<PAGE> 1
SCHEDULE 14A
(Rule 14a-101)
Information Required in Proxy Statement To Section 14(a) Of The Securities
Exchange Act Of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
MEDIA ARTS GROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
MEDIA ARTS GROUP, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held September 24, 1997
To The Stockholders:
Please take notice that the annual meeting of the stockholders of Media Arts
Group, Inc. (the "Company") will be held on September 24, 1997, at 9:00 a.m. at
the Company's offices at 521 Charcot Avenue, San Jose, California, for the
following purposes:
1. To elect five directors to hold offices for one year terms or until
their successors are elected and qualified.
2. To consider approval to amend the Company's Employee Stock Option Plan
to increase the number of shares reserved for issuance thereunder from
824,863 to 1,124,863.
3. To consider and vote upon a proposal to ratify the appointment of
Price Waterhouse LLP as the Company's independent public accountants
for the fiscal year ending March 31, 1998.
4. To transact such other business that may come before the meeting and
any adjournments or postponements thereof.
Stockholders of record at the close of business on July 28, 1997 are entitled
to notice of, and to vote at, this meeting and any adjournments thereof. For
ten days prior to the meeting, a complete list of the stockholders entitled to
vote at the meeting will be available for examination by any stockholder for
any purpose relating to the meeting during ordinary business hours at the
principal office of Media Arts Group, Inc.
By Order of the Board of Directors
/s/ James F. Landrum, Jr.
Vice President, General Counsel
Corporate Secretary
San Jose, California
September 10, 1997
IMPORTANT: Please fill in, date, sign and promptly mail the enclosed proxy card
in the accompanying pre-paid envelope to ensure that your shares are
represented at the meeting. If you attend the meeting, you may choose to vote
in person even if you have previously sent in your proxy card.
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<PAGE> 3
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
MEDIA ARTS GROUP, INC.
521 CHARCOT AVENUE
SAN JOSE, CALIFORNIA 95131
The accompanying proxy is solicited by the Board of Directors of Media Arts
Group, Inc., a Delaware corporation ("Media Arts" or the "Company"), for use at
the Annual Meeting of Stockholders to be held September 24, 1997 at 9:00 a.m.,
or any adjournment or postponement thereof, for the purposes set forth in the
accompanying Notice of Annual Meeting. The date of this Proxy Statement is
September 10, 1997, the approximate date on which this Proxy Statement and the
accompanying form of proxy are first being sent or given to stockholders.
SOLICITATION AND VOTING OF PROXIES
The cost of soliciting proxies will be borne by the Company. In addition to
soliciting stockholders by mail through its regular employees, the Company will
request banks and brokers, and other custodians, nominees and fiduciaries, to
solicit their customers who have stock of the Company registered in the names
of such persons and will reimburse them for their reasonable, out-of-pocket
costs. The Company may use the services of its officers, directors, and others
to solicit proxies, personally or by telephone, without additional
compensation.
Only stockholders of record as of the close of business on July 28, 1997 will
be entitled to vote at the meeting and any adjournment or postponement thereof.
As of that date, there were 11,030,052 shares of common stock of the Company,
par value $.01 per share ("Common Stock"), issued and outstanding. Stockholders
may vote in person or by proxy. Each holder of shares of Common Stock is
entitled to one (1) vote for each share of stock held on the proposals
presented in this Proxy Statement. The Company's By-Laws provide that a
majority of all of the shares of the stock entitled to vote, whether present in
person or represented by proxy, shall constitute a quorum for the transaction
of business at the meeting.
All valid proxies received prior to the meeting will be voted. All shares
represented by a proxy will be voted, and where a stockholder specifies by
means of the proxy a choice with respect to any matter to be acted upon, the
shares will be voted in accordance with the specification so made. If no choice
is indicated on the proxy, the shares will be voted in favor of the proposal. A
stockholder giving a proxy has the power to revoke his or her proxy, at any
time prior to the time it is voted, by delivering to the Secretary of the
Company a written instrument revoking the proxy or a duly executed proxy with a
later date, or by attending the meeting and voting in person.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
Under the Company's By-Laws and Delaware law: (1) shares represented by
proxies that reflect abstentions or "broker non-votes" (i.e., shares held by a
broker or nominee which are represented at the meeting, but with respect to
which such broker or nominee is not empowered to vote on a particular proposal)
will be counted as shares that are present and entitled to vote for purposes of
determining the presence of a quorum; (2) the five director nominees receiving
the highest number of votes, up to the number of directors to be elected, are
elected and accordingly, abstentions, broker non-votes and withholding of
authority to vote will not affect the election of directors; and (3) proxies
that reflect abstentions as to a particular proposal will be treated as voted
for purposes of determining the approval of that proposal and will have the
same effect as a vote against that proposal, while proxies that reflect broker
non-votes will be treated as unvoted for purposes of determining approval of
that proposal and thus will not be counted as votes for or against that
proposal.
DEADLINE OF RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company that are intended to be presented by
such stockholders at the Company's next annual meeting of stockholders must be
received by the Company no later than May 29, 1998 in order that they may be
considered for possible inclusion in the proxy statement and form of proxy
relating to that meeting.
An annual report on Form 10-K (excluding exhibits) for the fiscal year ended
March 31, 1997 is enclosed with this Proxy Statement.
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<PAGE> 4
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of June 30, 1997, with
respect to the beneficial ownership of the Company's Common Stock by (i) all
persons known by the Company to be the beneficial owners of more than 5% of the
outstanding Common Stock of the Company, (ii) each director and
director-nominee of the Company, (iii) the Chief Executive Officer and other
highly compensated executive officers of the Company as of March 31, 1997,
whose total salary and bonus compensation for the fiscal year ended March 31,
1997 exceeded $100,000 and (iv) all executive officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF
BENEFICIAL OWNERS (1) NUMBER OF SHARES PERCENTAGE OF CLASS
--------------------------------------- -------------------- ------------------------
<S> <C> <C>
Kenneth E. Raasch (2) (3) 3,851,875 34.4
Chairman & Chief Executive Officer
Thomas Kinkade 3,321,043 30.1
Director
Levine Leichtman Capital Partners, L.P. (4) 1,117,693 10.0
Hyprom S.A. (5) 894,604 7.7
Raymond A. Peterson (6) 138,726 1.2
Chief Financial Officer and
Senior Vice President of Finance
Daniel P. Byrne (7) 108,476 *
Senior Vice President of Marketing
Michael L. Kiley (9) 50,000 *
Director
Norman A. Nason (10) 16,181 *
Director
Norman T. Mahoney (11) 6,000 *
Director
As a group (9 persons) executive
officers and directors (12) 7,594,801 64.9
- ------------
</TABLE>
* less than 1 percent
(1) Except as otherwise noted, the persons named in the table have the
sole voting and investment power with respect to all shares shown as
beneficially owned by them, subject to the information contained in
the footnotes to this table.
(2) The shares owned by Mr. Raasch are held by Kenneth E. Raasch and Linda
Louise Raasch, as Trustees of the Raasch Family Trust, May 18, 1993.
(3) Includes 165,517 shares of Common Stock which may be acquired upon the
conversion of a $1,200,000 promissory note issued to Linda Louise
Raasch, the wife of Mr. Raasch, on June 30, 1995. See "Certain
Relationships and Related Transactions." Also includes 15,000 shares
subject to options held by Mr. Raasch.
(4) Information was derived from a Schedule 13D filed with the Securities
and Exchange Commission on February 26, 1997. However in a letter
dated July 9, 1997, the Company was informed that the named
stockholder's sold 31,000 shares of Common Stock. The general partner
of the named stockholder is Levine Leichtman Capital Partners, L.P.
(5) Includes an aggregate of 298,953 shares of Common Stock underlying two
warrants held by Hyprom S.A.
(6) Includes 135,726 shares subject to options held by Mr. Peterson.
(7) Includes 107,976 shares subject to options held by Mr. Byrne.
(8) Includes 75,000 shares subject to options held by Mr. Fleming.
(9) Includes 50,000 shares subject to options held by Mr. Kiley.
(10) Includes 11,181 shares subject to options held by Mr. Nason.
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<PAGE> 5
(11) Includes 5,000 shares subject to options held by Mr. Mahoney.
(12) Includes an aggregate of 427,383 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.
DIRECTORS & OFFICERS
Set forth below is a chart listing the positions held by the Company's
current Directors:
<TABLE>
<CAPTION>
NAME POSITIONS WITH THE DIRECTOR SINCE
COMPANY
<S> <C> <C>
Kenneth E. Raasch Chief Executive Officer 1990
& Chairman of the Board
Thomas Kinkade Art Director, Director 1990
Michael L. Kiley Director 1997
Norman T. Mahoney Director 1997
Norman A. Nason Director 1993
</TABLE>
The ages, principal occupations and positions for the past five years, and in
certain cases prior years, of each of the directors and executive officers of
the Company are as follows:
KENNETH E. RAASCH, age 37, has been the Chairman, President and Chief
Executive Officer of the Company since its inception in March 1990. On May 8,
1997 he relinquished the position of President and became Chairman and Chief
Executive Officer of 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. He
was President of Trustec Financial Group, Inc., the general partner of Beta
Associates, a pension fund, for the previous two years. Mr. Raasch also has
served as the exclusive manager, agent and representative of Thomas Kinkade
pursuant to the Management Agreement between Mr. Kinkade and Mr. Raasch. See
"Certain Relationships and Related Transactions - Management Agreement between
Thomas Kinkade and Kenneth E. Raasch".
THOMAS KINKADE, age 39, has been the Art Director and a member of the Board
of Directors of the Company since its inception in March 1990. In addition, Mr.
Kinkade has provided artwork to the Company for its productions since the
Company's inception. Prior to March 1990, Mr. Kinkade was a self-employed
artist.
CRAIG FLEMING, age 42, has been the President of the Company since May 1997.
He was the Vice President of Sales for the Company from October 1996 to May
1997. For the two years prior to joining the Company, Mr. Fleming was the
Executive Vice President of Sales for Home Cable Concepts, Inc., specializing
in direct TV satellite dishes. 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.
MICHAEL L. KILEY, age 52, has been a director of the Company since January
1997. In 1978, he founded and has since served as Pastor of Home Church. For
the seven years prior to founding Home Church Mr. Kiley co-owned Business
Exchange, Inc. a company specializing in building a cooperative buying service
among 400 business owners.
NORMAN T. MAHONEY, age 67, has been a director of the Company since March
1997. From 1988 to 1995 he served as a consultant to Scott & Fetzler
Corporation, a diversified manufacturer whose product lines include Kirby brand
vacuum cleaners, and encyclopedias and educational materials. For the previous
five years Mr. Mahoney served as President and CEO for Kirby Company, a division
of Scott & Fetzler Corporation.
NORMAN A. NASON, age 56, has been a director of the Company since April 1993.
In 1976 he founded, and has since served as President, of Saratoga Commercial
Real Estate Brokerage Corporation and Saratoga Management Corporation,
companies that are involved in selling, leasing and managing commercial
property.
RAYMOND A. PETERSON, age 51, C.P.A. has been the Chief Financial Officer of
the Company and Vice President of Finance since May 1993. He was the Chief
Executive Officer of Peterson, Sense & Company, a certified public accounting
firm, for the previous 15 years, during which time he provided accounting, tax
and financial planning services for the Company. Prior to this, Mr. Peterson
was the Corporate Tax Manager for Raychem Corporation, a Fortune 500
multi-national manufacturing corporation, where he implemented internal tax
reporting systems for use by 32 international subsidiaries, and engaged in tax
planning, research and
5
<PAGE> 6
forecasting of international corporate taxes. Prior to that, Mr. Peterson was a
Senior Tax Accountant with Peat Marwick & Mitchell (currently, KPMG Peat
Marwick).
DANIEL P. BYRNE, age 35, has been the Vice President of Marketing of the
Company since March 1992. He was employed by the Bradford Exchange, Ltd., an
established manufacturer and marketer of collectible giftware, from October
1988 until February 1992 as Manager of Product Development and Manager of
Concept Development. Mr. Byrne also served as the Product Manager of Precious
Moments Collection, a multi-million dollar product line of Enesco Corporation,
a subsidiary of Stanhome Inc., for a period of three years.
JAMES F. LANDRUM, JR., age 33, has been the General Counsel for the Company
since February 1995 and appointed to Vice President and Corporate Secretary on
April 30, 1997. He was self employed as an attorney and business consultant
for the two years prior to joining the Company.
Meetings of the Board of Directors. During the fiscal year ended March 31,
1997, the Board of Directors held thirteen meetings. No director attended less
than 75% of the total number of meetings of the Board of Directors and of the
committees of the Board of Directors on which such director served during
fiscal 1997.
The Company does not have a standing Nominating Committee, but does have an
Audit Committee and a Compensation Committee.
The Audit Committee's function is to review, with the Company's independent
public accountants, management and the Board of Directors, the Company's
financial reporting processes and internal financial controls. The Audit
Committee reviews the results of the examination of the Company's financial
statements by the independent public accounts and the independent public
accountants' opinion. The Audit Committee also approves all professional
services performed by the independent public accountants, recommends the
retention of the independent public accountants to the Board of Directors,
subject to ratification by the stockholders, and periodically reviews the
Company's accounting policies and internal accounting and financial controls.
During fiscal 1997, the Audit Committee was composed of Michael Kiley, Norman
Nason and Robert Wallace (resigned February 26, 1997). The Audit Committee held
two meetings during the fiscal year ended March 31, 1997.
The Compensation Committee's primary function is to review and recommend
salary levels of, to approve bonus plans for, and approve stock option grants
to executive officers, and to set the compensation of the Chief Executive
Officer. During fiscal 1997, the Compensation Committee was composed of Michael
Kiley, Norman A. Nason and Robert Wallace (resigned February 26, 1997). The
Compensation Committee met twice during the fiscal year ended March 31, 1997.
EXECUTIVE COMPENSATION AND OTHER MATTERS
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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM ALL OTHER
ANNUAL COMPENSATION COMPENSATION COMPENSATION
------- ----------------- -------------- -------------
NAME AND PRINCIPAL AWARDS
POSITION OPTIONS
YEAR SALARY BONUS (SHARES)
------- ----------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
KENNETH E. RAASCH 1997 $ 352,586 - -
PRESIDENT AND CHIEF 1996 335,286 -
EXECUTIVE OFFICER 1995 363,075 - - -
DANIEL P. BYRNE 1997 $ 148,244 $ 6,798
SENIOR VICE PRESIDENT 1996 152,466 - - -
OF MARKETING 1995 136,992 - - -
RAYMOND A. PETERSON 1997 $ 133,995 $ 6,798 25,000 -
</TABLE>
6
<PAGE> 7
<TABLE>
<S> <C> <C> <C> <C> <C>
CHIEF FINANCIAL 1996 129,080 10,000 5,000 -
OFFICER AND SENIOR 1995 122,917 - - -
</TABLE>
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
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
OPTION TERM (3)
NAME OPTIONS % OF TOTAL EXERCISE EXPIRATION 5%($) 10%($)
GRANTED OPTIONS OR BASE DATE
(#)(1) GRANTED PRICE
TO ($/SH)(2)
EMPLOYEES
IN FISCAL
YEAR
<S> <C> <C> <C> <C> <C> <C>
KENNETH E. RAASCH - - - - - -
DANIEL P. BYRNE - - - - - -
RAYMOND A. PETERSON 25,000 17% $2.437 2/3/07 - 250,686
</TABLE>
____________
(1) Generally, the right to exercise an option under the Company's Employees
Stock Option Plan (the "Plan") vests as to one-fifth of the shares subject
to the option on each anniversary of the date of grant. The Plan permits
the grant of both incentive stock options within the meaning of Section 422
of the Internal Revenue Code, as amended (the "Code"), and nonstatutory
stock options. The exercise price of incentive stock options must at least
equal the fair market value of the Common Stock of the Company on the date
of grant. The exercise price of nonstatutory stock options must equal at
least 85% of the fair market value of the Common Stock of the Company on
the date of grant. The exercise price of incentive stock options or
nonstatutory stock options granted to any person who at the time of grant
owns stock representing more than 10% of the voting power of all classes of
stock of the Company or any parent or subsidiary corporations must be at
least 110% of the fair market value of the Common Stock of the Company on
the date of grant and the term of such options cannot exceed five years or
five years and one day, respectively.
(2) 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-holders'
continued employment through the vesting period. The amounts reflected in
this table may not necessarily be achieved.
OPTION EXERCISES AND FISCAL 1997 YEAR-END VALUE
The following table provides the specified information concerning exercises
of options to purchase the Company's Common Stock in the fiscal year ended
March 31, 1997, and unexercised 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.
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<PAGE> 8
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS VALUE OF UNEXERCISED
HELD AT MARCH 31, 1997 IN-THE-MONEY OPTIONS AT
MARCH 31, 1997(2)
NAME EXERCISABLE (1) UNEXERCISABLE (1) $ EXERCISABLE $ UNEXERCISABLE(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.
COMPENSATION OF DIRECTORS
Board members other than the Company's outside directors receive no
compensation for attending Board meetings, except for reimbursement of certain
expenses in connection with attendance at Board meetings and Committee
meetings. The Company's outside directors receive $2,000 per meeting as
compensation for their services as Directors. In addition, one of the outside
directors, Norman A. Nason, received $15,000 annually for serving as a board
member, for the fiscal year ended March 31, 1997.
In addition to cash compensation, the Company's nonemployee directors are
entitled to participate in the Company's Stock Option Plan for Outside
Directors (the "Director Plan"). The Board of Directors and the stockholders of
the Company approved the Director Plan on February 15, 1994 and reserved 50,000
shares of Common Stock for issuance thereunder. As of June 30, 1997 the
aggregate market value of such shares was $243,750. On the approval date of the
Director Plan, the Company's then current nonemployee directors, Messrs. Morse
and Nason, received an initial grant of an option to purchase 7,909 shares of
Common Stock at an exercise price of $7.11 per share. After the approval date
of the Director Plan, any new nonemployee director is entitled to receive on
the first business day following such director's appointment an initial grant
of an option to purchase 5,000 shares of Common Stock under the Director Plan.
Following an initial grant, on the business day following each annual meeting
of the Company's stockholders, each nonemployee director who will then have
served at least one year as a director of the Company is entitled to receive a
grant of an option to purchase an additional 1,500 shares of Common Stock. All
options granted under the Director Plan are non-qualified and have an exercise
price per share equal to the fair market value of the Common Stock, as
determined pursuant to the Director Plan. The options are immediately and fully
exercisable as of their respective grant dates and terminate upon the earlier
of (i) the tenth anniversary of the grant date, (ii) the expiration of the
three-month period following the termination of the participant's services as a
director for any reason other than disability or death, (iii) the first
anniversary of the termination of the participant's service by reason of
disability or (iv) the first anniversary of the participant's death. Directors'
options expire upon a merger or consolidation of the Company with or into
another corporation or acquisition by another corporation or person of all or
substantially all of the Company's assets or at least 51% of the Company's then
outstanding voting stock or a liquidation or dissolution of the Company.
Options are not transferable except by will or descent and distribution.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee during fiscal 1997 was composed of three
independent, non-employee directors of the Company, Michael Kiley, Norman Nason
and Robert Wallace (resigned February 26, 1997).
During fiscal 1997, no executive officer of the Company served on the board
of directors or compensation committee of another company that had an executive
officer serve on the Company's Board of Directors or its Compensation
Committee.
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<PAGE> 9
EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
Certain executive officers have entered into employment agreements with the
Company. In January 1994, the Company entered into an 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 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. 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. In addition to
his base salary, Mr. Byrne is entitled to receive a bonus each year in an
amount which bears the same pro rata relationship to his base salary as the
Company's pre-tax operating income for the year bears to the forecast amount
reflected in the Company's business plan for that year.
Mr. Peterson was engaged by the Company as Chief Financial Officer effective
January 1, 1994 for a period of five years at an annual base salary of $100,000
($150,000 effective January 1, 1997) pursuant to Mr. Peterson's employment
agreement with the Company. In addition to his base salary, Mr. Peterson is
entitled to receive a bonus each year in an amount which bears the same pro
rata relationship to his base salary as the Company's pre-tax operating income
for the year bears to the forecast amount reflected in the Company's business
plan for that year.
Mr. Kinkade was engaged by the Company as Art Director for a period of five
years at an annual base salary of $60,000 pursuant to Mr. Kinkade's employment
agreement effective January 1, 1994 with the Company. In addition to his base
salary, Mr. Kinkade is entitled to receive a bonus each year which bears the
same pro rata relationship to his base salary as the Company's 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 "Certain
Relationships and Related Transactions".
Mr. 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 advise to the Company for
approximately one year for a monthly fee of $12,500.
The employment agreements of Messrs. Raasch, Peterson, Kinkade and Byrne
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 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.
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<PAGE> 10
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LICENSES
The Company entered into a ten-year worldwide license agreement with Thomas
Kinkade, a principal stockholder and director of the Company, dated as of
December 1, 1993, which grants the Company the exclusive worldwide right to
reproduce certain artwork of Thomas Kinkade in the form of two dimensional art.
The term of the agreement renews automatically every five years, absent notice
of termination by either party. In particular, the Company has the exclusive
right to produce, sell, distribute and promote reproductions of Thomas Kinkade's
artwork in the form of tabletop lithographs, posters, paper and canvas
lithographs and any other form of wall art, and the right to use the name and
likeness of Mr. Kinkade in promoting the sale of its products and for general
business purposes. Under the license agreement Mr. Kinkade is obligated to
deliver 16 paintings per year to the Company for reproduction. While the license
does not cover the rights to reproduce the artwork in other media such as
plates, calendars, greeting cards or puzzles, it grants the Company a right of
first refusal with respect to any future licenses entered into by Mr. Kinkade,
subject to the prior right of first refusal which Mr. Kinkade granted to The
Bradford Exchange, Ltd. The license agreement permits Mr. Kinkade to reproduce
one piece of his artwork annually for sale and distribution in order to raise
money for the City of Placerville, California. Mr. Kinkade is not paid any
royalty upon sales of products using his artwork, and receives only a flat fee
of $18,750 for each painting delivered to the Company for reproduction. The
agreement is terminable by either party after failure by the other party for 30
days to cure a material breach of any agreement or representation contained in
the agreement, upon a change of control of the Company, in the event Kenneth E.
Raasch ceases to serve as the Company's Chief Executive Officer or in the event
of the Company's insolvency. A change of control is defined to occur on the date
when any person or group (as defined in Rule 13(d)(3) under the Securities
Exchange Act of 1934) beneficially owns (as defined in such Rule) a number of
shares of Common Stock in excess of the number of shares of Common Stock
beneficially owned by Messrs. Kinkade and Raasch, collectively, and neither Mr.
Kinkade nor Mr. Raasch are directors of the Company. Upon termination of the
agreement, the Company may not produce any new licensed products but retains the
right to sell its existing inventory of licensed products. Mr. Kinkade retains
the original artwork produced under the license.
In addition to the license agreement, the Company has entered into a royalty
agreement with Mr. Kinkade, dated as of December 1, 1993, which grants to the
Company for ten years the right to use the name "Thomas Kinkade" in connection
with the operation of Thomas Kinkade stores owned or licensed by the Company.
Under the agreement the Company is obligated to pay Mr. Kinkade a royalty of 5%
of net sales of stores utilizing his name.
Mr. Kinkade is also employed by the Company as Art Director and receives
certain payments from dealers for personally hand finishing master editions and
supervising the hand finishing of studio proof editions. See " - Sales of
Studio Proofs and Master Editions."
MANAGEMENT AGREEMENT BETWEEN THOMAS KINKADE AND KENNETH E. RAASCH
Thomas Kinkade and Kenneth E. Raasch entered into an Amended and Restated
Management Agreement, dated as of April 1, 1994 (the "Management Agreement"),
which replaced and superseded a management agreement, dated July 26, 1991, to
which Messrs. Kinkade and Raasch were parties. Pursuant to the Management
Agreement, for a three-year term, Mr. Raasch serves as Mr. Kinkade's exclusive
manager, agent and representative and is responsible for all negotiations
regarding the sale, reproduction, licensing, negotiated rights, usage and
exclusive license activity of Mr. Kinkade's artwork. In exchange for his
services, Mr. Raasch is paid 10% of the gross amount received by Mr. Kinkade
for all original paintings produced by Mr. Kinkade, except those paintings
whose sale was previously arranged by Mr. Kinkade and those paintings whose
sale is arranged through any individual who contacts Mr. Kinkade independent of
Mr. Raasch. In addition, Mr. Raasch is entitled to receive 50% of the gross
amount received by Mr. Kinkade for all licensed products, usage fees and other
revenue generated as a result of Mr. Raasch's efforts and negotiations.
Effective April 1, 1994, Mr. Raasch assigned to the Company his rights under
the Management Agreement to receive 50% of the gross amount received by Mr.
Kinkade for all licensed products, usage fees and other revenues.
Under the authority granted to him pursuant to the Management Agreement, Mr.
Raasch negotiated on Mr. Kinkade's behalf, and Messrs. Kinkade and Raasch
entered into a license agreement and royalty agreement with the Company. See "
Licenses". Each of Messrs. Raasch and Kinkade have entered into employment
agreements with the Company. See "EXECUTIVE COMPENSATION AND OTHER MATTERS -
Employment and Change of Control Arrangements." Effective May 9, 1997 Mr.
10
<PAGE> 11
Raasch assigned the Management Agreement to the Company in its entirety and Mr.
Raasch will not represent Mr. Kinkade in future negotiations with the Company.
OWNERSHIP AND SALE OF THOMAS KINKADE GALLERY, VALLEY FAIR
Linda L. Raasch, spouse of Kenneth E. Raasch, President, Chairman and Chief
Executive Officer of the Company, was the owner of Thomas Kinkade Gallery,
Valley Fair, in San Jose, California, until June 30, 1995. The Thomas Kinkade
Gallery, Valley Fair offers for sale framed canvas and paper lithographs
produced, sold and distributed by the Company as well as other products based
upon the artwork of Thomas Kinkade. On June 30, 1995, the Company purchased
Ms. Raasch's gallery for an aggregate purchase price of approximately
$1,500,000, of which $1,200,000 was paid in the form of an 8% subordinated
convertible promissory note due October 10, 2002. The Holder of the note may
convert it into Common Stock at a conversion price of $7.25 per share. The
entire principal amount of the note is due at maturity, unless converted prior
to maturity. Prior to the consummation of the sale transaction an independent
appraisal of the gallery was performed and the terms of the purchase were
approved by a special committee of the Board of Directors.
SALES OF STUDIO PROOFS AND MASTER EDITIONS
Mr. Kinkade receives certain payments from the Company for personally hand
finishing master editions and supervising the hand finishing of studio proofs.
Pursuant to those arrangements, Mr. Kinkade earned $932,464 in fiscal 1997.
COMERICA BANK - CALIFORNIA
Mr. Lowell W. Morse, a director of the Company from December 31, 1993 to
August 29, 1996, is also a director of Comerica Bank - California. Since the
Company's inception until February 1997, all of the commercial banking
facilities of the Company, excluding its former subsidiary John Hine Limited,
have been provided by Comerica Bank - California.
LEVINE LEICHTMAN CAPITAL PARTNERS, LLP
Effective July 26, 1995, Levine Leichtman Capital Partners, L.P. ("LLCP")
entered into a credit agreement with the Company pursuant to which LLCP
purchased a $5,000,000 12.375% promissory note of the Company due June 30,
2002, a $3,000,000 12.50% convertible promissory note of the Company due June
30, 2002 which was convertible into Common Stock at a conversion price of $6.25
per share and a warrant to purchase 400,000 shares of Common Stock at $5.9375
per share, exercisable until June 30, 2002. As a result, LLCP became a
beneficial owner of 880,000 shares of Common Stock, making LLCP a greater than
five percent stockholder of the Company. Effective March 13, 1996, the Company
entered into an agreement with LLCP for the restructuring of the $8 million
notes held by LLCP. Under the agreement, the interest rate on the debt was
raised to 13.5% effective October 1, 1995, and LLCP received a subordinated
security interest in the Company's assets. Of the $8 million principal amount,
$960,000 is convertible into Common Stock at a conversion price of $2.00 per
share and $810,000 is convertible into Common Stock at a conversion price of
$3.00 per share. The exercise price of LLCP's warrant for 400,000 shares of
Common Stock was reduced to $2.00 per share. Thus as a result of the
restructuring agreement LLCP became the beneficial owner of 1,150,000 shares of
Common Stock. In addition, as part of the restructuring, LLCP waived all
defaults then existing under the credit agreement and certain financial ratios
and other covenants were modified.
Effective February 21, 1997, the Company renegotiated the credit agreement
to restructure the balance of its obligation to LLCP, totaling $7,400,000 after
a payment of $592,500 pursuant to the renegotiation. The interest rate on the
debt remained at 13.5%, however certain prepayment penalties were eliminated
based on certain payments, which have been satisfied. As part of the
renegotiation, the warrant price was amended to $0.01 per share, and these
warrants were fully exercised, resulting in the issuance of 398,693 shares of
Common Stock and paid for by cancellation of 1,307 warrant shares. The
conversion rights initially provided under the $3 million note were amended to
a conversion price of $0.01 per share of Common Stock, and also fully exercised
into 750,000 shares of Common Stock and paid for by conversion of $7,500 of
principal amount of the $3 Million note (as amended). As a result of the
conversions, LLCP is the owner of 1,148,693 shares of Common Stock, of which
31,000 has since been sold. In addition, as part of the restructuring, LLCP
waived all defaults then existing under the credit agreement and certain
financial ratios and other covenants were modified.
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<PAGE> 12
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
the Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission ("SEC"). Such
persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the Company
and written representations from certain reporting persons, the Company
believes that the Company's executive officers, directors and more than 10%
stockholders have complied with the filing requirements applicable to them.
BOARD COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE
The Compensation Committee is composed of three independent, non-employee
directors of the Company, none of whom are employees of the Company. During
fiscal 1997, the Committee members were Michael Kiley, Norman Nason and Robert
Wallace (resigned February 26, 1997). The Compensation Committee's primary
function is to approve bonus plans for, review the compensation of and to
approve stock option grants to executive officers including the Chief Executive
Officer.
COMPENSATION PHILOSOPHY
The Compensation Committee strives to align executive compensation with the
value achieved by management for the Company's stockholders. Toward that goal,
the Company's compensation program emphasized both short - term and long - term
incentives designed to attract, motivate, and retain highly qualified
executives who will effectively manage the Company and maximize stockholder
value. The Company uses salary, executive officer bonuses and stock options to
motivate executive officers to achieve the Company's business objectives and to
align the incentives of officers with the long-term interests of stockholders.
The Committee's policy is to generally target levels of equity compensation
paid to its executive officers to be competitive with such compensation paid by
comparable companies in the art industry. The Committee reviews and evaluates
the executive officers' total compensation annually, relative to corporate
performance and comparative market information.
The Company has considered the potential impact of Section 162(m) of the
Internal Revenue Code ("Section 162(m)") adopted under the federal Revenue
Reconciliation Act of 1993. Section 162(m) disallows a tax deduction to any
publicly-held corporation for individual compensation exceeding $1 million in
any taxable year paid to the chief executive officer or any of the four other
most highly compensated executive officers, unless compensation is
performance-based. Since the targeted cash compensation of each of the named
executive officers is well below the $1 million threshold and the Company
believes that any options granted under the Employees Stock Option Plan
currently meet the requirement of being performance-based in accordance with
the regulations under Section 162(m), the Committee believes that Section
162(m) will not reduce the tax deduction available to the Company. The
Company's policy is to qualify to the extent reasonable its executive officers'
compensation for deductibility under applicable tax laws.
FORMS OF COMPENSATION
Specific executive compensation elements and the factors on which they were
based are:
Salary. The Company strives to offer executive officers salaries that are
competitive with comparable companies in the art industry. The Compensation
Committee approves executive salaries at the time executives join the Company
and thereafter, periodically reviews the executive officers and makes
adjustments to the base salaries of those officers. Adjustments made by the
Committee are based on individual executive officer performance, cost of living
increases and adjustments to retain qualified personnel. For Fiscal 1996, the
Committee made no adjustment to the Chief Executive Officer's salary and the
Chief Executive Officer voluntarily reduced his salary to $272,300. In 1997,
the Committee retroactively paid the Chief Executive Officer the balance of his
1996 base salary.
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<PAGE> 13
Incentive Compensation. For fiscal 1997, the Board of Directors approved an
executive bonus plan based upon the Company and individual performance. Under
the plan, bonuses are measured each quarter and paid annually pursuant to set
percentage schedules, as adjusted by individual performance as determined by
the management. No amounts are paid unless the Company reaches predetermined
objectives. The plan is administered by the Compensation Committee determining
whether executive officers met their individual performance goals. If the
officer's performance goals are met and the Company's operating profit meets
predetermined objectives, the incentive paid is comparable with industry
standard incentive compensation, and could be higher if the Company's
performance exceeded goals. No bonus awards were granted in fiscal 1997.
The Compensation Committee believes that equity ownership provides
significant additional motivation to executive officers to maximize value for
the Company's stockholders, and therefore grants stock options under the
Company's Employees Stock Option Plan at the commencement of an executive
officer's employment and, depending on that officer's performance and the
appropriateness of additional awards to retain key employees, periodically
thereafter. Stock options were granted at the prevailing market price and will
only have value if the Company's stock price increases over the exercise price.
Therefore, the Compensation Committee believes that stock options serve to
align the interests of executive officers closely with other stockholders
because of the direct benefit executive officers receive through improved stock
price performance.
In view of significant challenges faced by certain key employees of the
Company, the Compensation Committee recommended to the Board of Directors that
it is in the Company's best interests to reprice existing options previously
granted by the Company to such employees. This will substantially advance the
Company's ability to retain its key employees and also motivate higher levels of
performance on the part of the employees. Pursuant to the foregoing, on August
21, 1996 the Board approved the repricing of existing options previously granted
to certain employees. The repriced options have an exercise price of $3.00 per
share well above the $2.188 closing price of the Company's Common Stock on
August 21, 1996, the date the Board determined such exercise price.
TEN-YEAR OPTION REPRICING
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
NAME DATE NUMBER OF MARKET PRICE OF EXERCISE NEW LENGTH OF
OPTIONS/SARS STOCK AT TIME OF PRICE AT EXERCISE ORIGINAL TERM
REPRICED OR REPRICING TIME OF PRICE REMAINING AT
AMENDED ($) REPRICING ($) DATE OF
(#) ($) REPRICING
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Daniel P. Byrne 8/21/96 50,000 2.188 7.25 3.00 8 yrs
Snr. Vice President of 8/21/96 5,000 2.188 6.13 3.00 8 yrs 4 mths
Marketing
- -----------------------------------------------------------------------------------------------------------------------------
Raymond A. Peterson 8/21/96 50,000 2.188 7.25 3.00 8 yrs
Chief Financial Officer 8/21/96 3,000 2.188 6.13 3.00 8 yrs 4 mths
and Vice President of 8/21/96 5,000 2.188 6.25 3.00 9 yrs
Finance
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Compensation Committee
MICHAEL L. KILEY
NORMAN A. NASON
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<PAGE> 14
COMPARISON OF STOCKHOLDER RETURN
The following graph shows a comparison of total stockholder return for the
period commencing on August 2, 1994 and ending on March 31, 1996, calculated on
a dividend reinvested basis, the Standard & Poor's 500 Index (SP 500) and a
peer group constructed by the Company (the "Peer Group"). The Peer Group is
composed of Department 56, Inc., Marvel Entertainment Group, Inc., Score Board,
Inc., Stanhome, Inc. and Topps Co. Inc. The graph assumes that $100 was
invested in each of these three on August 2, 1994. Returns for the Peer Group
are weighted based on market capitalization at the beginning of each period
presented. Note that historic stock price performance is not necessarily
indicative of future stock price performance.
TOTAL RETURNS - WITH DIVIDENDS REINVESTED - AUGUST 2, 1994 (1) TO MARCH 31,
1997
<TABLE>
<CAPTION>
RETURNS AUG 2, 1994 MARCH 31, 1995 MAR 31, 1996 MAR 31, 1997
<S> <C> <C><C> <C> <C>
MAGI 100 88 38
67
Peer Group 100 109 80
113
SP 500 100 109 140
164
</TABLE>
(1) The Company's initial public offering commenced on August 3, 1994. For
purposes of this presentation, the Company has assumed that its initial
public offering price of $7.25 would have been the closing price on August
2, 1994, the day prior to the commencement of trading.
PROPOSAL #1
ELECTION OF DIRECTORS
The Board of Directors currently has five members. Management has nominated
the five current directors as the candidates for election to the Board of
Directors. See "Information about Media Arts Group, Inc. - Management."
The directors elected at this meeting will serve until the next annual
meeting of stockholders or until their respective successors are elected and
qualified. It is the intention of the persons named in the Proxy to vote the
shares subject to such Proxy for the election as directors of the persons
currently serving as directors. Although it is not contemplated that any
nominee will decline or be unable to serve as director, in the event that at
the meeting or any adjournment or postponement thereof any nominee declines or
is unable to serve, the persons named in the enclosed Proxy will, in their
discretion, vote the shares subject to such Proxy for another person selected
by them for Director.
If a quorum is present and voting, the five nominees for Directors receiving
the highest number of votes, up to the number of directors to be elected, will
be elected as Directors. Abstentions and shares held by brokers that are
present, but not voted because the brokers were prohibited from exercising
discretionary authority, i.e., "broker non-votes," will be counted as present
for purposes of determining if a quorum is present.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
ELECTION OF MESSRS. KENNETH E. RAASCH, THOMAS KINKADE, MICHAEL KILEY, NORMAN
MAHONEY AND NORMAN NASON
PROPOSAL #2
APPROVAL OF AMENDMENT TO THE
EMPLOYEES STOCK OPTION PLAN
The Company's Employees Stock Option Plan (the "Plan") was adopted by
the Board of Directors and the Company's stockholders on February 15, 1994 to
provide employees of the Company and its subsidiaries with the granting of
options to purchase shares to promote the interests of the Company and its
stockholders. The Plan provides for the granting of options to purchase shares
of Common Stock to employees of the Company and its subsidiaries. Under the
terms of the Plan, the Company may grant options to purchase an aggregate of
574,863 shares of Common Stock, which options may either be Incentive Stock
Options (as defined under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") or non-qualified stock options. No options may be granted
under the Plan after February 1, 2004. At the Annual Meeting of Stockholders
held on September 27, 1995
14
<PAGE> 15
it was approved to amend the Employee Stock Option to further increase the
number of shares reserved for issuance thereunder from 574,863 to 824,863.
The Plan is administered by the Compensation Committee of the Board of
Directors of the Company. The Committee, in its discretion, selects employees
to whom options will be granted and determines the terms and conditions of
options granted pursuant to the Plan, including the number of shares of Common
Stock, the per share exercise price, the time or times when options will be
granted, and the time or times when each option may be exercised, the duration
of the exercise period and whether and to what extent the option is an
Incentive Stock Option. Options granted under the Plan have an exercise price
per share of not less than the fair market value of a share of Common Stock on
the date of the grant (or 110% of the fair market value for optionees who
qualify as "substantial shareholders" within the meaning of Section 424 of the
Code). No Incentive Stock Option may be granted under the Plan to any
individual to the extent that the aggregate fair market value (determined as of
the date of grant of such Incentive Stock Option) of the Company's Common Stock
subject to such Incentive Stock Option which first becomes exercisable during
any calendar year would exceed $100,000.
Incentive Stock Options may not be exercised after the date which is
the earlier (i) ten years from the date of the grant (or five years if the
optionee is a substantial shareholder) or (ii) either three months after the
date on which the optionee ceases to be employed by the Company if the reason
for the optionees cessation is other than his death or disability, or one year
after the date on which the optionee ceases to be employed by the Company or
the reason for the optionee's cessation is his death or disability (or if the
optionee dies within three months after ceasing to be an employee of the
Company). Non-qualified stock options may not be exercised six months after
the date the optionee ceases to be employed by the Company, if the reason for
the optionee's cessation was other than death or disability, or one year after
the date the optionee ceases to be employed by the Company, if the reason for
the optionee's cessation is his death or disability (or the optionee dies
within three months after ceasing to be an employee of the Company). Only the
optionee may exercise an option and no option granted under the Plan may be
transferable other than (i) by the last will and testament of the optionee (or,
if the optionee dies intestate, by the applicable law 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. No option granted
under the Plan may be pledged or hypothecated, nor may any such option be
subject to execution, attachment or similar process.
Under the Plan simultaneous to the grant of stock options, the
Committee may provide for stock appreciation rights in lieu of or in
conjunction with the exercise of such options.
The specific terms of any stock option awarded under the Plan,
including the vesting of such stock option are reflected in the stock option
agreement executed by the Company and the optionee. The Committee may, in its
discretion, waive any restriction 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.
The Plan provides for an adjustment of the number of shares available
for grant in the event 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 or reclassification of the
Common Stock.
The Company, at any time, may amend, suspend or terminate the Plan,
provided that the rights of any optionee under any option granted prior to any
such action shall not be altered or impaired without the optionee's consent.
The Board of Directors also must obtain stockholder approval for any change in
the Plan that would modify the requirements as to eligibility for participation
under the Plan, increase or decrease the number of shares which may be issued
under the Plan or cause any option granted under the Plan or 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. Between
February 15, 1994 and June 30, 1997 the Board of Directors approved options of
852,165 shares. In 1997, options to purchase an aggregate of 294,000 shares
were granted to key employees. Of this amount, options to purchase 100,000
shares were granted to the current executive officers as a group.
Participants who hold Nonqualified Stock Options do not recognize
income as a result of the grant of such options, but normally recognize
compensation taxable at ordinary income rates upon the exercise of such options
to the extent that the fair market value of the shares of Common Stock on the
date of the exercise of such options exceeds the option price paid. However, in
the case of a participant subject to Section 16(b) of the Securities Exchange
Act of 1934 (the "Exchange Act") who has held a non-qualified stock option for
less than six months after the date of its grant and exercises such option prior
to the expiration of such six month period, the ordinary income portion
generally would be calculated using the fair market value of the shares upon the
expiration of the six month period rather than the fair market value on the date
of exercise, unless the participant elects to recognize income immediately upon
exercise in accordance with Section 83 (b) of the Code. The Company will be
15
<PAGE> 16
entitled to a tax deduction in an amount equal to the amount that the
participant is required to include in ordinary income at the time of such
inclusion, and will be required to withhold taxes on such ordinary income. The
participant's initial tax basis for shares of Common Stock acquired upon the
exercise of a nonqualified stock option exercise price paid plus the amount of
ordinary income recognized by the participant. The tax consequences resulting
from the exercise of a non-qualified option through the delivery of
already-owned shares of Common Stock are not completely certain. In published
rulings, the Internal Revenue Service has taken the position that, to the extent
an equivalent value of shares is acquired, the employee will recognize no gain
and the employee's basis in the shares acquired upon such exercise is equal to
the employee's basis in the surrendered shares, that any additional shares
acquired upon such exercise will be compensation to the employee taxable under
the rules described above, and that the employee's basis in any such additional
shares will be their fair market value.
Participants who hold Incentive Stock Options generally will not be
considered to have received taxable income upon either the grant of an incentive
stock option or its exercise. Upon the sale or other taxable disposition of
shares of Common Stock, long-term capital gain will normally be recognized in
the full amount of the difference between the amount realized and the option
exercise price if no disposition of shares has taken place within either (a) two
years from the date the grant of the Incentive Stock Option or (b) one year from
the date of transfer of such shares of Common Stock to the participant upon
exercise (whether or not such participant is subject to Section 16(b) of the
Exchange Act). If shares of Common Stock acquired upon the exercise of an
Incentive Stock Option are sold or otherwise disposed of before the end of the
one-year or two-year periods referenced above, the difference between the option
exercise price and the fair market value of the shares of Common Stock on the
date of the options exercise will be taxed as ordinary income; the balance of
the gain, if any, will be taxed as capital gain. If shares of Common Stock
acquired upon the exercise of an Incentive Stock Option are disposed of before
the expiration of the one-year or two-year periods referenced above and the
amount realized is less than the fair market value of the shares at the date of
exercise, the participant's ordinary income is limited to the excess, if any, of
the amount realized less the option exercise price paid. The Company will be
entitled to a tax deduction in regard to an Incentive Stock Option only to the
extent the participant has ordinary income upon sale or other disposition of the
shares of Common Stock. The tax consequences resulting from the exercise of an
incentive stock option through delivery of already-owned shares of Common Stock
are not completely certain. In published rulings and proposed regulations, the
Internal Revenue Service has taken the position that generally the employee will
recognize no income upon such stock for-stock exercise (subject to the
discussion above), that, to the extent an equivalent number of shares is
acquired, the employee's basis in the shares acquired upon such exercise is
equal to the employee's basis in the surrendered shares increased by any
compensation income recognized by the employee, that the employee's basis in any
additional shares acquired upon such exercise is zero, and that any sale or
other disposition of the acquired shares within the one-year or two-year periods
described above will be viewed as a disposition of the shares with the lowest
basis first.
The difference between the fair market value of Common Stock on the
exercise date and the exercise price of an Incentive Stock Option is deemed to
be a "tax preference" under the alternative minimum tax rules of the Code. The
consequences of the application of these provisions to individual participants
may vary depending on their particular circumstances.
On June 18, 1997 the Board of Directors approved, subject to
stockholder approval, an amendment to the Plan to further increase the number
of shares reserved for issuance thereunder by 300,000 shares to 1,124,863
shares. As of June 30, 1997 1,124,863 shares had an aggregate value of
$4,640,060. None of the 300,000 incremental shares, valued at $1,237,500, have
been allocated for option grants as of the date hereof. At the Annual Meeting,
the stockholders are being requested to ratify and approve this amendment. The
Board of Directors believes that it is in the Company's best interests to
increase the number of shares reserved for issuance under the Employees Stock
Option Plan so that the Company may continue to provide ongoing incentives to
the Company's employees through the opportunity to grant options.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS APPROVAL OF AMENDMENT
TO EMPLOYEES STOCK OPTION PLAN TO INCREASE THE SHARES RESERVED FOR ISSUANCE
THEREUNDER FROM 824,863 TO 1,124,863.
PROPOSAL #3
APPROVAL OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected Price Waterhouse LLP, independent
accountants, to audit the financial statements of the Company for the year
ending March 31, 1998 and recommends that the stockholders ratify such
selection. In the event of a negative vote, the Board of Directors will
reconsider its selection. Price Waterhouse LLP has audited the Company's
financial statements for all periods subsequent to 1991. Representatives of
Price Waterhouse LLP are expected to be present at the Annual Meeting with the
opportunity to make a statement if they desire to do so, and are expected to be
available to respond to appropriate questions.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS APPOINTMENT OF PRICE
WATERHOUSE LLP AS THE COMPANY'S INDEPENDENT
ACCOUNTANTS.
16
<PAGE> 17
OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting. If any
other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form of proxy to vote the shares they represent
as the Board of Directors may recommend.
BY ORDER OF THE BOARD OF DIRECTORS
MEDIA ARTS GROUP, INC.
James F. Landrum, Jr.,
Secretary
San Jose, California
Dated: September 10, 1997
STOCKHOLDERS OF RECORD ON JULY 28, 1997 MAY ALSO OBTAIN COPIES OF THE COMPANY'S
ANNUAL REPORT ON FORM 10-K (EXCLUDING EXHIBITS) FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION BY WRITING TO JAMES F. LANDRUM, JR., MEDIA ARTS GROUP,
INC., 521 CHARCOT AVENUE, SAN JOSE, CALIFORNIA, 95131.
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APPENDIX A
MEDIA ARTS GROUP, INC. EMPLOYEE STOCK OPTION PLAN
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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.
(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.
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(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 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;
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(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.
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.
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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 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
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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.
(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
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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.
(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.
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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 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:
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(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;
(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;
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(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;
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)
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pursuant to an irrevocable written election by the participant to receive 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 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.
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<PAGE> 29
(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.
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.
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<PAGE> 30
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
----------------------------------
Chairman & Chief Executive Officer
By: /s/ James F. Landrum, Jr.
----------------------------------
Vice President & General Counsel
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<PAGE> 31
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
MEDIA ARTS GROUP, INC.
The undersigned hereby appoints Kenneth E. Raasch, James F. Landrum, Jr. and
Raymond A. Peterson proxies, with power to act without the other and with power
of substitution, and hereby authorizes them to represent and vote, as
designated on the other side, all the shares of stock of Media Arts Group, Inc.
standing in the name of the undersigned with all powers which the undersigned
would possess if present at the Annual Meeting of Stockholders of the Company
to be held September 24, 1997 or any adjournment or postponement thereof.
(CONTINUED, AND TO BE MARKED, DATED AND SIGNED, ON THE OTHER SIDE)
+ FOLD AND DETACH HERE +
<PAGE> 32
Indicated in
this example [X]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2 AND 3.
WITHHELD
FOR FOR ALL
Item 1 - ELECTION OF DIRECTORS [ ] [ ]
Nominees:
Kenneth E. Raasch
Thomas Kinkade
Michael L. Kiley
Norman T. Mahoney
Norman A. Nason
WITHHELD FOR: (Write that nominee's name in the space
provided below) FOR AGAINST ABSTAIN
Item 2 - TO APPROVE THE AMENDMENT TO THE EMPLOYEES [ ] [ ] [ ]
STOCK OPTION PLAN
Item 3 - TO APPROVE RATIFICATION OF PRICE WATERHOUSE, [ ] [ ] [ ]
LLP AS THE COMPANY'S INDEPENDENT PUBLIC
ACCOUNTANTS
Item 4 - IN THEIR DISCRETION THE PROXIES ARE AUTHORIZED [ ] [ ] [ ]
TO VOTE UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE MEETING
Signature(s)_______________________________________________ Date_______________
NOTE: Please sign as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such.
_______________________________________________________________________________
+ FOLD AND DETACH HERE +
