<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
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 Avenue
San Jose, California 95131
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (408) 324-2020
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.01 Par Value
(Title of Class)
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229,405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statement incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the Common Stock on May 29,
1998, as reported on Nasdaq National Markets was approximately $122,231,000.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares of the registrant's $0.01 par value Common Stock
outstanding on May 31, 1998, was 12,975,554.
Documents incorporated by reference: None
<PAGE>
The undersigned registrant hereby amends the following items of its
Annual Report on Form 10-K for the fiscal year ended March 31, 1998.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS
Directors and executive officers of the Company, and their ages and
positions as of July 23, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------- ---- ---------------------------------
<S> <C> <C>
Kenneth E. Raasch 38 Chairman of the Board
Thomas Kinkade 40 Creative Director and Director
Raymond A. Peterson 52 President and Chief Executive Officer
James F. Landrum, Jr. 34 Senior Vice President, General Counsel and
Corporate Secretary
Greg H.L. Nash 39 Senior Vice President and Chief Financial
Officer
Craig A. Fleming 43 President and Chief Executive Officer of
Lightpost Publishing, Inc.
John R. Lackner 58 Senior Vice President and Chief Operating
Officer of Lightpost Publishing, Inc.
Daniel P. Byrne 36 Senior Vice President of Product Development and
Marketing of Lightpost Publishing, Inc.
Brian P. Mahoney 42 Senior Vice President of Sales of Lightpost
Publishing, Inc.
Norman A. Nason 57 Director
Michael L. Kiley 53 Vice Chairman of the Board and Independent
Consultant
Norman T. Mahoney 68 Director
W. Michael West 48 Director Nominee
</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 communicating the Company's brand message through public
appearances and books. Prior to March 1990, Mr. Kinkade was a self-employed
artist.
1
<PAGE>
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 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.
2
<PAGE>
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 (1995-1998),
President and Chief Operating Officer (1995-1998) and Executive Vice President
for Worldwide Sales and Marketing (1986-1995). Prior to 1986 Mr. West was
employed by the Rolm Corporation, most recently as 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, California. Prior to
July 1998, he also served as a director of ACS Wireless and Octel Communications
Corporation.
There are no family relationships among the executive 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.
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.
3
<PAGE>
ITEM 11 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
ANNUAL COMPENSATION AWARDS
-------------------------------------------------- ------------
OTHER ANNUAL SHARES ALL OTHER
FISCAL COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)(1) OPTIONS(#) ($)(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
Sr. V.P. of Prod. Dev. 1997 161,572 6,798 2,244 - -
& Marketing 1996 160,298 - 2,244 - -
Raymond A. Peterson 1998 150,000 246,442 12,563 25,000 270
Sr. 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."
(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.
4
<PAGE>
(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 $1,258,633 earned by Thomas
Kinkade in 1998, 1997 and 1996, respectively, pursuant to certain
licensing royalty and other arrangements with the Company. See "Certain
Relationships and Related Transactions."
(8) Does not include an option to purchase 600,000 shares of the Company's
Common Stock granted as of December 3, 1997, subject to stockholder
approval at the 1998 Annual Meeting of Stockholders. See "Certain
Relationships and Related Transactions."
OPTION GRANTS
Set forth below is information relating to grants of stock options to
the Named Officers during the fiscal year ended March 31, 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
OPTIONS STOCK PRICE
GRANTED TO APPRECIATION FOR
OPTIONS EMPLOYEES EXERCISE OPTION TERM (3)
GRANTED IN FISCAL PRICE EXPIRATION --------------------
NAME (#)(1) YEAR ($/SH)(2) DATE 5%($) 10%($)
- --------------------------- -------- ----------- ---------- ---------- ------- -------
S> <C> <C> <C> <C> <C> <C>
Craig A. Fleming 50,000 11.30 4.375 6/19/2007 137,571 348,631
25,000 5.65 5.000 9/10/2007 78,612 199,218
Kenneth E. Raasch - - - - - -
Daniel P. Byrne 25,000 5.65 5.000 9/10/2007 78,612 199,218
Raymond A. Peterson 25,000 5.65 5.000 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."
5
<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.
<TABLE>
<CAPTION> NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
ACQUIRED HELD AT MARCH 31, 1998 MARCH 31, 1998(1)
ON VALUE --------------------------- ------------------------------
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. See "Certain
Relationships and Related Transactions."
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."
6
<PAGE>
In addition to cash compensation, the Company's nonemployee directors
are 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 is entitled to
receive on the first business day following such director's appointment an
initial grant of an option to purchase 5,000 shares of Common Stock under the
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 has served at least one year as a director of the
Company is entitled to receive a grant of an option to purchase an additional
1,500 shares of Common Stock. All options granted under the 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.
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."
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
7
<PAGE>
agreement provides for an annual base salary of $225,000, the opportunity to
participate in any bonus plan adopted for the benefit of senior executives, a
monthly living allowance through December 1997, a $10,000 art allowance, a
relocation expense payment and a twelve-month living allowance in the event
of relocation of Mr. Fleming's immediate family to Santa Clara County,
California, in addition to other benefits. The Company also granted to Mr.
Fleming pursuant to the agreement an option to purchase 50,000 shares of the
Company's Common Stock at fair market value on the date of formal Board
approval of such options; an option to purchase 25,000 shares of the
Company's Common Stock at fair market value on July 1, 1998; and an option to
purchase 25,000 shares of the Company's Common Stock at fair market value on
July 1, 1999.
Mr. Byrne was engaged by the Company as Vice President of Marketing for
a period of three years (with an automatic two year renewal) effective
January 1, 1994 at an annual base salary of $138,000 ($181,560 effective
April 1, 1997) pursuant to Mr. Byrne's employment agreement with the Company.
Mr. Byrne is also eligible to participate in the Company's bonus plan adopted
for the benefit of senior executives.
The employment agreements of Messrs. Raasch, Peterson, Kinkade, Byrne
and Fleming each provide for the officer to receive all salary and bonus
payments that would have been payable to him for the remaining term of the
agreement after a "Change in Control" which provides "Good Reason" for the
officer to terminate his employment. "Good Reason" is defined to include,
among other things, the assignment to the officer of duties inconsistent with
his senior executive status, a reduction in his base salary, a relocation of
the officer or the Company's principal office and the termination of any
compensation or other employee benefits plans in which he was eligible to
participate.
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.
8
<PAGE>
ITEM 12 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, director nominee and
Named Officer, and (iii) all directors, director nominees 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
July 23, 1998, there were 13,015,038 shares of the Company's Common Stock
outstanding.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL PERCENTAGE OF
OWNERSHIP (1) CLASS
-------------------- -------------
<S> <C> <C>
NAME AND ADDRESS OF 5% STOCKHOLDERS(2)
- --------------------------------------
Kenneth E. Raasch 3,660,208 (3)(4) 27.7%
Thomas Kinkade 3,140,651 (5)(6) 24.1%
CERTAIN OTHER EXECUTIVE OFFICERS,
DIRECTORS AND DIRECTOR NOMINEES
- ---------------------------------
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 0 0
Directors, director nominees and
executive officers as a group
(13 persons) 7,778,390 (5)(13) 57.5%
</TABLE>
____________________
* Less than one (1) percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power
and/or investment power with respect to those securities and includes
shares of common stock issuable pursuant to the exercise of stock options
that are immediately exercisable or exercisable within 60 days. Unless
otherwise indicated, the persons or entities identified in this table have
sole voting and investment power with respect to all shares shown as
beneficially owned by them.
(2) All addresses are 521 Charcot Avenue, San Jose, California 95131.
(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."
9
<PAGE>
(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.
(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.
ITEM 13 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 50.0% 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
10
<PAGE>
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.
In addition, pursuant to the New License Agreement, the Company and Mr.
Kinkade entered into a stock option agreement as of December 3, 1997, wherein
the Company granted to Mr. Kinkade a 15-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 stockholder approval at the Company's 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
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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 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 then
fair market value of the shares. Effective August 1, 1997, the Consulting
Agreement was amended to provide for consulting fees of $10,000 per month.
In June 1997 and September 1997, the Company granted to Mr. Kiley options to
purchase 20,000 and 30,000 shares of Common Stock, respectively, at the
then-fair market value of the Common Stock. In October 1997, the Board of
Directors awarded Mr. Kiley a consulting bonus of $90,000 (payable in the
amount of $45,000 immediately and $45,000 in April 1998) in connection with
various consulting services provided by Mr. Kiley. 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 then fair market value for his
various services.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on July 29, 1998.
MEDIA ARTS GROUP, INC.
By: /s/ GREG H. L. NASH
--------------------
Name: Greg H. L. Nash
Title: Senior Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed on July 29, 1998 by the following persons on behalf of
the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
-------------------- -------------------------------------
<S> <C>
*
-------------------- President and Chief Executive Officer
Raymond A. Peterson (Principal Executive Officer)
/s/ GREG H. L. NASH Senior Vice President and Chief
-------------------- Financial Officer
Greg H. L. Nash (Principal Financial and Accounting
Officer)
* Chairman
--------------------
Kenneth E. Raasch
* Director
--------------------
Thomas Kinkade
* Director
--------------------
Norman A. Nason
* Director
--------------------
Michael L. Kiley
* Director
--------------------
Norman T. Mahoney
* By: /s/ GREG H. L. NASH
-------------------
Greg H. L. Nash
Attorney-in-fact
</TABLE>
