<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-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.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(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):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / 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 paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------------------
<PAGE>
PRELIMINARY COPIES
NOTICE OF 1998 ANNUAL MEETING AND PROXY STATEMENT
AUGUST 21, 1998
------------------------
To the Stockholders of
MEDIA ARTS GROUP, INC.:
You are cordially invited to attend the Annual Meeting of Stockholders of
Media Arts Group, Inc. to be held on September 17, 1998 at 9:00 a.m. at the
Company's corporate offices at 521 Charcot Avenue, San Jose, California 95131.
The attached Notice of Annual Meeting and Proxy Statement set forth the
details of business to be conducted at the Annual Meeting.
We hope you will attend the Annual Meeting in person. However, whether or
not you plan to attend, please complete, sign, date and return the enclosed
proxy card promptly in the accompanying reply envelope to ensure that your
shares will be represented and voted at the Meeting.
Sincerely yours,
Raymond A. Peterson
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
MEDIA ARTS GROUP, INC.
521 CHARCOT AVENUE
SAN JOSE, CA 95131
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 17, 1998
------------------------
The Annual Meeting of Stockholders of Media Arts Group, Inc. (the "Company")
will be held at the Company's corporate offices at 521 Charcot Avenue, San Jose,
California on Wednesday, September 17, 1998 at 9:00 a.m. for the following
purposes:
1. To elect six (6) directors to the Board of Directors to serve for a
period of one (1) year or until their respective successors are elected
and qualified;
2. To approve the adoption of the Company's 1998 Stock Incentive Plan;
3. To approve the grant of an option to purchase 600,000 shares of Common
Stock to Thomas Kinkade;
4. To approve the adoption of the Company's Employee Qualified Stock
Purchase Plan;
5. To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized shares
of Common Stock from 20,000,000 to 80,000,000;
6. To ratify the selection of PricewaterhouseCoopers LLP as the Company's
independent public accountants for the fiscal year ending March 31, 1999;
and
7. To transact such other business as may properly come before the Annual
Meeting or adjournments or postponements thereof.
Only stockholders of record as of the close of business on July 23, 1998
will be entitled to notice of and to vote at the Annual Meeting and any
adjournments or postponements thereof.
Whether or not you plan to attend the Annual Meeting, please complete, sign,
date and return the enclosed proxy card in the envelope provided. By promptly
returning your proxy card, you will ensure that your shares are represented and
voted at the Annual Meeting.
BY THE ORDER OF THE BOARD OF DIRECTORS
James F. Landrum, Jr.
SECRETARY
San Jose, California
August 21, 1998
2
<PAGE>
MEDIA ARTS GROUP, INC.
1521 CHARCOT AVENUE
SAN JOSE, CA 95131
PROXY STATEMENT
This Proxy Statement, together with the Notice of Annual Meeting of
Stockholders and proxy card enclosed herewith, are being furnished in connection
with the solicitation of proxies by the Board of Directors of Media Arts Group,
Inc., a Delaware corporation ("MAGI" or the "Company"), for use at the Annual
Meeting of Stockholders of MAGI to be held on Wednesday, September 17, 1998 at
9:00 a.m. at the Company's corporate offices at 521 Charcot Avenue, San Jose,
California 95131 and at any adjournments or postponements thereof. These proxy
materials were first mailed to stockholders on or about August 21, 1998.
------------------------
PURPOSE OF MEETING
The specific proposals to be considered and acted upon at the Annual Meeting
are summarized in the accompanying Notice of Annual Meeting of Stockholders.
Each proposal is described in more detail in subsequent sections of this Proxy
Statement. The Board of Directors knows of no other business which will come
before the Annual Meeting.
VOTING RIGHTS AND SOLICITATIONS
MAGI has one class of stock entitled to vote at the Annual Meeting, Common
Stock, $0.01 par value (the "Common Stock"). If you were a stockholder of record
of Common Stock at the close of business on July 23, 1998 (the "Record Date"),
you may attend and vote at the Annual Meeting. Each holder of Common Stock on
the Record Date is entitled to one vote on each matter that is properly
presented at the Annual Meeting. At the close of business on the Record Date,
there were 13,015,038 shares of Common Stock issued and outstanding.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The presence at the meeting, in person or by a proxy relating to any matter
to be acted upon at the meeting, of a majority of the outstanding shares, is
necessary to constitute a quorum for the meeting. For purposes of the quorum and
the discussion below regarding the vote necessary to take stockholder action,
stockholders of record who are present at the meeting in person or by proxy and
who abstain, including brokers holding customers' shares of record who cause
abstentions to be recorded at the meeting, are considered stockholders who are
present and entitled to vote and they count toward the quorum.
Brokers holding shares of record for customers generally are not entitled to
vote on certain matters unless they receive voting instructions from their
customers. As used herein, "uninstructed shares" means shares held by a broker
who has not received instructions from its customers on such matters and the
broker has so notified the Company on a proxy form in accordance with industry
practice or has otherwise advised the Company that it lacks voting authority. As
used herein, "broker non-votes" means the votes that could have been cast on the
matter in question by brokers with respect to uninstructed shares if the brokers
had received their customers' instructions. Although there are no controlling
precedents under Delaware law regarding the treatment of broker non-votes in
certain circumstances, the Company intends to apply the principles set forth
herein.
If you are unable to attend the Annual Meeting, you may vote by proxy on any
matter that may properly come before the Annual Meeting. All valid proxies
received prior to the Annual Meeting will be voted. All shares represented by a
proxy will be voted, and where a stockholder specifies by means of the
3
<PAGE>
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.
All proxy cards delivered pursuant to this solicitation are revocable at any
time at the option of the persons executing them by giving written notice to the
Secretary of the Company at the Company's principal executive offices in San
Jose, California, by delivering a duly executed proxy card bearing a later date
or by voting in person at the Annual Meeting.
PROPOSAL 1
ELECTION OF DIRECTORS
The Board of Directors of the Company currently has five (5) members. At the
Annual Meeting, the stockholders will elect six (6) directors to serve one-year
terms expiring in 1999 or until their successors are elected and qualified.
Set forth below are the names of the nominees of the Board of Directors for
election, together with certain information concerning such nominees. In the
event that any nominee is unable or declines to serve as a director at the time
of the Annual Meeting, 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. See "Board of Directors Meetings and Committees" and
"Compensation of Directors" on pages 17 and 18, respectively.
NOMINEES FOR ELECTION
<TABLE>
<CAPTION>
AGE OF
NAME OF NOMINEE NOMINEE POSITION WITH THE COMPANY DIRECTOR SINCE
- ---------------------------------------------- ------------- ---------------------------------------- ---------------
<S> <C> <C> <C>
Kenneth E. Raasch............................. 38 Chairman of the Board of Directors 1990
Thomas Kinkade................................ 40 Creative Director & Member of the Board 1990
of Directors
Norman A. Nason............................... 57 Member of the Board of Directors 1993
Michael L. Kiley.............................. 53 Vice Chairman of the Board of Directors 1997
and Independent Consultant
Norman T. Mahoney............................. 68 Member of the Board of Directors 1997
W. Michael West............................... 48 Board Nominee 1998
</TABLE>
KENNETH E. RAASCH co-founded the Company in 1990 and has been the Chairman
of the Board of the Company since its inception in March 1990. In addition, he
was President and Chief Executive Officer of the Company from March 1990 to May
1997 and Chief Executive Officer from March 1996 until October 1997. Mr.
Raasch's responsibilities as Chairman include formulating and executing the
Company's strategic plan, developing new strategic business relationships and
representing the Company to the financial community, among other things. Prior
to joining the Company, he was the President and majority shareholder of First
Med Corp., Inc., a medical billing and management company, from August 1988
until January 1990 when it was sold to Medaphis Corp., a public company.
THOMAS KINKADE co-founded the Company and has been the Creative Director and
a member of the Board of Directors of the Company since its inception in March
1990. Mr. Kinkade has provided artwork to the Company for its productions since
the Company's inception. In addition, Mr. Kinkade's role includes providing
strategic vision for the Thomas Kinkade brand, assisting in product development
and
4
<PAGE>
communicating the Company's brand message through public appearances and books.
Prior to March 1990, Mr. Kinkade was a self-employed artist.
NORMAN A. NASON has been a director of the Company since April 1993. Mr.
Nason is President of Saratoga Commercial Real Estate Brokerage Corporation and
Saratoga Management Corporation, companies that he founded in 1976.
MICHAEL L. KILEY has been a director of the Company since January 1997 and
Vice Chairman of the Board since June 1997. Mr. Kiley has been an independent
consultant to the Company since April 1997. In 1978, he founded Home Church and
has served as Pastor since that time. Prior to founding Home Church, Mr. Kiley
co-owned Business Exchange, Inc., a cooperative buying company servicing over
400 business owners.
NORMAN T. MAHONEY has been a director of the Company since March 1997. From
1988 to 1995 he served as a consultant to Scott Fetzer Corporation, a
diversified manufacturer whose product lines include Kirby brand vacuum
cleaners, encyclopedias and educational materials. Mr. Mahoney was previously
President and CEO of the Kirby Company, a division of Scott Fetzer Corporation.
W. MICHAEL WEST will be a director of the Company as of September 1998, if
elected at the 1998 Annual Meeting of Stockholders. From September 1997 to
January 1998, he served in an advisory capacity to Lucent Technologies'
Executive Vice President. From September 1986 to September 1997, he served at
Octel Communications Corporation as Vice Chairman of the Board (1995-1997),
President and Chief Operating Officer (1995-1997) and Executive Vice President
for Worldwide Sales and Marketing (1986-1995). Prior to 1986 Mr. West's last
position in the Rolm Corporation was General Manager of the National Sales
Division. He currently serves as a member of the board of directors of Netcom
Systems and Calvary Church, Los Gatos, Calfornia. Prior to July 1998, he also
served as a director of ACS Wireless and Octel Communications Corporation.
VOTE REQUIRED AND RECOMMENDATION OF THE BOARD OF DIRECTORS
If a quorum is present and voting, the six nominees for Directors receiving
the highest number of votes, up to the number of directors to be elected, will
be elected as directors. 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 BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE ELECTION OF
MESSRS. RAASCH, KINKADE, NASON, KILEY, MAHONEY AND WEST.
PROPOSAL 2
APPROVAL OF THE ADOPTION OF
THE 1998 STOCK INCENTIVE PLAN
INTRODUCTION
On June 22, 1998, the Board of Directors adopted the MAGI 1998 Stock
Incentive Plan (the "Plan"), subject to the approval of the Company's
stockholders at the 1998 Annual Meeting of Stockholders. The Plan provides for
awards in the form of options (which may constitute incentive stock options or
non-statutory stock options), stock units and stock appreciation rights
("SARs"), or any combination thereof.
The Board believes that the Plan will enable the Company to continue to
attract and retain highly qualified individuals capable of implementing the
Company's long-term strategic goals and objectives. The Board further believes
that the Plan will provide the Company with the means to motivate high levels of
performance by key employees and directors in order to increase stockholder
value.
5
<PAGE>
The Plan is intended to replace the Employee Stock Option Plan and the Stock
Option Plan for Directors (the "Prior Plans") under which approximately 32,281
shares of Common Stock currently remain available for grant. The Board believes
that the number of shares available under the Prior Plans is inadequate to meet
the Company's ongoing requirements.
The Compensation Committee expects to use option awards under the Plan as
its primary method of providing stock-based incentive compensation to key
employees over the next few years. The value of stock options granted under the
Plan is dependent on increases in the Company's stock price. As a result, the
Board believes that the Plan directly ties management's interests to those of
stockholders and that approval of the Plan is in the stockholders' best
interests. As of July 27, 1998, the closing price of a share of the Company's
Common Stock as reported on the Nasdaq National Market was $17.69.
PURPOSE
The purpose of the Plan is to promote the long-term success of the Company
and the creation of stockholder value by (a) encouraging key employees and
directors to focus on critical long-range objectives, (b) encouraging the
attraction and retention of key employees and directors with exceptional
qualifications, including key executives and directors that may join the Company
in the future and (c) linking key employees and directors directly to
stockholder interests through increased stock ownership.
ADMINISTRATION
The Plan will be administered by the Compensation Committee (the
"Committee"), which consists of at least three (3) directors, each of whom is a
"non-employee director" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended and an "outside director" under Section 162(m)
of the Internal Revenue Code of 1986, as amended (the "IRC"). The Committee
selects the key employees of the Company or any subsidiary who will receive
awards, determines the size of any award and establishes any vesting or other
conditions.
ELIGIBILITY
Key employees of the Company (including, without limitation, independent
contractors) are eligible to receive awards under the Plan. Directors who are
not employees of the Company or any of its subsidiaries ("Outside Directors")
are eligible to receive automatic grants under the Plan. The Committee may also
choose to implement a program whereby Outside Directors may elect to receive
awards under the Plan in lieu of meeting fees. As of the Record Date, none of
the executive officers or directors were participants in the Plan. It is not
possible to determine how many eligible employees will participate in the Plan
in the future.
OPTIONS AND STOCK APPRECIATION RIGHTS
Options may include incentive stock options ("ISOs") intended to qualify for
special tax treatment under Section 422 of the IRC, as well as nonstatutory
stock options ("NSOs"). The exercise price of ISOs must be equal to or greater
than 100% of the fair market value of the Common Stock on the date of grant. The
exercise price of NSOs must be equal to or greater than 85% of the fair market
value of the Common Stock on the date of grant. On the Record Date, the
Company's Common Stock closed at $19.00 per share. The term of an ISO cannot
exceed ten (10) years, and all options and SARs are nontransferable prior to the
optionee's death. The exercise price of an option may be paid in any lawful form
permitted by the Committee, including cash or the surrender of shares of Common
Stock already owned by the optionee.
An SAR permits the participant to elect to receive any appreciation in the
value of the optioned stock directly from the Company, either in shares of
Common Stock or in cash or a combination of the two, in lieu of exercising the
option, with the Committee having the discretion to determine the form in which
6
<PAGE>
such payment will be made. The amount payable on exercise of an SAR is measured
by the difference between the market value of the optioned stock at exercise and
the exercise price. SARs may be granted in combination with options or on a
stand-alone basis.
Upon exercise of an SAR, the corresponding portion of the related option
must be surrendered and cannot thereafter be exercised. Conversely, upon
exercise of an option to which an SAR is attached, the SAR may no longer be
exercised to the extent that the corresponding option has been exercised. The
Committee has no present intention to issue SARs under the Plan except under the
Outside Director automatic grant provisions as described below.
STOCK UNITS
Stock unit awards consist of grants of stock units for no consideration,
subject to such terms, conditions and restrictions as the Committee may
determine. A stock unit is an unfunded bookkeeping entry representing the
equivalent of one share of Common Stock, and it is nontransferable prior to the
holder's death. A holder of stock units has no voting rights or other privileges
as a stockholder but may be entitled to receive dividend equivalents.
Stock units, when vested, may be settled by distributing shares of Common
Stock or by a cash payment corresponding to the fair market value of an
equivalent number of shares of Common Stock, or a combination of both. Vested
stock units will be settled at the time determined by the Committee. With the
Committee's consent, the recipient of stock units may pay all projected
withholding taxes relating to the award with Common Stock rather than cash.
VESTING CONDITIONS
The Committee determines the number of options, SARs and stock units to be
included in the award as well as the vesting and other conditions. The vesting
conditions may be based on the employee's service, his or her individual
performance, the Company's performance or other appropriate criteria. In
general, the vesting conditions will be based on the employee's service after
the date of grant. Vesting may be accelerated in the event of the employee's
death, disability or retirement or in the event of a change of control.
The events which constitute a change of control for purposes of the Plan are
(i) when a person or entity becomes the beneficial owner of 15% or more of the
voting power of Media Arts Group, Inc.'s shares, (excluding current 15%
stockholders) or (ii) during any two consecutive years, members of the Board of
Directors at the beginning of such period cease to constitute a majority
thereof, unless the election or nomination of each director is approved by the
vote of at least two-thirds of the directors still in office who were directors
at the beginning of such period, or (iii) the occurrence of any other change of
control reportable under the Exchange Act, or (iv) stockholder approval of a
merger or consolidation of MAGI, or (v) the adoption of a plan of complete
liquidation of MAGI, or stockholder approval of the sale by MAGI of all or
substantially all of its assets. The events described under subparagraphs (i),
(iii) and (iv) above will not be deemed a change of control if so determined by
the Board of Directors.
AUTOMATIC GRANTS TO OUTSIDE DIRECTORS
The Plan provides that Outside Directors will automatically receive an NSO
covering 5,000 shares annually at an exercise price equal to 85% or more of the
fair market value of Common Stock on the date of grant. NSOs granted to Outside
Directors become immediately and fully exercisable as of their respective grant
dates. The NSOs expire ten (10) years after grant, except that they expire on
the first anniversary after the Outside Director's service terminates, if
sooner. All NSOs granted to Outside Directors include an SAR that is exercisable
for cash only during the 30-day period following a change of control with
respect to the Company.
7
<PAGE>
The Plan also provides that all new Outside Directors may receive, at the
discretion of the Committee, 1,000 stock units when they first become elected to
the Board. These stock units will be settled by issuing an equal number of
shares of Common Stock. Settlement occurs on the earliest of (i) the date one
year after the date of grant, (ii) the date of a change of control with respect
to the Company or (iii) the date when the Outside Director's service terminates
for any reason.
LIMITATION ON PAYMENTS
Any provision of the Plan to the contrary notwithstanding, in the event that
the Company's current independent auditors (the "Auditors") determine that any
payment or transfer by the Company under the Plan to or for the benefit of a
participant (a "Payment") would be nondeductible by the Company for federal
income tax purposes because of the provisions concerning "excess parachute
payments" set forth in Section 280G of the IRC, then the aggregate present value
of all Payments shall be reduced (but not below zero) to the Reduced Amount (as
defined below); provided that the Committee, at the time of making an Award
under the Plan or at any time thereafter, may specify in writing that such Award
shall not be so reduced and shall not be subject to Article 13 of the Plan.
"Reduced Amount" shall be the amount, expressed as a present value, which
maximizes the aggregate present value of the Payments without causing any
Payment to be nondeductible by the Company because of Section 280G of the IRC
(present value shall be determined in accordance with Section 280G(d)(4) of the
IRC).
Any such reductions shall be made in accordance with the procedures set
forth in Section 13.2 of the Plan. All determinations made by the Auditors under
Article 13 of the Plan shall be binding on the Company and participants in the
Plan and shall be made within sixty (60) days of the date when a Payment becomes
payable or transferable.
In connection with the calculation of the Reduced Amount under Article 13 of
the Plan, Payments may be made which should not have been made (each an
"Overpayment") or Payments which should have been made may not be made (each an
"Underpayment"). If the Auditors determine, based upon the assertion of a
deficiency by the Internal Revenue Service against the Company or a participant
in the Plan which the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the participant which he or she shall repay to the
Company, together with interest at the applicable federal rate provided in
Section 7872(f)(2) of the IRC; provided, however, that no amount shall be
payable by the participant to the Company if and to the extent that such Payment
would not reduce the amount which is subject to taxation under Section 4999 of
the IRC. In the event that the Auditors determine that an Underpayment has
occurred, such Underpayment shall promptly be paid or transferred by the Company
to or for the benefit of the participant, together with interest at the
applicable federal rate provided in Section 7872(f)(2) of the Code.
OTHER PROVISIONS
The Committee is authorized, within the provisions of the Plan, to amend the
terms of outstanding stock units, to modify or extend outstanding options or to
exchange new options for outstanding options, including outstanding options with
a higher exercise price than the new options. The Committee has no present
intention to modify the terms of any outstanding stock-based incentive awards.
NUMBER OF AVAILABLE SHARES
The total number of shares available for grant under the Plan is 500,000,
plus the number of shares then remaining for grant under the Prior Plans at the
time of the adoption of this Plan by the stockholders. In addition, if awards
under the Prior Plans are forfeited or terminated before being exercised or
vested, the corresponding common shares become available for awards under the
Plan. The total number of shares available for grant under the Plan shall be
subject to adjustment in the event of stock splits, stock dividends
8
<PAGE>
and other similar recapitalization transactions. If any options, SAR's, stock
units are forfeited, or if options terminate for any other reason prior to
exercise, then the underlying shares again become available for awards.
NEW PLAN BENEFITS
As of July 30, 1998, no awards have been made to the Company's executive
officers under the Plan. Therefore, the aggregate benefits and amounts that will
be received by each of the Named Officers, the executive officers as a group and
all other employees under the Plan are not determinable.
The Committee has full discretion to determine the number of options, SARs
and stock units to be granted to employees under the Plan; provided, however,
that no individual may receive option or SAR grants in a single calendar year
covering more than 200,000 shares. Awards to Outside Directors under the Plan
are fixed. See "Automatic Grants to Outside Directors" on page 7.
TERM OF THE PLAN, AMENDMENT AND TERMINATION
The Board of Directors may at any time amend, modify or terminate the Plan.
An amendment of the Plan shall be subject to the approval of the Company's
stockholders only to the extent required by applicable law. The Plan shall
remain in effect until it is terminated except that no ISOs may be granted after
June 21, 2008.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL FEDERAL TAX CONSEQUENCES. Under current federal laws, in general,
recipients of awards and grants of NSOs, ISOs, SARs and stock units under the
Plan are taxable under Section 83 of the IRC upon their receipt of Common Stock
or cash with respect to such awards or grants and, subject to Section 162(m) of
the IRC, the Company will be entitled to an income tax deduction with respect to
the amounts taxable to such recipients. Under Sections 421 and 422 of the IRC,
recipients of ISOs are generally not taxable on their receipt of Common Stock
upon their exercises of ISOs if the ISOs and option stock are held for certain
minimum holding periods and, in such event, the Company in not entitled to any
income tax deductions with respect to such exercises. Participants in the Plan
will be provided with detailed information regarding the tax consequences
relating to the various types of awards and grants under the Plan.
SECTION 162(M) LIMITATION. In general, under Section 162(m) of the IRC
("Section 162(m)"), income tax deductions of publicly-held corporations may be
limited to the extent total compensation (including base salary, annual bonus,
stock option exercises and non-qualified benefits paid) for certain executive
officers exceeds $1 million (less the amount of any "excess parachute payments"
as defined in Section 280G of the IRC) in any one year. However, under Section
162(m), the deduction limit does not apply to certain "performance-based
compensation" established by an independent compensation committee which is
adequately disclosed to, and approved by, stockholders. In particular, stock
options and SARs will satisfy the "performance-based compensation" exception if
the awards are made by a qualifying compensation committee, the plan sets the
maximum number of shares that can be granted to any person within a specified
period and the compensation is based solely on an increase in the stock price
after the grant date (i.e. the option exercise price is equal to or greater than
the fair market value of the stock subject to the award on the grant date).
The Company has attempted to structure the Plan in such a manner that,
subject to obtaining stockholder approval for the Plan, the remuneration
attributable to stock options and SARs which meet the other requirements of
Section 162(m) will not be subject to the $1,000,000 limitation. The Company has
not, however, requested a ruling from the IRS or an opinion of counsel regarding
this issue.
9
<PAGE>
VOTE REQUIRED AND RECOMMENDATION OF THE BOARD OF DIRECTORS
To be approved, the MAGI 1998 Stock Incentive Plan must receive the
affirmative vote of the majority of the shares present in person or by proxy at
the meeting and entitled to vote. Broker non-votes are not entitled to vote on
this matter, and therefore do not affect the outcome. Abstentions have the
effect of negative votes.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE MEDIA ARTS
GROUP, INC. 1998 STOCK INCENTIVE PLAN.
PROPOSAL 3
APPROVAL OF THE GRANT OF AN OPTION TO PURCHASE
600,000 SHARES OF COMMON STOCK TO THOMAS KINKADE
INTRODUCTION
On December 9, 1997, the Board of Directors ratified the License Agreement
entered into by the Company with Thomas Kinkade dated as of December 3, 1997,
wherein the Company granted to Mr. Kinkade a fifteen-year non-statutory option
to purchase 600,000 shares of Common Stock, subject to the approval of the
Company's stockholders. See "Certain Relationships and Related Transactions" on
page 27. Pursuant to the License Agreement, a stock option agreement was also
entered into between the Company and Thomas Kinkade as of December 3, 1997 (the
"Option Agreement"). As of July 27, 1998 the closing price of a share of the
Company's Common Stock as reported on the Nasdaq National Market was $17.69.
PURPOSE
The purpose of the grant is to provide Mr. Kinkade with greater incentive to
serve and promote the interests of the Company and its stockholders.
SECURITIES SUBJECT TO THE STOCK OPTION AGREEMENT
A maximum of 600,000 shares of the Company's Common Stock may be issued upon
exercise of the options underlying the Option Agreement. All options underlying
the Option Agreement are nonqualified stock options (as defined in the IRC).
The Option Agreement provides for appropriate adjustments in the number and
kind of shares subject thereto in the event of a stock split, stock dividend or
certain other similar changes in the Company's Common Stock and in the event of
a merger, consolidation or certain other types of reorganization.
EXERCISE OF OPTIONS
All of the options underlying the Option Agreement became fully exercisable
upon grant on December 3, 1997 and expires on the fifteenth year anniversary
thereof. The exercise price for each share under such options is $12.375 per
share, the closing price of the Company's Common Stock on the date of grant. Mr.
Kinkade may exercise the option, or any portion thereof, by giving written
notice to the Company at its principal executive office, to the attention of the
Secretary of the Company, accompanied by a copy of the Stock Purchase Agreement
attached to the Option Agreement executed by Mr. Kinkade (or at the option of
the Company such other form of stock purchase agreement as shall then be
acceptable to the Company), payment of the exercise price and payment of any
applicable withholding taxes. The date the Company receives written notice of an
exercise accompanied by payment will be considered as the date the option was
exercised. Promptly after receipt of written notice of exercise of the option,
the Company will, without stock issue or transfer taxes to Mr. Kinkade, deliver
to him or such other person as he directs, a certificate or certificates for the
requisite number of shares. Mr. Kinkade will not have any privileges as a
stockholder with respect to any shares covered by the Option Agreement until the
date of issuance of a stock certificate.
10
<PAGE>
In the event Mr. Kinkade ceases to be an employee of the Company or any of
its subsidiaries for any reason other than death or permanent disability, the
options may be exercised at any time within twelve (12) months after the date of
termination (but in no event after the expiration date of the option), but not
thereafter. If Mr. Kinkade's termination is due to death or permanent
disability, or if he dies or becomes disabled within the period that the option
remains exercisable after termination, the option may be exercised by Mr.
Kinkade in the case of disability, by his personal representative or by the
person to whom the option is transferred by will or the laws of descent and
distribution, at any time within two years after the death or two years after
the disability of Mr. Kinkade (but in no event after the expiration of the
option).
PAYMENT FOR SHARES
Payment in full must be made for all option shares purchased at the time
written notice of exercise of the option is given to the Company, and proceeds
of any payment shall constitute general funds of the Company. At the time of
exercise of the option (or at such later time(s) as the Company may prescribe),
Mr. Kinkade must remit to the Company all United States federal and state
withholding taxes determined by the Company to be applicable.
TRANSFER RESTRICTIONS
The option is not assignable or transferable by Mr. Kinkade except by will
or by the laws of descent and distribution. During Mr. Kinkade's lifetime, the
option is exercisable only by him. Any attempt to assign, pledge, transfer,
hypothecate or otherwise dispose of the option in a manner not permitted by the
Option Agreement, and any levy of execution, attachment or similar process on
the option, will be null and void.
Regardless of whether the sale of the exercised shares has been registered
under the Act or has been registered or qualified under the securities laws of
any state, the Company may impose restrictions upon the sale, pledge or other
transfer of exercised shares if, in the judgment of the Company and the
Company's counsel, such restrictions are necessary or desirable in order to
achieve compliance with the provisions of the Act, the securities laws of any
state, or any other law.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of some of the possible
material federal income tax consequences to Mr. Kinkade and the Company. The
discussion is based on the IRC, regulations thereunder, rulings and decisions
now in effect, all of which are subject to change.
Holders of non-qualified stock options generally do not recognize income as
a result of the grant of such options, but 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 exercise price paid. Subject to Section 162(m)
of the Code, the Company will be entitled to a tax deduction in an amount equal
to the amount that Mr. Kinkade is required to include in ordinary income at the
time of such inclusion, and will be required to withhold taxes on such ordinary
income. Mr. Kinkade's initial tax basis for shares of Common Stock acquired upon
the exercise of a nonqualified stock option will be the option exercise price
paid plus the amount of ordinary income recognized by him.
At the Annual Meeting, the stockholders are being requested to ratify and
approve this grant to Mr. Kinkade. The Board of Directors believes that it is in
the Company's best interests to award this grant as an ongoing incentive to Mr.
Kinkade, one of the Company's key employees.
11
<PAGE>
VOTE REQUIRED AND RECOMMENDATION OF THE BOARD OF DIRECTORS
To be approved, the grant to Mr. Kinkade of an option to purchase 600,000
shares of Common Stock must receive the affirmative vote of the majority of the
shares present in person or by proxy at the meeting and entitled to vote. Broker
non-votes are not entitled to vote on this matter, and therefore do not affect
the outcome. Abstentions have the effect of negative votes.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE GRANT OF AN
OPTION TO PURCHASE 600,000 SHARES OF COMMON STOCK TO THOMAS KINKADE.
PROPOSAL 4
ADOPTION OF EMPLOYEE QUALIFIED STOCK PURCHASE PLAN
("EMPLOYEE PURCHASE PLAN")
On May 28, 1998, the Board of Directors unanimously adopted, subject to
stockholder approval, the Company's Employee Qualified Stock Purchase Plan
("Employee Purchase Plan"). The stockholders are asked to approve the adoption
of the Employee Purchase Plan. In general, the Employee Purchase Plan authorizes
the Company to sell shares of its Common Stock to employees of the Company and
its subsidiaries at a purchase price of 85% of the fair market value of such
shares.
The Board of Directors believes that it is in the best interests of the
Company and its stockholders to approve the Employee Purchase Plan because the
ability to sell shares of the Company's Common Stock to employees at a discount
from the then current market price and without commissions and other charges
will assist the Company in attracting and retaining experienced and capable
persons who can make significant contributions to the further growth and success
of the Company. Moreover, the Board of Directors believes that offering the
employees of the Company and its subsidiaries the opportunity to become owners
of capital stock of the Company will help to further identify their interests
with those of the Company's stockholders generally.
The following is a description of the material provisions of the Employee
Purchase Plan. The summary which follows is not intended to be complete and
reference should be made to the Employee Purchase Plan for a complete statement
of its terms and provisions. As of July 27, 1998, the closing price of a share
of the Company's Common Stock as reported on the Nasdaq National Market was
$17.69.
GENERAL
The Employee Purchase Plan authorizes the granting of options to employees
in six-month offering periods pursuant to a plan intended to qualify as an
"employee stock purchase plan" under Section 423 of the IRC. The Employee
Purchase Plan is not subject to the provisions of ERISA, and is not a qualified
plan under Section 401(a) of the IRC. Proceeds received by the Company from the
sale of Common Stock pursuant to the exercise of options under the Employee
Purchase Plan will be used for general corporate purposes.
SECURITIES SUBJECT TO THE EMPLOYEE PURCHASE PLAN
The Employee Purchase Plan provides for an aggregate number of 125,000
shares of the Company's Common Stock which may be issued thereunder. The
Employee Purchase Plan provides for appropriate adjustments in the number and
kind of shares subject to the plan and to outstanding options in the event of a
stock split, stock dividend or certain other similar changes in the Company's
Common Stock and in the event of a merger, consolidation or certain other types
of recapitalizations of the Company.
ADMINISTRATION OF THE EMPLOYEE PURCHASE PLAN
The Employee Purchase Plan is administered by the Company, acting through
its chief executive officer, or his or her delegate, who receives no
compensation for serving as administrator of the Employee Purchase Plan. All
costs of administering the Employee Purchase Plan and of granting and exercising
12
<PAGE>
options under the Employee Purchase Plan are paid by the Company. The Employee
Purchase Plan provides for the indemnification of the administrator for
liability, loss, costs, damages, attorneys' fees and other expenses the
administrator may sustain or incur in connection with the administration of the
Employee Purchase Plan.
ELIGIBILITY TO PARTICIPATE
Each employee of the Company who has been employed by the Company for at
least one year, who is customarily employed by the Company for more than 20
hours per week and who is customarily employed by the Company for more than five
months per calendar year, is eligible to participate in the Employee Purchase
Plan. The Company presently has approximately 212 employees who are eligible to
participate under the Employee Purchase Plan. Directors who are not employees of
the Company are not eligible to participate in the Employee Purchase Plan.
No options may be granted under the Employee Purchase Plan to an employee
who immediately after the granting of the option would own stock (including
stock which the individual may purchase under outstanding options) possessing
more than 5% of the total voting power or value of all classes of stock of the
Company, or any parent or subsidiary corporation. In addition, no employee may
be granted an option which would permit his rights to purchase stock under all
IRC Section 423 employee stock purchase plans of the Company, or any parent or
subsidiary corporation to accrue at a rate which exceeds $25,000 of the fair
market value of such stock (as of the time the option is granted) for each
calendar year in which such option is outstanding.
GRANT AND AUTOMATIC EXERCISE OF OPTIONS
Subject to limitations contained in the Employee Purchase Plan,
participating employees are granted non-transferable six month options on a date
determined by the Company (each such six month period is referred to herein as
an "Offering Period"). The cash compensation payable by the Company to a
participating employee is reduced through payroll deductions expressed as a
whole percentage of such employee's base pay (as defined in the Employee
Purchase Plan), not to exceed 10% of base pay, as elected by the employee. Such
payroll deductions are contributed to the Company upon the exercise of an
employee's option to purchase shares of the Company's Common Stock under the
Employee Purchase Plan. Under no circumstances shall an employee receive any
interest on payroll deductions credited to his or her account under the Employee
Purchase Plan.
Options granted under the Employee Purchase Plan entitle a participating
employee to purchase the number of whole shares of the Company's Common Stock
determined by dividing his or her total payroll contributions for the Offering
Period by the purchase price for such shares. The employee is deemed to have
automatically exercised his or her option on the last day of each Offering
Period, unless the employee notifies the Company in writing, at least two weeks
prior to the last day of such Offering Period, that the option shall not be
exercised. In that event, the Company shall return the amount of payroll
contributions credited to such employee's account under the Employee Purchase
Plan to the employee and cancel the option. Each option expires on the last day
of each Offering Period immediately after the automatic exercise of the option
as described herein.
No fractional shares of stock shall be purchased upon exercise of options
and any funds credited to an employee's account remaining after purchases of
whole shares of stock upon exercise of an option shall remain credited to such
employee's account and carried forward for purchase of whole shares of stock
pursuant to the option, if any, granted to such employee for the next following
Offering Period.
ELECTION TO PARTICIPATE
Each eligible employee participates in the Employee Purchase Plan by means
of payroll deductions. An eligible employee participates in the Employee
Purchase Plan by submitting a completed and executed
13
<PAGE>
Authorization Card to the Company during the two week period commencing one
month prior to the first day of the Offering Period and ending two weeks prior
to the first day of the Offering Period.
PURCHASE PRICE
The purchase price for the shares issuable upon automatic exercise of the
options on the last day of the Offering Period equals the lesser of 85% of the
fair market value of such shares on the date of grant (the first day of the
Offering Period), or 85% of the fair market value of such shares on the day of
exercise (the last day of the Offering Period). For purposes of the Employee
Purchase Plan, the fair market value of the shares of Common Stock on any date
is considered to be: (i) the closing price of a share of the Company's stock on
the principal exchange on which shares of the Company's stock are then trading,
if any, on the day previous to the date on which such options are granted, or if
such date is not a trading day, on the trading day immediately preceding such
date; or (ii) if such stock is not traded on an exchange system (a) the mean
between the high and low prices for the stock on the day previous to the date on
which such options are granted, or if such date is not a trading day, on the
trading day immediately preceding such date, as reported by the Nasdaq or such
successor quotation system (if the stock is then listed as a National Market
Issue under the NASD National Market System), or (b) the mean between the
closing representative bid and asked prices (in all other cases) for the stock
on the day previous to the date on which such options are granted, or if such
date is not a trading day, on the trading day immediately preceding such date,
as reported by Nasdaq or such successor quotation system; or (iii) if such stock
is not publicly traded on an exchange and not quoted on Nasdaq or a successor
quotation system, the mean between the closing bid and asked prices for the
stock on the date on which such options are granted, or if such date is not a
trading day, on the trading day immediately preceding such date, as determined
in good faith by the Board; or (iv) if the Company's stock is not publicly
traded, the fair market value established by the Committee acting in good faith.
CESSATION OF PARTICIPATION
An employee shall cease to participate in the Employee Purchase Plan when
the employee (i) gives written instructions to the Committee to terminate such
employee's participation in the Employee Purchase Plan, (ii) resigns or is
discharged from employment by the Company, or has a leave of absence, or (iii)
dies. However, during certain leaves of absence an employee may continue to
participate in the Employee Purchase Plan. As soon as practicable after
cessation of participation, all funds credited to such employee's account under
the Employee Purchase Plan will be returned to such employee, without payment of
any interest thereon.
An employee shall not be eligible to participate in the Employee Purchase
Plan during the Offering Period which immediately follows the Offering Period
during which such employee voluntarily terminated participation in the Employee
Purchase Plan.
ADJUSTMENTS TO STOCK
The administrator shall make appropriate adjustments to the aggregate number
of shares of Common Stock subject to the Employee Purchase Plan, the number of
shares of Common Stock subject to outstanding options and the price per share
thereof if there is any merger, consolidation, reorganization, recapitalization,
stock dividend (in excess of 2%), stock split or other change in the corporate
structure of the Company. If, however, the Company is not the surviving
corporation in any such merger or reorganization, every option under the
Employee Purchase Plan shall terminate upon the consummation of such merger or
reorganization, unless the surviving corporation shall issue a new option
therefor or assume the option then existing under the Employee Purchase Plan.
Options terminating upon the consummation of a merger or reorganization shall be
exercisable prior to such consummation.
14
<PAGE>
RESTRICTIONS ON TRANSFER
Each director, officer and person who beneficially owns 10% or more of the
Company's Common Stock is required under federal securities laws to not sell the
shares acquired under the Employee Purchase Plan for at least six months
following the date on which such shares were acquired (I.E.,the last day of the
Offering Period).
AMENDMENT AND TERMINATION OF PLAN
The Board of Directors may amend the Employee Purchase Plan from time to
time as the Board of Directors may deem advisable. Subject to the foregoing, the
Board of Directors may not, without prior shareholder approval, amend the
Employee Purchase Plan so as to increase the maximum number of shares of Common
Stock subject to the Employee Purchase Plan, change the designation or class of
employees eligible to receive options under the Employee Purchase Plan or amend
the Employee Purchase Plan in any manner which would cause the Employee Purchase
Plan to cease to be an employee stock purchase plan under Section 423 of the
IRC.
Although the Company expects to continue the Employee Purchase Plan until
all shares of the Company's Common Stock reserved for issuance under the
Employee Purchase Plan have been so issued, the Company's Board of Directors may
terminate the Employee Purchase Plan at any time with respect to any shares not
then subject to an option under the Employee Purchase Plan.
FEDERAL INCOME TAX CONSEQUENCES
The income tax consequences of the Employee Purchase Plan under current
federal law are summarized below. The discussion is intended to provide only
general information. Foreign, state and local income tax consequences are not
discussed. The Employee Purchase Plan is intended to qualify as an "employee
stock purchase plan," as defined in Section 423 of the IRC.
If an option is granted to an employee under the Employee Purchase Plan, no
taxable income will result to such employee on the date the option is granted or
on the date the option is exercised. If the employee does not dispose of the
shares of Common Stock purchased upon exercise of the option within two years
after the date on which the option was granted or within one year after the
transfer of the shares of such Common Stock to the employee (the "Holding
Period"), or the employee dies while owning the shares, the employee will be
taxed in the year in which the shares are disposed of, or the year closing with
the employee's death, as follows:
(a) The employee will be subject to ordinary income tax on an amount
equal to the lesser of (i) the excess, if any, of the fair market value of
the shares on the date on which they were disposed of over the amount paid
for the shares, or (ii) the excess, if any, of the fair market value of the
shares on the date the option was granted over the option price; and
(b) Any further gain realized by the employee on the disposition of the
shares (after increasing the basis of these shares by the amount of ordinary
income realized as described in (a) above) will be taxed as capital gain.
If the employee disposes of the shares of Common Stock purchased upon
exercise of the option before the expiration of the Holding Period, the employee
will realize ordinary income, reportable for the year of the disposition of such
shares, to the extent of the excess of the fair market value of such shares on
the date on which the option was exercised, over the option price for such
shares. Any additional gain realized will be taxable as capital gain. If the
Common Stock is disposed of before the expiration of the Holding Period and the
amount realized is less than the fair market value of the Common Stock at the
time of exercise, the employee will realize (i) ordinary income to the extent of
the excess of the fair market value of such Common Stock on the date on which
the option was exercised, over the option price for such Common Stock and (ii)
capital loss to the extent the fair market value of such Common Stock on the
15
<PAGE>
exercise date exceeds the amount realized on the sale. If the employee realizes
ordinary income as a result of a disposition before the expiration of the
Holding Period, the amount of such ordinary income would be deductible by the
Company for federal income tax purposes provided such amount constitutes an
ordinary and necessary business expense.
VOTE REQUIRED AND RECOMMENDATION OF THE BOARD OF DIRECTORS
To be approved, the Employee Purchase Plan must receive the affirmative vote
of the majority of the shares present in person or by proxy at the meeting and
entitled to vote. Broker non-votes are not entitled to vote on this matter, and
therefore do not affect the outcome. Abstentions have the effect of negative
votes.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE EMPLOYEE
QUALIFIED STOCK PURCHASE PLAN.
PROPOSAL 5
APPROVAL OF AN AMENDMENT TO THE COMPANY'S AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK
On June 22, 1998, the Board of Directors approved an amendment to Article
Fourth of the Company's Amended and Restated Certificate of Incorporation to
increase the number of authorized shares of Common Stock from 20,000,000 to
80,000,000. The Board of Directors recommends that the Company's stockholders
approve this amendment. The full text of Article Fourth, as such Article is
proposed to be amended pursuant to this proposal, is set forth in Appendix D
hereto.
The Board of Directors believes that it is in the Company's best interests
to increase the number of authorized shares of Common Stock in order to have
additional authorized shares available for issuance to meet strategic
requirements as they arise. The Board believes that the availability of such
shares will provide the Company with the flexibility to issue Common Stock for
various strategic purposes which may be identified in the future, such as stock
dividends, stock splits, financings or acquisitions. The Board also believes
that the availability of such additional shares will help the Company attract
and retain talented employees through the grant of stock options and other
stock-based incentives.
Of the 20,000,000 shares of Common Stock currently authorized for issuance,
approximately 4,183,890 shares are unissued and unreserved for issuance. These
shares, together with the additional 60,000,000 shares, if the proposed increase
is approved by the stockholders, will be available for issuance at such times
and for such corporate purposes as the Board of Directors may deem advisable
without further action by the Company's stockholders, except as may be required
by applicable laws or the rules of any stock exchange or national securities
association trading system on which the Common Stock may be listed or traded.
The Company has no agreements, understandings or plans at the present time for
the issuance or use of the additional shares of Common Stock proposed to be
authorized. Upon issuance, such shares will have the same rights as the
outstanding shares of Common Stock. The Board of Directors does not intend to
issue any Common Stock except on terms which the Board deems to be in the best
interests of the Company and its then-existing stockholders.
The issuance of additional shares of Common Stock may have a dilutive effect
on earnings per share and on a stockholder's percentage voting power. The
availability of increased authorized Common Stock for issuance in the future
could render more difficult or discourage an unsolicited tender offer, proxy
contest or other attempt to obtain control of the Company. Neither the
management of the Company nor the Board of Directors is aware of any existing or
planned effort on the part of any party to accumulate material amounts of Common
Stock or to acquire control of the Company.
16
<PAGE>
If approved by the stockholders, the proposed amendment to Article Fourth
will become effective upon the filing of a Certificate of Amendment with the
Secretary of State of Delaware amending the Company's Amended and Restated
Certificate of Incorporation, which will occur as soon as reasonably
practicable.
VOTE REQUIRED AND RECOMMENDATION OF THE BOARD OF DIRECTORS
To be adopted, the proposed amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 20,000,000 to 80,000,000 must receive the affirmative vote of
the majority of the shares entitled to vote. For purposes of this matter,
abstentions broker non-votes have the effect of negative votes.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO AMEND ARTICLE
FOURTH OF THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AS SET
FORTH IN APPENDIX D.
PROPOSAL 6
RATIFICATION OF SELECTION
OF INDEPENDENT PUBLIC ACCOUNTANTS
The firm of PricewaterhouseCoopers LLP (formerly known as Price Waterhouse
LLP) served as independent public accountants for the Company for the fiscal
year ended March 31, 1998. The Audit Committee has selected that firm to
continue in this capacity to audit the accounts and records of the Company for
the fiscal year ending March 31, 1999, and to perform other appropriate
services. Ratification by the stockholders will be sought at the Annual Meeting
for the selection of PricewaterhouseCoopers LLP as independent public
accountants for the Company for fiscal 1999. PricewaterhouseCoopers LLP has
audited the Company's financial statements since 1991. In the event that the
stockholders do not ratify the selection of PricewaterhouseCoopers LLP, the
Audit Committee will reconsider its selection.
The Company expects that one or more representatives of
PricewaterhouseCoopers LLP will be present at the Annual Meeting and will have
the opportunity to make a statement and to respond to appropriate questions.
VOTE REQUIRED AND RECOMMENDATION OF THE BOARD OF DIRECTORS
To be approved, this matter must receive the affirmative vote of the
majority of the shares present in person or by proxy at the meeting and entitled
to vote. Uninstructed shares are entitled to vote on this matter. Therefore,
abstentions and broker non-votes have the effect of negative votes.
THE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR RATIFICATION OF THE
APPOINTMENT OF
PRICEWATERHOUSECOOPERS LLP AS THE COMPANY'S INDEPENDENT AUDITORS.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of fourteen (14) meetings
during the fiscal year ended March 31, 1998. The Board has two standing
committees, an Audit Committee and a Compensation Committee. The Company does
not have a Nominating Committee or a committee that performs equivalent
functions of a Nominating Committee. From time to time the Board of Directors
may establish other committees to facilitate its business objectives. During
fiscal 1998, the Audit Committee met twice and the Compensation Committee met
four (4) times. Each director attended more than 92.9% of the total number of
meetings held during fiscal 1998 of the Board of Directors and the committees on
which such director served.
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
17
<PAGE>
statements by the independent public accounts and the independent public
accountants' opinion. The Audit Committee also approves all professional
services performed by the independent public accountants, recommends the
retention of the independent public accountants to the Board of Directors,
subject to ratification by the stockholders, and periodically reviews the
Company's accounting policies and internal accounting and financial controls.
The Audit Committee consists of Messrs. Mahoney and Nason.
The functions of the Compensation Committee include establishment of
compensation plans for MAGI's executive officers and administration of certain
of MAGI's employee benefit and compensation programs. The Compensation Committee
consists of Messrs. Kiley, Nason and Mahoney.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1998, 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.
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. One of the Company's Outside Directors has a
consulting agreement with the Company. See "Certain Relationships and Related
Transactions" on page 27.
In addition to cash compensation, the Company's nonemployee directors were
entitled to participate in the Company's Stock Option Plan for Directors. The
Board of Directors and the stockholders of the Company approved the Stock Option
Plan for Directors on February 15, 1994 and reserved 50,000 shares of Common
Stock for issuance thereunder. On the approval date of the Stock Option Plan for
Directors, the Company's then current nonemployee directors received an initial
grant of an option to purchase 7,909 shares of Common Stock at an exercise price
of $7.11 per share. After the approval date of the Stock Option Plan for
Directors, any new non-employee director was 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 Stock Option Plan for
Directors. Following an initial grant, on the business day following each annual
meeting of the Company's stockholders, each non-employee director who would then
have served at least one year as a director of the Company was entitled to
receive a grant of an option to purchase an additional 1,500 shares of Common
Stock. All options granted under the Stock Option Plan for Directors are
non-qualified and have an exercise price per share equal to 100% of the fair
market value of the Common Stock, as of the date of grant. 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. Assuming the 1998 Stock Incentive Plan is approved by
the stockholders at the Annual Meeting, Outside Directors will receive no
further grants under the Stock Option Plan for Directors. Under the 1998 Stock
Incentive Plan, all Outside Directors (including new Outside Directors) will
automatically receive an NSO covering 5,000 shares annually at an exercise price
equal to 85% or more of the fair market value of Common Stock on the date of
grant.
18
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The functions of the Compensation Committee are to establish and administer
compensation plans for the Company's executive officers, review executive
officer compensation levels and evaluate management performance. The Committee
is composed of three (3) directors. Set forth below is a report submitted by the
Compensation Committee regarding the Company's compensation policies and
programs for executive officers for fiscal 1998.
OVERVIEW OF COMPENSATION POLICY
The primary objective of MAGI's management team over the past few years has
been to improve the Company's profitability and increase stockholder value.
During fiscal 1998, the Company achieved significant success in this regard. The
operating performance of MAGI's businesses improved substantially and the
Company as a whole achieved record operating earnings. In addition, during this
period the Company substantially improved its competitive position and built
corporate value through brand name development, increased operating
efficiencies, as well as gallery expansion.
The Committee believes that the compensation policies and programs which it
has implemented have directly contributed to management's successful track
record and its continuing focus on improving profitability and increasing
stockholder value.
The Committee has developed a compensation policy under which a substantial
portion of the compensation of executive officers is directly linked to the
financial performance of the Company and the enhancement of stockholder value.
To promote this policy, the Committee implemented a compensation program for
fiscal 1998 that was comprised of (i) an annual cash incentive program (the
Company's discretionary "Executive Management Bonus Program"), which "pays for
performance" and provided bonuses based on the realization of the Company's
annual financial goals and (ii) the grant of stock options that directly tied
management's interest to those of stockholders.
The Committee believes that executive compensation should be highly
leveraged toward the incentive-based programs described above. By placing much
of an officer's compensation "at risk" in this manner, the Company's
compensation program focuses management's efforts on improving financial
performance and effectively integrates executive compensation with the Company's
annual and long-term strategic objectives.
FISCAL 1998 EXECUTIVE OFFICER COMPENSATION PROGRAM
The components of the executive compensation program are described below:
BASE SALARY--The Committee determines the base salary component of executive
compensation by reviewing executive salary levels at a broad group of companies
with comparable revenues either engaged in the home dcor/accessories industry or
located in the Silicon Valley, as well as evaluating the specific job functions
and past performance of individual officers. The Committee believes that base
salaries for executive officers are within the median range of executive salary
levels at comparable companies surveyed by the Committee.
EXECUTIVE MANAGEMENT BONUS PROGRAM--The Committee administers the
discretionary Executive Management Bonus Program which is a pay-for-performance
program under which cash bonus awards are paid based upon (i) achievement of the
Company's earnings per share growth above a fixed threshold and (ii) a
percentage of each (executive officer) participant's personal base salary, with
the percentage varying based on the executive's level of responsibility and
management tier classification. In addition, participants are not eligible to
receive bonus pay-outs unless they are employees of the Company on the last day
of the sixth (6th) month of the management bonus period.
19
<PAGE>
STOCK OPTION GRANTS--In fiscal 1998, the Committee granted an aggregate of
246,000 stock options under the Employee Stock Option Plan (one of the Prior
Plans) to the Company's executive officers. The Committee determined the number
of options granted to executive officers primarily by evaluating each officer's
respective job responsibilities, past performance and expected future
contributions. The Committee believes that these stock option grants will more
closely align the long-term interests of senior management with those of
stockholders and assist in the retention of key executives.
COMPENSATION OF CHIEF EXECUTIVE OFFICER--Craig A. Fleming
The Committee uses the same procedures described above in setting the annual
salary, bonus and stock option awards for the Chief Executive Officer. The CEO's
salary is determined based on comparisons with competitive companies as
described above.
Mr. Fleming earned a cash bonus of $340,111 under the Executive Management
Bonus Program during fiscal 1998. Mr. Fleming's bonus was based on the Company
achieving certain earnings per share targets determined at the beginning of the
fiscal year and a percentage of his base salary.
In fiscal 1998, the Committee granted an aggregate of 75,000 stock options
to Mr. Fleming under the Employee Stock Option Plan which will vest over three
(3) years. The Committee determined the size of the award by evaluating Mr.
Fleming's job responsibilities, past performance and expected future
contributions.
COMPENSATION OF CHAIRMAN--Kenneth E. Raasch
The Committee uses the same procedures described above in setting the annual
salary and bonus awards for the Chairman. Mr. Raasch earned a cash bonus of
$1,387,375 under his employment agreement during fiscal 1998 based on the
Company's growth in earnings per share in fiscal 1998. No options were awarded
to Mr. Raasch in fiscal 1998. See "Employment, Severance and Change of Control
Arrangements" on page 26.
POLICY ON DEDUCTIBILITY OF COMPENSATION--Section 162(m) of the IRC provides
that a company may not take a tax deduction for that portion of the annual
compensation paid to a named executive officer in excess of $1 million, unless
certain exemption requirements are met. The Employee Stock Option Plan was
designed to meet the exemption requirements of Section 162(m) and the MAGI 1998
Stock Incentive Plan is also designed to meet the exemption requirements of
Section 162(m). The Committee has determined at this time not to seek to qualify
the Company's remaining executive officer compensation programs under Section
162(m).
CONCLUSION--All aspects of the Company's executive compensation program are
subject to change at the discretion of the Committee. The Committee will monitor
the Company's executive compensation program on an ongoing basis to ensure that
it continues to support a performance-oriented environment and remains properly
integrated with MAGI's annual and long-term strategic objectives.
MEMBERS OF THE COMPENSATION COMMITTEE
Michael L. Kiley, Chairman
Norman A. Nason
Norman T. Mahoney
20
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Company's
executive officers as of the Record Date.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- ----------- -----------------------------------------------------
<S> <C> <C>
Raymond A. Peterson.................................. 52 President and CEO of MAGI
James F. Landrum, Jr................................. 34 Snr. Vice President, General Counsel and Corporate
Secretary of MAGI
Greg H.L. Nash....................................... 39 Snr. Vice President and Chief Financial Officer of
MAGI
Craig A. Fleming..................................... 43 President and Chief Executive Officer of Lightpost
Publishing, Inc.
John R. Lackner...................................... 58 Snr. Vice President and Chief Operating Officer of
Lightpost Publishing, Inc.
Daniel P. Byrne...................................... 36 Snr. Vice President of Product Development and
Marketing of Lightpost Publishing, Inc.
Brian P. Mahoney..................................... 42 Snr. Vice President of Sales of Lightpost Publishing,
Inc.
</TABLE>
RAYMOND A. PETERSON has been the President and Chief Executive Officer of
the Company since June 1998. He was the Senior Vice President and Chief
Financial Officer of the Company from May 1993 to May 1998. He was the Chief
Executive Officer of Peterson, Sense & Company, a certified public accounting
firm, for the previous 15 years, during which time he provided accounting, tax
and financial planning services for the Company. Prior thereto, Mr. Peterson was
the Corporate Tax Manager for Raychem Corporation, a multi-national
manufacturing corporation, and a Senior Tax Accountant with Peat Marwick &
Mitchell (currently KPMG Peat Marwick).
JAMES F. LANDRUM, JR. has been the General Counsel for the Company since
February 1995 and was appointed Vice President and Corporate Secretary on April
30, 1997. He was appointed Senior Vice President of the Company in March 1998.
He was self employed as an attorney and business consultant for two years prior
to joining the Company.
GREG H. L. NASH has been the Chief Financial Officer of the Company since
June 1998. He was appointed Senior Vice President of the Company in July 1998.
He held the position of Vice President and the Corporate Controller of the
Company from April 1998 to May 1998. He was the Corporate Controller of the
Company from May 1995 to April 1998 and he has also been Principal Accounting
Officer since November 1997 and Principal Financial Officer since July 1998.
From August 1988 until April 1995 he was employed by Price Waterhouse LLP
(currently PricewaterhouseCoopers LLP), most recently as an Audit and Business
Services Manager. Prior to August 1988 he held various management positions with
companies in the investment and retail industries.
CRAIG A. FLEMING has been the (i) President and Chief Executive Officer of
Lightpost Publishing, Inc. and (ii) President of Thomas Kinkade Stores, Inc.,
since June 1998. He was President of the Company from May 1997 to October 1997
and the President and Chief Executive Officer from October 1997 to May 1998. He
was also the Vice President of Sales for the Company from November 1996 to May
1997. Prior to joining the Company, Mr. Fleming was an independent consultant
from March 1996 to October 1996, as well as the Executive Vice President of
Sales for Home Cable Concepts, Inc., a direct TV satellite dish company from
October 1995 to March 1996. Prior to employment with Home Cable Concepts, Mr.
Fleming was the Vice President of Sales for Dorling Kindersley Family Library, a
direct
21
<PAGE>
seller of children's books, from July 1994 through October 1995. Prior thereto,
Mr. Fleming was Director of Sales for Melaleuca, Inc., a direct selling
organization, from June 1992 to July 1994.
JOHN R. LACKNER has been the Senior Vice President and Chief Operating
Officer of Lightpost Publishing, Inc. since June 1998. He was the Senior Vice
President and Chief Operating Officer of the Company from October 1997 to May
1998. Prior to joining the Company, Mr. Lackner was employed for over 25 years
with the Kirby Company, an established manufacturer and retailer of quality
vacuum cleaners. His most recent position with the Kirby Company was as Senior
Vice President of Research, Product Development and Technology, which position
he had held since 1990. Mr. Lackner also served as a Vice President in
manufacturing and production for the Kirby Company from 1981 to 1990.
DANIEL P. BYRNE has been the Senior Vice President of Product Development
and Marketing of Lightpost Publishing, Inc. since June 1998. He was the Senior
Vice President of Product Development and Marketing of the Company from June
1996 to May 1998. He was the Vice President of Marketing of the Company from
March 1993 to June 1996. Prior thereto, he was a Vice President with
Commemorative Press, an art retailing company co-founded by Kenneth E. Raasch
and Thomas Kinkade. He was employed as Manager of Product Development and
Manager of Concept Development by the Bradford Exchange, Ltd., an established
manufacturer and marketer of collectible giftware, from October 1988 until
February 1992. Mr. Byrne also served as the Product Manager of Precious Moments
Collection, a multi-million dollar product line of Enesco Corporation, a
subsidiary of Stanhome Inc., for a period of three years.
BRIAN P. MAHONEY has been the Senior Vice President of Sales for Lightpost
Publishing, Inc., since June 1998. He was Senior Vice President of the Company
from April 1998 to May 1998. He was Vice President of Sales for the Company from
July 1997 to April 1998. Prior to joining the Company, from August 1994 to July
1997, Mr. Mahoney was the Vice President of Sales for Natural World, a direct
sales company. From July 1992 to August 1994 he was a Region Vice President for
Melaleuca, Inc., a direct sales company. For the 13 years prior to that, he was
an independent contractor for the Kirby Company, serving as a sales person,
Assistant Divisional Supervisor and Factory Distributor.
There are no family relationships among the officers and directors of the
Company, except that Brian P. Mahoney, Senior Vice President of Sales of
Lightpost Publishing, Inc., is the son of Norman T. Mahoney, a director of the
Company.
22
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Set forth below is information concerning the annual and long-term
compensation for services rendered in all capacities to the Company for the
fiscal years ended March 31, 1998, 1997 and 1996, of the persons who were, at
March 31, 1998, (i) the Chief Executive Officer and (ii) the other four most
highly compensated executive officers of the Company (the "Named Officers").
Effective June 1, 1998, Raymond A. Peterson replaced Craig A. Fleming as
President and Chief Executive Officer of the Company and Mr. Fleming was
appointed (i) President and Chief Executive Officer of Lightpost Publishing,
Inc., and (ii) President of Thomas Kinkade Stores, Inc., wholly owned
subsidiaries of the Company.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ----------------------------------
------------------------------------------------ SHARES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS(#) COMPENSATION($)(2)
- ------------------------------- ----------- ------------ -------------- ------------------ ----------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Craig A. Fleming(3) ........... 1998 214,583 364,532(4) 51,189(5) 75,000 --
President & CEO 1997 63,077 10,025(4) 27,526(6) 25,000 -- --
1996 -- -- -- --
Kenneth E. Raasch ............. 1998 372,000 1,431,393(4) 26,367 -- 732
Chairman 1997 413,422 -- 14,164 -- --
1996 372,000 -- 9,119 -- --
Daniel P. Byrne ............... 1998 187,648 247,754 13,601 25,000 743
Snr. V.P of Prod. 1997 161,572 6,798 2,244 -- --
Dev. & Mrkt. 1996 160,298 -- 2,244 -- --
Raymond A. Peterson ........... 1998 150,000 246,442 12,563 25,000 270
Snr. V.P & CFO 1997 126,066 6,798 7,929 25,000 --
1996 121,151 10,000 7,929 5,000 --
Thomas Kinkade ................ 1998 372,300(7) -- 25,868 (8) --
Creative Director 1997 372,300(7) -- 1,893 -- --
1996 372,300(7) -- 1,908 -- --
</TABLE>
- ------------------------
(1) Includes Profit Sharing Plan payments to Messrs. Fleming, Raasch, Byrne,
Peterson and Kinkade for 1998, in the amounts of $12,559, $22,495, $11,357,
$9,423 and $22,512, respectively.
(2) Represents 401(k) Plan contributions to the accounts of Messrs. Raasch,
Byrne and Peterson for 1998, in the amounts of $732, $743 and $270
respectively.
(3) Mr. Fleming joined the Company in November 1996 as Vice President of Sales.
He was appointed President of the Company in May 1997 and President and
Chief Executive Officer in October 1997.
(4) Includes commission payments to Messrs. Fleming and Raasch for 1998, in the
amounts of $24,421 and $44,018, respectively. In addition, Mr. Raasch
received an incentive bonus of $1,387,375 (based upon the Company's annual
growth in earnings per share) pursuant to his employment agreement. See
"Employment, Severance and Change-of-Control Arrangements" on page 26.
(5) Includes the cost to the Company of certain benefits provided to Mr. Fleming
during 1997, aggregating $38,630, including relocation and living allowance
incurred during the year.
(6) Represents a signing bonus of $15,026 and a living allowance of $12,500 paid
to Mr. Fleming.
(7) Does not include $5,047,441, $1,323,977 and $1,258,633 earned by Thomas
Kinkade in 1998, 1997 and 1996, respectively, pursuant to certain licensing
royalty and other arrangements with the Company. See "Certain Relationships
and Related Transactions" on page 27.
23
<PAGE>
(8) Does not include an option to purchase 600,000 shares of the Company's
Common Stock granted as of December 3, 1997, subject to stockholder approval
at the 1998 Annual Meeting of Stockholders. See "Certain Relationships and
Related Transactions" on page 27.
OPTION GRANTS
Set forth below is information relating to grants of stock options to the
Named Officers during the fiscal year ended March 31, 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
OPTIONS STOCK PRICE
GRANTED TO APPRECIATION FOR
OPTIONS EMPLOYEES EXERCISE OPTION TERM(3)
GRANTED IN FISCAL PRICE EXPIRATION --------------------
NAME (#)(1) YEAR ($/SH)(2) DATE 5%($) 10%($)
- --------------------------------------------------- ------------ ------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Craig A. Fleming................................... 50,000 11.3 4.375 6/19/2007 137,571 348,631
25,000 5.65 5.00 9/10/2007 78,612 199,218
Kenneth E. Raasch.................................. -- -- -- -- -- --
Daniel P. Byrne.................................... 25,000 5.65 5.00 9/10/2007 78,612 199,218
Raymond A. Peterson................................ 25,000 5.65 5.00 9/10/2007 78,612 199,218
Thomas Kinkade..................................... (4) -- -- -- -- --
</TABLE>
- ------------------------
(1) These options become exercisable in equal annual installments over a
three-year period. In the event of a change of control, the options listed
above become immediately exercisable.
(2) All options were granted at no less than fair market value on the date of
grant.
(3) Potential gains are net of exercise price, but before taxes associated with
exercise. These amounts represent certain assumed rates of appreciation
only, based on the Securities and Exchange Commission rules. Actual gains,
if any, on stock option exercises are dependent on the future performance of
the Common Stock, overall market conditions and the option-holder's
continued employment through the vesting period. The amounts reflected in
this table may not necessarily be achieved.
(4) Does not include an option to purchase 600,000 shares of the Company's
Common Stock granted as of December 3, 1997, subject to stockholder approval
at the 1998 Annual Meeting of Stockholders. See "Certain Relationships and
Related Transactions" on page 27.
24
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
Set forth below is information with respect to the exercise of stock options
by the Named Officers during fiscal year 1998 and the number and value of
unexercised options held by the Named Officers at March 31, 1998.
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
SHARES HELD AT MARCH 31, 1998 MARCH 31, 1998(1)
ACQUIRED VALUE -------------------------- ------------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($)(2) (#)(3)(4) (#)(4)(5) ($)(3) ($)(5)
- --------------------------------------- ----------- --------- ----------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Craig A. Fleming....................... 0 0 8,250 91,750 145,917.75 1,433,757.25
Kenneth E. Raasch...................... 0 0 15,000 0 195,150 0
Daniel P. Byrne........................ 15,000 165,075 92,725 25,000 1,576,910.45 368,750
Raymond A. Peterson.................... 45,000 479,375 68,725 47,000 1,192,805.45 742,880
Thomas Kinkade......................... 0 0 (6) (6) (6) (6)
</TABLE>
- ------------------------
(1) The value of the unexercised in-the-money options is based on the closing
price of $19.75 of the Company's Common Stock, as reported on the Nasdaq
National Market, on March 31, 1998 and is net of the exercise price of such
options.
(2) The value realized on stock option exercises represents the difference
between the grant price of the options exercised and the market price of the
underlying shares of Common Stock as of the date of exercise multiplied by
the number of options exercised.
(3) Represents shares which are immediately exercisable and/or vested.
(4) Company stock options vest either at the rate of one-third or one-fifth on
the first anniversary of the date of grant and one-third or one-fifth per
year, as applicable, thereafter. These options are exercisable only to the
extent vested
(5) Represents shares which are not vested and not immediately exercisable.
(6) Does not include an option to purchase 600,000 shares of the Company's
Common Stock granted as of December 3, 1997, subject to stockholder approval
at the 1998 Annual Meeting of Stockholders.
25
<PAGE>
EMPLOYMENT, SEVERANCE AND CHANGE-OF-CONTROL ARRANGEMENTS
The Company has entered into employment agreements with certain of its
executive officers. In January 1994, the Company entered into a five-year
Employment Agreement with Kenneth E. Raasch to serve as Chairman of the Board,
President and Chief Executive Officer of the Company. This agreement, as amended
in March 1997, provides for an annual base salary of $360,000. In addition, Mr.
Raasch is entitled to, and has received, incentive bonuses based upon (i) annual
growth in earnings per share; (ii) past enhanced performance (with penalties for
poor performance); (iii) operating income generated by new business ventures;
and (iv) early retirement of the Company's subordinated debt. In May 1997, he
relinquished the position of President and became Chairman and Chief Executive
Officer of the Company; in October 1997, Mr. Raasch also relinquished the
position of Chief Executive Officer.
In the event Mr. Raasch's employment is terminated by the Company prior to a
"Change in Control" other than for cause or disability (as defined in the
agreement), he is entitled to (i) receive salary, bonus and vested benefits for
the remaining term of the agreement at his then current compensation; and (ii)
continuation of indemnification and insurance coverage in effect at the time of
the termination, until any possible law suit against him is time barred by the
statute of limitation.
Mr. Kinkade was engaged by the Company as Art Director (later changed to
Creative Director) for a period of five years at an annual base salary of
$60,000, (increased to $372,300) pursuant to Mr. Kinkade's January 1, 1994
employment agreement with the Company. Mr. Kinkade is also entitled to certain
royalties and other payments in connection with his artwork. See "Certain
Relationships and Related Transactions" on page 27.
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 and increased to $180,000 as of April 6,
1998) pursuant to Mr. Peterson's employment agreement with the Company. Mr.
Peterson is also eligible to participate in the Company's bonus plan adopted for
the benefit of senior executives. Effective June 1, 1998, Raymond A. Peterson
replaced Craig A. Fleming as President and Chief Executive Officer of the
Company, at an annual base salary of $230,000.
Mr. Fleming, President and Chief Executive Officer of Lightpost Publishing,
Inc. and President of Thomas Kinkade Stores, Inc., (previously President and CEO
of the Company), entered into a three-year employment agreement with the Company
effective as of May 8, 1997 that supersedes a prior employment agreement. The
agreement provides for an annual base salary of $225,000, the opportunity to
participate in any bonus plan adopted for the benefit of senior executives, a
monthly living allowance through December 1997, a $10,000 art allowance, a
relocation expense payment and a twelve-month living allowance in the event of
relocation of Mr. Fleming's immediate family to Santa Clara County, California,
in addition to other benefits. The Company also granted to Mr. Fleming pursuant
to the agreement an option to purchase 50,000 shares of the Company's Common
Stock at fair market value on the date of formal Board approval of such options;
an option to purchase 25,000 shares of the Company's Common Stock at fair market
value on July 1, 1998; and an option to purchase 25,000 shares of the Company's
Common Stock at fair market value on July 1, 1999.
Mr. Byrne was engaged by the Company as Vice President of Marketing for a
period of three years (with an automatic two year renewal) effective January 1,
1994 at an annual base salary of $138,000 ($181,560 effective April 1, 1997)
pursuant to Mr. Byrne's employment agreement with the Company. Mr. Byrne is also
eligible to participate in the Company's bonus plan adopted for the benefit of
senior executives.
The employment agreements of Messrs. Raasch, Peterson, Kinkade, Byrne and
Fleming each provide for the officer to receive all salary and bonus payments
that would have been payable to him for the remaining term of the agreement
after a "Change in Control" which provides "Good Reason" for the officer to
terminate his employment. "Good Reason" is defined to include, among other
things, the
26
<PAGE>
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LICENSE AGREEMENT WITH THOMAS KINKADE AND STOCK OPTION GRANT. Effective
December 3, 1997, the Company entered into a new license agreement (the "New
License Agreement") with Thomas Kinkade, a director, employee and principal
stockholder of the Company. The New License Agreement supersedes a previous
license agreement under which Mr. Kinkade received a flat fee of $18,750 per
painting delivered to the Company for reproduction, a royalty agreement pursuant
to which the Company paid Mr. Kinkade a royalty of 5.0% of net sales of
Company-owned stores using his name and certain other arrangements. Mr. Kinkade
is also employed by the Company as Creative Director. Mr. Kinkade and Mr. Raasch
have an understanding whereby Mr. Kinkade will through May 8, 2000 pay to Mr.
Raasch 45.5% of royalty payments payable to Mr. Kinkade by the Company from the
sale of studio proofs. In the past Mr. Kinkade paid Mr. Raasch 50% of the
royalty payments payable to Mr. Kinkade by the Company from the sale of studio
proofs. In fiscal 1998, Mr. Kinkade and Mr. Raasch shared approximately
$2,523,000 in royalty payments from the sale of studio proofs.
Under the New License Agreement Thomas Kinkade granted the Company perpetual
and exclusive rights to each image produced by Mr. Kinkade under the New License
Agreement, as well as to the library of over 170 existing Thomas Kinkade images,
subject to certain exceptions. In particular, the Company has the exclusive
right to produce, sell, distribute and promote reproductions of Mr. Kinkade's
artwork in any form and the right to use the name and likeness of the artist in
promoting the sale of its products and development of any brand name associated
with Mr. Kinkade. The New License Agreement requires Mr. Kinkade to deliver 150
paintings to the Company during the period commencing December 3, 1997 and
ending 15 years thereafter, with at least 10 paintings to be delivered during
each of the first five years. Mr. Kinkade has the right to approve the Company's
products based upon his artwork, as well as promotional materials, business
plans and strategic relationships relating to such products or the use of his
name or likeness. Mr. Kinkade retains ownership of the original paintings he
produces.
The New License Agreement permits Mr. Kinkade to reproduce up to two pieces
annually to raise money for the City of Placerville, California. Mr. Kinkade
also retained the right to use his name, likeness and certain artwork in
association with non-profit organizations. In addition, Mr. Kinkade retained the
right to use his name in connection with for-profit ventures with the Company's
prior consent, provided that he first offers the opportunity to the Company. Mr.
Kinkade is otherwise subject to a non-compete agreement with the Company under
the New License Agreement.
The New License Agreement is terminable by either party after failure by the
other party for 90 days to cure a material breach of the agreement. In addition,
Mr. Kinkade may terminate the New License Agreement in the event of the
Company's insolvency or upon a change of control of the Company. A change in
control is defined to occur on the date when any person or group (as defined in
Rule 13(d)(3) under the Securities Exchange Act of 1934) beneficially owns (as
defined in such Rule) a number of shares of Common Stock in excess of the number
of shares then beneficially owned by Mr. Kinkade. The computation excludes
stockholders as of December 3, 1997, to the extent of their beneficial holdings
of Common Stock as of such date. The right of termination may not be invoked by
Mr. Kinkade if it is triggered as a result of Mr. Kinkade's transfer of shares.
After December 3, 2012, the perpetual nature of the New License Agreement may be
terminated by Mr. Kinkade if the Company engages in any material business
enterprises unrelated to his work or brand name to which he objects. Upon any
termination of the New License Agreement by Mr. Kinkade, the Company would be
prohibited from selling any products based upon Mr. Kinkade's artwork, other
than the Company's then existing product inventory.
27
<PAGE>
In addition, pursuant to the New License Agreement, the Company and Thomas
Kinkade entered into a stock option agreement as of December 3, 1997, wherein
the Company granted to Mr. Kinkade a fifteen-year non-statutory option to
purchase 600,000 shares of Common Stock at $12.375 (the closing price on the
date of grant), subject to stockholders' approval at the 1998 Annual Meeting of
Stockholders.
MANAGEMENT AGREEMENT. Under the Amended and Restated Management Agreement
between Thomas Kinkade, Kenneth E. Raasch and Lightpost Publishing dated as of
April 1, 1994, the Company had the right to receive 50.0% of the gross revenues
received by Mr. Kinkade from third party licensing activity. The New License
Agreement has superceded this arrangement.
OWNERSHIP AND SALE OF THOMAS KINKADE GALLERY, VALLEY FAIR. On June 30,
1995, the Company purchased the Thomas Kinkade Gallery, Valley Fair from Linda
L. Raasch, spouse of Kenneth E. Raasch, who was President, Chairman and Chief
Executive Officer of the Company at the time, for an aggregate purchase price of
approximately $1,500,000, of which $1,200,000 was paid in the form of an 8.0%
subordinated convertible promissory note due October 10, 2002. The note is
convertible into Common Stock of the Company at a price of $7.25 per share. The
entire principal amount of the note is due at maturity, unless converted prior
to maturity. Prior to the consummation of the sale transaction, an independent
appraisal of the gallery was performed and the terms of the purchase were
approved by a special committee of the Board of Directors.
LEVINE LEICHTMAN. Effective July 26, 1995, Levine Leichtman Capital
Partners, L.P., ("Levine Leichtman"), a former principal stockholder of the
Company, entered into a credit agreement with the Company pursuant to which
Levine Leichtman purchased $8.0 million principal amount of promissory notes of
the Company due June 30, 2002, $3.0 million of which was convertible into Common
Stock at a conversion price of $6.25 per share, and a warrant to purchase
400,000 shares of Common Stock at $5.9375 per share exercisable until June 30,
2002. As a result, Levine Leichtman became a beneficial owner of 880,000 shares
of Common Stock, making it a greater than five percent stockholder of the
Company. Effective March 13, 1996, the Company entered into an agreement with
Levine Leichtman for the restructuring of the $8.0 million notes held by Levine
Leichtman. Under the agreement, the interest rate on the debt was raised to
13.5% effective October 1, 1995, and Levine Leichtman received a subordinated
security interest in the Company's assets. Of the $8.0 million principal amount,
$960,000 was convertible into Common Stock at a conversion price of $2.00 per
share and $810,000 was convertible into Common Stock at a conversion price of
$3.00 per share. The exercise price of Levine Leichtman's warrant for 400,000
shares of Common Stock was reduced to $2.00 per share. As a result of the
restructuring agreement, Levine Leichtman became the beneficial owner of
1,150,000 shares of Common Stock. In addition, Levine Leichtman waived all
defaults then existing under the credit agreement and certain financial ratios
and other covenants were modified.
Effective February 21, 1997, the Company renegotiated the credit agreement
to restructure its obligation to Levine Leichtman, totaling $7.4 million after a
payment of $592,500 pursuant to the restructuring. The interest rate on the debt
remained at 13.5%. As part of the renegotiation, the warrant price was amended
to $0.01 per share and Levine Leichtman fully exercised these warrants through a
cashless exercise, resulting in the issuance of 398,693 shares of Common Stock.
The conversion rights initially provided under the $3.0 million note were
amended to provide that $7,500 of principal amount would be convertible into
Common Stock at a conversion price of $0.01 per share, and such amount was
converted into 750,000 shares of Common Stock. In addition, Levine Leichtman
waived all defaults then existing under the credit agreement and certain
financial ratios and other covenants were modified pursuant to the
restructuring.
On September 10, 1996, the Company entered into an Investment Monitoring
Agreement with Levine Leichtman Capital Partners, Inc., an affiliate of Levine
Leichtman, pursuant to which Levine Leichtman Capital Partners, Inc., agreed to
monitor Levine Leichtman's investment in the Company in exchange for a
monitoring fee of $12,500 per month. The agreement was terminable by the Company
or Levine
28
<PAGE>
Leichtman Capital Partners, Inc., upon 30 days written notice at any time from
and after March 31, 1998. The Investment Monitoring Agreement was amended as of
February 21, 1997 in connection with the renegotiation of the credit agreement
between the Company and Levine Leichtman to provide for a reduced monthly
monitoring fee of $11,500 beginning February 28, 1997. The Company's obligation
to pay monthly monitoring fees to Levine Leichtman Capital Partners, Inc.,
terminated on July 31, 1997 as a result of the outstanding principal balance of
the Company's note payable to Levine Leichtman being reduced to $5.4 million.
In addition, the Company agreed to reimburse Levine Leichtman for up to
$600,000 of any underwriting discounts and commissions relating to Levine
Leichtman's sale of 700,000 shares of Common Stock in the Company's secondary
offering in February 1998, notwithstanding the actual amount thereof.
In February 1998, the Company used a portion of the net proceeds received
from the secondary offering to repay its entire indebtedness to Levine
Leichtman.
OTHER AGREEMENTS WITH DIRECTORS. On April 1, 1997, the Company entered into
a one-year Consulting Agreement with Michael L. Kiley, a director of the
Company. Pursuant to the Consulting Agreement, Mr. Kiley agreed to act as a
liaison between Thomas Kinkade and the Company and to provide various other
consulting services in exchange for a fee of $6,000 per month and an option to
purchase 25,000 shares of the Company's Common Stock priced at the thenfair
market value of the shares. Effective August 1, 1997, the Consulting Agreement
was amended to provide for consulting fees of $10,000 per month. In June 1997
and September 1997, the Company granted to Mr. Kiley options to purchase 20,000
and 30,000 shares of Common Stock, respectively, at the then-fair market value
of the Common Stock. In October 1997, the Board of Directors awarded Mr. Kiley a
consulting bonus of $90,000 (payable in the amount of $45,000 immediately and
$45,000 in April 1998) in connection with various consulting services provided
by Mr. Kiley. On June 22, 1998, the Board approved another amendment to the
Consulting Agreement whereby Mr. Kiley's bonus would be tied to EPS growth of
consolidated net earnings of the Company.
In fiscal 1998, the Company paid Norman A. Nason, a director of the Company,
(i) $13,750 for serving as a member of the Compensation Committee and performing
various other services; (ii) $35,000 for his services in negotiating a sale and
leaseback of the Company's corporate offices in San Jose, California; and (iii)
$17,600 for his services in negotiating the lease of one of the Company's
warehouse facilities in San Jose, California. In addition, in September 1997,
the Company granted to Mr. Nason an option to purchase 15,000 shares of Common
Stock, at the fair market value on the date of grant, for his various services.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
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 officers, directors and more than 10% stockholders have
complied with the filing requirements applicable to them, except that each of
Messrs. Lackner and Nason did not timely file one statement.
29
<PAGE>
STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in
the cumulative total shareholder return on a $100 investment in the Company's
Common Stock against the cumulative total return of the Standard and Poor's 500
Index (S&P500) and a peer group constructed by the Company composed of
Department 56, Inc., Abercrombie & Fitch co., Bombay Co., Inc., Coldwater Creek,
Inc., Gap, Inc., Gucci Group, N.V., The Gymboree Corp., Starbucks Corp., Tiffany
Co. and Williams-Sonoma Grande Cuisine (the "Peer Group"). In addition, the
returns of the companies within the S&P500 and the Peer Group have been weighted
according to their respective market capitalizations.
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, 1998
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MAGI PEER GROUPS S&P 500
<S> <C> <C> <C>
8/2/94 100 100 100
3/31/95 88 87 109
3/31/96 38 159 141
3/31/97 67 195 165
3/31/98 272 324 240
</TABLE>
<TABLE>
<CAPTION>
RETURNS 8/2/94 3/31/95 3/31/96 3/31/97
- ---------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
MAGI.................................................................. 100 88 38 67
PEER GROUP............................................................ 100 87 159 195
S&P 500............................................................... 100 109 141 165
<CAPTION>
RETURNS 3/31/98
- ---------------------------------------------------------------------- -----------
<S> <C>
MAGI.................................................................. 272
PEER GROUP............................................................ 324
S&P 500............................................................... 240
</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.
30
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL STOCKHOLDERS
The following table sets forth, as of July 23, 1998, certain information
with respect to the beneficial ownership of shares of Common Stock of (i) each
person known to the Company to own beneficially more than 5% of the Company's
outstanding Common Stock, (ii) each director and Named Officer, and (iii) all
directors and executive officers of the Company as a group. Except as otherwise
indicated below, the persons listed have advised the Company that they have sole
voting and investment power with respect to the securities shown as owned by
them. On the Record Date, there were 13,015,038 shares of the Company's Common
Stock outstanding.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL PERCENTAGE OF
NAMES AND ADDRESSES OF BENEFICIAL OWNERS(1) OWNERSHIP(2) CLASS
- --------------------------------------------------------- -------------------- ---------------
<S> <C> <C>
Kenneth E. Raasch........................................ 3,660,208(3)(4) 27.7%
Thomas Kinkade........................................... 3,140,651(5)(6) 24.1%
Raymond A. Peterson...................................... 121,225(7) *
Daniel P. Byrne.......................................... 101,975(8) *
Michael L. Kiley......................................... 51,500(9) *
Craig A. Fleming......................................... 31,750(10) *
Norman A. Nason.......................................... 20,681(11) *
Norman T. Mahoney........................................ 7,500(12) *
W. Michael West.......................................... -- *
Directors, director nominees and executive officers as a
group (13 persons)(13)................................. 7,778,390 57.5%
</TABLE>
- ------------------------
* Less than one (1) percent.
(1) All addresses are 521 Charcot Avenue, San Jose, California 95131.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power
and/or investment power with respect to those securities and includes
shares of common stock issuable pursuant to the exercise of stock options
that are immediately exercisable or exercisable within 60 days. Unless
otherwise indicated, the persons or entities identified in this table have
sole voting and investment power with respect to all shares shown as
beneficially owned by them.
(3) 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.
(4) Includes 165,517 shares of Common Shares which may be acquired upon the
conversion of a $1,200,000 promissory note issued to Linda Raasch, the wife
of Mr. Raasch, on June 30, 1995. Also includes 15,000 shares subject to
options held by Mr. Raasch.
(5) Does not include an option to purchase 600,000 shares of the Company's
Common Stock granted as of December 3, 1997, subject to stockholder
approval at the 1998 Annual Meeting of Stockholders. See "Certain
Relationships and Related Transactions" on page 27.
(6) The shares owned by Mr. Kinkade are jointly held in the names of Mr. Thomas
Kinkade and Mrs. Nanette Kinkade.
(7) Includes 93,225 shares subject to options held by Mr. Peterson.
(8) Includes 101,225 shares subject to options held by Mr. Byrne.
(9) Includes 51,500 shares subject to options held by Mr. Kiley.
31
<PAGE>
(10) Includes 31,750 shares subject to options held by Mr. Fleming.
(11) Includes 20,681 shares subject to options held by Mr. Nason.
(12) Includes 6,500 shares subject to options held by Mr. Mahoney.
(13) Includes an aggregate of 344,581 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.
STOCKHOLDER PROPOSALS TO BE PRESENTED
AT THE NEXT ANNUAL MEETING
Proposals of stockholders intended to be presented at the next Annual
Meeting of Stockholders of the Company and included in the proxy statement and
form of proxy for such meeting (i) must be received by the Company at its
corporate offices no later than April 13, 1999, and (ii) must satisfy the
conditions established by the Securities and Exchange Commission for stockholder
proposals to be included in the Company's Proxy Statement for that meeting. New
SEC rules regarding stockholder proposals became effective on June 29, 1998.
Pursuant to these new rules, if the Company receives notice later than 45 days
before the anniversary of the mailing of the proxy materials for the last annual
meeting of any matter a stockholder intends to propose for a vote at the 1999
Annual Meeting of Stockholders, then a proxy solicited by the Board of Directors
of the Company may be voted on such matter in the discretion of the proxy
holder, without discusion of the matter in the proxy statement soliciting such
proxy and without such matter appearing as a separate item on the proxy card.
SOLICITATION 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.
TRANSACTION OF OTHER BUSINESS
At the date of this Proxy Statement, the Board of Directors knows of no
other business that will be conducted at the 1998 Annual Meeting of Stockholders
other than as described in this Proxy Statement. If any other matter or matters
are properly brought before the meeting, or any adjournment thereof, it is the
intention of the persons named in the accompanying form of Proxy to vote the
shares they represent on such matters in accordance with their best judgment.
An annual report on Form 10-K (excluding exhibits) for the fiscal year ended
March 31, 1998 is enclosed with this Proxy Statement.
By Order of the Board of Directors
James F. Landrum, Jr.
Secretary
August 21, 1998
32
<PAGE>
APPENDIX A
MEDIA ARTS GROUP, INC. 1998 STOCK INCENTIVE PLAN
<PAGE>
MEDIA ARTS GROUP, INC.
1998
STOCK INCENTIVE PLAN
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 2 ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . 4
2.1 Committee Composition. . . . . . . . . . . . . . . . . . . . . 4
2.2 Committee Responsibilities . . . . . . . . . . . . . . . . . . 5
ARTICLE 3 SHARES AVAILABLE FOR GRANTS. . . . . . . . . . . . . . . . . . 5
3.1 Basic Limitation . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 Unused Shares Under This Plan. . . . . . . . . . . . . . . . . 5
3.3 Unused Shares Under Prior Plans. . . . . . . . . . . . . . . . 5
3.4 Dividend Equivalents . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE 4 ELIGIBILITY. . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.1 General Rules. . . . . . . . . . . . . . . . . . . . . . . . . 6
4.2 Outside Directors. . . . . . . . . . . . . . . . . . . . . . . 6
4.3 Incentive Stock Options. . . . . . . . . . . . . . . . . . . . 7
ARTICLE 5 OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.1 Stock Option Agreement . . . . . . . . . . . . . . . . . . . . 7
5.2 Number of Shares . . . . . . . . . . . . . . . . . . . . . . . 7
5.3 Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . 7
5.4 Exercisability and Term. . . . . . . . . . . . . . . . . . . . 7
5.5 Expiration . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.6 Effect of Change in Control. . . . . . . . . . . . . . . . . . 8
5.7 Modification or Assumption of Options. . . . . . . . . . . . . 8
ARTICLE 6 PAYMENT FOR OPTION SHARES. . . . . . . . . . . . . . . . . . . 8
6.1 General Rule . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.2 Surrender of Stock . . . . . . . . . . . . . . . . . . . . . . 8
6.3 Exercise/Sale. . . . . . . . . . . . . . . . . . . . . . . . . 8
6.4 Exercise/Pledge. . . . . . . . . . . . . . . . . . . . . . . . 8
6.5 Promissory Note. . . . . . . . . . . . . . . . . . . . . . . . 9
6.6 Other Forms of Payment . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 7 STOCK APPRECIATION RIGHTS. . . . . . . . . . . . . . . . . . . 9
7.1 SAR Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 9
7.2 Number of Shares . . . . . . . . . . . . . . . . . . . . . . . 9
7.3 Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . 9
7.4 Exercisability and Term. . . . . . . . . . . . . . . . . . . . 9
7.5 Effect of Change in Control. . . . . . . . . . . . . . . . . . 9
7.6 Exercise of SARs . . . . . . . . . . . . . . . . . . . . . . . 10
7.7 Modification or Assumption of SARs . . . . . . . . . . . . . . 10
ARTICLE 8 STOCK UNITS. . . . . . . . . . . . . . . . . . . . . . . . . . 10
8.1 Time, Amount and Form of Awards. . . . . . . . . . . . . . . . 10
2
<PAGE>
<S> <C> <C>
8.2 Vesting Conditions . . . . . . . . . . . . . . . . . . . . . . 10
8.3 Form and Time of Settlement of Stock Units . . . . . . . . . . 10
8.4 Death of Recipient . . . . . . . . . . . . . . . . . . . . . . 11
8.5 Creditors' Rights. . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 9 VOTING AND DIVIDEND RIGHTS . . . . . . . . . . . . . . . . . . 11
9.1 Stock Units. . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 10 PROTECTION AGAINST DILUTION. . . . . . . . . . . . . . . . . . 11
10.1 Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . 11
10.2 Reorganizations. . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 11 AWARDS UNDER OTHER PLANS . . . . . . . . . . . . . . . . . . . 12
ARTICLE 12 PAYMENT OF DIRECTOR'S FEES IN SECURITIES . . . . . . . . . . . 12
12.1 Effective Date . . . . . . . . . . . . . . . . . . . . . . . . 12
12.2 Elections to Receive NSOs or Stock Units . . . . . . . . . . . 12
12.3 Number and Terms of NSOs or Stock Units. . . . . . . . . . . . 12
ARTICLE 13 LIMITATION ON RIGHTS . . . . . . . . . . . . . . . . . . . . . 13
13.1 Retention Rights . . . . . . . . . . . . . . . . . . . . . . . 13
13.2 Stockholders' Rights . . . . . . . . . . . . . . . . . . . . . 13
13.3 Regulatory Requirements. . . . . . . . . . . . . . . . . . . . 13
ARTICLE 14 LIMITATION ON PAYMENTS . . . . . . . . . . . . . . . . . . . . 13
14.1 Basic Rule . . . . . . . . . . . . . . . . . . . . . . . . . . 13
14.2 Reduction of Payments. . . . . . . . . . . . . . . . . . . . . 13
14.3 Overpayments and Underpayments . . . . . . . . . . . . . . . . 14
14.4 Related Corporations . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 15 WITHHOLDING TAXES. . . . . . . . . . . . . . . . . . . . . . . 14
15.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
15.2 Sharing Withholding. . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 16 ASSIGNMENT OR TRANSFER OF AWARDS . . . . . . . . . . . . . . . 15
16.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 17 FUTURE OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . 15
17.1 Term of the Plan . . . . . . . . . . . . . . . . . . . . . . . 15
17.2 Amendment or Termination . . . . . . . . . . . . . . . . . . . 15
ARTICLE 18 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 19 EXECUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
3
<PAGE>
MEDIA ARTS GROUP, INC.
1998 STOCK INCENTIVE PLAN
(Adopted Effective June 22, 1998)
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board on June 22, 1998, subject to approval by
the Company's stockholders at the annual meeting on September 17, 1998.
The purpose of the Plan is to promote the long-term success of the Company
and the creation of stockholder value by (a) encouraging Key Employees to focus
on critical long-range objectives, (b) encouraging the attraction and retention
of Key Employees with exceptional qualifications and (c) linking Key Employees
directly to stockholder interests through increased stock ownership. The Plan
seeks to achieve this purpose by providing for awards in the form of Stock
Units, Options (which may constitute incentive stock options or nonstatutory
stock options) or stock appreciation rights.
The Plan shall be governed by, and construed in accordance with, the laws
of the State of Delaware (except their choice-of-law provisions).
ARTICLE 2. ADMINISTRATION.
2.1 COMMITTEE COMPOSITION. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of directors of the Company,
who shall be appointed by the Board. In addition, the composition of the
Committee shall satisfy:
(a) Such requirements as the Securities and Exchange Commission may
establish for administrators acting under Plans intended to qualify for
exemption under Rule 16b-3 (or its successor) under the Exchange Act; and
(b) Such requirements as the Internal Revenue Service may establish
for outside directors acting under plans intended to qualify for exemption
under Section 162(m) (4) (C) of the Code.
The Board may also appoint one or more separate Committees of the Board,
each composed of one or more directors of the Company who need not satisfy the
foregoing requirements, who may administer the Plan with respect to Key
Employees who are not considered officers or directors of the Company under
Section 16 of the Exchange Act, may grant Awards under the Plan to such Key
Employees and may determine all terms of such Awards.
4
<PAGE>
2.2 COMMITTEE RESPONSIBILITIES. The Committee shall:
(a) Select the Key Employees who are to receive Awards under the
Plan;
(b) Determine the type, number, vesting requirements and other
features and Conditions of such Awards;
(c) Interpret the Plan; and
(d) Make all other decisions relating to the operation of the
Plan.
The Committee may adopt such rules or guidelines, as it deems appropriate
to implement the Plan. The Committee's determinations under the Plan shall be
final and binding on all persons.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 BASIC LIMITATION. Common Shares issued pursuant to the Plan may be
authorized by unissued shares or treasury shares. The aggregate number of Stock
Units, Options and SARs awarded under the Plan shall not exceed 500,000 plus the
number of Common Shares that remained available for issuance under the Prior
Plans at the time of the adoption of this Plan. (No additional awards shall be
made under the Prior Plans after the adoption of this Plan, unless the Company's
stockholders fail to approve this Plan as provided in Section 17.1.) The
limitation of this Section 3.1 shall be subject to adjustment pursuant to
Article 10.
3.2 UNUSED SHARES UNDER THIS PLAN. If Stock Units, Options or SARs are
forfeited or if Options or SARs terminate for any other reason before being
exercised, then the corresponding Common Shares shall again become available for
Awards under the Plan. If Stock Units are settled, then only the number of
Common Shares (if any) actually issued in settlement of such Stock Units shall
reduce the number available under Section 3.1 and the balance shall again become
available for Awards under the Plan. If SARs are exercised, then only the
number of Common Shares (if any) actually issued in settlement of such SARs
shall reduce the number available for Awards under the Plan. Common Shares
withheld or surrendered under Section 6.2 or 15.2 shall become available for
Awards under the Plan.
3.3 UNUSED SHARES UNDER PRIOR PLANS. If stock units, options or SARs
granted under the Prior Plans are forfeited after the adoption of this Plan or
if options or SARs granted under the Prior Plans terminate for any other reason
before being exercised, but after the adoption of this Plan, then the
corresponding Common Shares shall become available for Awards under this Plan.
3.4 DIVIDEND EQUIVALENTS. Any dividend equivalents distributed under
the Plan shall not be applied against the number of Stock Units, Options or SARs
available for Awards, whether or not such dividend equivalents are converted
into Stock Units.
5
<PAGE>
ARTICLE 4. ELIGIBILITY.
4.1 GENERAL RULES. Only Key Employees (including, without limitation,
independent contractors) shall be eligible for designation as Participants by
the Committee.
4.2 OUTSIDE DIRECTORS. Any other provision of the plan
notwithstanding, the participation of Outside Directors in the Plan shall be
subject to the following restrictions:
(a) Outside Directors (acting in their capacity as directors) shall
receive no Awards except as described in this Section 4.2 and Article 12.
(b) On the last business day in September of each year, each Outside
Director shall receive an NSO covering 5,000 Common Shares (subject to
adjustment under Article 10). Such NSO shall include an SAR exercisable
only during the 30-day period following Change in Control with respect to
the Company. Such NSO shall be cancelled to the extent that such SAR is
exercised, and such SAR shall be cancelled to the extent that such NSO is
exercised. Such SAR shall be settled only in cash and shall be subject to
the same terms and conditions (including the Exercise Price and the
expiration date) as the related NSO.
(c) All NSOs granted to an Outside Director under this Section 4.2
shall be immediately exercisable on the date of grant.
(d) The Exercise price under all NSOs granted to an Outside Director
under this Section 4.2 shall be equal to 85% or more of the Fair Market
Value of a Common Share on the date of grant, payable in one of the forms
described in Sections 6.1, 6.2, 6.3 and 6.4.
(e) All NSOs granted to an Outside Director under this Section 4.2
shall terminate on the earlier of:
(i) The tenth (10th) anniversary of the date of grant; or
(ii) The first (1st) anniversary of the termination of such
Outside Director's service for any reason.
(f) Each Outside Director who first becomes a member of the Board
after the adoption of this plan may receive, at the discretion of the
Board, a one-time grant of 1,000 Stock Units (subject to adjustment under
Article 10). Such Stock Units may be granted on the date when such Outside
Director first joins the Board.
(g) All Stock Units granted to an Outside Director under this Section
4.2 shall be settled by issuing an equal number of Common Shares to such
Outside Director. The issuance shall occur on the earliest of:
6
<PAGE>
(i) The first anniversary of the date of grant;
(ii) The date of Change in Control with respect to the Company;
or
(iii) The date of the termination of such Outside Director's
service for any reason.
4.3 INCENTIVE STOCK OPTIONS. Only Key Employees who are common-law
employees of the Company, a Parent or a Subsidiary shall be eligible for the
grant of ISOs. In addition, a Key Employee who owns more than 10% of the total
combined voting power of all classes of outstanding stock of the Company or any
of its Parents or Subsidiaries shall not be eligible for the grant of an ISO
unless the requirements set forth in Section 422 (c) (6) of the Code are
satisfied.
ARTICLE 5. OPTIONS.
5.1 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms of the Plan and
may be subject to any other terms that are not inconsistent with the Plan.
The Stock Option Agreement shall specify whether the Option is an ISO or an
NSO. The provisions of the various Stock Option Agreements entered into
under the Plan need not be identical. Options may be granted in
consideration of a cash payment or in consideration of a reduction in the
Optionee's other compensation. A Stock Option Agreement may provide that new
Options will be granted automatically to the Optionee when he or she
exercises the prior Options.
5.2 NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10. Options granted to any
Optionee in a single calendar year shall in no event cover more than 200,000
Common Shares, subject to adjustment in accordance with Article 10.
5.3 EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price; provided that the Exercise Price under an ISO shall in no event
be less than 100% of the Fair Market Value of a Common Share on the date of
grant and the Exercise Price under an NSO shall in no event be less than 85% of
the Fair Market Value of a Common Share on the date of grant. In the case of an
NSO, a Stock Option Agreement may specify an Exercise Price that varies in
accordance with a predetermined formula while the NSO is outstanding.
5.4 EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify
the date when all or any installment of the Option is to become exercisable.
The Stock Option Agreement shall also specify the term of the Option; provided
that the term of an ISO shall in no event exceed 10 years from the date of
grant.
7
<PAGE>
Options may be awarded in combination with SARs, and such an Award may
provide that the Options will not be exercisable unless the related SARs are
forfeited. NSOs may also be awarded in combination with Stock Units and such
an Award may provide that the NSOs will not be exercisable unless the related
Stock Units are forfeited. Optionees may be required to comply with any
timing or other restrictions with respect to settlement or exercise of an
Option, including a window-period limitation, as may be imposed in the
discretion of the Committee.
5.5 EXPIRATION.
5.5.1 ISO GRANTS.
An ISO may not be exercised to any extent after the first to occur
of the following events:
(a) The expiration of ten (10) years from the date the ISO
was granted; or
(b) If the employee owned (within the meaning of Section
424(d) of the Code), at the time the ISO was granted, more
than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Subsidiary
or Parent thereof, the expiration of five (5) years from
the date the ISO was granted; or
(c) The time of the employee's termination of employment
unless such termination of employment results from his
death, his retirement, his disability (within the meaning
of Section 22(e)(3) of the Code), his voluntary termination
or his being discharged not for good cause; or
(d) The expiration of three (3) months from the date of the
employee's termination of employment by reason of his
retirement, his voluntary termination or his being
discharged not for good cause, unless the employee dies
within said three-month period; or
(e) The expiration of one (1) year from the date of the
employee's termination of employment by reason of his
disability (within the meaning of Section 22(c)(3) of the
Code); or
(f) The expiration of one (1) year from the date of the
employee's death.
5.5.2 NSO Grants to independent contractors.
An NSO may not be exercised to any extent after the first to occur
of the following events:
(a) The expiration of ten (10) years from the date the NSO
was granted; or
(b) The time of the independent contractor's termination of
employment unless such termination of employment results
from his death, his retirement, his disability (within
the meaning of Section 22(e)(3) of the Code), his
voluntary termination or his being discharged not for
good cause; or
(c) The expiration of one (1) year from the date of the
consultant's termination of employment by reason of his
retirement, his voluntary termination or his being
discharged not for good cause, unless the independent
contractor dies within said one-year period; or
(d) The expiration of one (1) year from the date of the
independent contractor's termination of employment by
reason of his disability (within the meaning of Section
22(e)(3) of the Code); or
(e) The expiration of one (1) year from the date of the
independent contractor's death.
5.5.3 NSO grants to employees
An NSO may not be exercised to any extent after the first to occur
of the following events:
(a) The expiration of ten (10) years from the date the NSO
was granted; or
(b) The time of the employee's termination of employment
unless such termination of employment results from his
death, his retirement, his disability (within the meaning
of Section 22(e)(3) of the Code), his voluntary
termination or his being discharged not for good cause; or
(c) The expiration of six (6) months from the date of the
employee's termination of employment by reason of his
retirement, his voluntary termination or his being
discharged not for good cause, unless the employee dies
within said six-month period; or
(d) The expiration of one (1) year from the date of the
employee's termination of employment by reason of his
disability (within the meaning of Section 22(e)(3) of the
Code); or
(e) The expiration of one (1) year from the date of the
employee's death.
5.6 EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the
time of granting an Option or thereafter, that such Option shall become fully
exercisable as to all Common Shares subject to such Option in the event that a
Change in Control occurs with respect to the Company.
5.7 MODIFICATION OR ASSUMPTION OF OPTIONS. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding options or may
accept the cancellation of outstanding options in return for the grant of new
options for the same or a different number of shares and at the same or a
different exercise price. The foregoing notwithstanding, no modification of an
Option shall, without the consent of the Optionee, alter or impair his or her
rights or obligations under such option.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 GENERAL RULE. The entire Exercise Price of Common Shares issued
upon exercise of Options shall be payable in cash at the time when such Common
Shares are purchased, except as follows:
(a) In the case of an ISO granted under the plan, payment shall be
made only pursuant to the express provisions of the applicable Stock Option
Agreement. The Stock Option Agreement may specify that payment may be made
in any form(s) described in this Article 6.
(b) In the case of an NSO, the Committee may at any time accept
payment in any form(s) described in this Article 6.
6.2 SURRENDER OF STOCK. To the extent that this Section 6.2 is
applicable, payment for all or any part of the Exercise Price may be made with
Common Shares which have already been owned by the Optionee for more than six
months. Such Common Shares shall be valued at their Fair Market Value on the
date when the new Common Shares are purchased under the Plan.
6.3 EXERCISE/SALE. To the extent that this Section 6.3 is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to a securities broker approved by the Company to sell
Common Shares in payment of all or part of the Exercise Price and any
withholding taxes.
6.4 EXERCISE/PLEDGE. To the extent that this Section 6.4 is
applicable, payment may be made by the delivery (on a form prescribed by the
Company) of an irrevocable direction to pledge Common Shares to a securities
broker or lender approved by the Company, as security
8
<PAGE>
for a loan, and to deliver all or part of the loan proceeds to the Company in
payment of all or part of the Exercise Price and any withholding taxes.
6.5 PROMISSORY NOTE. To the extent that this Section 6.5 is
applicable, payment may be made with a full-recourse promissory note; provided
that the par value of the Common Shares shall be paid in cash.
6.6 OTHER FORMS OF PAYMENT. To the extent that this Section 6.6 is
applicable, payment may be made in any other form that is consistent with
applicable laws, regulations and rules.
ARTICLE 7. STOCK APPRECIATION RIGHTS.
7.1 SAR AGREEMENT. Each grant of an SAR under the Plan shall be
evidenced by a SAR Agreement between the Optionee and the Company. Such SAR
shall be subject to all applicable terms of the Plan and may be subject to any
other terms that are not inconsistent with the Plan. The provisions of the
various SAR Agreements entered into under the Plan need not be identical. SARs
may be granted in consideration of a reduction in the Optionee's other
compensation.
7.2 NUMBER OF SHARES. Each SAR Agreement shall specify the number of
Common Shares to which the SAR pertains and shall provide for the adjustment of
such number in accordance with Article 10. SARs granted to any Optionee in a
single calendar year shall in no event pertain to more than 200,000 Common
Shares, subject to adjustment in accordance with Article 10.
7.3 EXERCISE PRICE. Each SAR Agreement shall specify the Exercise
Price. An SAR Agreement may specify an Exercise Price that varies in accordance
with a predetermined formula while the SAR is outstanding.
7.4 EXERCISABILITY AND TERM. Each SAR Agreement shall specify the date
when all or any installment of the SAR is to become exercisable. The SAR
Agreement shall also specify the term of the SAR. An SAR Agreement may provide
for accelerated exercisability in the event of the Optionee's death, disability
or retirement or other events and may provide for expiration prior to the end of
its term in the event of the termination of the Optionee's service. SARs may
also be awarded in combination with Options or Stock Units, and such an Award
may provide that the SARs will not be exercisable unless the related Options or
Stock Units are forfeited. An SAR may be included in an ISO only at the time of
grant but may be included in an NSO at the time of grant or thereafter. An SAR
granted under the Plan may provide that it will be exercisable only in the event
of a Change in Control.
7.5 EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the
time of granting an SAR or thereafter, that such SAR shall become fully
exercisable as to all Common Shares subject to such SAR in the event that a
Change in Control occurs with respect to the Company.
9
<PAGE>
7.6 EXERCISE OF SARS. The exercise of an SAR shall be subject to the
restrictions imposed by Rule 16b-3 (or its successor) under the Exchange Act, if
applicable. If, on the date when an SAR expires, the Exercise Price under such
SAR is less than the Fair Market Value on such date but any portion of such SAR
has not been exercised or surrendered, then such SAR shall automatically be
deemed to be exercised as of such date with respect to such portion. Upon
exercise of an SAR, the Optionee (or any person having the right to exercise the
SAR after his or her death) shall receive from the Company (a) Common Shares,
(b) cash or (c) a combination of Common Shares and cash, as the Committee
shall determine. The amount of cash and/or the Fair Market Value of Common
Shares received upon exercise of SARs shall, in the aggregate, be equal to the
amount by which the Fair Market Value (on the date of surrender) of the Common
Shares subject to the SARs exceeds the Exercise Price.
7.7 MODIFICATION OR ASSUMPTION OF SARS. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding SARs or may accept
the cancellation of outstanding SARs in return for the grant of new SARs for the
same or a different number of shares and at the same or a different exercisable
price. The foregoing notwithstanding, no modification of an SAR shall, without
the consent of the Optionee, alter or impair his or her rights or obligations
under such SAR.
ARTICLE 8. STOCK UNITS.
8.1 TIME, AMOUNT AND FORM OF AWARDS. Awards under the Plan may be
granted in the form of Stock Units. Stock Units may also be awarded in
combination with NSOs or SARs, and such an Award may provide that the Stock
Units will be forfeited in the event that the related NSOs or SARs are
exercised.
8.2 VESTING CONDITIONS. Each Award of Stock Units shall become vested,
in full or in installments, upon satisfaction of the conditions specified in the
Stock Award Agreement. A Stock Award Agreement may provide for accelerated
vesting in the event of the Participant's death, disability or retirement or
other events. The Committee may determine, at the time of making an Award or
thereafter, that such Award shall become fully vested in the event that a Change
in Control occurs with respect to the Company.
8.3 FORM AND TIME OF SETTLEMENT OF STOCK UNITS. Settlement of vested
Stock Units may be made in the form of (a) cash, (b) Common Stock or (c)
any combination of both, as determined by the Committee. The actual number
of Stock Units eligible for settlement may be larger or smaller than the
number included in the original Award, based on predetermined performance
factors. Methods of converting Stock Units into cash may include (without
limitation) a method based on the average Fair Market Value of Common Shares
over a series of trading days. Vested Stock Units may be settled in a lump
sum or in installments. The distribution may occur or commence when all
vesting conditions applicable to the Stock Units have been satisfied or have
lapsed, or it may be deferred to any later date. The amount of a deferred
distribution may be increased by an interest factor or by dividend
equivalents. Until an
10
<PAGE>
Award of Stock Units is settled, the number of such Stock Units shall be
subject to adjustment pursuant to the Article 10.
8.4 DEATH OF RECIPIENT. Any Stock Units Award that becomes payable
after the recipient's death shall be distributed to the recipient's
beneficiary or beneficiaries. Each recipient of a Stock Units Award under
the Plan shall designate one or more beneficiaries for this purpose by filing
the prescribed form with the Company. A beneficiary designation may be
changed by filing the prescribed form with the Company at any time before the
Award recipient's death. If no beneficiary was designated or if no designated
beneficiary survives the Award recipient, then any Stock Units Award that
becomes payable after the recipient's death shall be distributed to the
recipient's estate.
8.5 CREDITOR'S RIGHTS. A holder of Stock Units shall have no rights
other than those of a general creditor of the Company. Stock Units represent
an unfunded and unsecured obligation of the Company, subject to the terms and
conditions of the applicable Stock Award Agreement.
ARTICLE 9. VOTING AND DIVIDEND RIGHTS.
9.1 STOCK UNITS. The holders of Stock Units shall have no voting
rights. Prior to settlement or forfeiture, any Stock Unit awarded under the
Plan may, at the Committee's discretion, carry with it a right to dividend
equivalents. Such right entitles the holder to be credited with an amount
equal to all cash dividends paid on one Common Share while the Stock Unit is
outstanding. Dividend equivalents may be converted into additional Stock
Units. Settlement of dividend equivalents may be made in the form of cash, in
the form of Common Shares, or in a combination of both. Prior to
distribution, any dividend equivalents, which are not paid, shall be subject
to the same conditions and restrictions as the Stock Units to which they
attach.
ARTICLE 10. PROTECTION AGAINST DILUTION.
10.1 ADJUSTMENTS. In the event of a subdivision of the outstanding
Common Shares, a declaration of a dividend payable in Common Shares, a
declaration of a dividend payable in a form other than Common Shares in an
amount that has a material effect on the price of Common Shares, a
combination or consolidation of the outstanding Common Shares (by
reclarification or otherwise) into a lesser number of Common Shares, a
recapitalization, a spin-off or a similar occurrence, the Committee shall
make such adjustments as it, in its sole discretion, deems appropriate in one
or more of:
(a) The number of Options, SARs and Stock Units available for
future Awards under Article 3;
(b) The limitations set forth in Sections 5.2 and 7.2;
11
<PAGE>
(c) The number of NSOs and Stock Units to be granted to Outside
Directors under Section 4.2;
(d) The number of Stock Units included in any prior Award which has
not yet been settled;
(e) The number of Common Shares covered by each outstanding Option
and SAR; or
(f) The Exercise Price under each outstanding Option and SAR.
Except as provided in this Article 10, a Participant shall have no rights
by reason of any issue by the Company of stock of any class or securities
convertible into stock of any class, any subdivision or consolidation of shares
of stock of any class, the payment of any stock dividend or any other increase
or decrease in the number of shares of stock of any class.
10.2 REORGANIZATIONS. In the event that the Company is a party to a
merger or other reorganization, outstanding Options, SARs, and Stock Units shall
be subject to the agreement of merger or reorganization. Such agreement may
provide, without limitation, for the assumption of outstanding Awards by the
surviving corporation or its parent, for their continuation by the Company (if
the Company is a surviving corporation), for accelerated vesting and accelerated
expiration, or for settlement in cash.
ARTICLE 11. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such awards
may be settled in the form of Common Shares issued under this Plan. Such Common
Shares shall be treated for all purposes under the Plan like Common Shares
issued in settlement of Stock Units and shall, when issued, reduce the number of
Common Shares available under Article 3.
ARTICLE 12. PAYMENT OF DIRECTOR'S FEES IN SECURITIES.
12.1 EFFECTIVE DATE. No provision of this Article 12 shall be effective
unless and until the Board has determined to implement such provision.
12.2 ELECTIONS TO RECEIVE NSOS OR STOCK UNITS. An Outside Director may
elect to receive his or her meeting fees from the Company in the form of cash,
NSOs, Stock Units, or a combination thereof, as determined by the Board. Such
NSOs and Stock Units shall be issued under the Plan. An election under this
Article 12 shall be filed with the Company on the prescribed form.
12.3 NUMBER AND TERMS OF NSOS OR STOCK UNITS. The number of NSOs or
Stock Units to be granted to Outside Directors in lieu of meeting fees that
would otherwise be paid in cash shall be calculated in a manner determined by
the Board. The terms of such NSOs or Stock Units shall also be determined by
the Board.
12
<PAGE>
ARTICLE 13. LIMITATION ON RIGHTS.
13.1 RETENTION RIGHTS. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain an employee,
consultant or director of the Company, a Parent or a Subsidiary. The Company
and its Subsidiaries reserve the right to terminate the service of any employee,
consultant or director at any time, with or without cause, subject to applicable
laws, the Company's certificate of incorporation and by-laws and a written
employment agreement (if any).
13.2 STOCKHOLDERS' RIGHTS. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Common Shares
covered by his or her Award prior to the issuance of a stock certificate for
such Common Shares. No adjustment shall be made for cash dividends or other
rights for which the record date is prior to the date when such certificate is
issued, except as expressly provided in Articles 8, 9 and 10.
13.3 REGULATORY REQUIREMENTS. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Common Shares pursuant
to any Award prior to the satisfaction of all legal requirements relating to the
issuance of such Common Shares, to their registration, qualification or listing
or to an exemption from registration, qualification or listing.
ARTICLE 14. LIMITATION ON PAYMENTS.
14.1 BASIC RULE. Any provision of the Plan to the contrary
notwithstanding, in the event that the independent auditors most recently
selected by the Board (the "Auditors") determine that any payment or transfer by
the Company under the Plan to or for the benefit of a Participant (a "Payment")
would be nondeductible by the Company for federal income tax purposes because of
the provisions concerning "excess parachute payments" in Section 280G of the
Code, then the aggregate present value of all Payments shall be reduced (but not
below zero) to the Reduced Amount; provided that the Committee, at the time of
making an Award under this Plan or at any time thereafter, may specify in
writing that such Award shall not be so reduced and shall not be subject to this
Article 14. For purposes of this Article 14, the "Reduced Amount" shall be the
amount, expressed as a present value, which maximizes the aggregate present
value of the Payments without causing any Payment to be nondeductible by the
Company because of Section 280G of the Code.
14.2 REDUCTION OF PAYMENTS. If the Auditors determine that any Payment
would be nondeductible by the Company because of Section 280G of the Code, then
the Company shall promptly give the Participant notice to that effect and a copy
of the detailed calculation thereof and of the Reduced Amount, and the
Participant may then elect, in his or her sole discretion, which and how much of
the payments shall be eliminated or reduced (as long as after such election the
aggregate present value of the Payments equals the Reduced Amount) and shall
advise the Company in writing of his or her election within 10 days of receipt
of notice. If no
13
<PAGE>
such election is made by the participant within such 10-day period, then the
Company may elect which and how much of the Payments shall be eliminated or
reduced (as long as after such election the aggregate present value of the
payments equals the Reduced Amount) and shall notify the Participant promptly
of such election. For purposes of this Article 14, present value shall be
determined in accordance with Section 280G (d) (4) of the Code. All
determinations made by the Auditors under this Article 14 shall be binding
upon the Company and the Participant and shall be made within 60 days of the
date when a Payment becomes payable or transferable. As promptly as
practicable following such determination and the elections hereunder, the
Company shall pay or transfer to or for the benefit of the Participant such
amounts as are then due to him or her under the Plan and shall promptly pay
or transfer to or for the benefit of the Participant in the future such
amounts as become due to him or her under the Plan.
14.3 OVERPAYMENTS AND UNDERPAYMENTS. As a result of uncertainty in the
application of Section 280G of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that Payments will have been made by
the Company which should not have been made (an "Overpayment") or that
additional Payments which will not have been made by the Company could have been
made (an "Underpayment"), consistent in each case with the calculation of the
Reduced Amount hereunder. In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company or
the Participant which the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Participant which he or she shall repay to the
Company, together with interest at the applicable federal rate provided in
Section 7872(f) (2) of the Code; provided, however, that no amount shall be
payable by the Participant to the Company if and to the extent that such payment
would not reduce the amount which is subject to taxation under Section 4999 of
the Code. In the event that the Auditors determine that an Underpayment has
occurred, such Underpayment shall promptly be paid or transferred by the Company
to or for the benefit of the Participant, together with interest at the
applicable federal rate provided in Section 7872(f) (2) of the Code.
14.4 RELATED CORPORATIONS. For purposes of this Article 14, the term
"Company" shall include affiliated corporations to the extent determined by the
Auditors in accordance with Section 280G(d) (5) of the Code.
ARTICLE 15. WITHHOLDING TAXES.
15.1 GENERAL. To the extent required by applicable federal, state,
local or foreign law, a Participant or his or her successor shall make
arrangements satisfactory to the Company for the satisfaction of any withholding
tax obligations that arise in connection with the Plan. The Company shall not
be required to issue any Common Shares or make any cash payment under the Plan
until such obligations are satisfied.
15.2 SHARE WITHHOLDING. The Committee may permit a Participant to
satisfy all or part of his or her withholding or income tax obligations by
having the Company withhold all or a portion of any Common Shares that otherwise
would be issued to him or her or by surrendering all or a portion of any Common
Shares that he or she previously acquired. Such Common Shares
14
<PAGE>
shall be valued at their Fair Market Value on the date when taxes otherwise
would be withheld in cash. Any payment of taxes by assigning Common Shares
to the Company may be subject to restrictions, including any restrictions
required by rules of the Securities and Exchange Commission.
ARTICLE 16. ASSIGNMENT OR TRANSFER OF AWARDS.
16.1 GENERAL. Except as provided in Article 15, an Award granted
under the Plan shall not be anticipated, assigned, attached, garnished,
optioned, transferred or made subject to any creditor's process, whether
voluntarily, involuntarily or by operation of law. An Option or SAR may be
exercised during the lifetime of the Optionee only by him or her or by his or
her guardian or legal representative. Any act in violation of this Article 16
shall be void. However, this Article 16 shall not preclude a Participant from
designating a beneficiary who will receive any outstanding Awards in the event
of the Participant's death, nor shall it preclude a transfer of Awards by will
or by the laws of descent and distribution.
ARTICLE 17. FUTURE OF THE PLAN.
17.1 TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective on June 22, 1998, subject to approval by the Company's stockholders at
the annual meeting on September 17, 1998. In the event that the Company's
stockholders fail to approve the Plan at such meeting, the Plan and all Awards
granted under the Plan shall be rescinded, but the Prior Plans shall remain in
effect and available for making grants. This Plan shall remain in effect until
it is terminated under Section 17.2, except that no ISOs shall be granted after
June 21, 2008.
17.2 AMENDMENT OR TERMINATION. The Board may, at any time and for any
reason, amend or terminate the Plan. An amendment of the Plan shall be subject
to the approval of the Company's stockholders only to the extent required by
applicable laws, regulations or rules. No Awards shall be granted under the
Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not affect any Award previously granted under the Plan.
ARTICLE 18. DEFINITIONS.
18.1 "AWARD" means any award of an Option, an SAR or a Stock Unit under the
Plan.
18.2 "BOARD" means the Company's Board of Directors, as constituted from
time to time.
18.3 "CHANGE IN CONTROL" means:
(a) That the holders of the voting securities of the Company have approved
a merger of consolidation of the Company with any other entity unless:
(i) The proposed merger or consolidation would result in the
15
<PAGE>
voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or
by being converted into voting securities of the surviving entity)
at least 50% of the total voting power represented by the voting
securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; or
(ii) Prior to the effective date of such merge or consolidation, the
Board (as constituted immediately prior to such effective date)
adopts a resolution that for purposes of the Plan no Change in
Control shall be occurred;
(b) That a plan of complete liquidation of the Company has been
adopted or the holders of voting securities of the Company have proved an
agreement for the sale or disposition by the Company (in one transaction or
a series of transactions) of all or substantially all of the Company's
assets;
(c) That any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act)(excluding current 15%+ stockholders),
directly or indirectly, of 15% or more of the combined voting power of the
Company's then outstanding shares, unless, within 30 business days after
notice to the Company of such event, the Board (as constituted immediately
prior to such event) adopts a resolution that for purposes of the Plan no
Change in Control shall have occurred (which resolution may be revoked by
the Board at any time, in which case a Change in Control shall be deemed to
have occurred as of the date such revocation becomes effective);
(d) That, during any period of two consecutive years, members who at
the beginning of such period constituted the Board have ceased for any
reason to constitute a majority thereof, unless the election, or nomination
for election by the Company's stockholders, of each director has been
approved by the vote of at least two-thirds of the directors then still in
office who were directors at the beginning of such period; or
(e) The occurrence of any other change in control of a nature that
would be required to be reported in accordance with Item 1(a) of Form 8-K
pursuant to Sections 13 or 15(d) of the Exchange Act or in the Company's
proxy statement in accordance with Schedule 14A of the Regulation 14A
promulgated under the Exchange Act (or in any successor forms or
regulations to the same effect), unless, within 30 business days after
notice to the Company of such events, the Board (as constituted immediately
prior to such event) adopts a resolution that for purposes of the Plan no
Change in Control shall have occurred (which resolution may be revoked at
any time, in which case a Change in Control shall be deemed to have
occurred as of the date such revocation becomes effective).
18.4 "CODE" means the Internal Revenue Code of 1986, as amended.
16
<PAGE>
18.5 "COMMITTEE" means a Committee of the Board, as described in Article 2.
18.6 "COMMON SHARE" means one share of the common stock of the Company.
18.7 "COMPANY" means Media Arts Group, Inc., a Delaware corporation.
18.8 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
18.9 "EXERCISE PRICE," in the case of an Option, means the amount for which
one Common Share may be purchased upon exercise of such Option, as
specified in the applicable Stock Option Agreement. "Exercise Price, " in
the case of an SAR, means an amount, as specified in the applicable SAR
Agreement, which is subtracted from the Fair Market Value of one Common
Share in determining the amount payable upon exercise of such SAR.
18.10 "FAIR MARKET VALUE" means the market price of Common Shares,
determined by the Committee as follows:
(a) If the Common Shares were traded over-the-counter on the date in
question but were not classified as a national market issue, then the Fair
Market Value shall be equal to the mean between the last reported
representative bid and asked prices quoted by the Nasdaq system for such
date;
(b) If the Common Shares were traded over-the-counter on the date in
question and were classified as a national market issue, then the Fair
Market Value shall be equal to the last transaction price quoted by the
NASDAQ system for such date;
(c) If the Common Shares were traded on a stock exchange on the date
in question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite transactions report for such date; and
(d) If none of the forgoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith on such
basis as it deems appropriate.
18.11 "ISO" means an incentive stock option described in Section 422
(b) of the Code.
18.12 "KEY EMPLOYEE" means (a) a common-law employee of the Company, a
Parent or a Subsidiary, (b) an Outside Director and (c) a consultant or
advisor who provides services to the Company, a Parent or a Subsidiary as
an independent contractor. Service as an Outside Director or as an
independent contractor shall be considered employment for all purposes of
the Plan, except as provided in Sections 4.2 and 4.3.
18.13 "NSO" means a stock option not described in Sections 422 and 423
of the Code.
17
<PAGE>
18.14 "OPTION" means an ISO or NSO granted under the Plan and entitling
the holder to purchase one Common Share.
18.15 "OPTIONEE" means an individual or estate that holds an Option or
SAR.
18.16 "OUTSIDE DIRECTOR" shall mean a member of the Board who is not a
common-law-employee of the Company, a Parent or a Subsidiary.
18.17 "PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a
Parent on a date after the adoption of the Plan shall be considered a
Parent commencing such date.
18.18 "PARTICIPANT" means an individual or estate that holds an Award.
18.19 "PLAN" means this Media Arts Group, Inc., 1998 Stock Incentive
Plan, as amended from time to time.
18.20 "PRIOR PLANS" means the Media Arts Group, Inc. Employee Stock
Option Plan and Stock Option Plan for Directors.
18.21 "SAR" means a stock appreciation right granted under the Plan.
18.22 "SAR AGREEMENT" means the agreement between the Company and an
Optionee, which contains the terms, conditions and restrictions pertaining
to his or her SAR.
18.23 "STOCK AWARD AGREEMENT" means the agreement between the Company
and the recipient of a Stock Unit, which contains the terms, conditions and
restrictions pertaining to such Stock Unit.
18.24 "STOCK OPTION AGREEMENT" means the agreement between the
Company and an Optionee, which contains the terms, conditions and
restrictions pertaining to his or her Option.
18.25 "STOCK UNIT" means a bookkeeping entry representing the
equivalent of one Common Share, as awarded under the Plan.
18.26 "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns
stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain. A
corporation that attains the status of a Subsidiary on a date after the
adoption of the Plan shall be considered a Subsidiary commencing as of such
date.
ARTICLE 19. EXECUTION.
To record the adoption of the Plan by the Board, the Company has caused
its duly authorized officer to affix the corporate name and seal hereto.
MEDIA ARTS GROUP, INC.
BY: _________________________
18
<PAGE>
APPENDIX B
NON-QUALIFIED STOCK OPTION AGREEMENT BETWEEN MEDIA ARTS
GROUP, INC. AND THOMAS KINKADE
<PAGE>
MEDIA ARTS GROUP, INC.
EMPLOYEE NONQUALIFIED STOCK OPTION AGREEMENT
THIS NONQUALIFIED STOCK OPTION AGREEMENT (this "Agreement"), is
made and entered into as of December 3, 1997 between MEDIA ARTS GROUP, INC.,
a Delaware corporation (the "Company"), and Thomas Kinkade ("Optionee").
THE PARTIES AGREE AS FOLLOWS:
1. GRANT OF OPTION; EFFECTIVE DATE.
1.1 GRANT. The Company hereby grants to Optionee a
NONQUALIFIED stock option (the "NQO") to purchase all or any part of an
aggregate of 600,000 shares (the "NQO Shares") of the Company's common stock
("Common Stock") on the terms and conditions set forth herein.
1.2 EFFECTIVE DATE. The effective date of this NQO is
December 3, 1997("Effective Date").
2. EXERCISE PRICE. The exercise price for purchase of the shares
of Common Stock covered by this NQO shall be $12.375 per share.
3. TERM. Subject to Section 5.2, this NQO shall expire on the
fifteenth anniversary of the Effective Date.
4. ADJUSTMENT OF NQOS. The Company shall adjust the number and
kind of shares and the exercise price thereof in the event of any merger,
reorganization, consolidation, recapitalization, stock dividend, stock split,
spin-off, sale of substantial assets, or other change in corporate structure
affecting the Common Stock; provided, that the number of shares subject to
this NQO shall always be rounded down to the nearest whole number.
5. EXERCISE OF OPTIONS.
5.1 TIME OF EXERCISE. This NQO shall be exercisable with
respect to 100% of the NQO Shares commencing on December 3, 1997.
5.2 EXERCISE AFTER TERMINATION OF EMPLOYEE STATUS. In the
event that Optionee ceases to be an employee of the Company or any of its
subsidiaries for any reason other than death or permanent disability, this
NQO may be exercised at any time within twelve (12) months after the date of
termination (but in no event after the expiration date of this NQO), but not
thereafter. If Optionee's termination is due to death or
<PAGE>
permanent disability, or Optionee dies or becomes disabled within the period
that this NQO remains exercisable after termination, this NQO may be
exercised by the Optionee in the case of disability, by the Optionee's
personal representative or by the person to whom this NQO is transferred by
will or the laws of descent and distribution, at any time within two years
after the death or two years after the disability, as the case may be, of
Optionee (but in no event after the expiration of this NQO).
5.3 MANNER OF EXERCISE. Optionee may exercise this NQO, or
any portion of this NQO, by giving written notice to the Company at its
principal executive office, to the attention of the Secretary of the Company,
accompanied by a copy of the Stock Purchase Agreement in substantially the
form attached hereto as Exhibit 1 executed by Optionee (or at the option of
the Company such other form of stock purchase agreement as shall then be
acceptable to the Company), payment of the exercise price and payment of any
applicable withholding taxes. The date the Company receives written notice
of an exercise hereunder accompanied by payment will be considered as the
date this NQO was exercised.
Promptly after receipt of written notice of exercise of the NQO,
the Company shall, without stock issue or transfer taxes to the Optionee or
other person entitled to exercise, deliver to the Optionee or other person a
certificate or certificates for the requisite number of Shares. The Optionee
or transferee of the Optionee shall not have any privileges as a shareholder
with respect to any NQO Shares covered by this NQO until the date of issuance
of a stock certificate.
5.4 PAYMENT. Payment in full, shall be made for all NQO
Shares purchased at the time written notice of exercise of the NQO is given
to the Company, either (i) in cash or (ii) pursuant to a loan evidenced by a
promissory note; provided that the par value of the Common Stock shall be
paid in cash. Proceeds of any payment shall constitute general funds of the
Company. At the time of exercise of the NQO (or at such later time(s) as the
Company may prescribe), the Optionee shall remit to the Company all United
States federal and state withholding taxes determined by the Company to be
applicable.
6. NONASSIGNABILITY OF NQO. This NQO is not assignable or
transferable by Optionee except by will, the laws of descent and distribution
and to the extent approved by the Committee, pursuant to a qualified domestic
relations order as defined by the Code or the rules thereunder. Except as
otherwise provided in Section 5.2 in the event of an Optionee's death or
disability, only the Optionee may exercise the NQO. Any attempt to assign,
pledge, transfer, hypothecate or otherwise dispose of this NQO in a manner
not herein permitted, and any levy of execution, attachment or similar
process on this NQO, shall be null and void.
<PAGE>
7. MARKET STANDOFF. Optionee hereby agrees that if so requested
by the Company or any representative of the underwriters in connection with
any registration of the offering of the securities of the Company under the
Securities Act of 1933, as amended (the "Act"), Optionee shall not sell or
otherwise transfer any shares acquired upon exercise of this NQO (the
"Exercised Shares") for a period of up to 365 days following the effective
date of a Registration Statement filed under the Act. The Company may impose
stop-transfer instructions with respect to the Exercised Shares subject to
the foregoing restrictions until the end of each such 365-day period.
8. RESTRICTION ON ISSUANCE OF SHARES.
8.1 LEGALITY OF ISSUANCE. The Company shall not be obligated
to sell or issue any Exercised Shares pursuant to this Agreement if such sale
or issuance, in the opinion of the Company and the Company's counsel, might
constitute a violation by the Company of any provision of law, including
without limitation the provisions of the Act.
8.2 REGISTRATION OR QUALIFICATION OF SECURITIES. The Company
may, but shall not be required to, register or qualify the sale of this NQO
or any Exercised Shares under the Act or any other applicable law. The
Company shall not be obligated to take any affirmative action in order to
cause the grant or exercise of this option or the issuance or sale of any
Exercised Shares pursuant thereto to comply with any law.
9. RESTRICTION ON TRANSFER. Regardless of whether the sale of
the Exercised Shares has been registered under the Act or has been registered
or qualified under the securities laws of any state, the Company may impose
restrictions upon the sale, pledge or other transfer of Exercised Shares
(including the placement of appropriate legends on stock certificates) if, in
the judgment of the Company and the Company's counsel, such restrictions are
necessary or desirable in order to achieve compliance with the provisions of
the Act, the securities laws of any state, or any other law.
10. STOCK CERTIFICATE RESTRICTIVE LEGENDS. Stock certificates
evidencing Exercised Shares may bear such restrictive legends as the Company
and the Company's counsel deem necessary or advisable under applicable law or
pursuant to this Agreement, including, without limitation, the following
legends:
"The offering and sale of the securities represented hereby
have not been registered under the Securities Act of 1933, as
amended (the "Act"). Any transfer of such securities will be
invalid unless a
<PAGE>
Registration Statement under the Act is in effect as to such
transfer or in the opinion of counsel for the Company such
registration is unnecessary in order for such transfer to comply
with the Act."
"The securities represented hereby are subject to restrictions
on transfer for a period of 365 days following the effective date
of a registration statement under the Act for an offering of the
Company's securities as more fully provided in an agreement
relating to the option to purchase such securities."
11. INFORMATION TO OPTIONEE. During the period this NQO is
outstanding, the Company shall provide Optionee on an annual or other
periodic basis financial and other information regarding the Company in
accordance with Rule 260.140.41.2 promulgated under the California Corporate
Securities Law of 1968, if applicable.
12. ASSIGNMENT; BINDING EFFECT. Subject to the limitations set
forth in this Agreement, this Agreement shall be binding upon and inure to
the benefit of the executors, administrators, heirs, legal representatives
and successors of the parties hereto; provided, however, that Optionee may
not assign any of Optionee's rights under this Agreement.
13. DAMAGES. Optionee shall be liable to the Company for all
costs and damages, including incidental and consequential damages, resulting
from a disposition of shares which is not in conformity with the provisions
of this Agreement.
14. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable
to contracts entered into and wholly to be performed within the State of
California by California residents. The parties agree that the exclusive
jurisdiction and venue of any action with respect to this Agreement shall be
in the Superior Court of California for the County of San Jose or the United
States District Court for the Northern District of California, and each of
the parties hereby submits to the exclusive jurisdiction and venue of such
courts for the purpose of such action. The parties agree that service of
process in any such action may be effected by delivery of the summons to
the parties in the manner provided for delivery of notices set forth in
Section 15.
15. NOTICES. All notices and other communications under this
Agreement shall be in writing. Unless and until the Optionee is notified in
writing to the contrary, all notices, communications and documents directed
to the Company and related
<PAGE>
to the Agreement, if not delivered by hand, shall be mailed, addressed as
follows:
MEDIA ARTS GROUP, INC.
521 Charcot Avenue
San Jose, California 95131
Attn: James F. Landrum, Jr.
Snr. Vice President & General Counsel
Unless and until the Company is notified in writing to the contrary, all
notices, communications and documents intended for the Optionee and related
to this Agreement, if not delivered by hand, shall be mailed to Optionee's
last known address as shown on the Company's books. Notices and
communications shall be mailed by first class mail, postage prepaid;
documents shall be mailed by registered mail, return receipt requested,
postage prepaid. All mailings and deliveries related to this Agreement shall
be deemed received only when actually received.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the Effective Date.
MEDIA ARTS GROUP, INC.
By:
-----------------------------------
Chief Executive Officer & President
The Optionee hereby accepts and agrees to be bound by all of the
terms and conditions of this Agreement.
-----------------------------------
Thomas Kinkade
Optionee's spouse indicates by the execution of this NONQUALIFIED
Stock Option Agreement his/her consent to be bound by the terms thereof as to
his/her interests, whether as community property or otherwise, if any, in the
options granted hereunder, and in any Exercised Shares purchased pursuant to
this Agreement.
-----------------------------------
Nanette N. Kinkade
EXHIBITS
Exhibit 1 from Section 5.3 Stock Purchase Agreement
<PAGE>
EXHIBIT 1 FROM SECTION 5.3 OF THE
MEDIA ARTS GROUP, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
MEDIA ARTS GROUP, INC.
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made and
entered into as of _________________, 199_, between MEDIA ARTS GROUP, INC., a
California corporation doing business in the State of California under the
name MAGI (the "Company"), and ___________ ("Purchaser").
THE PARTIES AGREE AS FOLLOWS:
1. PURCHASE OF SHARES. Pursuant to an NONQUALIFIED stock option
agreement ("Option Agreement") between the parties attached hereto as Exhibit
1, the Company hereby sells to Purchaser, and Purchaser hereby buys from the
Company, ______________ shares (the "Exercised Shares") of the Company's
Common Stock ("Common Stock") on the terms and conditions set forth herein
and in the Option Agreement, the terms and conditions of the Option Agreement
being hereby incorporated into this Agreement by reference.
2. PURCHASE PRICE. Purchaser shall purchase the Exercised Shares
from the Company, and the Company shall sell the Exercised Shares to
Purchaser, at a price of $_______ per share (the "Exercise Price"), for a
total purchase price of $_____ (the "Purchase Price").
3. MANNER OF PAYMENT. Purchaser shall pay the Purchase Price of
the Exercised Shares in cash.
4. STOCK CERTIFICATE RESTRICTIVE LEGENDS. Stock certificates
evidencing Exercised Shares may bear such restrictive legends as the Company
and the Company's counsel deem necessary or advisable under applicable law or
pursuant to this Agreement, including without limitation, the following
legends:
"The offering and sale of the securities represented hereby
have not been registered under the Securities Act of 1933, as
amended (the "Act"). Any transfer of such securities will be
invalid unless a Registration Statement under the Act is in effect
as to such transfer or in the opinion of counsel for the Company
such registration is unnecessary in order for such transfer to
comply with the Act."
<PAGE>
"The securities represented hereby are subject to restrictions
on transfer for a period of 365 days following the effective date
of a registration statement under the Act for an offering of the
Company's securities as more fully provided in an agreement
relating to the option to purchase such securities."
5. REPRESENTATIONS, WARRANTIES, COVENANTS, AND ACKNOWLEDGMENTS OF
PURCHASER. Purchaser hereby represents, warrants, covenants, acknowledges
and agrees that:
5.1 INVESTMENT. Purchaser is acquiring the Exercised Shares
for Purchaser's own account, and not for the account of any other person.
Purchaser is acquiring the Exercised Shares for investment and not with a
view to distribution or resale thereof except in compliance with applicable
laws regulating securities.
5.2 BUSINESS EXPERIENCE. Purchaser is capable of evaluating
the merits and risks of Purchaser's investment in the Company evidenced by
the purchase of the Exercised Shares.
5.3 RELATION OF COMPANY. Purchaser is presently an employee
or advisor to, the Company and in such capacity has become personally
familiar with the business, affairs, financial condition and results of
operations of the Company.
5.4 ACCESS TO INFORMATION. Purchaser has had the opportunity
to ask questions of, and to receive answers from, appropriate executive
officers of the Company with respect to the terms and conditions of the
transactions contemplated hereby and with respect to the business, affairs,
financial condition, and results of operations of the Company. Purchaser has
had access to such financial and other information as is necessary in order
for Purchaser to make a fully-informed decision as to investment in the
Company by way of purchase of the Exercised Shares, and has had the
opportunity to obtain any additional information necessary to verify any of
such information to which Purchaser has had access.
5.5 SPECULATIVE INVESTMENT. Purchaser's investment in the
Company represented by the Exercised Shares is highly speculative in nature
and is subject to a high degree of risk of loss in whole or in part. The
amount of such investment is within Purchaser's risk capital means and is not
so great in relation to Purchaser's total financial resources as would
jeopardize the personal financial needs of Purchaser or Purchaser's family in
the event such investment were lost in whole or in part.
<PAGE>
5.6 REGISTRATION. Purchaser may bear the economic risk of
investment for an indefinite period of time in the event the sale to
Purchaser of the Exercised Shares is not registered under the Securities Act
of 1933, as amended (the "Act"), and the Exercised Shares cannot be
transferred by Purchaser unless such transfer is registered under the Act or
an exemption from such registration is available. The Company has made no
agreements or covenants to register the transfer of any of the Shares under
the Act. The Company has made no representations, warranties, or covenants
whatsoever as to whether any exemption from the Act, including without
limitation any exemption for limited sales in routine brokers' transactions
pursuant to Rule 144, will be available; if the exemption under Rule 144 is
available at all, it will not be available until at least two years after
payment of cash for the Exercised Shares and not then unless: (a) a public
trading market then exists in the Company's common stock; (b) adequate
information as to the Company's financial and other affairs and operations is
then available to the public; and (c) all other terms and conditions of Rule
144 have been satisfied.
5.7 PUBLIC TRADING. The Company has made no representation,
covenant or agreement as to whether there will continue to be a public market
for its Common Stock.
5.8 TAX ADVICE. The Company has made no warranties or
representations to Purchaser with respect to the income tax consequences of
the transactions contemplated by this Agreement or the Option Agreement and
Purchaser is in no manner relying on the Company or its representatives for
an assessment of such tax consequences.
6. BINDING EFFECT. Subject to the limitations set forth in this
Agreement, this Agreement shall be binding upon, and inure to the benefit of,
the executors, administrators, heirs, legal representatives, successors and
assigns of the parties hereto.
7. TAXES. The Company may require Purchaser to pay to the
Company, any applicable withholding taxes resulting from the purchase of
Exercised Shares hereunder or from the lapse of any restrictions imposed on
the Exercised Shares.
8. DAMAGES. Purchaser shall be liable to the Company for all
costs and damages, including incidental and consequential damages, resulting
from a disposition of Exercised Shares which is not in conformity with the
provisions of this Agreement.
9. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable
to contracts entered into and wholly to be
<PAGE>
performed within the State of California by California residents. The
parties agree that the exclusive jurisdiction and venue of any action with
respect to this Agreement shall be in the Superior Court of California for
the County of San Jose or the United States District Court for the Northern
District of California, and each of the parties hereby submits to the
exclusive jurisdiction and venue of such courts for the purpose of such
action. The parties agree that service of process in any such action may be
effected by delivery of the summons to the parties in the manner provided for
delivery of notices set forth in Section 10.
10. NOTICES. All notices and other communications under this
Agreement shall be in writing. Unless and until Purchaser is notified in
writing to the contrary, all notices, communications and documents directed
to the Company and related to the Agreement, if not delivered by hand, shall
be mailed, addressed as follows:
MEDIA ARTS GROUP, INC.
521 Charcot Ave.
San Jose, California 95131
Attn: James F. Landrum, Jr.
Snr. Vice President & General Counsel
Unless and until the Company is notified in writing to the contrary, all
notices, communications and documents intended for Purchaser and related to
this Agreement, if not delivered by hand, shall be mailed to Purchaser's last
known address as shown on the Company's books. Notices and communications
shall be mailed by registered mail, return receipt requested, postage
prepaid. All mailings and deliveries related to this Agreement shall be
deemed received only when actually received.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MEDIA ARTS GROUP, INC.
By
------------------------------------
Title
---------------------------------
Purchaser hereby accepts and agrees to be bound by all of the terms
and conditions of this Agreement.
-----------------------------------
Purchaser's spouse indicates by the execution of this Agreement her
consent to be bound by the terms herein as to her interests, whether as
community property or otherwise, if any, in the Exercised Shares hereby
purchased.
-----------------------------------
Purchaser's Spouse
EXHIBITS
Exhibit 1 from Section 1 Option Agreement
<PAGE>
APPENDIX C
MEDIA ARTS GROUP, INC.
EMPLOYEE QUALIFIED STOCK PURCHASE PLAN
<PAGE>
MEDIA ARTS GROUP, INC.
EMPLOYEE QUALIFIED STOCK PURCHASE PLAN
Media Arts Group, Inc., a Delaware corporation (the "Company"), hereby
adopts this Employee Qualified Stock Purchase Plan (the "Q.S.P. Plan").
1. PURPOSE. The purpose of the Q.S.P. Plan is to assist employees of
the Company in acquiring stock ownership interests in the Company, pursuant
to a plan which qualifies as an "employee stock purchase plan" under Code
Section 423 of the Internal Revenue Code of 1986, as amended. The Q.S.P.
Plan is intended to help employees provide for their future security, and to
encourage then to remain in the employ of the Company.
2. DEFINITIONS. Whenever one of the following terms is used in the
Q.S.P. Plan with the first letter or letters capitalized, it shall have the
following meaning, unless the context clearly indicates to the contrary (such
definitions to be equally applicable to the singular and plural forms of the
terms defined):
(a) "Administrator" shall mean the Company, acting through its chief
executive officer or his or her delegate.
(b) "Authorization Card" shall mean the form prescribed by the
Administrator, which shall include a form of stock purchase agreement pursuant
to which an Eligible Employee shall purchase shares of Stock under the Q.S.P.
Plan and a form of payroll deduction authorization pursuant to which such
Eligible Employee shall authorize the Company to deduct such Eligible Employee's
contributions under the Q.S.P. Plan.
(c) "Base Pay" shall mean gross pay payable to an Employee on each
Payday as cash compensation for services to the Company, including any amounts
by which such pay is reduced under any plan which is sponsored by the Company
and which is a cash or deferred salary reduction profit sharing plan qualified
under Section 401(a) and 401(k) of the Code, a nonqualified deferred
compensation plan or cafeteria plan intended to qualify under Section 125 of the
Code, but excluding overtime payments, sales commissions, incentive
compensation, bonuses, and other special-payments, except to the extent that the
inclusion of any such item is specifically designated by the Administrator.
(d) "Board of Directors" shall mean the Board of Directors of the
Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(f) "Company" shall mean Media Arts Group, Inc., a Delaware
corporation.
(g) "Eligible Employee" shall mean any Employee who satisfies the
requirements of Section 4.
<PAGE>
(h) "Employee" shall mean any person who renders services to the
Company in the status of an employee within the meaning of Code Section
3121(d). "Employee" shall not include any director of the Company who does
not render services to the Company in the status of an employee within the
meaning of Code Section 3121(d).
(i) "Enrollment Period" shall mean the two week period preceding each
Offering Period determined in accordance with Subsection 6(b).
(j) "Offering Period" shall mean each six month period as provided in
Section 5. Options shall be granted on the first day of an Offering Period and
exercised on the last day of Offering Period, as provided in Section 8.
(k) "Option" shall mean an option granted to an Eligible Employee to
purchase shares of Stock under the Q.S.P. Plan.
(l) "Option Price" shall mean the per share exercise price of shares
of Stock to be purchased pursuant to an Option, as provided in Section 9.
(m) "Parent Corporation" shall mean any corporation, other than the
Company, in an unbroken chain of corporations ending with the Company if, at the
time of the granting of the Option, each of the corporations other than the
Company own stock possessing 50% or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.
(n) "Payday" of an Employee shall mean the regular and recurring
established day for payment of cash compensation to Employees in the same
classification or position.
(o) "Q.S.P. Plan" shall mean the Media Arts Group, Inc. Employee
Qualified Stock Purchase Plan.
(p) "Subsidiary Corporation" shall mean any corporation, other than
the Company, in an unbroken chain of corporations beginning with the Company if,
at the time of the granting of the Option, each of the corporations other than
the last corporation in the unbroken chain owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one of the other
corporations in such chain.
(q) "Stock" shall mean the shares of the Company's Common Stock, $.01
par value.
3. STOCK SUBJECT TO THE Q.S.P. PLAN.
(a) Subject to Section 14, the shares of Stock which may be sold
pursuant to Options granted under the Q.S.P. Plan shall not exceed 125,000
shares.
(b) The Company shall reserve for issuance under the Q.S.P. Plan
125,000 shares of either the Company's authorized but unissued Stock or Stock
held in the Company's treasury.
2
<PAGE>
(c) Any adjustment to the number of shares of Stock reserved for
issuance under the Q.S.P. Plan shall be made only in accordance with Sections 14
(relating to recapitalization) and 17 (relating to amendments of the Q.S.P.
Plan).
4. ELIGIBILITY. Each Employee of the Company who on the first day
of any Enrollment Period:
(a) has been employed by the Company for not less than one (1) year;
(b) is customarily employed by the Company for more than twenty (20)
hours per week; and
(c) is customarily employed by the Company for more than five (5)
months per calendar year,
shall become an Eligible Employee on such day.
5. OFFERING PERIODS. Options shall be granted under the Q.S.P. Plan in
successive six month Offering Periods, commencing on July 1 and January 1 of
each year, until the earlier of the maximum number of shares subject to sale
pursuant to Options have been sold, or the Q.S.P. Plan is terminated. The First
Offering Period shall commence on July 1, 1998.
6. PARTICIPATION IN THE Q.S.P. PLAN.
(a) Each Eligible Employee may elect to participate in the Q.S.P.
Plan for an Offering Period by submitting to the Administrator a completed and
executed Authorization Card in accordance with subsection (b). An Eligible
Employee who elects to participate in the Q.S.P. Plan for an Offering Period
shall elect on such Authorization Card a whole percentage of Base Pay (such
percentage not to exceed 10% of Base Pay) to be withheld by payroll deduction,
which upon the exercise of the Option granted to such Eligible Employee with
respect to such Offering Period, shall be contributed to the Company as payment
for shares of Stock purchased pursuant to the Option.
(b) The Authorization Card must be submitted to the Administrator
during the two-week period commencing one month prior to the first day of the
Offering Period and ending two weeks prior to the first day of the Offering
Period in order to participate in the Q.S.P. Plan during such Offering Period.
(c) Except as otherwise provided in subsection (b) and Section 11, an
Employee's Authorization Card shall operate with respect to each Offering Period
commencing after delivery of the Authorization Card to the Administrator for
which such Employee is an Eligible Employee.
7. PAYROLL DEDUCTIONS.
(a) Cash compensation payable to an Eligible Employee who elects to
participate in the Q.S.P. Plan for an Offering Period shall be reduced each
Payday through
3
<PAGE>
payroll deductions by an amount equal to the whole percentage of Base Pay
payable on such Payday elected by the Eligible Employee under Section 6.
(b) The amount of each Eligible Employee's payroll deduction shall be
held by the Company and credited to an account established for such Eligible
Employee. The Company shall not pay any interest on the funds credited to an
Eligible Employee's account under the Q.S.P. Plan.
(c) An Eligible Employee participating in the Q.S.P. Plan may change
his or her payroll deduction percentage for any Offering Period by submitting a
new Authorization Card to the Administrator during the Enrollment Period for
such Offering Period. Such change in payroll deduction percentage shall become
effective on the first day of the Offering Period.
(d) During a leave of absence from the Company which is approved by
the Company and which meets the requirements of Treasury Regulation Section
1.421-7(h)(2), an Eligible Employee may continue to participate in the Q.S.P.
Plan by making cash payments to the Company on each Payday equal to the dollar
amount of the payroll deduction made for such Eligible Employee for the Payday
next preceding the first day of such Eligible Employee's leave of absence.
8. GRANT OF OPTIONS; EXERCISE OF OPTIONS.
(a) Each Eligible Employee participating in the Q.S.P. Plan shall be
granted an option on the first day of the Offering Period for each Offering
Period for which such Eligible Employee elects to participate. The term of each
Option shall end on the last day of the Offering Period for which the Option is
granted, and such Option shall expire immediately thereafter. The number of
shares of Stock subject to each Option shall be the quotient of the total
payroll deductions made for the Eligible Employee during the Offering Period,
divided by the Option Price, excluding fractional shares of Stock; provided,
however, that the number of shares of Stock subject to each Option shall not
exceed 250 shares.
(b) Except as otherwise provided in subsection (c), each Eligible
Employee participating in the Q.S.P. Plan shall be deemed to have exercised his
or her Option on the last day of the Offering Period, to the extent that the
balance of payroll deductions credited to such Eligible Employee's account under
the Q.S.P. Plan is sufficient to purchase, at the Option Price, whole shares of
Stock. No fractional shares of Stock shall be purchased upon the exercise of
the Option and any funds credited to such Eligible Employee's account, remaining
after the purchase of whole shares of Stock upon exercise of an option, shall
remain credited to such Eligible Employee's account and carried forward for
purchase of shares of Stock pursuant to the Option, if any, granted to such
Eligible Employee for the next following Offering Period.
(c) An Eligible Employee's Option shall not be exercised on the last
day of the Offering Period if such Eligible Employee instructs the Administrator
in writing at least two weeks prior to the last day of the Offering Period that
such Option is not to be exercised. As soon as practicable after receipt of
such instruction, the Administrator shall pay to such Eligible
4
<PAGE>
Employee in cash in one lump sum the balance of payroll deductions credited
to such Eligible Employee's account under the Q.S.P. Plan, without the
payment of any interest thereon.
(d) If the total number of shares of Stock for which options are to
be exercised on any date exceeds the number of shares remaining unsold under the
Q.S.P. Plan (after deduction of all shares for which Options have theretofore
been exercised), the Administrator shall make a pro rata allocation of the
available remaining shares in as nearly a uniform manner as shall be practicable
and any balance of payroll deductions credited to the accounts of Eligible
Employees which have not been applied to the purchase of shares of Stock shall
be paid to such Eligible Employees in cash in one lump sum as soon as
practicable, without payment of any interest thereon.
(e) Notwithstanding any provision in this Section to the contrary, an
Eligible Employee shall not be granted an Option:
(i) if, immediately after the Option is granted, such Employee
would own stock possessing 5% or more of the total combined voting power or
value of all classes of stock of the Company, any Parent Corporation or any
Subsidiary Corporation. For purposes of determining stock ownership under
this paragraph, the rules of Code Section 425(d) shall apply and stock
which an Eligible Employee may purchase under outstanding options held by
such Eligible Employee shall be treated as stock owned by such Eligible
Employee; or
(ii) which permits such Eligible Employee's rights to purchase
stock under all employee stock purchase plans of the Company, any Parent
Corporation or any Subsidiary Corporation, which qualify under Code Section
423, to accrue at a rate which exceeds $25,000 of the fair market value of
such stock (determined at the time such option is granted) for each
calendar year in which such option is outstanding at any time. For purpose
of the limitations imposed by this paragraph, the right to purchase stock
under an option accrues when the option (or any portion thereof) first
becomes exercisable during the calendar year, the right to purchase stock
under an option accrues at the rate provided in the option (but in no case
may such rate exceed $25,000 of fair market value of such stock determined
at the time such option is granted for any one calendar year), and a right
to purchase stock which has accrued under the option may not be carried
over to any other option.
9. OPTION PRICE.
(a) The per share exercise price of each option (the "Option Price")
shall be an amount equal to the lesser of:
(i) 85% of the fair market value of a share of Stock on the date
the Option is granted (the first day of the Offering Period); or
(ii) 85% of the fair market value of a share of the Stock on the
date such option is exercised (the last day of the Offering Period).
5
<PAGE>
(iii) For purposes of subsection (a), the fair market value
of a share of Stock as of a given date shall be:
(b) the closing price of a share of Stock on the principal exchange
on which shares of Stock are then trading, if any, on such date, or, if shares
were not traded on such date, then on the next preceding trading day during
which a sale occurred;
(i) if such Stock is not traded on an exchange but is quoted on
NASDAQ or a successor quotation system, the last sales price (if the Stock
is then listed as a National Market issue under the NASD National Market
System) or the mean between the closing representative bid and asked prices
(in all other cases) for the Stock of such date as reported by NASDAQ or a
successor quotation system;
(ii) if such Stock is not publicly traded on an exchange and not
quoted on NASDAQ or a successor quotation system, the mean between the
closing bid and asked prices for the Stock on such date as determined in
good faith by the Committee; or
(iii) if the Stock is not publicly traded, the fair market
value established by the Administrator acting in good faith.
10. ISSUANCE OF CERTIFICATES.
(a) The Administrator shall, as soon as practicable after the
exercise of any Option, instruct the Company's transfer agent to deliver to the
Eligible Employee exercising the Option a certificate evidencing the whole
shares of Stock purchased by such Eligible Employee under the Q.S.P. Plan from
funds credited to such Eligible Employee's account.
(b) In the event the Administrator is required to obtain authority to
issue certificates for any shares of Stock purchased by an Eligible Employee
under the Q.S.P. Plan from any commissioner or agency, the Administrator will
seek to obtain such authority. If the Administrator in unable, after reasonable
efforts, to obtain such authority, the Administrator and the Company shall be
relieved from all liability and shall pay to each such Eligible Employee the
balance of payroll deductions credited to each such Eligible Employee's account
under the Q.S.P. Plan in cash in one lump sum as soon as practicable, without
the payment of any interest thereon.
11. CESSATION OF PARTICIPATION.
(a) Except as otherwise provided in Subsection 7(d), an Eligible
Employee shall cease to participate in the Q.S.P. Plan in the event that:
(i) the Administrator receives written instructions from the
Eligible Employee to terminate such Eligible Employee's participation in
the Q.S.P. Plan;
(ii) the Eligible Employee resigns or is discharged from
employment by the Company, or has a leave of absence from the Company; or
6
<PAGE>
(iii) the Employee dies.
(b) Upon cessation of participation by an Eligible Employee, such
Eligible Employee's payroll deductions shall cease. If such cessation of
participation occurs during the last two weeks of an Offering Period, such
Eligible Employee's Option shall be exercised on the last day of the Offering
Period in accordance with Section 8(b). Upon cessation of participation at any
other time, any balance of payroll deductions credited to such Eligible
Employee's account under the Q.S.P. Plan shall be paid to the Employee in cash
in one lump sum as soon as practicable after cessation of participation, without
payment of any interest thereon.
(c) An Eligible Employee shall not be eligible to participate in the
Q.S.P. Plan during the Offering Period which immediately follows the Offering
Period during which such Employee voluntarily terminated participation in the
Q.S.P. Plan under paragraph (a)(i).
12. TRANSFER OF OPTION. Options granted pursuant to the Q.S.P. Plan
shall not be transferable by an Eligible Employee, other than by will or the
laws of descent and distribution, and shall be exercisable during the Eligible
Employee's lifetime only by such Eligible Employee.
13. BENEFICIARY. Each Eligible Employee shall designate on his or
her Authorization Card a beneficiary or beneficiaries and may, without such
beneficiaries consent, change such designation. Any designation shall be
effective only after it is received by the Administrator and shall be
controlling over any disposition by will or otherwise. Upon the death of an
Eligible Employee, the balance of payroll deductions credited to such Eligible
Employee's account shall be paid or distributed to the designated beneficiary or
beneficiaries, or in the absence of such designation, to the executor or
administrator of the Eligible Employee's estate, and in either event the
Administrator and the Company shall not be under any further liability to
anyone.
14. RECAPITALIZATION. If there shall be any change in the Stock
subject to the Q.S.P. Plan or the Stock subject to any Option, through merger,
consolidation, reorganization, recapitalization, reincorporation, stock split,
stock dividend (in excess of 2% of the fair market value of the Stock) or other
change in the corporate structure of the Company, appropriate adjustments shall
be made by the Administrator to the aggregate number of shares subject to the
Q.S.P. Plan and the number of shares and the price per share subject to
outstanding Options in order to preserve, but not to increase, the benefits of
the Eligible Employees hereunder; provided, however, that subject to any
required action by the stockholders, if the Company shall not be the surviving
corporation in any such merger, consolidation or reorganization, every Option
outstanding shall terminate, unless the surviving corporation shall (subject to
applicable provisions of the Code) issue a new option therefor or assume (with
appropriate changes) the existing Option. If the Option shall terminate by
reason of such merger, consolidation, or reorganization, then any provision
herein to the contrary notwithstanding, any option held by an Eligible Employee
may be exercised, in whole or in part, by such Eligible Employee at any time
prior to or concurrently with consummation of such merger, consolidation or
reorganization.
15. RIGHTS AS A STOCKHOLDER. An Eligible Employee shall have no
rights as a stockholder with respect to any shares of Stock covered by Options
until the date of the issuance of a certificate for such shares of Stock. No
adjustments shall be made for dividends (ordinary or
7
<PAGE>
extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the date
such certificate is issued, except as otherwise expressly provided herein.
16. COSTS; INDEMNIFICATIONS.
(a) All costs and expenses incurred in administering the Q.S.P. Plan
shall be paid by the Company.
(b) In addition to such other rights of indemnification as the
Administrator may have as a director or officer of the Company, the Company
shall indemnify and hold the Administrator harmless against any and all
liability, loss, costs, damages, attorneys' fees and other expenses the
Administrator may sustain or incur in connection with administration of the
Q.S.P. Plan, except for liability, loss, costs, damages, attorneys' fees and
other expenses caused by the negligence of the Administrator or his agent;
provided, that within 60 days after the institution of any action, suit or
proceeding the Administrator shall in writing offer the Company the opportunity
to handle, prosecute or defend the same, at the Company's own expense. The
Administrator shall have the right, but not the obligation, to adjust, settle,
or compromise any claim, obligation, debt, demand, suit or judgment against the
Administrator, and if such settlement is approved by independent legal counsel
selected by the Company then the Company shall reimburse the Administrator for
all sums of money the Administrator may pay or become liable to pay against
which the Administrator is indemnified hereunder.
17. AMENDMENT OR TERMINATION OF THE Q.S.P. PLAN. The Board of
Directors may at any time, with respect to any shares of Stock not then subject
to Options suspend or terminate the Q.S.P. Plan, and may amend the Q.S.P. Plan
from time to time as the Board of Directors may deem advisable; provided,
however, that except as provided in Section 14 hereof, the Board of Directors
shall not amend the Q.S.P. Plan in the following respects without the
affirmative vote of approval by a majority of the outstanding shares of Stock of
the Company:
(a) To increase the maximum number of shares of Stock subject to the
Q.S.P. Plan;
(b) To change the designation or class of employees eligible to
receive Options under the Q.S.P. Plan; or
(c) In any manner which would cause the Q.S.P. Plan to no longer be
an employee stock purchase plan under Code Section 423.
18. APPLICATION OF FUNDS. The proceeds received by the Company from
the sale of Stock pursuant to the exercise of Options shall be deposited in the
account of the general corporate funds of the Company.
19. APPROVAL OF STOCKHOLDERS. The Q.S.P. Plan will be submitted for
the approval of the Company's stockholders within twelve months after the date
of the Board's initial adoption of the Plan. Options may be granted prior to
such stockholder approval, provided that such options shall not be exercisable
prior to the time when the Q.S.P. Plan is approved by the
8
<PAGE>
stockholders, and provided further that if such approval has not been
obtained at the end of said twelve-month period, all options previously
granted under the Plan shall thereupon be canceled and become null and void..
20. NO RIGHTS AS AN EMPLOYEE. Nothing in the Q.S.P. Plan shall be
construed to give any person the right to remain in the employ of the Company or
to affect the right of the Company to terminate the employment of any person at
any time with or without cause.
21. TITLES. Titles are provided herein for convenience only and are
not to serve as a basis for interpretation or construction of the Q.S.P. Plan.
22. CONFORMITY TO SECURITIES LAWS. The Plan is intended to conform
to the extent necessary with all provisions of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, and any and all
regulations and rules promulgated by the Securities and Exchange Commission
thereunder, including without limitation Rule 16b-3. Notwithstanding anything
herein to the contrary, the Plan shall be administered, and Options shall be
granted and may be exercised, only in such a manner as to conform to such laws,
rules and regulations. To the extent permitted by applicable law, the Q.S.P.
Plan and Options granted hereunder shall be deemed amended to the extent
necessary to conform to such laws, rules and regulations.
* * * * *
I hereby certify that the foregoing Q.S.P. Plan was adopted by the Board of
Directors of Media Arts Group, Inc. on this _______ day of ______________, 1998.
------------------------------------------------
Name:
Title:
9
<PAGE>
I hereby certify that the foregoing Q.S.P. Plan was duly approved by
affirmative vote of a majority of the outstanding shares of Stock of the
Company at the Annual Meeting of Stockholders of Media Arts Group, Inc. on
____________________, 1998.
Executed on this _____ day of ___________________, 1998.
--------------------------------------------------
Name:
Title:
10
<PAGE>
APPENDIX D
ARTICLE FOURTH OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF MEDIA ARTS GROUP, INC.
FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is 80,000,000 shares of Common Stock, each
having a par value of one penny ($.01), and 1,000,000 shares of Preferred
Stock, each having a par value of one ($.01).
The Board of Directors is expressly authorized to provide for the
issuance of all or any shares of the Preferred Stock in one or more classes
or series, and to fix for each such class or series such voting powers, full
or limited, or no voting powers, and such distinctive designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof, as shall be stated
and expressed in the resolution or resolutions adopted by the Board of
Directors providing for the issuance of such class or series and as may be
permitted by the GCL, including, without limitation , the authority to
provide that any such class or series may be (i) subject to redemption at
such time or times and at such price or prices; (ii) entitled to receive
dividends (which may be cumulative or non- cumulative) at such rates, on such
conditions, and at such times, and payable in preference to or in such
relation to, the dividends payable on any other class or classes or any other
series; (iii) entitled to such rights upon the dissolution of, or upon any
distribution of the assets of, the Corporation; and/or (iv) convertible into,
or exchangeable for, shares of any other class or classes of stock, or of any
other series of the same or any other class or classes of stock, of the
Corporation at such price or prices or at such rates of exchange and with
such adjustments; all as may be stated in such resolution or resolutions.
<PAGE>
MEDIA ARTS GROUP, INC.
521 CHARCOT AVENUE, SAN JOSE, CA 95131
PRELIMINARY COPIES
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints James F. Landrum, Jr. and Greg H.L. Nash (the
"Proxies"), and each of them, each with the power to appoint his substitute,
and hereby authorizes each of them to represent and vote as designated below,
all the shares of Common Stock of Media Arts Group, Inc. (the "Company") held
of record by the undersigned on July 23, 1998, at the Annual Meeting of
Stockholders to be held on September 17, 1998 or any adjournment or
postponement thereof.
-FOLD AND DETACH HERE-
<PAGE>
Please mark your votes as /X/ indicated in this example.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2, 3, 4, 5 AND 6.
Item 1 ELECTION OF DIRECTORS - To elect the following directors as directors
of the Company to hold office for one year terms or until their
successors are elected and qualified.
FOR WITHHELD
Kenneth E. Raasch / / / /
Thomas Kinkade / / / /
Michael L. Kiley / / / /
Norman T. Mahoney / / / /
Norman A. Nason / / / /
W. Michael West / / / /
Item 2 To approve the adoption of the Company's 1998 Stock Incentive Plan.
FOR / / AGAINST / / ABSTAIN / /
Item 3 To approve the grant of an option to purchase 600,000 shares of
Common Stock to Thomas Kinkade
FOR / / AGAINST / / ABSTAIN / /
Item 4 To approve the Company's Employee Qualified Stock Purchase Plan
FOR / / AGAINST / / ABSTAIN / /
Item 5 To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized
shares of Common Stock from 20,000,000 to 80,000,000.
FOR / / AGAINST / / ABSTAIN / /
Item 6 To ratify the appointment of Pricewaterhouse Coopers LLP as the
independent public accountants of the Company for the fiscal year
ending March 31, 1999.
FOR / / AGAINST / / ABSTAIN / /
Item 7 In their discretion the proxies are authorized to vote upon such other
business as may properly come before the meeting.
This Proxy when properly executed will be voted in the manner herein by the
undersigned stockholder. If no direction is made, the Proxy will be voted for
Proposals 1, 2, 3, 4, 5 and 6. Please sign exactly as your name appears on your
stock certificates. When shares are held by joint tenants, both should sign.
When signing as an attorney, as executor, administrator, trustee or guardian,
please give your full title. If a corporation, please sign in full corporate
name, by President or other authorized officer. If a partnership, please sign
in partnership name by authorized person.
Signature
------------------------------------------------
Signature if held jointly
--------------------------------
Dated: ___________, 1998
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO DATE,
SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED TO ASSURE
THAT YOUR SHARES ARE REPRESENTED AT THE MEETING. IF YOU ATTEND THE MEETING,
YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO EVEN THOUGH YOU HAVE SENT IN YOUR
PROXY.
-FOLD AND DETACH HERE-
