperate with Buyer in notifying tenants as
to Buyer's inspection thereof.
6.4.1 PHASE I ENVIRONMENTAL AUDIT. During the Due Diligence
Period, Buyer may conduct (or have conducted on its behalf by an
environmental auditor) a phase I environmental audit of the Real Property,
subject to the terms and conditions of Sections 6.4.2 and 6.5 below.
6.4.2 ENVIRONMENTAL CONDITIONS. In the event that Buyer shall
conduct a phase I environmental audit of the Real Property, Buyer shall
provide Seller with at least forty-eight (48) hours' prior written notice of
its intent thereof. Buyer shall not disclose to any third party, other than
Buyer's consultants, agents and attorneys associated with such environmental
investigation, the results of any of Buyer's inspections or testing of the
Real Property (collectively, "INVESTIGATIONS"). Prior to performing any of
the Investigations, Buyer shall obtain any required permits and
authorizations and shall pay all applicable fees required by any public body
or agency in connection therewith.
6.5 INDEMNITY; RETURN. Buyer shall indemnify, defend by counsel
reasonably acceptable to Seller, and hold Seller harmless from and against
any cost, expense, claim, liability or demand, including reasonable
attorneys' fees, arising from such entry by Buyer or from the performance of
any testing or other Investigations of the Real Property by Buyer, except
with respect to any loss or liability incurred by Seller resulting from the
mere discovery by Buyer of the presence of Hazardous Materials (as defined
below) at the Property or the existence of other defects with respect to the
Property. If this transaction does not close for any reason, Buyer shall
repair any damage to the Real Property resulting from Buyer's entry onto the
Real Property, including any tests and other Investigations. The aforesaid
indemnity and other agreements of Buyer set forth in this Section 6.5 shall
survive without limitation the termination or other expiration of this
Agreement.
6.6 GENERAL CONDITIONS. Buyer shall have the right to review and
approve, in its sole, absolute and subjective discretion, during the Due
Diligence Period, the Due Diligence Materials, title to the Property and any
physical or other items set forth in Sections 6.2, 6.3 and 6.4 above. In the
event that Buyer does not approve or waive each such item by giving written
notice of such approval and/or waiver to Seller on or before the Due
Diligence Date, this Agreement shall terminate, all rights and obligations
hereunder of each party shall be at an end (except those matters which are
specifically stated in the Agreement to survive the termination), and the
Deposit together with interest thereon shall be promptly returned to Buyer.
7. CONDITIONS TO CLOSING.
7.1 SELLER'S CONDITIONS. The obligation of Seller to sell and
convey the Property pursuant to this Agreement is subject to the satisfaction
on or before the Closing Date (or such earlier date as is specifically set
forth in this Agreement) of all of the following conditions precedent, which
conditions are for the benefit of Seller only and the satisfaction of which
may be waived only in writing by Seller:
7
<PAGE>
7.1.1 BUYER'S DELIVERIES. Delivery and execution by Buyer of
all monies, items and instruments required to be delivered by Buyer pursuant
to this Agreement;
7.1.2 BUYER'S REPRESENTATIONS. Buyer's warranties and
representations set forth herein shall be true and correct as of the Closing
Date;
7.1.3 BUYER'S PERFORMANCE. Buyer shall have performed each and
every agreement to be performed by Buyer pursuant to this Agreement;
7.1.4 SELLER'S PURCHASE. Seller shall have completed its
acquisition of the Property; and
7.1.5 NEW LEASE. Seller and Buyer shall have executed the
New Lease.
7.2 BUYER'S CONDITIONS. The obligation of Buyer to acquire the
Property pursuant to this Agreement is subject to the satisfaction on or
before the Closing Date (or such earlier date as is specifically set forth in
this Agreement) of all of the following conditions precedent which
conditions are for the benefit of Buyer only and the satisfaction of which
may be waived only in writing by Buyer:
7.2.1 SELLER'S DELIVERIES. Delivery and execution by Seller of
all instruments and other items required to be delivered by Seller pursuant
to this Agreement;
7.2.2 SELLER'S REPRESENTATIONS. Seller's warranties and
representations set forth herein shall be true and correct as of the Closing
Date;
7.2.3 SELLER'S PERFORMANCE. Seller shall have performed each
and every agreement to be performed by Seller pursuant to this Agreement;
7.2.4 BUYER'S TITLE POLICY. As of the Closing, the Title
Company shall have issued or shall have committed to issue, upon the sole
condition of the payment of its regularly scheduled premium, the Buyer's
Title Policy;
7.2.5 DUE DILIGENCE MATERIALS. Buyer's inspection and written
approval on or prior to the Due Diligence Date of the matters described in
Section 6.6 including the Due Diligence Materials, the Title Report and all
other physical, environmental, legal and other matters relating to the
Property which Buyer may, in Buyer's sole discretion, elect to investigate;
7.2.6 MATERIAL ADVERSE CHANGE. Between the Effective Date and
the Closing Date except as set forth in Section 13.1 and Section 13.2,
there shall have been no material adverse change in the physical condition of
the Property;
7.2.7 SELLERS' PURCHASE. Seller shall have completed its
acquisition of the Property; and
7.2.8 LEASEBACK. Seller and Buyer shall have executed the
New Lease.
8
<PAGE>
7.3 FAILURE OF CONDITIONS. If any of the conditions set forth in
Sections 7.1 or 7.2 are not timely satisfied or waived, for any reason other
than the default of Buyer or Seller under this Agreement, then this Agreement
and the rights and obligations of Buyer and Seller shall terminate and be of
no further force or effect except as to those matters as specifically stated
in this Agreement to survive termination, in which case the Title Company is
hereby instructed to return promptly to the party which placed such items
into Escrow all funds (including the Deposit together with interest accrued
thereon to be promptly returned to Buyer) and documents which are held by the
Title Company on the date of termination.
7.4 SATISFACTION OF CONDITIONS. The occurrence of the Closing
shall constitute satisfaction of conditions not otherwise specifically
satisfied or waived by Buyer or Seller.
8. DELIVERIES INTO ESCROW.
8.1 DELIVERIES BY SELLER. At least one (1) business day before the
Closing, Seller shall deliver or cause to be delivered into Escrow (with a
copy delivered concurrently to Buyer) the following documents duly executed
and acknowledged where appropriate:
8.1.1 DEED. Standard-form grant deed (the "DEED") in the form
set forth on EXHIBIT 8.1.1 to be attached hereto conveying the Real
Property to Buyer as provided in this Agreement;
8.1.2 BILL OF SALE. Bill of sale ("BILL OF SALE") in the form
set forth on EXHIBIT 8.1.2 to be attached hereto conveying the Personal
Property to Buyer;
8.1.3 ASSIGNMENT. The Assignment in the form set forth on
EXHIBIT 8.1.3 to be attached hereto;
8.1.4 FIRPTA. Certificate of non-foreign status to confirm
that Buyer is not required to withhold part of the Purchase Price pursuant to
Section 1445 of the Internal Revenue Code of 1986, as amended;
8.1.5 FORM 590. Franchise Tax Board Form (590);
8.1.6 NEW LEASE. Two original counterparts of the New Lease;
8.1.7 EXISTING LEASE. A certificate of termination as
described in Section 3.3; and
8.1.8 SELLER'S AUTHORITY. Such proof of Seller's authority
and authorization to enter into this Agreement and consummate the
transaction contemplated hereby and such proof of the power and authority of
the individual(s) executing and/or delivering any instruments, documents or
certificates on behalf of Seller to act for and bind Seller as may be
reasonably required by Title Company or Buyer.
8.2 DELIVERIES BY BUYER. Buyer shall deliver into Escrow the
following cash and shall, at least one (1) business day before the Closing,
deliver or cause to be delivered the
9
<PAGE>
following documents (with a copy delivered concurrently to Seller) duly
executed and acknowledged where appropriate:
8.2.1 CASH. The cash portion of the Purchase Price and such
additional sums as are necessary to pay the Buyer's share of closing costs,
prorations and any fees as more particularly set forth in Section 9 below;
8.2.2 ASSIGNMENT. The Assignment;
8.2.3 BUYER'S AUTHORITY. Such proof of Buyer's authority and
authorization to enter into this Agreement and consummate the transaction
contemplated by this Agreement, and such proof of the power and authority of
the individual(s) executing and/or delivering any instruments, documents or
certificates on behalf of Buyer to act for and bind Buyer as may be
reasonably required by Title Company or Seller;
8.2.4 NEW LEASE. Two original counterparts of the New Lease;
8.2.5 REQUEST FOR RECONVEYANCE. A Request for Reconveyance of
the Deed of Trust;
8.2.6 PROMISSORY NOTE. The original promissory note, having
been executed by Seller and delivered to Buyer in connection with the Seller
Escrow, which promissory note, on the occurrence of the Closing shall be
marked "paid" and delivered to Seller; and
8.2.7 OTHER DOCUMENTS. Such other documents as may be
reasonably necessary and appropriate to complete the Closing of the
transaction contemplated herein.
8.3 DELIVERY TO BUYER UPON CLOSING. Seller shall deliver
possession of the Property, subject to Seller's possessory rights as the
tenant of the Property pursuant to the New Lease to Buyer upon the Closing.
8.4 DELIVERY FOLLOWING CLOSING. Within one (1) business day
following the Closing, Seller shall deliver to Buyer: (i) all building plans
and specifications with respect to the Property which are in the possession
of Seller or reasonably accessible to Seller or its property manager; (ii)
all structural reviews, architectural drawings, engineering, soils, seismic,
geologic and architectural reports in the possession of Seller or reasonably
accessible to Seller or its property manager; and (iii) such other matters
and documents in the possession of Seller or reasonably accessible to Seller
or to its property manager as Buyer may reasonably request.
9. PRORATIONS; CLOSING COSTS; SECURITY DEPOSIT.
9.1 PRORATIONS.
9.1.1 TAXES AND ASSESSMENTS. All non-delinquent real estate
taxes on the Property shall be prorated through Escrow based on the actual
current tax bill as of 12:01 a.m. on the Closing Date. If after the Closing,
supplemental real estate taxes are assessed against the Property by reason of
any event occurring prior to the Closing Date, Buyer and Seller shall adjust
10
<PAGE>
the proration of the real estate taxes following the Closing. Any delinquent
taxes on the Property shall be paid at the Closing from funds accruing to
Seller. All assessments or installment payments thereof which are due and
payable prior to the Closing Date shall be paid at the Closing from funds
accruing to Seller. Seller shall have no obligation to pay any assessment
amounts not then due and payable.
9.1.2 OPERATING EXPENSES. It is acknowledged that the New
Lease is a NNN Lease obligating Seller as Tenant to pay all operating
expenses, including all costs relating to service contracts in connection
with the Property. Buyer shall have no obligation of any kind whatsoever for
any operating expenses accruing or attributable to the Property prior to the
Closing Date and Seller shall pay all such expenses. Further, commencing as
of the Closing Date and continuing thereafter, Seller as the tenant of the
Property pursuant to the New Lease shall be required to pay all operating
expenses accruing and attributable to the Property, and Buyer shall have no
responsibility for such expenses. Further, all service contracts in connection
with the Property shall, following the Closing, continue to be maintained by
Seller as the tenant of the Property pursuant to the New Lease and Buyer
shall have no responsibility to pay any costs or undertake any obligations in
connection with any service contracts with respect to the Property.
9.1.3 CALCULATION OF PRORATIONS. All prorations shall be made
on the basis of the actual number of days of the year and month which have
elapsed as of 12:01 a.m. Pacific Daylight Time on the Closing Date.
9.2 CLOSING COSTS.
9.2.1 SELLER'S COSTS. Seller shall pay (i) the premium for
the standard coverage CLTA portion of the Buyer's Title Policy; (ii) the cost
of the Survey; (iii) all county documentary and transfer taxes, and fifty
percent (50%) of the city transfer taxes; (iv) all escrow fees and costs,
including recording costs; and (v) all sales taxes, if any.
9.2.2 BUYER'S COSTS. Buyer shall pay (i) fifty percent (50%)
of the city transfer taxes; and (ii) the incremental premium for the ALTA
portion of Buyer's Title Policy and the premium for any endorsements.
9.3 SECURITY DEPOSITS. It is acknowledged that in connection with
the close of the Seller Escrow, Seller shall be entitled to retain any
security deposit having been paid by Seller to South Bay. As of the Closing
pursuant to the Escrow, Seller shall pay to Buyer through Escrow the amount
of any security deposit, if any, required to be paid by Seller pursuant to
the New Lease.
9.4 OTHER EXPENSES. Buyer and Seller shall each pay all legal and
professional fees and fees of other consultants incurred by Buyer and Seller
respectively.
10. OPERATION OF PROPERTY PENDING THE CLOSING. Following the Effective
Date and pending the Closing, the Seller shall operate the Property in
accordance with the following:
11
<PAGE>
10.1 NORMAL COURSE OF BUSINESS. Seller shall continue to operate,
manage and maintain the Property in such condition so that the Property shall
be in the same condition as of the Closing Date as it is as of the Effective
Date, reasonable wear and tear and casualty excepted. Seller shall maintain
all existing insurance policies in connection with the Property and shall
keep in effect and renew without modification all licenses, permits and
entitlements applicable to the Property. Seller shall not make any material
alterations to the Property or remove any Personal Property without the prior
written approval of Buyer.
10.2 FURTHER ENCUMBRANCES. Seller shall not voluntarily execute
any documents or otherwise take any action which will have the result of
conveying, transferring or encumbering the Property or any portion thereof in
any fashion whatsoever.
10.3 ADDITIONAL NEW LEASES. Other than the New Lease, which is to
be executed by Seller as tenant and Buyer as landlord, Seller shall not enter
into any other leases, rental agreements, or occupancy agreements either as
landlord or tenant or modify in any fashion any existing leases (except
termination of the Existing Lease) or undertake any assignment or sublease in
connection with any lease or in connection with the Property without the
prior written approval of Buyer, which approval may be withheld by Buyer in
its absolute discretion.
10.4 ENVIRONMENTAL MATTERS. Seller shall not (or permit any other
tenant of the Real Property or any portion thereof to) use, produce, process,
manufacture, generate, treat, handle, store or dispose of any Hazardous
Materials in, on or under the Real Property except in accordance with
applicable Environmental Law (as defined in Section 11.2.10 below) or release
any Hazardous Materials into the air, soil, surface water or ground water
comprising the Real Property.
11. REPRESENTATIONS AND WARRANTIES
11.1 NO REPRESENTATIONS OR WARRANTIES BY SELLER. Except as
expressly set forth in this Agreement, Seller has not made any warranty or
representation, express or implied, written or oral, concerning the Property.
11.2 SELLER'S REPRESENTATIONS AND WARRANTIES. Seller represents
and warrants to Buyer that:
11.2.1 AUTHORITY. This Agreement constitutes the valid and
binding obligation of Seller and is enforceable against Seller in accordance
with its terms, subject to bankruptcy, insolvency and similar laws affecting
the enforcement of creditors' rights generally and general equitable
principles. Seller is a corporation, validly formed, duly organized and in
good standing under the laws of the State of Delaware. Seller has full power
and authority to enter into and perform this Agreement. The execution and
delivery of this Agreement, delivery of money and all required documents,
Seller's performance of this Agreement and the transaction contemplated
hereby have been duly authorized by the requisite action on the part of
Seller. Neither the execution and delivery of this Agreement, nor the
transaction contemplated by this Agreement will conflict in any material
respect or constitute a breach under any agreement or instrument by which
Seller or the Property is bound.
12
<PAGE>
11.2.2 PENDING ACTIONS. Except as disclosed in writing to Buyer,
there are no pending or threatened actions, suits, arbitrations, claims or
proceedings, at law or in equity, including without limitation, any action or
proceeding for condemnation, affecting the Property of in which Seller is, or
to the best of Seller's knowledge, will be, a party by reason of Seller's
ownership of the Property.
11.2.3 GOVERNMENTAL REGULATIONS. Seller is not knowingly in
violation of governmental regulations relating to the Property including,
without limitation, the Americans With Disability Act, and Seller has not
received notice of any violations of governmental regulations relating to the
Property. To the best of Seller's knowledge, the Improvements are permitted
structures under applicable zoning and building laws and ordinances and the
present uses thereof are permitted uses under applicable zoning and building
laws and ordinances. To the best of Seller's knowledge, the conveyance of the
Property to Buyer will not violate any governmental regulations and will
include all rights necessary to permit continued compliance by the Property
will all governmental regulations.
11.2.4 LICENSES. To the best of Seller's knowledge, all licenses,
approvals, permits and certificates from governmental authorities or private
parties currently necessary for the use and operation of the Property, as it
is currently being used and operated, have been obtained.
11.2.5 TAXES. Except for the amounts disclosed by the tax bills for
all real property taxes and personal property taxes, and notices for any
assessments or bonds relating to the Property provided by Seller to Buyer, to
the best of Seller's knowledge, no real property taxes have been assessed
against the Property for the current tax year and no supplemental taxes or
assessments will be levied against the Property, resulting from work,
activities or improvements done to the Property by Seller.
11.2.6 UTILITIES. The Improvements are connected to and are served
by water, solid waste and sewage disposal, drainage, telephone, electricity
and other utility equipment facilities and services which are adequate for
the present use and operation of the Property and to the best of Seller's
knowledge, no fact or condition exists which would result in the termination
or impairment in the furnishing of utility services to the Improvements.
11.2.7 PHYSICAL DEFECTS. To the best of Seller's knowledge, there
are no material physical or mechanical defects or deficiencies in the
condition of the Property, including, but not limited to, the roofs, exterior
walls or structural components of the Improvements and the heating, air
conditioning, plumbing, ventilating, elevator, utility, sprinkler and other
mechanical and electrical systems, apparatus and appliances located in the
Improvements.
11.2.8 SOIL DEFECTS. To the best of Seller's knowledge, there are
no defects or conditions of the soil which will impair the present use and
operation of the Property.
11.2.9 INSURANCE NOTICE. Neither Seller nor, to the best of
Seller's knowledge, South Bay has received any notice from any insurance
company of any defects or inadequacies in any portion of the Real Property.
13
<PAGE>
11.2.10 HAZARDOUS MATERIALS. To the best of Seller's knowledge, all
operations or activities upon, or use or occupancy of the Real Property, or
any portion thereof, is in all material respects in compliance with all
state, federal and local laws and regulations governing or in any way
relating to the generation, handling, manufacturing, treatment, storage,
use, transportation, spillage, leakage, dumping, discharge or disposal of
Hazardous Materials. To the best of Seller's knowledge, except as set forth
on EXHIBIT 11.2.10 to be attached hereto, there is not present upon the Real
Property, or any portion thereof, any asbestos, or any structures, fixtures
or equipment containing asbestos. To the best of Seller's knowledge, and
except for matters, if any, disclosed in the environmental reports delivered
to Buyer and listed on EXHIBIT 11.2.10 to be attached hereto, Seller has no
current knowledge of, nor any reasonable cause to believe that, any release
of Hazardous Materials has occurred on or beneath the Real Property, and
neither Seller nor any tenant of the Real Property has been required by any
governmental agency to undertake any remediation activity with respect to any
Hazardous Materials on the Real Property. To Seller's knowledge, the
environmental reports listed on EXHIBIT 11.2.10 constitute all of the
environmental reports existing with respect to the Real Property. For
purposes of this Agreement, the term "HAZARDOUS MATERIALS" shall refer to any
material or substance defined as "hazardous substances", "hazardous
materials", "hazardous waste", "toxic substance", or related terms under any
federal, state or local law, ordinance or regulation or any court judgment
applicable to Seller or to the Real Property, relating to environmental
conditions (collectively, "ENVIRONMENTAL LAW") including, but not limited to,
those relating to the release, emission, storage, discharge or disposal of
substances defined therein. The Environmental Law includes, but is not
limited to, those acts commonly known as the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Hazardous Materials
Transportation Act, the Clean Water Act, the Resource Conservation and
Recovery Act, the Toxic Substances Control Act, the Safe Drinking Water Act,
the Carpenter-Presley-Tanner Hazardous Substance Act, the Safe Drinking Water
and Toxics Enforcement Act, and all regulations adopted, publications
promulgated, orders issued and official interpretations announced pursuant to
those laws. In connection with the matters described above in this Section
11.2.10, Buyer shall, pursuant to Section 6.4.1, conduct its own Phase I
Environmental Audit with respect to the Property and thereby conduct an
independent investigation with respect to Hazardous Materials issues relating
to the Property.
11.2.11 MATERIAL FACTS. Seller has disclosed to Buyer all material
facts and conditions of which Seller has knowledge regarding the Property and
all instruments, documents, lists, schedules and items delivered to Buyer,
and prepared by Seller or its agents, will fairly present the information set
forth in a manner that is not misleading and will be true, complete and
correct in all material respects on the date of delivery and upon the Closing,
as they may be updated, modified or supplemented in accordance with this
Agreement.
11.2.12 LEASES. As of the date of this Agreement, except for the
Existing Lease between Seller as tenant and South Bay as landlord as
described above and as of the Closing, except for the New Lease, there are
and will be no leases, subleases, occupancy, tenancies or licenses in effect
pertaining to the Real Property or any portion thereof. The Existing Lease
shall be terminated as of the closing of the Seller Escrow and following the
Closing pursuant to the Escrow, the New Lease shall be the only lease,
rental, tenancy or occupancy agreement or license in effect pertaining to the
Real Property or any portion thereof.
14
<PAGE>
11.2.13 SERVICE CONTRACTS. There are no service or maintenance
contracts maintained with respect to the Property other than those service or
maintenance contracts maintained directly by Seller as the tenant of the Real
Property. Such service contracts as maintained by Seller in connection with
the Real Property are not being assigned pursuant to this Agreement and shall
continue following the Closing as the sole responsibility of Seller.
11.2.14 FINANCIAL RECORDS. To the best of Seller's knowledge, the
financial and other records affecting the Property and delivered to Buyer, are
complete and accurate in all material respects as of the date thereof, and
were prepared on a consistent basis in accordance with generally accepted
accounting principles.
11.2.15 ACCESS. To the best of Seller's knowledge, no fact or
condition exists which may result in the termination or reduction of the
current access from the Property to existing roads and highways.
11.2.16 FOREIGN PERSON. Seller is not a "foreign person" as defined
in Section 1445 of the Internal Revenue Code of 1986, as amended, and the
income tax regulations issued thereunder.
11.2.17 SQUARE FOOTAGE. The Improvements contain approximately
90,000 rentable square feet computed in accordance with BOMA standards.
11.2.18 GOOD TITLE. Following the closing of the Seller Escrow,
Seller will have good title to the Personal Property, if any, and to the
Intangible Property, free and clear of all liens, encumbrances, security
interest and adverse claims of any kind whatsoever.
11.2.19 CORRECT COPIES. To the best of Seller's knowledge, all
copies of documents delivered to Buyer or to be delivered to Buyer pursuant
to Section 6.2.1 are and will be accurate and complete copies of the
originals.
11.2.20 OPTION TO PURCHASE. Seller possesses a valid option to
purchase the Property, which option Seller represents will be timely
exercised so that Seller can timely deliver the Property to Buyer in
conformity with the provisions of this Agreement.
11.2.21 TRUE AS OF CLOSING. Each representation and warranty in
this Agreement is true, correct and complete in all material respects, and
those contained in this Section 11.2 shall be continuing and shall be true,
correct and materially complete as of the Closing with the same force and
effect as if remade by Seller in a separate certificate at that time and
shall survive the Closing.
11.2.22 MATERIAL CHANGES. Seller shall promptly notify Buyer of
any change in any condition with respect to the Property or any event or
circumstance which makes any representation or warranty of Seller under this
Agreement materially untrue or misleading, or any covenant of Seller under
this Agreement incapable of being performed.
15
<PAGE>
11.2.23 SELLER'S KNOWLEDGE. For purposes of this Section 11.2, all
references to Seller's knowledge shall be deemed to include the knowledge of
Seller's property manager, if any.
11.3 BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer represents and
warrants to Seller that:
11.3.1 AUTHORITY TO EXECUTE; ORGANIZATION. This Agreement
constitutes valid and binding obligations of Buyer and is enforceable against
Buyer in accordance with its terms, subject to bankruptcy, insolvency and
similar laws affecting the enforcement of creditors' rights generally and
general equitable principles. Buyer represents that it is a corporation, is
validly formed and duly organized in good standing under the laws of the
State of California and has full power and authority to enter into and
perform this Agreement. The execution of this Agreement, delivery of money
and all required documents, Buyer's performance of this Agreement and the
transaction contemplated hereby have been duly authorized by the requisite
action on the part of Buyer and Buyer's board of directors.
11.3.2 FINANCIAL CONDITION. Buyer's financial condition is as
represented to Seller on the Effective Date and shall not have materially
adversely changed prior to the Closing Date.
11.3.3 NO ENCUMBRANCE. Prior to Closing, Buyer shall neither
encumber nor cause any liens to be created against the Property in any way,
nor shall Buyer, at any time, record this Agreement or a memorandum thereof.
12. INDEMNIFICATION.
12.1 INDEMNIFICATION OF BUYER. Seller hereby agrees to indemnify
Buyer against, and to hold Buyer harmless from, all losses, damages, costs
and expenses whatsoever including without limitation reasonable legal fees
and disbursements, incurred by Buyer relating to the Property which arise,
result from or relate to (i) acts, occurrences or matters that took place
prior to the Closing to the extent that any such claim described in this
clause (i) is covered by the comprehensive general liability insurance policy
maintained by Seller or otherwise covered pursuant to applicable insurance
coverage maintained by Seller and in this connection Seller represents and
warrants that Seller has during the period of its ownership maintained and
continues to maintain comprehensive general liability insurance coverage; or
(ii) any breach of any of the representations or warranties of Seller set
forth in Section 11.2 of this Agreement.
12.2 DEFENSE OF CLAIMS AGAINST BUYER. With respect to any claim
for which Buyer has requested indemnification under Section 12.1, Seller
shall be entitled to assume the defense of any related litigation,
arbitration or other proceeding, provided that Buyer may at its election and
expense, participate in such defense, and provided further that if there is
any difference of opinion or strategy with respect to the defense of such
action or the assertion of counterclaims to be brought with respect thereto,
Seller's counsel will, after consultation with Buyer's counsel, determine
that actual strategy, defense or counterclaim to be employed. At Seller's
reasonable request, Buyer will cooperate with Seller in the preparation of
any defense for any such claim and Seller will reimburse Buyer for any
reasonable expenses incurred in connection
16
<PAGE>
with such request. If Seller does not elect to assume the defense of any such
matter and such matter is defended by Buyer, Seller shall have the right, at
its sole expense, to employ separate counsel acceptable to Buyer and
participate in such defense, provided that if there is any difference of
opinion or strategy with respect to the defense of such action or the
assertion of counterclaims to be brought with respect thereto, Buyer's
counsel will, after consultation with Seller's counsel, determine the actual
strategy, defense and/or counterclaim to be employed.
12.3 INDEMNIFICATION OF SELLER. Buyer hereby agrees to indemnify
Seller against, and to hold Seller harmless from, all losses, damages, costs
and expenses whatsoever including without limitation reasonable legal fees
and disbursements, incurred by Seller relating to the Property which arise,
result from or relate to (i) acts, occurrences or matters that take place
subsequent to the Closing and during the period of Buyer's ownership of the
Property, to the extent that any such claim described in this clause (i) is
covered by the comprehensive general liability insurance policy maintained by
Buyer or otherwise covered pursuant to applicable insurance coverage
maintained by Buyer and in this connection Buyer represents and warrants that
Buyer will during the period of its ownership maintain comprehensive general
liability insurance coverage; or (ii) any breach of any of the
representations or warranties of Buyer set forth in Section 11.3 of this
Agreement.
12.4 DEFENSE OF CLAIMS AGAINST SELLER. With respect to any claim
for which Seller has requested indemnification under Section 12.3, Buyer
shall be entitled to assume the defense of any related litigation,
arbitration or other proceeding, provided that Seller may at its election and
expense, participate in such defense, and provided further that if there is
any difference or opinion or strategy with respect to the defense of such
action or the assertion of counterclaims to be brought with respect thereto,
Buyer's counsel will, after consultation with Seller's counsel, determine the
actual strategy, defense or counterclaim to be employed. At Buyer's
reasonable request, Seller will cooperate with Buyer in the preparation of
any defense for any such claim and Buyer will reimburse Seller for any
reasonable expenses incurred in connection with such request. If Buyer does
not elect to assume the defense of any such matter, and such matter is
defended by Seller, Buyer shall have the right, at its sole expense, to
employ separate counsel acceptable to Seller and participate in such defense,
provided that if there is any difference of opinion or strategy with respect
to the defense of such action or the assertion of counterclaims to be brought
with respect thereto, Seller's counsel will, after consultation with Buyer's
counsel, determine the actual strategy, defense and/or counterclaim to be
employed.
13. CASUALTY OR CONDEMNATION.
13.1 CASUALTY. Prior to the Closing, and notwithstanding the
pendency of this Agreement, the entire risk of loss or damage by earthquake,
flood, landslide, fire or other casualty shall be borne and assumed by
Seller, except as otherwise provided in this Section 13.1. If, prior to the
Closing, any part of the Real Property is damaged or destroyed by earthquake,
flood, landslide, fire or other casualty, Seller shall immediately notify
Buyer of such fact. If such damage or destruction is "material", Buyer shall
have the option to terminate this Agreement upon notice to Seller given not
later than ten (10) days after receipt of Seller's notice. For purposes of
this Section 13.1, "material" shall be deemed to be (i) any uninsured damage
or destruction to the Property; (ii) any insured damage or destruction where
the costs of repair or replacement is estimated to be Fifty Thousand Dollars
($50,000) or more or shall take more than one hundred
17
<PAGE>
(100) days to repair, or (iii) any insured damage or destruction where the
insurance proceeds available (plus deductible to be paid by Seller) is
insufficient to repair the Property so as to return the Property to its
condition prior to the occurrence of the damage or destruction; provided,
however, in the case of any material damage or destruction (except where the
cost of repair or replacement is estimated to be in excess of $200,000), upon
notice of Buyer's intent to terminate this Agreement based on material
damage, Seller may, at Seller's option, elect to repair such damage and
destruction and keep this Agreement in full force an effect and in such event
the Closing shall occur, provided that: (i) sufficient funds are held in
Escrow from the Purchase Price in an amount reasonably satisfactory to Buyer
so as to fully cover the cost of repair or replacement after giving effect to
any available insurance proceeds; (ii) Seller is contractually bound to make
the necessary repairs or replacements; and (iii) pursuant to the New Lease
there shall be no abatement of rent or any other amounts payable by Seller as
tenant, during the period following the Closing in which the repair or
replacement occurs. If Buyer does not exercise this option to terminate this
Agreement, or the casualty is not material, neither party shall have the
right to terminate this Agreement, but Seller shall assign and turn over to
Buyer, and Buyer shall be entitled to receive and keep all insurance proceeds
payable to it with respect to such destruction plus Seller shall pay over to
Buyer an amount equal to the deductible amount with respect to the insurance
and the parties shall proceed to the Closing pursuant to the terms hereof
without modification of the terms of this Agreement and without any reduction
in the Purchase Price. If Buyer does not elect to terminate this Agreement by
reason of any casualty, Buyer shall have the right to participate in any
adjustment in the insurance claim. If Buyer does terminate this Agreement
pursuant to this Section 13.1, this Agreement shall terminate, all rights and
obligations hereunder of each party shall be at an end and the Title Company
is hereby instructed to return promptly to the party which placed such items
into Escrow all funds (including the Deposit together with interest accrued
thereon to be promptly returned to Buyer) and documents which are held by the
Title Company on the date of termination.
13.2 CONDEMNATION. In the event that all or any portion of the
Real Property shall be taken in condemnation or under the right of eminent
domain after the Effective Date and before the Closing, Buyer may, at its
option either (a) terminate this Agreement by written notice thereof to
Seller and receive an immediate refund of the Deposit, together with any
interest earned thereon, or (b) proceed to close the transaction contemplated
herein pursuant to the terms hereof in which event Seller shall assign and
turn over to Buyer, and Buyer shall be entitled to receive and keep all awards
for the taking by eminent domain which accrue to Seller and there shall be no
reduction in the Purchase Price.
14. COMMISSIONS
14.1 PAYMENT OF THE SALES COMMISSION. Subject to the occurrence
of the Closing, Buyer agrees to pay in Escrow Ninety Thousand Dollars
($90,000,000) brokerage commission due from Buyer to Colliers Parrish
International, Inc., Buyer's broker, for the sale of the Property. Buyer
represents and warrants to the Seller that no other real estate broker or
agent has been authorized to act on Buyer's behalf. Buyer and Seller each
indemnifies the other party and agrees to defend and hold the other party
harmless from any and all demands or claims which now or hereafter may be
asserted against the other party for any brokerage fees, commissions or
similar types of compensation which may be claimed by any broker as a result
of the indemnifying party's acts in connection with this transaction, except
as otherwise provided herein.
18
<PAGE>
14.2 LEASING COMMISSION. Seller shall pay all leasing
commissions, if any, payable under the New Lease as of the Closing.
15. NOTICES.
All notices, requests or demands to a party hereunder shall be in
writing and shall be given or served upon the other party by personal
service, by certified return receipt requested or registered mail, postage
prepaid, or by Federal Express or other nationally recognized commercial
courier, charges prepaid, addressed as set forth below. Any such notice,
demand, request or other communication shall be deemed to have been given
upon the earlier of personal delivery thereof, five (5) business days after
having been mailed as provided above, or one (1) business day after delivery
through a commercial courier, as the case may be. Notices may be given by
facsimile and shall be effective upon the transmission of such facsimile
notice provided that the facsimile notice is transmitted on a business day
and a copy of the facsimile notice together with evidence of its successful
transmission indicating the date and time of transmission is sent on the day
of transmission by recognized overnight carrier for delivery on the
immediately succeeding business day. Each party shall be entitled to modify
its address by notice given in accordance with this Section 15.
If to Seller: Media Arts Group, Inc.
521 Charcot Avenue
San Jose, CA 95131
Attn: Bud Peterson
Fax: (408) 232-4822
With a copy to: Media Arts Group, Inc.
521 Charcot Avenue
San Jose, CA 95131
Attn: Jay Landrum, Esq.
Fax: (408) 324-2034
If to Buyer: Limar Realty Corp. #36
1730 South El Camino Real, Suite 400
San Mateo, CA 94402
Attn: Theodore H. Kruttschnitt
Fax: (415) 525-9345
With a copy to: H.L. (Bing) Heckman
Limar Financial Corporation
1730 South El Camino Real, Suite 400
San Mateo, CA 94402
Fax: (415) 525-9811
With a copy to: Walter F. Merkle, Esq.
Kay & Merkle
100 The Embarcadero, Penthouse
San Francisco, CA 94105
19
<PAGE>
Fax: (415) 512-9277
16. MISCELLANEOUS.
16.1 TIME. Time is of the essence in the performance of each
party's obligation hereunder.
16.2 ATTORNEYS' FEES. If any legal action, arbitration or other
proceeding is commenced to enforce or interpret any provision of this
Agreement, the prevailing party shall be entitled to an award of its
attorneys' fees and expenses. The phrase "prevailing party" shall include a
party who receives substantially the relief desired whether by dismissal,
summary judgment, judgment or otherwise.
16.3 NO WAIVER. No waiver by any party of the performance or
satisfaction of any covenant or condition shall be valid unless in writing
and shall not be considered to be a waiver by such party of any other
covenant or condition hereunder.
16.4 ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties regarding the Property and supersedes all prior
agreements, whether written or oral, between the parties regarding the same
subject. This Agreement may only be modified in writing.
16.5 SURVIVAL. The provisions of this Agreement shall not merge
with the delivery of the Deed but shall, except as otherwise provided in this
Agreement, survive the Closing.
16.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the heirs, executors, administrators and
successors and assigns of Seller and Buyer; provided, however, that Buyer
shall not assign Buyer's rights and obligations pursuant to this Agreement to
any party without the prior written consent of Seller which consent shall not
be unreasonably withheld.
16.7 SEVERABILITY. In the case that any one or more of the
provisions contained in this Agreement are for any reason held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof, and this
Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein.
16.8 PURCHASE PRICE ALLOCATION. Buyer and Seller agree to exert
their best efforts prior to Closing to agree on a mutual allocation of the
Purchase Price between Land, Improvements and Personal Property. In the event
that Buyer and Seller are unable to timely agree upon such an allocation,
Buyer and Seller agree that no allocation shall be referenced in this
Agreement or in any other agreements or documents executed in connection with
this Agreement.
16.9 CAPTIONS. Paragraph titles or captions contained in this
Agreement are inserted as a matter of convenience only and for reference, and
in no way define, limit, extend or describe the scope of this Agreement.
20
<PAGE>
16.10 EXHIBITS. All exhibits attached hereto shall be incorporated
herein by reference as if set out herein in full.
16.11 RELATIONSHIP OF THE PARTIES. The parties acknowledge that
neither party is an agent for the other party, and that neither party shall
or can bind or enter into agreements for the other party.
16.12 GOVERNING LAW. This Agreement and the legal relations
between the parties hereto shall be governed by and be construed in
accordance with the laws of the State of California.
16.13 REVIEW BY COUNSEL. The parties acknowledge that each party
and its counsel have reviewed and approved this Agreement, and the parties
hereby agree that the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement or any amendments or
exhibits hereto.
16.14 CONFIDENTIALITY. The parties hereto shall not disclose any
of the material terms of this Agreement (except to the extent as may be
required by law or as required by the Title Company or the officers,
directors, partners, lenders and employees of the parties hereto in the
ordinary course of business) without the prior written consent of the other
party.
16.15 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall constitute an original. This Agreement
shall only be effective if a counterpart is signed by both Seller and Buyer.
16.16 LICENSED REAL ESTATE BROKERS. Seller hereby acknowledges
that (a) Limar Financial Corporation ("LFC"), an affiliate of Buyer, is a
licensed real estate broker under the laws of the State of California, (b)
Thomas Numainville and H.L. (Bing) Heckman, officers of LFC and Buyer, are
similarly so licensed and (c) no agency relationship has been created between
Buyer and Seller (or between LFC, Thomas Numainville or H.L. (Bing) Heckman
and Seller) with respect to the transactions subject to this Agreement.
17. LIQUIDATED DAMAGES.
If Buyer breaches this Agreement, and the transaction contemplated
by this Agreement fails to close solely by reason thereof, Seller shall be
entitled to terminate this Agreement and retain the amount of the Deposit
plus any accrued interest thereon (the "SPECIFIED SUM") as liquidated
damages. SELLER AND BUYER ACKNOWLEDGE THAT SELLER'S DAMAGES WOULD BE
DIFFICULT TO DETERMINE, AND THAT THE SPECIFIED SUM IS A REASONABLE ESTIMATE
OF SELLER'S DAMAGES. SELLER AND BUYER FURTHER AGREE THAT THIS SECTION IS
INTENDED TO AND DOES LIQUIDATE THE AMOUNT OF DAMAGES DUE SELLER, AND SHALL BE
SELLER'S EXCLUSIVE REMEDY AGAINST BUYER, BOTH AT LAW AND IN EQUITY ARISING
FROM OR RELATED TO A BREACH BY BUYER OF ITS OBLIGATIONS TO CONSUMMATE THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
21
<PAGE>
Buyer's Initials Seller's Initials
18. DEFINITIONS. For ease of reference, the defined terms as employed
in this Agreement and as listed below are defined in the designated sections:
18.1 "Additional Deposit" as defined in section 2.2
18.2 "Agreement" as defined in first paragraph.
18.3 "ALTA Supplement" as defined in section 6.3
18.4 "Assignment" as defined in section 1.3
18.5 "Bill of Sale" as defined in section 8.1.2
18.6 "Buyer" as defined in first paragraph.
18.7 "Buyer's Title Policy" as defined in section 3.2
18.8 "Closing" as defined in section 5.1
18.9 "Closing Date" as defined in section 5.1
18.10 "Deed" as defined in section 8.1.1
18.11 "Deed of Trust" as defined in section 5.3
18.12 "Deposit" as defined in section 2.3
18.13 "Due Diligence Date" as defined in section 6.1
18.14 "Due Diligence Materials" as defined in section 6.2
18.15 "Due Diligence Period" as defined in section 6.1
18.16 "Effective Date" as defined in first paragraph.
18.17 "Environmental Law" as defined in section 11.2.10
18.18 "Escrow" as defined in section 4.1
18.19 "Existing Lease" as defined in recital B
18.20 "Hazardous Materials" as defined in section 11.2.10
18.21 "Improvements" as defined in section 1.1.2
18.22 "Initial Deposit" as defined in section 2.1
18.23 "Intangible Property" as defined in section 1.3
18.24 "Investigations" as defined in section 6.4.2
18.25 "Land" as defined in section 1.1.1
18.26 "Loan" as defined in section 5.3
18.27 "LFC" as defined in section 16.16
18.28 "New Lease" as defined in section 3.3
18.29 "No Supplement Notice" as defined in section 6.3
18.30 "Permitted Exceptions" as defined in section 6.3
18.31 "Personal Property" as defined in section 1.1.3
18.32 "Property" as defined in section 1.1
18.33 "Purchase Price" as defined in section 2
18.34 "Real Property" as defined in section 1.2
18.35 "Seller" as defined in first paragraph
18.36 "Seller Escrow" as defined in recital C
18.37 "South Bay" as defined in recital B
18.38 "Specified Sum" as defined in section 17
18.39 "Survey" as defined in section 6.3
18.40 "Title Company" as defined in section 4.1
18.41 "Title Notice" as defined in section 6.3
18.42 "Title Report" as defined in section 6.3
22
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
SELLER: BUYER:
MEDIA ARTS GROUP, INC. LIMAR REALTY CORP. #36
a Delaware corporation a California corporation
By: /s/ Bud Peterson By: /s/ Theodore H. Kruttschnitt
-------------------------- ------------------------------
Name: Bud Peterson Theodore H. Kruttschnitt
------------------------ President
Title: CFO
-----------------------
23
<PAGE>
LIST OF EXHIBITS
Exhibit 1.1.1 - Legal Description of Land
Exhibit 3.3 - Form of New Lease
Exhibit 5.3-1 - Form of Promissory Note
Exhibit 5.3-2 - Form of Deed of Trust
Exhibit 8.1.1 - Form of Grant Deed
Exhibit 8.1.2 - Form of Bill of Sale
Exhibit 8.1.3 - Form of Assignment
Exhibit 11.2.10 - Schedule of Environmental Matters and Reports
24
<PAGE>
EXHIBIT 1.1.1
LEGAL DESCRIPTION OF LAND
-------------------------
The land referred to in this Agreement is situated in the State of
California, County of Santa Clara, and is described as follows:
All that certain Real Property in the City of San Jose, County of Santa
Clara, State of California, described as follows:
All of Parcel B, as shown upon that certain Map entitled, "Parcel Map being a
Resubdivision of Parcel 1 as shown on the Parcel Map recorded in Book 316 of
Maps, at Page 21, Santa Clara County Records", which Map was filed for record
in the Office of the Recorder of the County of Santa Clara, State of
California, on February 3, 1976 in Book 367 of Maps, at Pages 27 and 28.
<PAGE>
EXHIBIT 3.3
FORM OF NEW LEASE
<PAGE>
Exhibit 10.26
INDEMNITY AGREEMENT
This Indemnity Agreement (this "Agreement") is made as of _____________
by and between Media Arts Group, Inc., a Delaware corporation ("Company"),
and _________________ ("Indemnitee").
BACKGROUND
WHEREAS, Indemnitee is a director of Company.
WHEREAS, Indemnitee has indicated that he does not regard the
indemnities available under Company's Certificate of Incorporation and Bylaws
(together, the "Charter Documents") as adequate to protect him against the
risks associated with his service to Company.
WHEREAS, Company and Indemnitee now agree that they should enter into
this Agreement in order to provide greater protection to Indemnitee against
such risks of service to Company.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, Company and Indemnitee agree as follows:
1. Definitions of "Proceeding" and "Expenses". As used in this Agreement:
(a) "Proceeding" includes any threatened, pending or completed claim, action,
suit, arbitration, alternate dispute resolution mechanism or other
proceeding, whether brought in the name of the Company or otherwise and
whether of a civil, criminal, administrative or investigative nature
(including, but not limited to, proceedings brought under or predicated upon
the Securities Act of 1933, as amended, the Securities Exchange Act of 1934,
as amended, their respective state counterparts or any rule or regulation
promulgated thereunder), in which Indemnitee may be or may have been involved
as a party, a witness or otherwise by reason of the fact that Indemnitee is
or was a director and/or officer of Company or that Indemnitee is or was
serving at the request of the Company as director, officer, employee or agent
of another corporation, partnership, joint venture, trust, limited liability
company or other enterprise, whether or not Indemnitee is serving in such
capacity at the time any Expense is incurred. "Other enterprise" as used
herein includes, without limitation, employee benefit plans and
administrative committees thereof.
1
<PAGE>
(b) "Expenses" include, but shall not be limited to, damages, judgments,
fines (including any excise taxes assessed on Indemnitee with respect to an
employee benefit plan), penalties, charges, assessments, settlements and
costs, costs of investigation, attorneys' fees and disbursements, costs of
attachment or similar bonds and any federal, state, local or foreign taxes
imposed on Indemnitee as a result of the actual or deemed receipt of any
payment under this Agreement.
2. INDEMNITY IN THIRD-PARTY PROCEEDINGS. Company shall indemnify
Indemnitee against all Expenses actually and reasonably incurred by
Indemnitee in connection with any Proceeding (other than a Proceeding by
Company itself to procure a judgment in its favor), PROVIDED that Indemnitee
acted in good faith and in a manner that Indemnitee reasonably believed to be
in or not opposed to the best interests of Company and, in the case of a
criminal proceeding, had no reasonable cause to believe that his conduct was
unlawful.
3. INDEMNITY IN PROCEEDINGS BY OR IN THE NAME OF COMPANY. Company shall
indemnify Indemnitee against all Expenses actually and reasonably incurred by
Indemnitee in connection with any Proceeding by or in the name of Company to
procure a judgment in its favor, but only if Indemnitee acted in good faith
and in a manner that Indemnitee reasonably believed to be in or not opposed
to the best interests of Company and its stockholders; provided, however,
that no indemnification for Expenses shall be made under this Paragraph 3
with respect to any claim, issue or matter as to which Indemnitee shall have
been adjudged to be liable to Company, unless, and only to the extent that,
any court in which such Proceeding is brought shall determine upon
application that, despite the adjudication of liability, but in view of all
the circumstances of the case, Indemnitee is fairly and reasonably entitled
to indemnity for such expenses as such court shall deem proper.
4. EXCLUSIONS. Company shall not be liable under this Agreement to pay
or advance any Expenses:
(a) to the extent that payment is actually made to Indemnitee under a
valid, enforceable and collectible insurance policy;
(b) to the extent that Indemnitee is indemnified and actually paid
otherwise than pursuant to this Agreement;
(c) if it is proved by final judgment in a court of law or other final
adjudication to have been based upon or attributable to Indemnitee's in fact
having gained any personal profit or advantage to which Indemnitee was not
legally entitled;
(d) for a disgorgement of profits made from the purchase and sale by
Indemnitee of securities pursuant to Section 16(b) of the Securities Exchange
Act of
2
<PAGE>
1934 and amendments thereto or similar provisions of any state statutory law
or common law;
(e) brought about or contributed to by the deliberate dishonesty, fraud
or willful misconduct of Indemnitee; HOWEVER, notwithstanding the foregoing,
Indemnitee shall be protected under this Agreement as to any Proceedings
brought against him by reason of any alleged dishonesty, misconduct or fraud
on his part, unless a judgment or other final adjudication thereof shall be
establish that Indemnitee committed acts that (i) were deliberately dishonest
or knowingly fraudulent or that constituted willful misconduct and (ii) were
material to the cause of action so adjudicated;
(f) in respect of any Proceeding initiated by Indemnitee and not by way
of defense, counterclaim or crossclaim, except (i) with respect to any such
Proceeding that ultimately determines that Indemnitee is entitled to
indemnification under this Agreement, any directors' and officers'
liabilities insurance policy maintained by Company or under Charter Documents
now or hereafter in effect, (ii) in cases where the Board of Directors has
approved the initiation of such Proceeding (or part thereof) or (iii) as
otherwise required by Section 145 of the Delaware General Corporation Law; or
(g) for any judgment, fine or penalty which Company is prohibited by
applicable law from paying as indemnity or for any other reason (and, in this
respect, both Company and Indemnitee have been advised that the Securities
and Exchange Commission believes that indemnification for liabilities arising
under the federal securities laws is against public policy and is, therefore,
unenforceable, and that certain such claims for indemnification may have to
be submitted to appropriate courts for adjudication).
5. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY. Notwithstanding any
other provisions of this Agreement, to the extent that Indemnitee has been
successful on the merits of otherwise in defense of any Proceeding or in
defense of any claim, issue or matter therein, including the dismissal of an
action without prejudice, Indemnitee shall be indemnified against all
Expenses incurred in connection therewith.
6. NOTICES. Indemnitee shall, as a condition precedent to his right to
be indemnified for Expenses under this Agreement or to receive an advance
therefore, give to Company written notice as soon as practicable of any
Proceeding instituted against him for which indemnity will or could be sought
under this Agreement. Notice to Company shall be given at its principal
office and shall be directed to the Corporate Secretary (or at such other
address or to the attention of such other person as Company shall designate
in writing to Indemnitee). In addition, Indemnitee shall give Company such
information and cooperation as it may reasonably require and as shall be
within Indemnitee's power.
3
<PAGE>
7. ADVANCES OF EXPENSES. Expenses incurred by Indemnitee pursuant to
Paragraphs 2 and 3 in any Proceeding shall be paid by Company in advance of
the determination of such Proceeding at the written request of Indemnitee, if
Indemnitee (a) undertakes to repay such amount to the extent that it is
ultimately determined that Indemnitee is not entitled to indemnification in
such amount, and (b) delivers to Company a certificate affirming that
Indemnitee has met the relevant standards for indemnification set forth in
Paragraphs 2 and 3.
8. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION. Any
indemnification or advance under Paragraph 2, 3 and 7 shall be made no later
than 30 days after receipt of the written request of Indemnitee therefor,
subject to, in the case of an indemnification, a determination by a majority
of the Board of Directors within said 30 day period that Indemnitee has met
the relevant standards for indemnification set forth in Paragraph 2 and 3;
provided, however that if Indemnitee disagrees with the Board's decision, the
matter shall be referred to independent legal counsel (which shall not
include legal counsel that has previously represented Company or Indemnitee
or their affiliates) mutually selected by the Board and Indemnitee whose
written opinion shall bind the parties. The termination of any Proceeding by
judgment, order of court, settlement, conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption that
Indemnitee did not act in good faith or in a manner that Indemnitee
reasonably believed to be in or not opposed to the best interests of Company,
and with respect to any criminal proceeding, that such person had reasonable
cause to believe that his conduct was unlawful.
9. BURDEN OF PROOF. Notwithstanding Paragraph 8, the right to
indemnification or advances as provided by this Agreement shall be
enforceable by Indemnitee in any court of competent jurisdiction. Company
shall bear the burden of proving that indemnification or advances are not
appropriate. The failure of the Company to have made a determination that
indemnification or advances are proper in the circumstances shall not be a
defense to the action or create a presumption that Indemnitee has not met the
applicable standard of conduct. Indemnitee's Expenses incurred in connection
with successfully establishing his right to indemnification or advances, in
whole or in part, in any such Proceeding shall also be indemnified by Company.
10. SELECTION OF COUNSEL. If Company shall be obligated to provided
indemnification or advances for any Expenses in respect of any Proceedings,
Company, if appropriate, shall be entitled to assume the defense of such
Proceeding with counsel approved by Indemnitee (which approval shall not be
unreasonably withheld) upon delivery to Indemnitee of written notice of
Company's election to do so. After the retention of any such counsel by
Company, Company will not be liable to Indemnitee under this Agreement for
any fees or expenses of separate counsel subsequently retained by or on
behalf of Indemnitee with respect to the same Proceeding; provided, however,
that (i) Indemnitee shall have the right to employ his own separate counsel
in any such Proceeding at his expense and (ii) if (A) the
4
<PAGE>
employment of separate counsel by Indemnitee has been previously authorized
by a majority of the Board of Directors, (B) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between Company and
Indemnitee in the conduct of any such defense or (C) Company shall not
continue to retain such counsel to defend such Proceeding, then the fees and
expenses of Indemnitee's separate counsel shall be Expenses for which
Indemnitee may receive indemnification or advances hereunder.
11. SETTLEMENT OF PROCEEDINGS. Company shall not be liable to indemnify
Indemnitee under this Agreement for any amounts paid in settlement of any
Proceeding effected without its prior written consent. Company shall be
permitted to settle any Proceeding except that it shall not settle any
Proceeding in any manner which would impose any penalty, limitation or
admission of Indemnitee's liability on Indemnitee without Indemnitee's
written consent. Neither Company nor Indemnitee will unreasonably withhold
its consent to any proposed settlement.
12. CONTRIBUTION. If the indemnification provided in Paragraphs 2 and 3
is unavailable by reason of a court decision described in clause (g) of
Paragraph 4 based on grounds other than those set forth in clauses (c)
through (f) of such Paragraph 4, then in respect of any threatened, pending
or completed Proceeding in which Company is jointly liable with Indemnitee
(or would be joined in such Proceeding), Company shall contribute to the
amount of Expenses actually and reasonably incurred and paid or payable by
Indemnitee in such proportion as is appropriate to reflect (i) the relative
benefits received by Company on the one hand and Indemnitee on the other hand
from the transaction from which such Proceeding arose, and (ii) the relative
fault of Company on the one hand and of Indemnitee on the other in connection
with the events which resulted in such Expenses as well as any other relevant
equitable considerations. The relative fault of Company on the one hand and
Indemnitee on the other shall be determined with reference to, among other
things, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent the circumstances resulting in such
Expenses. Company agrees that it would not be just and equitable if
contribution pursuant to this Paragraph 12 were determined by pro rata
allocation or any other method of allocation which does not take account of
the foregoing equitable considerations.
13. NONEXCLUSIVITY.
(a) Notwithstanding any other provision of this Agreement, the Company
shall not indemnify Indemnitee for any act or omission or transaction for
which indemnification is expressly prohibited by Section 145 of the Delaware
General Corporation Law.
(b) The right of indemnification provided by this Agreement shall not be
exclusive of any other rights to which Indemnitee may be entitled under
Company's Charter Documents, any agreement, any vote of stockholders or
disinterested directors, the Delaware General Corporation Law or otherwise,
both as to action in his official
5
<PAGE>
capacity and as to action in another capacity while holding such office. To
the extent that a change in Delaware General Corporation Law (whether by
statute or judicial decision) permits greater indemnification by agreement
than would be afforded currently under the Charter Documents, it is the
intent of the parties hereto that Indemnitee shall enjoy by this Agreement
the greater benefits so afforded by such change.
14. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
provision of this Agreement to indemnification by Company for a portion of
his Expenses actually and reasonably incurred by him in any Proceeding but
not, however, for the total amount thereof, Company shall nevertheless
indemnify Indemnitee for the portion of such Expenses to which Indemnitee is
entitled.
15. SUBROGATION. In the event Indemnitee shall receive any payment from
any insurance carrier or from the plaintiff in any action against Indemnitee
with respect to indemnified amounts after payment on account of all or part
of such indemnified amounts having been made by Company pursuant to this
Agreement, Indemnitee shall reimburse Company for the amount, if any, by
which the sum of such payment by such insurance carrier or such plaintiff and
payments by Company to Indemnitee exceeds such indemnified amounts; PROVIDED,
HOWEVER, that such portions, if any, of such insurance proceeds that are
required to be reimbursed to the insurance carrier under the terms of its
insurance policy shall not be deemed to be payments to Indemnitee hereunder.
In addition, upon payment of indemnified amounts under the terms and
conditions of this Agreement, Company shall be subrogated to all of
Indemnitee's rights of recovery with respect to such indemnified amounts.
Indemnitee shall execute all papers required and shall do everything that may
be necessary to secure such rights, including the execution of such documents
necessary to enable Company effectively to bring suit to enforce such rights.
Such rights of subrogation shall be terminated upon receipt by Company of the
amount to be reimbursed by Indemnitee pursuant to the first sentence of this
paragraph.
16. BINDING EFFECT. The indemnification under this Agreement shall
continue as to Indemnitee even though Indemnitee may have ceased to be a
director or officer of the Company. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors, assigns (including any direct or indirect successors
by purchase, merger, consolidation or otherwise to all or substantially all
of the business and/or assets of Company), spouses, heirs, executors and
personal and legal representatives.
17. SEVERABILITY. If any provision of this Agreement or the application
of any provision hereof to any person or circumstance is held invalid,
unenforceable or otherwise illegal, the remainder of this Agreement and the
application of such provision to other persons or circumstances shall not be
affected, and the provision so held to be invalid, unenforceable or otherwise
illegal shall be revised to the extent (and only the extent) necessary to make
in enforceable, valid and legal.
6
<PAGE>
18. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Delaware.
19. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
MEDIA ARTS GROUP, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
INDEMNITEE
------------------------------------
7
<PAGE>
EXHIBIT 11.1
MEDIA ARTS GROUP, INC.
COMPUTATION OF NET INCOME AND
INCOME FROM CONTINUING OPERATIONS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (1)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------- ------------------------
1995 1996 1997 1996 1997
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income from continuing operations............ $ 4,014 $ 2,455 $ 2,644 $ 163 $ 4,204
Discontinued operations...................... (53) (3,128) (13,630) (13,630) --
Extraordinary loss........................... (172) -- -- -- --
--------- --------- --------- ----------- -----------
Net income (loss)............................ $ 3,789 $ (673) $ (10,986) $ (13,467) $ 4,204
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Weighted average common and common equivalent
shares outstanding......................... 9,133 9,756 9,991 9,867 11,031
Common shares issuable on exercise of options
and warrants(2)(4)(5)...................... 302 119 85 -- 265
Common shares required to be issued to pay
stockholder distributions(3)(5)............ 46 -- -- -- --
--------- --------- --------- ----------- -----------
Weighted average common and common equivalent
shares outstanding......................... 9,481 9,875 10,076 9,867 11,296
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Income from continuing operations before
extraordinary loss per common share........ $ 0.42 $ 0.25 $ 0.26 $ 0.02 $ 0.37
Discontinued operations...................... -- (0.32) (1.35) (1.38) --
Extraordinary loss........................... (0.02) -- -- -- --
--------- --------- --------- ----------- -----------
Net income (loss) per share.................. $ 0.40 $ (0.07) $ (1.09) $ (1.36) $ 0.37
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
- ------------------------
(1) This Exhibit should be read with Note 1 of Notes to Consolidated Financial
Statements.
(2) The dilutive effect of stock options and warrants granted subsequent to May
31, 1993 have been included in the computation of common and common
equivalent shares as if they were outstanding since January 1, 1993.
(3) Represents number of shares required to be issued to pay the stockholder
distributions of $1,000,000 using the proceeds of the Company's initial
public offering price of $7.25 per share as if those shares were outstanding
from January 1, 1993 through August 31, 1994.
(4) Reflects the issuance to David Winter of 223,600 shares of Common Stock upon
the consummation of the Company's initial public offering as if those shares
were outstanding since December 31, 1993.
(5) The computation of common and dilutive common equivalent shares utilizes the
treasury stock method. The initial public offering price of $7.25 per share
was used prior to August 10, 1994, the effective date of the initial public
offering.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated June 6, 1997, relating to
the financial statements of Media Arts Group, Inc., which appears in such
Prospectus. We also consent to the references to us under the headings "Experts"
and "Selected Financial Data" in such Prospectus. However, it should be noted
that Price Waterhouse LLP has not prepared or certified such "Selected Financial
Data."
/s/ PRICE WATERHOUSE LLP
San Jose, California
December 19, 1997
