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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-24294
MEDIA ARTS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0354419
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
521 Charcot Ave, San Jose, California 95131
(Address of principal executive offices and zip code)
Registrant's telephone number: (408) 324-2020
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the Registrant's Common Stock, $0.01
par value, was 12,992,538 at June 30, 1998.
This report consists of 14 pages of which this page is number 1.
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MEDIA ARTS GROUP, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I: Financial Information
Item 1: Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 1998 and June 30, 1998 3
Condensed Consolidated Statements of Income for the
Three Month Periods Ended June 30, 1997 and 1998 4
Condensed Consolidated Statements of Cash Flows for
the Three Month Periods Ended June 30, 1997 and 1998 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3: Quantitative and Qualitative Disclosures
About Market Risk 11
Part II: Other Information
Item 1: Legal Proceedings 12
Item 2: Changes in Securities 12
Item 3: Defaults upon Senior Securities 12
Item 4: Submission of Matters to a Vote of Security Holders 12
Item 5: Other Information 12
Item 6: Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
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MEDIA ARTS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1998
(Unaudited)
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,401 $ 12,364
Investments -- 5,846
Accounts receivable, net 15,919 17,937
Inventories 9,094 11,766
Prepaid expenses and other current assets 2,404 3,394
Deferred income taxes 1,878 1,953
--------- ---------
Total current assets 45,696 53,260
Property and equipment, net 5,397 6,299
Other assets 246 242
--------- ---------
$ 51,339 $ 59,801
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,804 $ 4,345
Commissions payable 1,003 1,437
Accrued royalties 653 1,702
Accrued compensation costs 3,881 3,374
Accrued expenses 2,469 3,885
Income taxes payable 2,210 4,583
--------- ---------
Total current liabilities 15,020 19,326
Convertible notes 1,200 1,200
--------- ---------
Total liabilities 16,220 20,526
--------- ---------
Stockholders' equity:
Common Stock 85 85
Additional paid-in capital 35,410 35,695
Retained earnings (accumulated deficit) (376) 3,495
--------- ---------
Total stockholder's equity 35,119 39,275
--------- ---------
$ 51,339 $ 59,801
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MEDIA ARTS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1997 1998
--------- ---------
<S> <C> <C>
Net sales $ 13,189 $ 26,339
Cost of sales 4,208 9,066
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Gross profit 8,981 17,273
--------- ---------
Operating expenses:
Selling and marketing 3,342 6,589
General and administrative 2,794 4,573
--------- ---------
Total operating expenses 6,136 11,162
--------- ---------
Operating income 2,845 6,111
Interest income (expense) (688) 131
Foreign exchange losses (61) --
--------- ---------
Income before income taxes 2,096 6,242
Provision for income taxes 765 2,371
--------- ---------
Net income $ 1,331 $ 3,871
========= =========
Net income per share:
Basic $ 0.12 $ 0.30
Diluted $ 0.12 $ 0.27
Shares used in net income per share computation:
Basic 11,032 12,969
Diluted 11,294 14,135
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MEDIA ARTS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30,
1997 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,331 $ 3,871
Adjustments to reconcile to net cash
provided by continuing operating activities:
Depreciation 252 438
Amortization of intangibles 268 4
Deferred income taxes 728 (75)
Provision for returns and allowances (259) 116
Provision for losses on accounts receivable 24 --
Changes in assets and liabilities:
Accounts receivable 1,562 (2,050)
Receivables from related parties -- (26)
Inventories (215) (2,274)
Prepaid expenses and other current assets (179) (990)
Accounts payable (356) (590)
Commissions payable 173 434
Accrued compensation costs -- (507)
Income taxes payable 1,304 2,373
Accrued expenses 555 1,407
Accrued royalties -- 1,049
--------- ---------
Net cash provided by continuing operating activities 5,188 3,180
Net cash provided by discontinued operations 590 --
--------- ---------
Net cash provided by operations 5,778 3,180
--------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment (181) (1,335)
Acquisition of gallery, net of cash acquired -- (321)
Purchases of investments -- (5,846)
--------- ---------
Net cash used in investing activities (181) (7,502)
--------- ---------
Cash flows from financing activities:
Repayments of borrowings under line of credit (2,655) --
Repayment of notes payable (1,410) --
Proceeds from issuance of common stock 13 285
--------- ---------
Net cash provided by (used in) financing activities (4,052) 285
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,545 (4,037)
Cash and cash equivalents at beginning of period 374 16,401
--------- ---------
Cash and cash equivalents at end of period $ 1,919 $ 12,364
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MEDIA ARTS GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The consolidated financial statements of Media Arts Group, Inc. (the
Company) include the accounts of its wholly owned subsidiary, Thomas
Kinkade Stores, Inc. The Company designs, manufactures, markets and
retails branded art-based home accessories, collectibles and gift
products based on the works of the artist Thomas Kinkade.
The condensed interim financial statements of Media Arts Group, Inc. have
been prepared by the Company without audit. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to rules and regulations of the Securities
and Exchange Commission. The information included in this report should
be read in conjunction with the Company's audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited interim
financial statements reflect all material adjustments (consisting solely
of normal recurring adjustments) necessary for a fair presentation of the
financial position, operating results and cash flows for the periods
presented. The results of the interim period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the entire
fiscal year which ends March 31, 1999.
NOTE 2 - Net income per share
The following summarizes the effects of the assumed issuance of dilutive
securities on weighted average shares for basic net income per share (in
thousands).
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1997 1998
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<S> <C> <C>
Weighted average number of shares - basic 11,032 12,969
Incremental shares from assumed issuance
of stock options 262 1,166
--------- ---------
Weighted average number of shares - diluted 11,294 14,135
========= =========
</TABLE>
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NOTE 3 - Investments
Investments are comprised of debt obligations of U.S. financial
institutions with contractual maturities of less than one year and have
been classified "available-for-sale." At June 30, 1998, the fair value
of the Company's investments approximated cost.
NOTE 4 - Inventories
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1998 1998
--------- ---------
<S> <C> <C>
Raw materials $ 993 $ 1,115
Work-in-process 8 8
Finished goods 8,093 10,643
--------- ---------
$ 9,094 11,766
========= =========
</TABLE>
NOTE 5 - Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income."
SFAS 130 establishes standards for reporting comprehensive income and its
components in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income as defined
includes all changes in equity (net assets) during a period from nonowner
sources. Examples of items to be included in comprehensive income, which
are excluded from net income, include foreign currency translation
adjustments and unrealized gains or losses on available-for-sale
securities. The Company does not expect this pronouncement to have a
material effect on its financial statements.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards
for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The disclosures prescribed by SFAS 131 are effective in 1998,
and are not required for interim periods. The Company does not expect
this pronouncement to have a material effect on its financial statements.
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NOTE 6 - Subsequent Events
On July 16, 1998 the Company initiated a stock repurchase program which
provides for the repurchase of up to 200,000 shares of the Company's
Common Stock which will be used in various employee incentive programs,
including a new employee stock purchase plan. The shares may be purchased
in the open market over the next twelve months at the then current market
price or in privately negotiated transactions.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth below should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto
included in Part I - Item 1 of this Quarterly Report and the Company's
Annual Report on Form 10-K for the year ended March 31, 1998 which
contains the audited financial statements and notes thereto for the years
ended March 31, 1996, 1997 and 1998 and Management's Discussion and
Analysis of Financial Condition and Results of Operations for those
respective periods.
Forward looking statements in this Quarterly Report on Form 10-Q as well
as the Company's Annual Report on Form 10-K for the year ended March 31,
1998, are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Stockholders are cautioned that
all forward-looking statements pertaining to the Company involve risks and
uncertainties, including, without limitation, other risks detailed from
time to time in the Company's periodic reports and other information filed
with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Net Sales
Net sales for the quarter ended June 30, 1998 were $26.3 million, a 99.7%
increase compared to the $13.2 million reported for the quarter ended June
30, 1997. Wholesale sales increased by 146.5% and retail sales increased
by 8.9% for the June 1998 quarter as compared to the June 1997 quarter.
Wholesale sales increased primarily due to the number of Signature
Galleries increasing from 25 at the end of June 1997 to 91 at the end of
June 1998, as well as increased average sales to Signature Gallery
customers. The remainder of the increase in wholesale sales was due to
increased sales to existing accounts as well as upgrades of those accounts
to higher dealership levels. Retail sales increased due to an increase in
the number of company-owned stores from 16 as of June 30, 1997 to 23 as of
June 30, 1998, as well as an increase in the number of units sold and a
shift towards higher priced products. Comparable store sales per square
foot for Company owned stores were $305 in the June 1998 quarter compared
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to $342 for the June 1997 quarter. Management believes that the shortfall
in the comparative store sales as compared to the prior year was due to
the significant impact of adverse weather on tourist traffic in the
Company's California galleries. By contrast, comparable store sales
growth after excluding the seven affected tourist galleries was 11%.
Gross Profit
Gross profit increased by $8.3 million for the quarter ended June 30,
1998, or 92.3%, to $17.3 million in comparison to the $9.0 million
reported for the quarter ended June 30, 1997. The increase was due to
increased sales partly offset by a decrease in gross margins. The
Company's consolidated gross margin was 65.6% for the quarter ended June
30, 1998, compared to 68.1% for the same quarter in the prior year. The
softening in gross margin was due to the 146.5% increase in the Company's
wholesale sales as compared to the Company's 8.9% retail sales growth.
Gross margin was further impacted by a Company event in June 1998 that
featured Studio Proof editions, which have a comparatively high retail
selling price but a lower gross margin.
Selling and Marketing Expenses
Selling and marketing expenses were $6.6 million during the quarter ended
June 30, 1998 compared to $3.3 million for the June 1997 quarter. As a
percentage of net sales, selling and marketing expenses were 25.0% for the
June 1998 quarter compared to 25.3% for the same quarter in the prior
year. Selling and marketing expenses increased in absolute terms due to
increased commissions resulting from increased net sales, incentive
compensation related to increased profits, the addition of sales personnel
and increases in sales and promotional costs.
General and Administrative Expenses
General and administrative expenses were $4.6 million and $2.8 million for
the June 1998 and 1997 quarters, respectively. Expressed as a percentage
of net sales, general and administrative expenses for the June 1998
quarter were 17.4% compared to 21.2% for the quarter ended June 1997.
The increase in general and administrative expenses in absolute terms was
primarily due to increased compensation costs and facility costs related
to expansion of capacity. General and administrative expenses decreased
as a percent of sales due to economies of scale from increased sales
levels.
Interest Income (Expense)
Interest income was $131,000 for the quarter ended June 30, 1998 compared
to interest expense of $688,000 for the same period in the prior year.
The increase in interest income was due to increased cash balances and
repayment of debt as compared to the prior year as a result of the early
repayment of debt using proceeds from the Company's February 1998 public
offering.
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Provision for Income Tax
The provision for income taxes was $2.4 million for the quarter ended June
1998, compared to $765,000 for the same quarter in the prior year. The
Company's effective income tax rate for the quarter ended June 30, 1998
was 38.0% compared to 36.5% in the prior year.
Seasonality
The Company's business has experienced, and is expected to continue to
experience, significant seasonal fluctuations in net sales and income.
The Company's net sales historically have been highest in the December
quarter and lower in the subsequent March and June quarters. Despite
overall increases in annual net sales in fiscal 1997, net sales in the
December quarter were $15.5 million and net sales in the subsequent March
1997 and June 1997 quarters were $11.5 million and $13.2 million,
respectively. Net sales in the December 1997 quarter were $26.8 million
and sales in the subsequent March 1998 and June 1998 quarters were $25.4
million and $26.3 million, respectively. Management believes that the
seasonal effect is due to customer buying patterns, particularly with
respect to holiday purchases, and is typical of the home decorative
accessories, collectibles and gift product industries. The Company
expects these seasonal trends to continue in the foreseeable future.
The Company's quarterly operating results have fluctuated significantly in
the past and may continue to fluctuate as a result of numerous factors
including demand for the art of Thomas Kinkade and the Company's Thomas
Kinkade products (including new product categories and series), the
Company's ability to achieve its expansion plans, the timing, mix and
number of new product releases, the timing of the opening of new Thomas
Kinkade Stores and the expensing of the associated pre-opening costs, the
successful implementation of the Thomas Kinkade Signature Gallery program
and expansion of distribution generally, the Company's ability to
implement strategic business alliances, the Company's ability to hire and
train new manufacturing, sales and administrative personnel, continued
implementation of manufacturing efficiencies, timing of product deliveries
and the incurrence of other operating costs. In addition, since a
significant portion of the Company's net sales are generated from orders
received in the quarter, net sales in any quarter are substantially
dependent on orders booked in that quarter. The Company's results may
also fluctuate based on extraordinary events. Accordingly, the results of
operations in any quarter will not necessarily be indicative of the
results that may be achieved for a full fiscal year or any future quarter.
Fluctuations in operating results may also result in volatility in the
price of the Company's Common Stock.
Liquidity and Capital Resources
The Company's primary source of funds in the first three months of fiscal
1999 has been from its operations. The Company's working capital as of
June 30, 1998 was $33.9 million, compared to $30.7 million as of March 31,
1998.
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Net cash provided by operations for the first three months of fiscal 1999
was $3.2 million consisting primarily of income from operations adjusted
by increases in income taxes payable, accrued royalties payable and other
accrued expenses offset by an increase in accounts receivable and
inventory. The Company increased inventory in anticipation of seasonally
higher demand and increased distribution. Accounts receivable increased
as a result of an increase in certain dealer categories which receive
preferential payment terms. Net cash provided by operations for the first
three months of fiscal 1998 was $5.8 million consisting primarily of
income from continuing operations adjusted by an increase in income taxes
payable and a decrease in accounts receivable.
Net cash used in investing activities was $7.5 million for the first three
months of fiscal 1999 and primarily related to purchases of securities and
to capital expenditures for property and equipment. Net cash used in
investing activities was $181,000 in the first three months of fiscal
1998. The Company anticipates that total capital expenditures in fiscal
1999 will be approximately $8.2 million, and will relate primarily to
continued manufacturing and infrastructure investments, as well as to the
opening of new retail locations.
Net cash provided by financing activities was $285,000 in the first three
months of fiscal 1999 compared to $4.1 million used in financing
activities in the first three months of fiscal 1998. Cash provided by
financing activities during the first three months of fiscal 1999 has been
primarily from the exercise of options and warrants for the Company's
Common Stock. Net cash used in financing activities during the first
three months of fiscal 1998 was primarily for the repayment of borrowings
under credit lines and notes payable.
The Company has a $10 million line-of-credit facility with a bank (the
Senior Debt). Borrowing capacity under the Senior Debt facility is based
upon eligible accounts receivable and inventory and aggregated $10.0
million as of June 30, 1998. There were no outstanding borrowings under
this credit facility as of June 30, 1998.
The Company's working capital requirements in the foreseeable future will
change depending on the rate of the Company's expansion, the Company's
operating results and any other adjustments in its operating plan as
needed in response to competition, acquisition opportunities or unexpected
events. The Company believes that existing borrowing capacity under lines
of credit, together with revenues from operations, will be sufficient to
meet the Company's working capital requirements through fiscal 1999.
However, there can be no assurance that the Company will not seek
additional capital in the future as a result of expansion or otherwise.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - Not
Applicable
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PART II - Other Information
ITEM 1. LEGAL PROCEEDINGS - Not Applicable
ITEM 2. CHANGES IN SECURITIES - Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Not
Applicable
ITEM 5. OTHER INFORMATION - Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.1 - Employee Nonqualified Stock Option Agreement entered
into between the Company and Thomas Kinkade,
dated December 3, 1997.
Exhibit 27 - Financial Data Schedule (EDGAR version only).
(b) Reports on Form 8-K - none
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MEDIA ARTS GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDIA ARTS GROUP, INC.
(Registrant)
By /s/ Raymond A. Peterson
--------------------------------------
Raymond A. Peterson
Chief Executive Officer
By /s/ Greg H.L. Nash
--------------------------------------
Greg H.L. Nash
Senior Vice President &
Chief Financial Officer
Date: August 11, 1998
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EXHIBIT INDEX
Exhibit Number
10.1 Employee Nonqualified Stock Option Agreement entered into between
the Company and Thomas Kinkade, dated December 3, 1997.
27 Financial Data Schedule
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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 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
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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.
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.
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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 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
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<PAGE> 4
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 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.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
MEDIA ARTS GROUP, INC.
By: /s/ James F. Landrum, Jr.
James F. Landrum, Jr.
Sr. Vice President and
General Counsel
The Optionee hereby accepts and agrees to be bound by all of the terms and
conditions of this Agreement.
/s/ Thomas Kinkade
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.
/s/ Nanette N. Kinkade
Nanette N. Kinkade
EXHIBITS
Exhibit 1 from Section 5.3 Stock Purchase Agreement
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
5
<PAGE> 6
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."
"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.
6
<PAGE> 7
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.
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
<PAGE> 8
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 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.
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
8
<PAGE> 9
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
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 12,364
<SECURITIES> 5,846
<RECEIVABLES> 20,461
<ALLOWANCES> 2,550
<INVENTORY> 11,766
<CURRENT-ASSETS> 53,260
<PP&E> 10,255
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0
0
<COMMON> 85
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<TOTAL-LIABILITY-AND-EQUITY> 59,801
<SALES> 26,339
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<CGS> 9,066
<TOTAL-COSTS> 11,162
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