<PAGE> 1
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, 1999
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 12,910,462 at June 30, 1999.
This report consists of 17 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
June 30, 1999 and March 31, 1999 3
Condensed Consolidated Statements of Income for the
Three Month Periods Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for
the Three Month Periods Ended June 30, 1999 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 9
Item 3: Quantitative and Qualitative Disclosures
About Market Risk 14
Part II: Other Information
Item 1: Legal Proceedings 15
Item 2: Changes in Securities 15
Item 3: Defaults upon Senior Securities 15
Item 4: Submission of Matters to a Vote of Security Holders 15
Item 5: Other Information 15
Item 6: Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
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MEDIA ARTS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,430 $ 6,361
Accounts receivable, net 19,606 22,354
Inventories 18,839 16,683
Prepaid expenses and other current assets 5,199 5,346
Deferred income taxes 5,319 5,288
--------- ---------
Total current assets 53,393 56,032
Property and equipment, net 13,092 10,971
Notes receivable 573 --
Cash value of life insurance 1,355 920
Other assets 220 223
--------- ---------
Total assets $ 68,633 $ 68,146
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,554 $ 4,883
Commissions payable 673 981
Accrued royalties 1,192 1,339
Accrued compensation costs 1,046 2,274
Accrued expenses 1,784 1,942
Income taxes payable 2,985 2,828
--------- ---------
Total current liabilities 14,234 14,247
Deferred compensation cost 1,453 908
Convertible notes 1,200 1,200
--------- ---------
Total liabilities 16,887 16,355
--------- ---------
Stockholders' equity:
Common Stock 88 88
Additional paid-in capital 37,451 37,367
Retained earnings 18,364 17,976
Treasury stock (4,157) (3,640)
--------- ---------
Total stockholders' equity 51,746 51,791
--------- ---------
Total liabilities and stockholders' equity $ 68,633 $ 68,146
========= =========
</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,
1999 1998
--------- ---------
<S> <C> <C>
Net sales $ 25,745 $ 26,339
Cost of sales 9,827 9,066
--------- ---------
Gross profit 15,918 17,273
--------- ---------
Operating expenses
Selling and marketing 8,929 6,589
General and administrative 6,362 4,573
--------- ---------
Total operating expenses 15,291 11,162
--------- ---------
Operating income 627 6,111
Interest income 10 131
--------- ---------
Income before income taxes 637 6,242
Provision for income taxes 249 2,371
--------- ---------
Net income $ 388 $ 3,871
========= =========
Net income per share:
Basic $ 0.03 $ 0.30
Diluted $ 0.03 $ 0.27
Shares used in net income per share computation:
Basic 12,932 12,969
Diluted 13,214 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,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 388 $ 3,871
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation 934 438
Amortization of intangibles 3 4
Deferred income taxes (31) (75)
Provision for returns and allowances (125) 116
Provision for losses on accounts receivable (88) --
Changes in assets and liabilities:
Accounts receivable 2,961 (2,050)
Inventories (2,272) (2,274)
Prepaid expenses and other current assets 141 (1,016)
Accounts payable 1,671 (590)
Commissions payable (308) 434
Accrued compensation costs (1,228) (507)
Income taxes payable 157 2,373
Accrued expenses (490) 1,407
Accrued royalties (147) 1,049
Deferred compensation liability 545 --
--------- ---------
Net cash provided by operations 2,111 3,180
--------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment (3,365) (1,335)
Disposal of galleries, net of cash acquired 764 --
Increase in cash surrender value of life insurance (435) --
Acquisition of gallery, net of cash acquired -- (321)
Purchases of short term investments -- (5,846)
--------- ---------
Net cash used in investing activities (3,036) (7,502)
--------- ---------
Cash flows from financing activities:
Receipt of notes receivable (573) --
Proceeds from issuance of common stock 84 285
Purchases of treasury stock (517) --
--------- ---------
Net cash provided by (used in) financing activities (1,006) 285
--------- ---------
Net decrease in cash and cash equivalents (1,931) (4,037)
Cash and cash equivalents at beginning of period 6,361 16,401
--------- ---------
Cash and cash equivalents at end of period $ 4,430 $ 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 subsidiaries,
Lightpost Publishing, Inc. and 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 Company's primary products are canvas and
paper lithographs that feature Mr. Kinkade's unique use of light and his
peaceful and inspiring themes.
The condensed interim consolidated 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 consolidated 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
condensed consolidated 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, 1999 are not necessarily indicative of the results that
may be expected for the entire fiscal year which ends March 31, 2000.
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,
1999 1998
--------- ---------
<S> <C> <C>
Weighted average number of shares - basic 12,932 12,969
Incremental shares from assumed issuance
of stock options 282 1,166
--------- ---------
Weighted average number of shares - diluted 13,214 14,135
========= =========
</TABLE>
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NOTE 3 - Inventories
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
--------- ---------
<S> <C> <C>
Raw materials $ 2,583 $ 2,579
Work-in-process 2,265 1,235
Finished goods 13,991 12,869
--------- ---------
$ 18,839 $ 16,683
========= =========
</TABLE>
NOTE 4 - Operating Segments and Geographic Information
Media Arts operates in two market segments: wholesale and retail. The
wholesale segment includes sales to the Company's branded distribution
channel (which includes Company-owned Thomas Kinkade Stores, and
independently owned Thomas Kinkade Signature Galleries and Showcase
dealers), other independent dealers and strategic partners such as QVC,
Avon and Hallmark. Media Arts' retail segment consists of sales by
Company-owned Thomas Kinkade Stores. Each operating segment has a
management team that reports directly to the Chief Executive Officer
("CEO"). The CEO, identified as the Chief Operating Decision Maker as
defined by Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
evaluates performance and allocates resources to each operating segment
based on its net sales and operating profits. Information on the
Company's reportable segments for the three months ended June 30, 1999
and 1998 is as follows (in thousands):
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<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
--------- ---------
<S> <C> <C>
Revenues:
External wholesale $ 19,444 $ 21,433
Intersegment wholesale 3,530 3,414
Retail 6,301 4,906
Eliminations (3,530) (3,414)
--------- ---------
Total company $ 25,745 $ 26,339
========= =========
Operating income (loss):
Wholesale $ 2,063 $ 6,718
Retail (984) (96)
Eliminations (452) (511)
--------- ---------
Total company $ 627 $ 6,111
========= =========
Assets:
Wholesale $ 62,307 $ 52,181
Retail 10,691 9,622
Eliminations (4,365) (2,841)
--------- ---------
Total company $ 68,633 $ 58,962
========= =========
Depreciation and amortization:
Wholesale $ 571 $ 368
Retail 366 74
--------- ---------
Total company $ 937 $ 442
========= =========
Capital expenditures:
Wholesale $ 3,296 $ 975
Retail 69 360
--------- ---------
Total company $ 3,365 $ 1,335
========= =========
</TABLE>
Media Arts currently does not sell to geographic regions outside the
United States and Canada. During the three months ended June 30, 1999
and 1998 no customer accounted for greater than 10% of net sales.
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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, 1999 which
contains the audited financial statements and notes thereto for the years
ended March 31, 1997, 1998 and 1999 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,
1999, 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, 1999 were $25.7 million, a 2.3%
decrease from $26.3 million for the quarter ended June 30, 1998. The
decline in sales was primarily attributable to reduced demand due to
larger edition sizes and our phased release program, as well as release
of two images late in the March 1999 quarter. Sales were also adversely
affected by lower average sales to new Thomas Kinkade Signature Galleries,
as many of these new galleries are additional sites for existing Signature
Gallery dealers who have gained inventory efficiencies by utilizing
centralized warehousing. We intend to reduce edition sizes, phased
releases and the number of dimensional sizes offered for certain releases
during the September 1999 quarter.
Gross Profit
Gross profit decreased by $1.4 million, or 7.8%, to $15.9 million for the
quarter ended June 30, 1999 from $17.3 million for the quarter ended June
30, 1998. The decrease was due to decreased sales and a decrease in
gross margins. Consolidated gross margin was 61.8% for the June 1999
quarter, compared to 65.6% for the June 1998 quarter. The softening in
gross margin was due to under absorbed manufacturing capacity resulting
from lower than expected sales.
Selling and Marketing Expenses
Selling and marketing expenses were $8.9 million for the quarter ended
June 30, 1999 compared to $6.6 million for the quarter ended June 30,
1998. As a percentage of net sales, selling and marketing expenses were
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34.7% for the June 1999 quarter compared to 25.0% for the June 1998
quarter. Selling and marketing expenses increased in absolute terms due
to increased advertising and promotional costs. Selling and marketing
expenses increased as a percentage of sales due to lower than anticipated
sales.
General and Administrative Expenses
General and administrative expenses were $6.4 million for the quarter
ended June 30, 1999 compared to $4.6 million for the quarter ended June
30, 1998. Expressed as a percentage of net sales, general and
administrative expenses for the June 1999 quarter were 24.7% compared to
17.4% for the June 1998 quarter. The increase in general and
administrative expenses was primarily due to increased infrastructure
costs in anticipation of higher sales volumes, as well as planned
spending on dealer support services and our e-commerce site.
Wholesale Segment
Net sales to wholesale accounts include sales to our branded distribution
channel, including independently owned Signature Galleries and Showcase
dealers, our Company-owned Thomas Kinkade Stores, other independent
dealers and strategic partners, as well as revenue generated from licensing
arrangements. Net sales to wholesale customers before intersegment
eliminations decreased 7.5% to $23.0 million in the June 1999 quarter
compared to $24.8 million in the June 1998 quarter. The decrease in net
sales for this segment was primarily due to decreased demand due to larger
edition sizes, our phased release program, release of two images late in the
March 1999 quarter and lower average sales to new Signature Galleries, as many
of these new galleries are additional sites for existing Signature Gallery
dealers who have gained efficiencies by utilizing centralized warehousing.
Sales to Signature Galleries increased 21.4% to $10.2 million in the June 1999
quarter from $8.4 million in June 1998 quarter due to an increase in the
number of Signature Galleries to 195 as of June 30, 1999 from 91 as of
June 30, 1998.
Operating income for the wholesale segment before intersegment
eliminations decreased 69.3% to $2.1 million in the June 1999 quarter
compared to $6.7 million in the June 1998 quarter. The decrease was
primarily due to decreased net sales, and increased advertising and
promotional costs and increased infrastructure costs in anticipation of
higher sales volumes. Operating margin for the wholesale segment before
inter-segment eliminations decreased to 9.0% in the June 1999 quarter
from 27.0% in June 1998 quarter due to lower net sales.
Retail Segment
Net sales for the retail segment consists of sales by Company-owned
Thomas Kinkade Stores and increased 28.4% to $6.3 million in the June
1999 quarter compared to $4.9 million in the June 1998 quarter. The
increase in net sales was primarily due to the opening of new Thomas
Kinkade Stores during fiscal 1999. There were 30 Company-owned galleries
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as of June 30, 1999 compared to 23 as of June 30, 1998. Two galleries were
transferred to Signature Galleries during the June 1999 quarter. We expect
to transfer the majority of our Company-owned galleries to Signature Gallery
owners by the end of fiscal 2000.
Operating losses for the retail segment increased 925.0% to $984,000 in the
June 1999 quarter compared to $96,000 in the June 1998 quarter primarily
due to increased headcount, advertising, rent and other infrastructure
costs related to expansion. Our retail segment purchases products from our
wholesale segment at the same price as external wholesale customers.
Interest Income
Interest income was $10,000 for the quarter ended June 30, 1999 compared
to $131,000 for the same period in the prior year. The decrease in
interest income was due to decreased cash balances.
Provision for Income Tax
The provision for income taxes was $249,000 for the quarter ended June
30, 1999, compared to $2.4 million for the same period in the prior
year. Our effective income tax rate for the June 1999 quarter was 39.1%
compared to 38.0% for the June 1998 quarter.
Seasonality; Fluctuations in Quarterly Results
Our business has experienced, and is expected to continue to experience,
significant seasonal fluctuations in net sales and income. Our 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 1999, net sales in the December 1998 quarter were $39.0
million and sales in the subsequent March 1999 and June 1999 quarters were
$31.4 million and $25.7 million. We believe 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. We expect these seasonal trends to continue in the
foreseeable future.
Our 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 our Thomas Kinkade products
(including new product categories and series),
- - Our ability to achieve our expansion plans,
- - The timing, mix and number of new product releases,
- - The successful implementation of the Signature Gallery program and
expansion of distribution generally,
- - Our ability to implement strategic business alliances,
- - Our 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.
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In addition, since a significant portion of our net sales are generated
from orders received in the quarter, net sales in any quarter are
substantially dependent on orders booked in that quarter. Our 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 our common stock.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of funds in the first three months of fiscal 2000 has
been from our operations. Our working capital as of June 30, 1999 was
$39.2 million, compared to $41.8 million as of March 31, 1999.
Net cash provided by operations for the first three months of fiscal 2000
was $2.1 million consisting primarily of a decrease in accounts
receivable and an increase in accounts payable, offset by an increase in
inventory and a decrease in accrued compensation costs. Accounts
receivable decreased as a result of a decrease in sales during the
quarter. Accounts payable increased due to timing of payments.
Inventory increased due to the receipt of a backlog of materials for our
high-end studio proof and renaissance edition products, receipt of
additional paper lithographs in full edition quantities and the
production of limited edition canvas for release in the first weeks of
July 1999. Accrued compensation costs decreased as a result of payment
of year end incentive compensation. 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, other accrued expenses and accrued royalties payable offset by
an increase in inventory and accounts receivable.
Net cash used in investing activities was $3.0 million for the first
three months of fiscal 2000 and primarily related to investment in our
e-commerce site and capital expenditures for property and equipment. Net
cash used in investing activities was $7.5 million in the first three
months of fiscal 1999 primarily related to purchases of securities and to
capital expenditures for property and equipment. We anticipate that
total capital expenditures in fiscal 2000 will be approximately $10
million, and will relate primarily to e-commerce development and
continued manufacturing and infrastructure investments.
Net cash used in financing activities was $1.0 million in the first three
months of fiscal 2000 compared to $285,000 provided by financing
activities in the first three months of fiscal 1999. Cash used in
financing activities during the first three months of fiscal 2000 was
primarily for financing the sales of two Company-owned galleries and
purchasing shares of our common stock under our continuing stock
repurchase program. During the three months ended June 30, 1999, we
purchased 74,300 shares of our common stock at an average price of $6.96.
Net cash provided by financing activities during the first three months
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of fiscal 1999 was due to the exercise of options and warrants for our
common stock.
We have a $10 million secured bank line-of-credit facility. We are
currently negotiating a new line-of-credit which is expected to be
completed in the 1999 calendar year. Borrowing capacity under the
existing credit facility is based upon eligible accounts receivable and
inventory. There were no outstanding borrowings under this credit
facility as of June 30, 1999.
Our working capital requirements in the foreseeable future will change
depending on the rate of our expansion, our operating results and any
other adjustments in our operating plan as needed in response to
competition, acquisition opportunities or unexpected events. We believe
that existing borrowing capacity under lines of credit, together with
revenues from operations, will be sufficient to meet our working capital
requirements through fiscal 2000. However, there can be no assurance
that we will not seek additional capital in the future as a result of
expansion or otherwise.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products may be
coded to accept only two-digit entries in the date code field and as the
Year 2000 approaches, these code fields will need to accept four digit
entries to distinguish years beginning with "19" from those beginning
with "20." As a result, in less than six months, computer systems and/or
software products used by many companies will need to be upgraded to
comply with such Year 2000 requirements.
Our Year 2000 Project (the "Project") was substantially complete by the
end of fiscal 1999. The scope and content of the Project included:
- - Assessing the ability of computer programs and embedded computer chips to
distinguish between the year 1900 and the year 2000,
- - Conducting a review of our information technology ("IT") and non-IT
systems to identify those areas that could be affected by Year 2000
issues,
- - Developing a comprehensive, risk-based plan to address IT and non-IT
systems and products, as well as dependencies on our business partners,
- - Completing an inventory and risk-assessment of our computer systems and
related technology, and
- - Developing and carrying out the testing and remediation process.
As part of the remediation process, in fiscal 1999 we upgraded our main
IT system and related JD Edwards software, IBM AS400 and PC-based network
to be Year 2000 compliant. The total cost for ensuring Year 2000
compliance was not material to our financial position. The total cost of
the Year 2000 Project was approximately $1 million, including upgrades
for the JD Edwards software, the IBM AS400 and the PC-based network. At
present, we believe that with the current modifications to existing
software and conversions to new software, the Year 2000 problem will not
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pose significant operational issues for our operations. However, we
cannot accurately predict a "worst case scenario" with regard to our Year
2000 issues.
We understand we may encounter difficulties interfacing or
interconnecting with third party systems, whether or not those systems
claim to be "compliant," and therefore have completed an inventory and
risk assessment of our outside vendors and have identified those key
vendors that represent a significant risk. We are continuing to
communicate with those vendors to determine their Year 2000 readiness.
Part of our preparation included preparing contingency plans in the event
of non-compliance by those vendors. Overall, we believe Year 2000 risks
with key vendors and suppliers are low because many are small
manufacturers with relatively simple business systems, however, we cannot
guarantee that the systems of those vendors and suppliers, or other
companies on which we rely, will be Year 2000 compliant. Failure by
another company to convert their systems to be Year 2000 compliant could
require us to incur unanticipated expenses to remedy problems, which
could have a material adverse effect on our business, operating results
and financial condition.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio and borrowings. We do not use
derivative financial instruments in our investment portfolio and our
investment portfolio only includes highly liquid instruments purchased
with an original maturity of 90 days or less and are considered to be
cash equivalents. We did not have short-term investments as of June 30,
1999. We are subject to fluctuating interest rates that may impact,
adversely or otherwise, our results from operations or cash flows for our
variable rate cash and cash equivalents and borrowings. We do not expect
any material loss with respect to our investment portfolio. The table
below presents principal (or notational) amounts and related weighted
average interest rates for our investment portfolio and debt obligations
(in thousands):
June 30,
1999
---------
Assets:
Cash and cash equivalents $ 4,430
Average interest rate 3.52%
Liabilities:
Bank line-of-credit $ --
Interest rate (prime rate plus 0.5%) 8.25%
Convertible note payable to related party $ 1,200
Fixed interest rate 8.00%
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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 Amendment to Peterson Employment Agreement entered
into between the Company and Raymond A. Peterson dated August 4,
1999.
Exhibit 10.2 Consulting Agreement entered into between the
Company and Raymond A. Peterson dated August 4, 1999.
(b) Exhibit 27.1 Financial Data Schedule (EDGAR version only).
(c) 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/ Craig Fleming
--------------------------------------
Craig Fleming
President and Chief Executive Officer
By /s/ Greg H.L. Nash
--------------------------------------
Greg H.L. Nash
Senior Vice President &
Chief Financial Officer
Date: August 13, 1999
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EXHIBIT INDEX
Exhibit Number
10.1 Amendment to Peterson Employment Agreement entered into between
the Company and Raymond A. Peterson dated August 4, 1999.
10.2 Consulting Agreement entered into between the Company and
Raymond A. Peterson dated August 4, 1999.
27.1 Financial Data Schedule
17
AMENDMENT TO EMPLOYMENT AGREEMENT
On November 19, 1998, Media Arts Group, Inc. ("Employer") and Bud Peterson
("Employee") entered into an employment agreement ("Employment Agreement"),
which is attached hereto. The Employment Agreement, except as modified below,
shall be incorporated by reference into and made part of this amendment
("Amendment") as if written directly into this Amendment. Based on Employer's
desire to appoint a different CEO, and based on Employee's desire to assist in
facilitating a smooth transition, Employer and Employee now wish to amend the
Employment Agreement as follows:
Section 1 - Employment
Shall be amended to replace "Chief Executive Officer ("CEO")" with "Vice-
Chairman of the Board".
Section 2 - Responsibilities and Duties of Employee
Shall be amended to replace entire section with the following language:
It is agreed that Employee is employed on a full-time basis, which is defined
to mean Employee's entire productive time, ability and attention. It is
further agreed that for so long as the Employee is employed with the Employer,
Employee shall not engage in any other business duties or pursuits without the
express written consent of the Board. In his capacity as Vice-Chairman of the
Board, Employee shall have such duties and responsibilities as listed below:
a. Continue to represent the Corporation externally to the investment banking
community, analysts, banks, investors, industry and government groups, public
relations, as requested by the Board;
b. Continue to be a Corporation spokesperson for the business and financial
opportunities the Corporation creates;
c. Provide strategic input in formulating the Business Plan;
d. Be available in areas where the Chief Executive Officer and President
requests his experience and expertise.
In addition, Employee shall perform such other duties and responsibilities as
the Board shall designate as are not inconsistent with Employee's position with
the Employer, including the performance of duties with respect to any
subsidiaries of the Employer.
Employee shall at all times perform the duties set forth herein faithfully,
industriously, and to the best of Employee's ability, experience and talent.
Section 4 - Duration of Employment
Shall be amended in its entirety to state "The Employer agrees to employ
Employee in the capacity set forth above for the period of time commencing as
of the date hereof and ending on December 31, 1999. In that regard, this
Agreement shall be binding on the parties as of the date hereof and shall
terminate at Midnight on December 31, 1999."
Section 5 - Compensation to Employee
The following language shall be added:
"(f) Payment upon Termination. Upon termination of this agreement pursuant
to paragraph 4 above, Employer agrees to pay Employee the sum equal to one
year's base salary plus benefits on January 15, 2000. Upon termination of this
agreement for termination for any other reason except for cause, as defined in
Section 7(b) below, Employer agrees to pay Employee the sum of any remaining
salary which otherwise would have been due through the duration stated in
paragraph 4 plus one year's base salary plus benefits.
(g) Consulting Contract. As further consideration for Employee's entering
into this Amendment to his Agreement, Employer agrees to enter into a short
term Consulting Agreement in the form attached hereto, to be executed
concurrently with this Amendment."
Section 13 -- Entire Agreement
Shall be amended in its entirety to state "This Amendment (and through
incorporation by reference, the Employment Agreement) and the Consulting
Agreement executed concurrently herewith, represent the entire agreement of
the parties hereto. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made
by any of the parties which are not expressly set forth in this Amendment,
the Employment Agreement or the Consulting Agreement."
ACCEPTED AND AGREED:
EMPLOYEE: EMPLOYER:
MEDIA ARTS GROUP INC.
521 Charcot Ave.
San Jose, CA 95131
By:\s\ Bud Peterson_____________________ By:\s\ Craig Fleming___________
Bud Peterson Craig Fleming CEO
Employee
By:\s\ Mike Kiley_________________
Mike Kiley, Compensation Committee
By:\s\ Mike West__________________
Mike West, Compensation Committee
By:\s\ Norm Nason_________________
Norm Nason, Compensation Committee
CONSULTING AGREEMENT
This Consulting Agreement, including the attached Exhibits ("Agreements") is
made and entered into effective the 1st day of January, 2000, by and between
MEDIA ARTS GROUP, INC.("MAGI"), a Delaware company, and Bud Peterson
("Consultant"). MAGI desires to terminate Consultant's existing employment
agreement and desires to retain Consultant as an independent contractor to
perform consulting services for MAGI as set forth below and Consultant is
willing to perform such services, on terms set forth more fully below. In
consideration of the mutual promises contained herein, the parties agree as
follows:
1. SERVICES AND COMPENSATION
(a) Consultant agrees to perform for MAGI the services described in the
(b) attached EXHIBIT A ("Services").
(c) MAGI agrees to pay Consultant the compensation set forth in the attached
(d) EXHIBIT B for the performance of the Services.
2. CONFIDENTIALITY
(a) "Confidential Information" means any MAGI proprietary information,
technical data, trade secrets or know-how, including, but not limited to,
research, product plans, products, services, suppliers, supplier lists,
customers, customer lists, markets, software, developments, Developments,
processes, formulas, technology, designs, drawings, engineering, marketing,
finances or other business information disclosed by MAGI either directly or
indirectly in writing, orally, electronically, or by drawings or inspection of
parts or equipment.
(b) Consultant will not, during or subsequent to the term of this Agreement,
use Confidential Information for any purpose whatsoever other than the
performance of the Services on behalf of MAGI or disclose Confidential
Information to any third party. Consultant agrees that Confidential
Information shall remain the sole property of MAGI. Consultant agrees to take
all reasonable precautions to prevent unauthorized disclosure of Confidential
Information. Notwithstanding the above, Consultant's obligation under this
Section 2(b) relating to Confidential Information shall not apply to
information which
(i) is known to Consultant at the time of disclosure to Consultant by
MAGI as evidenced by written records of Consultant,
(ii) has become publicly known and made generally available through no
wrongful act of Consultant, or
(iii)has been rightfully received by Consultant from a third party
authorized to make such a disclosure.
(c) Consultant agrees that Consultant will not, during the term of this
Agreement, improperly use or disclose any proprietary information or trade
secrets of any former or current employer or any other person or entity with
which Consultant has an agreement or a duty to keep in confidence information
acquired by Consultant in confidence and that Consultant will not bring onto
the premises of MAGI any unpublished document or proprietary information
belonging to such an employer, person, or entity unless consented to in
writing by such employer, person, or entity. Consultant will indemnify MAGI
and hold it harmless from and against all claims, liabilities, damages and
expenses, including reasonable attorneys' fees and costs of suit, arising out
of or in connection with any violation or claimed violation of a third party's
rights resulting in whole or in part from MAGI's use of the work product of
Consultant under this Agreement.
(d) Consultant recognizes that MAGI has received and in the future will
receive from third parties their confidential or proprietary information
subject to a duty on MAGI's part to maintain the confidentiality of such
information and use it only for certain limited purposes. Consultant agrees
that Consultant owes MAGI and such third parties, during the term of this
Agreement and thereafter, a duty to hold all such confidential or proprietary
information in the strictest confidence and not to disclose it to any person,
firm or corporation or to use it except as necessary in carrying out the
Services for MAGI consistent with MAGI's agreement with such third party.
(e) Upon the termination of this Agreement, or upon MAGI's earlier request,
Consultant will deliver to MAGI all of MAGI's property relating to, and all
tangible and electronic embodiments of, Confidential Information in
Consultant's possession or control.
(f) Consultant represents and warrants that each employee of Consultant, and
each independent contractor of Consultant, if any, has executed an agreement
with Consultant containing provisions in MAGI's favor substantially similar to
this Section 2.
3. OWNERSHIP
(a) Consultant agrees that all copyrightable material, notes, records,
drawings, designs, developments, improvements, developments, discoveries and
trade secrets (collectively, "Developments") conceived, made or discovered by
Consultant in performing the Services, solely or in collaboration with others,
during the term of this Agreement relating to the business of MAGI shall be
the sole property of MAGI. In addition, to the extent allowed by law, any
Developments which constitute copyrightable subject matter shall be considered
"works made for hire" as that term is defined in the United States Copyright
Act. Consultant further agrees to assign (or cause to be assigned) and does
hereby assign fully to MAGI all such Developments and any copyrights, patents,
mask work rights, or other intellectual property rights relating thereto.
(b) Upon the termination of this Agreement, or upon MAGI's earlier request,
Consultant will deliver to MAGI all of MAGI's property relating to, and all
embodiments of, Developments in Consultant's possession and control.
(c) Consultant agrees to assist MAGI, or its authorized representative, at
MAGI's expense, to obtain and from time to time enforce and defend MAGI's
rights in the Developments and any copyrights, patents, mask work rights or
other intellectual property rights relating thereto in any and all countries,
and to execute all documents reasonably necessary for MAGI to do so.
(d) MAGI agrees that if in the course of performing the Services, Consultant
incorporates into any Development developed hereunder any invention,
improvement, development, concept, discovery or other proprietary information
owned by Consultant or in which Consultant has an interest ("Item"), MAGI is
hereby granted and shall have a nonexclusive, royalty-free, perpetual,
irrevocable worldwide license to make, have made, modify, reproduce, display,
use and sell such Item as part of or in connection with such Invention.
(e) Consultant agrees that if MAGI is unable because of Consultant's
unavailability, dissolution, mental or physical incapacity, or for any other
reason, to secure Consultant's signature to apply for or to pursue any
application for any United States or foreign patents or mask work or copyright
registrations covering the Developments assigned to MAGI above, then
Consultant hereby irrevocably designates and appoints MAGI and its duly
authorized officers and agents as Consultant's agent and attorney-in-fact, to
act for and in Consultant's behalf and stead to execute and file any such
applications and to do all other lawfully permitted acts to further the
prosecution and issuance of patents, copyright and mask work registrations
thereon with the same legal force and effect as if executed by Consultant.
(f) Consultant represents and warrants that each employee of Consultant, and
each independent contractor of Consultant, if any, has executed an agreement
with Consultant containing provisions in MAGI's favor substantially similar to
his Section 3.
(g) Notwithstanding any other provision of this Section 3, the provisions of
this Section 3 shall not apply to any Invention that qualifies in all respects
under Section 2870 of the California Labor Code, which provides: "(a) Any
provision in an employment agreement which provides that an employee shall
assign, or offer to assign, any of his or her rights in an invention to his o
her employer shall not apply to an invention that the employee developed
entirely on his or her own time without using the employer's equipment,
supplies, facilities or trade secret information, except for those Developments
that either: (1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual demonstrably anticipated
research or development of the employer. (2) Result from any work performed by
the employee for the employer. (b) To the extent a provision in an employment
agreement purports to require an employee to assign an invention otherwise
excluded from being required to be assigned under subdivision (a), the
provision is against the public policy of this state and is unenforceable."
Consultant shall advise MAGI promptly and in writing of any of his or her
previous or future works or Developments which he believes qualify under the
California Labor Code Section 2870. MAGI agrees to receive such information in
confidence.
4. CONFLICTING OBLIGATIONS
(a) Consultant certifies that Consultant has no outstanding agreement or
obligation that is in conflict with any of the provisions of this Agreement,
or that would preclude Consultant from complying with the provisions hereof,
and further certifies that Consultant will not enter into any such conflicting
agreement during the term of this Agreement.
(b) Consultant represents and warrants that each employee of Consultant, and
each independent contractor of Consultant, if any, has executed an agreement
with Consultant containing provisions in MAGI's favor substantially similar to
this Agreement.
5. TERM AND TERMINATION
(a) This Agreement will commence on the date first written above and will
continue for six (6) months or termination as provided below.
(b) Upon such termination all rights and duties of the parties shall cease
except: (i) that MAGI shall be obligated to pay, within thirty (30) days of
the effective date of termination, all amounts owing to Consultant for unpaid
services and related expenses, if any, in accordance with the provisions of
Section 1 (Services and Compensation hereof; and (ii) Sections 2
(Confidentiality), 3 (Ownership), 7 (Independent Contractors) shall survive
termination of this Agreement.
(c) The parties have as of the effective date of this Agreement negotiated and
agreed that MAGI may not terminate this Agreement at any time for any reason
prior to the full term stated in 5(a) above, and that in all events
Consultant shall be paid all amounts due under the Agreement.
6. ASSIGNMENT
Neither this Agreement nor any right hereunder or interest herein may be
assigned or transferred by Consultant without the express written consent of
MAGI.
7. INDEPENDENT CONTRACTORS
Nothing in this Agreement shall in any way be construed to constitute
Consultant as an agent, employee or representative of MAGI, but Consultant
shall perform the Services hereunder as an independent contractor. Consultant
acknowledges and agrees that Consultant is obligated to report as income all
compensation received by Consultant pursuant to this Agreement, and Consultant
agrees to indemnify MAGI and hold it harmless to the extent of any obligation
imposed on MAGI (i) to pay withholding taxes or similar items or (ii) resulting
from Consultant's being determined not to be an independent contractor.
8. ARBITRATION, EQUITABLE RELIEF AND ATTORNEYS FEES
(a) Except as provided in Section 8(b) below, MAGI and Consultant agree that
any dispute or controversy arising out of or relating to any interpretation,
construction, performance or breach of this Agreement, shall be settled by
arbitration to be held in San Jose, California, by the American Arbitration
Association and in accordance to the then current rules thereof. The
arbitrator may grant injunctions or other relief in such dispute or
controversy. The decision of the arbitrator shall be final, in any court
of competent jurisdiction. In the event that any legal action or arbitration
is brought by any party hereunder, the prevailing party shall be entitled to
recover from the other party all reasonable costs, expenses and attorneys fees
incurred therein.
(b) Consultant agrees that it would be impossible or inadequate to measure and
calculate MAGI's damages from any breach of the covenants set forth in Sections
2 or 3 herein. Accordingly, Consultant agrees that if Consultant breached
Section 2 or 3, MAGI has, in addition to any other right or remedy available,
the right to obtain from any court of competent jurisdiction an order
restraining such breach or threatened breach and specific performance of any
such provision. Consultant further agrees to the extent provided by law that
no bond or other security shall be required in obtaining such equitable relief
and Consultant hereby consents to the issuance of such injunction and the
ordering of such specific performance.
9. GOVERNING LAW
This Agreement shall be governed by, and construed and interpreted under, the
laws of the State of California without reference to conflict of laws
principles.
10. ENTIRE AGREEMENT
This Agreement and the Exhibits hereto form the entire agreement of the parties
and supersedes any prior agreements between them with respect to the subject
matter hereof.
11. WAIVER
Waiver of any term or provision of this Agreement or forbearance to enforce any
term or provision by either party shall not constitute a waiver as to any
subsequent breach or failure of the same term or provision or a waiver of any
other term or provision of this Agreement.
12. MODIFICATION
No modification to this Agreement, nor any waiver of any rights, shall be
effective unless assented to in writing by the party to be charged.
13. COUNTERPARTS
This Agreement may be executed in counterpart, each of which shall be deemed
an original, but both of which together shall constitute one and the same
instrument.
14. INTERPRETATION
Consultant and MAGI agree that this Agreement was the product of negotiation,
with each party having the opportunity to propose modification of terms.
Accordingly, any ambiguity in this Agreement shall not be construed for or
against any party based upon who prepared such terms; the parties hereby
expressly waive California Civil Code Section 1654 with respect thereto.
15. SEVERABILITY
Should any provision of this Agreement be found to be void or unenforceable,
the remainder of this Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the undersigned are duly authorized to execute this
Agreement on behalf of Consultant and MAGI as of the day and year written
above.
CONSULTANT: MEDIA ARTS GROUP INC.
521 Charcot Ave.
San Jose, CA 95131
By:\s\ Bud Peterson ______________ By:\s\ Craig Fleming____________
Bud Peterson Craig Fleming CEO
Consultant
By:\s\ Mike Kiley_________________
Mike Kiley, Compensation Committee
By:\s\ Mike West__________________
Mike West, Compensation Committee
By:\s\ Norm Nason_________________
Norm Nason, Compensation Committee
EXHIBIT A
Services to be performed by Consultant:
Assist in the transition of CEO, as directed by the board of Directors and as
requested by the CEO;
Other duties as reasonably assigned.
EXHIBIT B
Compensation of Consultant:
(a) Rate of Pay: $38,333.33 per month, with payment to be made on the
first day of every month.
(b) Reimbursement of out of pocket costs and expenses
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