<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996 Commission file number 0-18102
MATTHEWS STUDIO EQUIPMENT GROUP
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(Exact name of registrant as specified in its charter)
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CALIFORNIA 95-1447751
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2405 EMPIRE AVENUE, BURBANK, CA 91504-3399
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(Address of principal executive offices) (Zip Code)
(818) 843-6715
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
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 in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [_]
At December 13, 1996, the aggregate market value of the Registrant's voting
stock held by nonaffiliates of the Registrant was approximately $11,148,000.
On December 13, 1996, Registrant's outstanding voting stock consisted of
10,331,591 shares of Common Stock, each no par value.
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TABLE OF CONTENTS
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PAGE
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PART I
Item 1. BUSINESS............................................................................... 1
Item 2. PROPERTIES............................................................................. 4
Item 3. LEGAL PROCEEDINGS...................................................................... 4
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 4
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................................................... 5
Item 6. SELECTED FINANCIAL DATA................................................................ 5
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................... 6
Item 8. FINANCIAL STATEMENTS................................................................... 12
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................................................. 12
PART III
Item 10. DIRECTORS; EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT ................................................................................... 13
Item 11. EXECUTIVE COMPENSATION................................................................. 16
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................................................. 18
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................... 20
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K............................................................................ 21
SIGNATURES.......................................................................................... 22
INDEX TO FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS'
REPORT.............................................................................................. F-1
</TABLE>
i
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PART I
ITEM 1. BUSINESS
Matthews Studio Equipment Group (the "Company") designs, manufactures, sells,
distributes, leases and rents essential production equipment, other than
cameras, to the motion picture, television, video and photography industries.
The Company provides, as a single source, the necessary production equipment
which is otherwise only available by using many different suppliers. The
Company supplies such equipment as lights, grip lighting supports, a complete
line of grip accessories to control lighting, grip camera supports, camera
mounts, tripods, pedestals, fluid heads, camera dollies, portable and foldable
camera cranes, power generators and production trucks and its patented
electronic Cam-Remote(R) and Mini-Mote(R)C.A.T.(R) Systems.
The Company believes that it plays a significant role in the entertainment
industry by providing a "one-stop" source for production equipment. The
Company's manufactured products are distributed worldwide by its sales force and
by independent dealers and distributors located in North America, Europe, Asia
and South America. The Company has won a number of awards for its manufactured
products, including two technical achievement awards from the Academy of Motion
Picture Arts and Sciences in March 1983 and March 1985 and one from the Academy
of Television Arts and Sciences in September 1989.
FORM AND YEAR OF ORGANIZATION
The Company was incorporated in California in May 1958. In February 1989, it
changed its corporate name from Captech, Inc. to its present name after a
reverse acquisition (exchange of stock and pooling) with Matthews Studio
Equipment, Inc., a California corporation incorporated in January 1970, which is
now a wholly owned subsidiary of the Company.
PRODUCTS
EQUIPMENT AND ACCESSORIES FOR LIGHTING SUPPORT, CAMERA SUPPORT AND LIGHTING
CONTROL. Matthews Studio Equipment, Inc. ("Studio Equipment"), a wholly owned
subsidiary of the Company, designs and manufactures grip lighting supports, grip
accessories and accessories to control lighting, grip camera supports, camera
mounts, tripods, pedestals, fluid heads, camera dollies, portable and foldable
camera cranes, equipment and accessories that are used in the production of
motion pictures, television and video programs, still photography, theatrical
productions and certain retail applications. All of Studio Equipment's products
are sold under the "Matthews/TM/" trademark. Sales of these products by Studio
Equipment accounted for approximately 38.0% of the Company's revenues in fiscal
1996.
RENTAL EQUIPMENT. Hollywood Rental Co., Inc. ("HRC"), a wholly owned subsidiary
of the Company, supplies the motion picture and television industry with a
diverse range of production equipment, specializing in lighting and grip
equipment, power generators and production trucks. The Company maintains vans
and medium size trucks, preloaded with equipment which the Company believes will
meet the needs of customers when working in rented studio sound stages, at
nearby locations away from the studio, or at remote locations. These rentals
vary from short periods of time to the complete duration of the filming of a
feature film or television series. The Company's larger tractors/trailers are
equipped with large generators capable of supplying the total power required by
feature film productions while on location. HRC generally issues its invoices
for these rentals weekly. The lessee is typically responsible for the loss,
damage or destruction, whether by fire, other casualty or accident, of such
equipment, and in the event of damage, the lessee also ordinarily agrees to pay
the accrued rental plus the cost of necessary repairs. HRC's usual procedure is
to require each of its lessees to furnish a certificate of insurance providing
for comprehensive coverage, including liability, injury and property damage.
1
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In fiscal 1996, the Company commenced long-term equipment management and
marketing arrangements ("Marketing Center") with Seattle-based Jonas Jensen
Studios, Inc. and Nashville-based D R & A, Inc. For each Marketing Center
arrangement completed in fiscal 1996, the Company acquired the production
equipment of the independent dealer and added other production equipment to such
inventory, to create a mix of equipment more capable of fully servicing the
needs of customers. The augmented inventory is then managed by the independent
dealer at its business, and the Company is entitled to a specified percentage of
the gross revenues from rentals (as defined in the Marketing Center agreements)
of this equipment. Both of these independent dealers, Jonas Jensen Studios,
Inc. and D R & A, Inc., were established providers of (production) rental
equipment and/or post-production and studio facilities with long business
relationships with the Company prior to commencement of these arrangements. The
independent dealer is generally responsible for the loss, damage or destruction,
whether by fire, other casualty or accident, of the Company's equipment. These
arrangements will continue unless cancelled by the Company or the independent
dealer, with the Company having the right to cancel if a specified annual rental
minimum is not met.
HRC's rental activities accounted for approximately 45.4% of the Company's
revenues in fiscal 1996.
PRODUCTION SUPPLIES AND PRODUCTS. As part of its goal to be a full service,
one-source supplier to the entertainment industry, the Company sells many
different supplies which are generally consumed in the production process.
These include art and cleaning products, hardware and tools, light bulbs, tape,
paint, gels, lubricants, lumber and other miscellaneous items. These items are
sold chiefly as an adjunct of equipment rentals at the Company's facilities in
Sun Valley, California, and Charlotte, North Carolina. During fiscal 1996, the
Company began to explore consignment arrangements for these supplies, with the
first consignment having been concluded with Seattle-based Jonas Jensen Studios,
Inc. Sales of these supplies were not significant to the Company's revenues in
fiscal 1996. Sales from supplies accounted for approximately 11.3% of the
Company's revenues in fiscal 1996.
CAM-REMOTE(R) AND MINI-MOTE(R) C.A.T.(R) SYSTEMS ("SYSTEMS"). Prior to October
1, 1994, Matthews Studio Electronics, Inc., a wholly owned subsidiary of the
Company ("Studio Electronics"), conducted its business in partnership with E. F.
Nettmann & Associates, Inc. ("Nettmann") under an exclusive license and
exclusive right of first refusal whose term expires January 31, 2014, to market
all such Systems and subsequent inventions conceived and designed by Nettmann
(the "License"). At October 1, 1994, the partnership was dissolved and the
assets were distributed to the partners in accordance with their partnership
interests. Since October 1, 1994, the assets distributed to and owned by the
Company are being marketed and managed by Nettmann pursuant to the License
(which continues) and under a management agreement between Nettmann and Studio
Electronics ("Management Agreement"). Future units of such Systems will
continue to be designed and manufactured for Studio Electronics by Nettmann
under the Management Agreement. Nettmann's president and principal shareholder
is Ernst F. Nettmann, who is a director of the Company. See Item 13, Certain
Relationships and Related Transactions.
The Systems utilize state of the art electronic circuitry to duplicate delicate
hand motions and enable the operator remotely to pan, tilt, zoom and focus any
film or video camera. By controlling the camera remotely, a cameraman may film
from more effective vantage points or from positions that would be more
difficult or dangerous with conventional equipment. The Systems are rented
directly to Southern California area production companies, to promoters of
special events, and sports broadcasters. For productions and broadcasts outside
of Southern California, the Systems are provided through independent leasing
agents and dealers who lease the Systems from the Company for periods generally
from two to five years. In fiscal 1996, the Company also commenced to market
and sell the Mini-Mote(R) C.A.T.(R) Systems. Revenues from the aggregate of
these activities accounted for approximately 4.0% of the Company's revenues in
fiscal 1996.
EQUIPMENT LEASING. Matthews Acceptance Corporation ("MAC"), a wholly owned
subsidiary of the Company, was engaged in the leasing of equipment manufactured
by the Company on a long term basis. After Company equipment is selected by a
credit worthy lessee, MAC purchases and rents same to the lessee. During fiscal
1996, management decided that the Company's resources are better utilized for
rental and manufacturing activities rather than equipment leasing and,
accordingly, no further leases were made by the Company during fiscal 1996. At
September 30, 1996, the MAC portfolio of leases consisted of 23 leases and
2
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represented approximately $1,317,000 of lease receivables. Revenues from this
lease segment represented less than 1% of the Company's revenues in fiscal 1996.
SALES AND MARKETING
The Company's manufactured equipment (other than the Systems) is sold through
sales representatives employed by the Company. The Company also has authorized
independent dealers in North America, Europe, Asia and South America. These
independent dealers purchase the Company's products for sale or lease to their
customers. The Company also has an independent commercial sales representative
for the still photography industry. The Company's rental equipment is rented
through representatives employed by the Company, and by the Marketing Centers.
The Company's Cam-Remote(R) and Mini-Mote(R) C.A.T.(R) Systems are rented by the
Company's representatives and by independent dealers in North America, Europe
and Asia. The Company supplies its manufactured and rental equipment to a wide
range of customers. No one customer accounted for more than 10% of the
Company's annual sales revenues or annual rental revenues.
MANUFACTURING AND SUPPLIERS
The Company purchases raw materials, components, products and services as
required from numerous suppliers, no one of which accounted for more than 10% of
the Company's annual purchases. The Company believes that there are adequate
alternative sources of supply at commercially reasonable rates for all products,
materials and services required by its operations.
COMPETITION
The Company competes with numerous manufacturers, distributors, equipment rental
companies and suppliers of production equipment for commercial use. The Company
believes that some of these entities are larger and better capitalized than the
Company. The Company also competes with numerous small rental and equipment
sellers. The principal competitive factors in the industries serviced by the
Company are product quality, product availability, product support services,
innovation and pricing.
The technology for remote, electronically controlled camera operating systems is
continually developing. It is difficult to predict how these developments will
affect the sales and rentals of the Company's Cam-Remote(R) and Mini-Mote(R)
C.A.T.(R) Systems in the future. Although no assurance can be given, the
Company believes that its expertise in the area of remote, electronically
controlled equipment for film and television camera operation will enable the
Company to adapt successfully to such technological developments as may occur.
The Company is aware of eight companies which are manufacturing products similar
to the Company's foldable camera cranes, seven companies which are manufacturing
products similar to the Company's grip lighting and camera support lines and
nine companies which are manufacturing remote camera operating systems that have
features similar to the Company's Cam-Remote(R) and Mini-Mote(R) C.A.T.(R)
Systems. In addition to the seven major studios located in Southern California,
the Company is aware of six non-studio independent production equipment rental
companies which are its principal competitors in the Southern California rental
market.
The Company believes that its domestic and international marketing network and
the quality of its manufactured products allow it to compete favorably in each
of its business segments. The Company believes that the quality and quantity of
its production equipment rental inventory coupled with the Company's reputation
for reliability, versatility, performance and competitive pricing will provide
the Company with a continuing competitive edge in the production and supply of
equipment for commercial use by the entertainment production equipment rental
supply business, the entertainment production industry and the still photography
industry.
3
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PATENTS, TRADEMARKS, AND LICENSES
While the Company has procured a number of trademarks for its manufactured
products, and one patent related to its Cam-Remote(R) System, the Company's
business is not dependent on such protection.
EMPLOYEES
The Company had approximately 207 employees at September 30, 1996 (191 full time
and 16 part-time). The Company is not a party to any collective bargaining
agreements and its employees are not represented by a labor union.
ITEM 2. PROPERTIES
The Company's principal offices and its manufacturing, design and warehouse
facilities are located in Burbank, California, totalling approximately 68,000
square feet in five separate but adjacent buildings.
Three such buildings, accounting for approximately 50,000 square feet, are
leased under a master lease with PDM, a general partnership whose sole partners
are Carlos D. De Mattos, the Chairman of the Board, President and Chief
Financial Officer of the Company, and Edward Phillips, a director of the Company
and President of Studio Equipment. During fiscal 1995, the Company and PDM
agreed to cancel the then in effect master lease (which would have expired
December 31, 1996), and entered into the current master lease with PDM. For
purposes of this lease negotiation, the Company acted through and by its
directors and executive officers other than Carlos D. De Mattos and Edward
Phillips. Rent payable under the current master lease represents the averaging
of lease payments that remained under the prior lease (i.e., 15 months at $1.23
per square foot) with lease payments for 36 months at $0.62 per square foot
(which was at the time of such negotiations the prevailing rental rate for like
property in the Burbank area). The average resulting rent for the entire 51-
month period is $0.80 per square foot, and is the rental due to PDM under the
current master lease, which commenced October 1, 1995 and will expire December
31, 1999.
The Company also has the option to extend the term of the current master lease
with PDM.
In addition, the Company leases from unrelated parties an aggregate of
approximately 104,000 square feet of sales office, warehouse and showroom space
in Burbank, Hollywood and Sun Valley, California, and in Charlotte, North
Carolina, at an aggregate monthly rent of approximately $66,000. The Burbank
leases expire in 1998; one of the Sun Valley leases has been extended on a short
term basis through April 1997; the other Sun Valley lease has been extended on a
short term basis through February 1997; and the Charlotte lease expires in 1998.
Commencing in January 1997, the Studio Electronics operations will be managed by
Nettmann at a facility leased by Nettmann from an unrelated party. The Company
will reimburse Nettmann approximately $3,000 per month in rental costs. The
Company is currently negotiating for new lease facilities in adjacent areas, and
will either obtain additional temporary extensions of the expiring leases, or
consolidate its operations as necessary into its Burbank facilities, pending the
acquisition of new lease facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time named as a defendant in the ordinary course of
its business. In the opinion of management, after consultation with outside
counsel, there are no outstanding suits or claims that may reasonably result in
a material adverse effect on the business, financial condition or results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is included in the Nasdaq National Market System
under the symbol "MATT". As of December 13, 1996, there were 10,331,591 shares
of common stock outstanding, held by approximately 244 shareholders of record.
The Company believes there are in excess of 1,300 beneficial holders based on
its last proxy listing. The following table sets forth the high and low bid
prices for the Company's common stock, for the quarterly periods ended as shown:
<TABLE>
<CAPTION>
(High) (Low)
<S> <C> <C>
(Fiscal year 1995)
December 31, 1994 3 3/8 2
March 31, 1995 1 15/16 1 3/8
June 30, 1995 2 15/16 1 5/8
September 30, 1995 2 1/2 1 21/32
(Fiscal year 1996)
December 31, 1995 2 1/8 1 1/2
March 31, 1996 2 5/8 1 1/2
June 30, 1996 2 3/16 1 7/8
September 30, 1996 2 1/8 1 1/2
</TABLE>
The quotations for the common stock set forth above represent bid quotations
between dealers, do not include retail mark-ups, mark-downs or commissions, and
may not necessarily represent actual transactions and "real time" sale prices.
The source of the bid information is Nasdaq.
The Company has never paid dividends and does not expect to declare or pay any
dividends in the foreseeable future. The Company's senior credit facility
prohibits the payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the five years ended
September 30, 1996 are derived from the consolidated financial statements of
Matthews Studio Equipment Group and acquired entities, which have been audited
by Ernst & Young LLP, independent auditors. The data set forth in this table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company's Consolidated
Financial Statements and the Notes thereto and the other financial information
included elsewhere in this Annual Report on Form 10-K.
5
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SELECTED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Net sales $ 16,079 $ 14,554 $ 12,482 $ 14,132 $ 14,397
Rental revenues 14,125 12,797 12,944 11,522 15,780
---------- ---------- ---------- --------- ----------
30,204 27,351 25,426 25,654 30,177
Gross profit - sales 5,861 4,562 3,924 4,815 4,479
Gross profit - rental operations 6,070 5,301 6,018 5,398 7,867
---------- ---------- ---------- --------- ----------
11,931 9,863 9,942 10,213 12,346
Income (loss) before extraordinary item 1,003 208 (478) (390) 318
Income (loss) per share before
extraordinary item 0.10 0.02 (0.05) (0.04) 0.03
Net income (loss) 1,003 (2,020) (478) (390) 318
Net income (loss) per common share 0.10 (0.20) (0.05) (0.04) 0.03
Cash provided by (used in) operations $ 4,698 $ (1,168) $ 1,207 $ 1,788 $ 2,007
Cash used in investing activities (5,789) (3,177) (1,160) (1,511) (2,950)
Cash provided by (used in) financing
activities 1,115 4,048 (60) (33) 936
EBITDA (Footnote 1) 6,043 4,849 2,466 4,250 4,170
Total assets 34,463 30,703 31,223 32,274 25,965
Working captal 7,932 7,872 4,405 2,857 3,810
Net property and equipment 20,339 17,226 16,223 16,391 12,577
Long term debt and capital lease
obligations 18,914 17,664 11,597 10,813 9,453
Shareholders' equity 9,074 8,054 9,893 9,689 8,926
</TABLE>
/1/ EBITDA represents earnings before taxes, interest expense, depreciation and
amortization. The EBITDA for fiscal 1995 is also before the extraordinary
item. The EBITDA for fiscal 1993 is also before the restructuring charge.
The Company believes that EBITDA serves as a financial analysis tool for
measuring financial information such as liquidity, operating performance and
leverage. EBITDA should not be considered by the reader as an alternative to
net income as an indicator of the Company's performance or as an alternative
to cash flows as a measure of liquidity.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company's business is continuing to evolve to meet the ongoing technological
and business changes prevalent in the entertainment production industry,
competitive pressures and changes in the resources of the Company. The Company
is particularly addressing the need to provide its products and services
throughout the United States by developing marketing and distribution
relationships in select geographic market places in furtherance of the Company's
core businesses.
In the fiscal year ended September 30, 1995, the Company refinanced its
operations through a combination of a senior secured revolving credit facility
and an issue of senior subordinated debt with warrants to purchase the Company's
common stock. At September 30, 1996, the Company's outstanding principal
obligations under the credit facility and the long-term subordinated debt were
approximately $13,779,000 and $5,000,000, respectively, with all current
repayment obligations under such credit facility and subordinated debt having
been met.
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Revenues from the Company's manufacturing and equipment rental business grew a
combined 10.4%, with income before income taxes and extraordinary item having
increased by 289%. Capital asset acquisitions made in fiscal 1996 for the
Company's equipment rental business permitted the Company to increase rental
income revenue and at the same time decrease subrental costs (i.e., costs to
rent production equipment from third-parties to meet Company customers' needs).
The Company also increased rental revenue from its manufactured equipment by
including such manufactured equipment in its equipment rentals. Concentrated
marketing efforts on certain higher margin products introduced in fiscal 1995
continued during fiscal 1996, and permitted the Company to increase sales of its
manufactured equipment. Industry-wide favorable conditions during fiscal 1996
also permitted the Company to increase its manufacturing and equipment rental
revenues generally.
Year ended September 30, 1996, compared
to year ended September 30, 1995
--------------------------------
Net Product Sales
Net equipment and supply sales for fiscal 1996 were $16,079,000, an increase of
$1,525,000 or 10.5% from $14,554,000 in fiscal 1995. Equipment sales increased
by $978,000 or 8.4% from fiscal 1995, primarily due to continued concentrated
marketing efforts on certain higher margin products introduced in fiscal 1996.
Partially offsetting the equipment sales increase was an $87,000 decline in
sales of used equipment in fiscal 1996 compared to fiscal 1995.
Revenues from Rental Operations
Revenues from rental operations were $14,125,000 in fiscal 1996, an increase of
$1,328,000 or 10.4% from $12,797,000 in fiscal 1995. Rental revenues at HRC
increased by $1,616,000 to $13,723,000, as compared to $12,107,000 in fiscal
1995. This increase is primarily due to availability of additional rental
equipment acquired during fiscal 1996, and industry-wide favorable conditions.
Gross Profit - Sales
Gross profit, as a percentage of sales, was 36.2% in fiscal 1996 as compared to
31.3% in fiscal 1995. Gross profit on equipment sales, as a percentage of
sales, increased to 38.9% in fiscal 1996 from 34.9% in fiscal 1995. The
increase was primarily due to an 8.4% increase in equipment sales in fiscal
1996, and to increased sales of the Company's higher margin products, which were
introduced in fiscal 1995.
Gross Profit - Rental
Gross profit on rental revenues, as a percentage of revenues, was 43.2% in
fiscal 1996 as compared to 41.4% in fiscal 1995. HRC's gross profit increased
to 42.8%, compared to 41.3% in fiscal 1995. The increase in gross profit
percentage was primarily due to increased rental activities, made possible
partly from an increase of the Company's rental equipment inventory coupled with
a decrease in subrental costs, and partly from industry-wide favorable
conditions. As discussed above, the Company made capital asset acquisitions (of
rental equipment) in fiscal 1996 which expanded the Company's equipment rental
inventory and permitted the Company to decrease subrental costs. The increase
in gross profit percentage was partially offset by $365,000 of increased
depreciation expenses incurred in connection with additions to the rental
equipment inventory.
Selling, General and Administrative
Selling, General and Administrative expenses including provision for doubtful
accounts receivable were $8,849,000 in fiscal 1996, an increase of $1,243,000 or
16.3% as compared to $7,606,000 in fiscal 1995. The increase is primarily due
to higher payroll, allowance for doubtful accounts receivable, sales commission
and bonus expenses, a significant portion of which results from the Company's
generally increased business.
7
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Interest
Interest expense for fiscal 1996 was $2,151,000, an increase of $23,000 or 1.0%
from $2,128,000 in fiscal 1995. The increase is attributable to increased
indebtedness in fiscal 1996 incurred to fund the Company's increased business
and for capital asset acquisitions (to increase the Company's rental equipment
inventory). This increase, however, was partially offset by lower interest
rates and lower loan fee amortization costs. (Loan fee amortization costs were
$275,000 in fiscal 1996 as compared to $403,000 in fiscal 1995.) Interest
income in fiscal 1996 was $107,000, a decrease of $31,000 from $138,000 in
fiscal 1995.
Income Taxes
The Company recognized a provision for income taxes in fiscal 1996 of $35,000 as
compared to a provision for income taxes on income before extraordinary item in
fiscal 1995 of $59,000. The Company's effective tax rate for fiscal 1996 was
3.4% compared to 22% in fiscal 1995, on income before extraordinary item. The
difference between the effective tax rates is primarily attributable to the
recognition of net operating loss carryforwards and alternative minimum tax net
operating loss carryforwards.
Year ended September 30, 1995, compared
to year ended September 30, 1994
--------------------------------
Net Product Sales
Net equipment and supply sales for fiscal 1995 were $14,554,000, an increase of
$2,072,000 or 16.6% from $12,482,000 in fiscal 1994. Equipment sales increased
$2,217,000 or 25.0% from fiscal 1994 primarily due to the introduction of new
products and expanded marketing activities to sell the new products. Partially
offsetting the equipment sales increase was a $188,000 decline in sales of used
equipment in fiscal 1995 from $275,000 in fiscal 1994.
Revenues from Rental Operations
Revenues from rental operations were $12,797,000 in fiscal 1995, a decline of
$147,000 or 1.1% from $12,944,000 in fiscal 1994. Rental revenues from HRC
increased $570,000 to $12,107,000 from $11,537,000 in fiscal 1994. Revenues
from Studio Electronics decreased to $690,000 in fiscal 1995 from $1,407,000 in
fiscal 1994, a decline of $717,000. The decline in Studio Electronics' revenues
is due to the dissolution of the Company's partnership arrangement, and to lower
sales of used Studio Electronics assets of approximately $300,000 in fiscal 1995
compared to fiscal 1994.
Gross Profit - Sales
Gross profit, as a percentage of sales, was 31.3% in fiscal 1995 as compared to
31.4% in fiscal 1994. Gross profit on equipment sales, as a percentage of
sales, increased to 34.9% in fiscal 1995 from 29.9% in fiscal 1994. The
increase was primarily due to a 25% increase in sales which allowed the Company
to absorb a higher percentage of labor than in fiscal 1994, and to the
introduction of higher margin products in 1995. In fiscal 1995, the Company
wrote down the carrying value of its remaining used equipment by $276,000, in
order to dispose of it. Gross profit on sales was 32.8% before the write-down,
as compared to 31.4% for fiscal 1994. In prior years, the Company had
experienced significant fourth quarter write-offs on inventory. Due to improved
inventory controls and manufacturing variance analysis, the Company recorded
approximately $18,000 in inventory adjustments in the fourth quarter of fiscal
1995.
8
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Gross Profit - Rental
Gross profit on rental revenues, as a percentage of revenues, was 41.4% in
fiscal 1995 as compared to 46.5% in fiscal 1994. HRC's gross profit declined to
41.3% compared to 42.7% in fiscal 1994. The decline in gross profit percentage
was primarily due to $111,000 of higher cost incurred to rent equipment to meet
customer orders, and $181,000 of increased depreciation expenses incurred for
additions of new assets to the rental equipment inventory.
Gross profit from Studio Electronics decreased to 43.2% from 75.6% in fiscal
1994. The decrease is primarily due to significantly lower sales of used
equipment in fiscal 1995 as compared to fiscal 1994. The decline in margin due
to equipment sales was approximately $350,000. Used equipment sales had gross
profit associated with them of over 90.0% in fiscal 1994.
Selling, General and Administrative
Selling, General and Administrative expenses including provision for doubtful
accounts receivable were $7,606,000 in fiscal 1995, a decrease of $1,830,000 or
19.4% as compared to $9,436,000 in fiscal 1994. The decrease is primarily due
to management's decision to write-off certain foreign notes and accounts
receivable amounting to $1,515,000 in fiscal 1994, which did not reoccur in
fiscal 1995 because of the discontinuance of the Company's United Kingdom
subsidiary and the closure of the Company's joint venture in Mexico, as well as
the dissolution of the Studio Electronics partnership, which resulted in a
decrease in Selling, General and Administrative expenses of $139,000 for fiscal
1995 as compared to fiscal 1994. In addition, professional fees decreased
approximately $430,000 partially offset by increased costs of trade shows of
$160,000.
Minority Interest
There was no minority interest in fiscal 1995 due to the dissolution of the
Studio Electronics partnership.
Interest
Interest expense for fiscal 1995 was $2,128,000 an increase of $826,000 or 63.4%
from $1,302,000 in fiscal 1994. The increase is attributable to increased
indebtedness in fiscal 1995 incurred to reduce trade payables, refinance the
Company's line of credit and to acquire capital assets as well as the effect of
increased interest rates in fiscal 1995. Interest income in fiscal 1995 was
$138,000, a decrease of $43,000 from $181,000 in fiscal 1994.
Income Taxes
The Company recognized a provision for income taxes on income before
extraordinary item in fiscal 1995 of $59,000 as compared to a benefit for income
taxes in fiscal 1994 of $415,000. The Company's effective tax rate for fiscal
1995 was 22% compared to 46.5% in fiscal 1994. The decrease in the effective
tax rate is primarily attributable to the inability in fiscal 1994 to recognize,
for income tax purposes, a write-off of a foreign note receivable, which did not
occur in fiscal 1995, and to changes in state income taxes.
Extraordinary Loss on the Extinguishment of Debt
The Company incurred an extraordinary loss on the extinguishment of debt during
fiscal 1995 of $2,228,000, net of income tax benefit of $221,000. These costs
were incurred in fiscal 1994 and fiscal 1995 for financing fees to establish the
General Electric Capital Corporation credit facility, and fees to the Company's
investment banker, as well as legal and accounting fees and prepayment
penalties.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended September 30, 1996, the Company financed its
operations primarily through bank borrowings and internally generated funds.
9
<PAGE>
The General Electric Capital Corporation Senior Secured Credit Facility
On September 6, 1994, the Company entered into a Credit Agreement with General
Electric Capital Corporation ("GECC") for a senior secured credit facility in
the aggregate principal amount of up to $22 million (the "GECC Facility"),
secured by substantially all of the Company's assets.
On July 27, 1995, the Company entered into a Release Agreement with GECC and
repaid approximately $15,000,000 outstanding under the GECC Facility from
borrowings under the Chase facility and the proceeds from the senior
subordinated promissory note with ING described in the paragraphs which follow.
As a result of the refinancing, the Company incurred (in fiscal 1995) an
extraordinary loss of $2,228,000 net of tax benefits, on the extinguishment of
the debt to GECC.
The Chase Bank Facility
On July 27, 1995, the Company and its principal subsidiaries (the "Borrowers")
entered into an agreement for a senior secured revolving credit facility with
Chase Bank (the "Chase Facility"), in an aggregate principal amount of up to $17
million. The primary purpose of this new credit facility was to provide the
financing required to purchase new equipment unavailable under the terms of the
GECC Facility, and to retire the GECC Facility. The GECC Facility was repaid in
full and terminated on July 27, 1995.
Borrowings under the Chase Facility by any of the Borrowers are cross-
collateralized pursuant to a security agreement in which the Borrowers have
granted Chase Bank a first priority lien and security interest in substantially
all of their respective assets.
Interest on outstanding borrowings under the Chase Facility is available, at the
Company's choice, at LIBOR plus 3.00%, Chase Bank's prime rate plus 1.00%, or
the Base CD Rate (as determined by Chase Bank) plus 2.00%. The initial rate
commencing July 27, 1995 through December 31, 1995 was 8.75% based on Chase
Bank's prime rate. The approximate average rate in effect for the period from
January 1, 1996 through September 30, 1996 was 8.75% based on a combination of
several LIBOR based borrowings, and borrowings based on Chase Bank's prime
rates, as described above.
The Chase Facility matures July 27, 1999 and provides the following declining
commitment schedule (as revised): $17 million on October 1, 1996; $15 million on
October 1, 1997; and $14 million on October 1, 1998.
The Chase Facility requires the Company to maintain on a quarterly basis certain
levels of earnings and to meet several financial ratios; including tangible net
worth, liabilities-to-net-worth, interest coverage and debt-to-EBITDA (earnings
before interest, taxes, depreciation and amortization). In addition, the
Company must maintain limits on annual lease expenses and executive compensation
levels. The Chase Facility also provides for annual limits on capital
expenditures and certain acquisitions.
At September 30, 1996, the Company had an outstanding principal balance of
$13,779,000 and had $2,588,000 available under the Chase Facility, and was in
full compliance with all covenants of the Chase Facility agreements and the ING
agreements more specifically described in the several paragraphs which follow.
10
<PAGE>
The ING Equity Partners, L.P. I Senior Subordinated Promissory Notes
In connection with the refinancing of the GECC Facility in July 1995, the
Company entered into a purchase agreement (as amended in April 1996, the
"Purchase Agreement") with ING Equity Partners, L.P. I ("ING"), pursuant to
which the Company sold to ING for a total purchase price of $5 million (i) its
senior subordinated promissory notes in the aggregate principal amount of $5
million, bearing interest at an initial rate of 10% per annum, (ii) a common
stock purchase warrant (the "ING Warrant") entitling ING to purchase 2,322,464
of the Company's outstanding shares of common stock at an initial purchase price
per share of $2.50 and having certain antidilutive rights and (iii) one share of
preferred stock of the Company entitling ING to voting rights, in the event of
default of the purchase agreement, with respect to the number of shares
underlying the ING Warrant. The ING Warrant requires an adjustment of the
exercise price to $2.00 per share if the Company does not complete a public
offering of its common stock at a price of at least $2.50 per share with net
proceeds to the Company of at least $10 million by July 27, 1998. The proceeds
from the offering are to be used for general corporate purposes, working
capital, retirement of bank debt and the subordinated note issued to ING, and
such other purposes as the Company may determine at such time.
At Nasdaq's request ING and the Company amended these agreements in April 1996.
The April 1996 amendments primarily effect the following: (i) certain limits
are placed on ING's anti-dilution rights under the ING Warrant; (ii) except for
voting rights accorded by law, the share of preferred stock issued to ING will
not have the right to vote until there has been a default under the Purchase
Agreement; and (iii) the shareholders of the Company must approve the stock
options granted to Carlos D. De Mattos under his employment agreement with the
Company and to Edward Phillips under his employment agreement with the Company
and Studio Equipment. In the absence of shareholder approval, those options
would have been reduced from options to purchase 200,000 shares of the Company's
common stock to 12,500 shares, in each individual's case. (See Item 12,
Security Ownership of Certain Beneficial Owners and Management.)
As amended the Purchase Agreement provides for a $100,000 subordinated note
maturing July 27, 2005, and a $4,900,000 subordinated note maturing July
27, 2000. If the Company fails to pay the $4,900,000 subordinated note when
due, ING has the right, but not the obligation, to extend the due date to July
27, 2005.
The $100,000 and $4,900,000 subordinated notes described above (the
"Subordinated Notes") require the Company to maintain certain financial
covenants similar to the covenants required by Chase Bank and provide similar
annual capital expenditure and acquisition limits. Interest on the $4,900,000
Subordinated Note is at the rate of 10.00% for the first three years of the
Purchase Agreement, and increases to 12.50% for the fourth year and 15.00% for
the fifth year. Interest on the $100,000 Subordinated Note is at the rate of
10.00% for the first three years of the Purchase Agreement, and, in the event
the Company does not repay the $4,900,000 Subordinated Note, increases to 12.50%
for the fourth year and 15% for the fifth through tenth years. If the
$4,900,000 Subordinated Note is repaid prior to the fourth year, interest on the
$100,000 Subordinated Note remains at 10% through the tenth year; or, if the
$4,900,000 Subordinated Note is repaid during the fourth year, interest on the
$100,000 Subordinated Note remains at 12.50% for the fourth through tenth years.
In accordance with the Purchase Agreement on June 11, 1996, the Company amended
its Articles of Incorporation to provide for the indemnification of its
directors and officers to the fullest extent permitted under California law.
This amendment was approved by the Company's shareholders at the annual
shareholder meeting held on May 30, 1996.
As part of the transaction with ING, the Company also entered into a
registration rights agreement (the "Registration Rights Agreement") with ING and
Sutro & Co., Incorporated ("Sutro"), which acted as the Company's investment
bankers in connection with the transaction, entitling the holders of the ING
Warrant and the common stock purchase warrant issued to Sutro (for the purchase
of up to 100,000 shares of common stock
11
<PAGE>
of the Company), to certain piggy back registration rights with respect to the
shares of common stock issuable upon exercise of these warrants, as well as any
shares of common stock subsequently acquired by ING. The Registration Rights
Agreement also grants ING the right to require the Company to file a shelf
registration statement with respect to the sale from time to time of 1.4 million
shares of common stock of the Company acquired by ING from a former employee of
the Company.
In addition, as part of the transaction with ING, the Company, Carlos D. De
Mattos and Edward Phillips and their affiliates ("Management Shareholders")
entered into a Stockholders' Agreement with ING (the "Stockholders Agreement")
pursuant to which the Company and the Management Shareholders agreed to nominate
and vote for the election of two representatives of ING to the Board of
Directors of the Company, the number of members of which would be set at nine.
The Stockholders Agreement also contains certain restrictions on the transfer of
shares held by ING and the Management Shareholders. In addition, the
Stockholders Agreement was amended in April 1996 to provide that the obligations
of the Management Shareholders to vote for ING nominees for the Company's Board
of Directors, and the obligation of the Company to nominate such ING nominees,
shall extend to July 27, 2005, unless a change in control or certain public
offering of the Company's common stock, as described in the Stockholders
Agreement, occurs, in which case those obligations will terminate.
Working Capital - Cash Flows
At September 30, 1996, the Company's working capital was $7,953,000 which was an
increase of $81,000 from its working capital at September 30, 1995.
In fiscal 1996, the Company generated cash from operating activities of
$4,698,000. The major contributors to cash from operating activities were
earnings before depreciation and amortization of $3,899,000, increased accounts
payable and accrued liabilities of $1,588,000, collections from investments in
leases of $697,000 and income tax refunds of $252,000. Partially offsetting the
major contributors to cash from operating activities was an increase in trade
accounts receivable of $1,402,000 and inventory of $406,000, as a result of a
general increase in business activity in the fourth quarter of fiscal 1996.
The Company primarily utilized cash from operating activities of $4,698,000,
augmented by additional borrowings from the Company's bank line of $1,098,000,
to finance the acquisition of capital equipment. The major components of the net
capital equipment additions were equipment for the Company's Equipment rental
operations of approximately $3,373,000, and equipment acquisition costs for the
expansion of marketing centers in Seattle, Washington and Nashville, Tennessee
of approximately $1,487,000.
During the next twelve months, the Company expects to purchase new rental
equipment, to permit the Company to continue to expand its rental equipment
operation and to decrease the costs to subrent equipment necessary to meet
customer orders. The Company expects to finance its capital asset (rental
equipment) acquisitions by a combination of cash generated from operations and
from borrowings under the Chase Facility. The Company believes it has
sufficient funds from operations and currently in place credit facilities to
meet its anticipated requirements for working capital during the next twelve
months.
ITEM 8. FINANCIAL STATEMENTS
The required financial statements commence at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
12
<PAGE>
PART III
ITEM 10. DIRECTORS; EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
(Name) (Age) (Position)
----------------------- ----- ------------
Carlos D. De Mattos 44 Chairman of the Board, President,
Chief Financial Officer
Edward Phillips 50 Director, President of MSEI
Ernst F. Nettmann 57 Director, President of
Electronics
Jack 68 Director
Brehm/(1)(2)(3)(4)/
John H. 51 Director
Donlon/(1)(2)(3)(4)/
Jerome E. 55 Director
Farley/(1)(2)(3)(4)/
Benjamin P. 34 Director
Giess/(1)(2)(3)(4)/
John F. 41 Director
Jastrem/(1)(2)(3)(4)/
John Alonzo 62 Director
Gary S. Borman 39 Corporate Controller (Principal
Accounting Officer)
/(1)/ Member of 1994 Stock Option Plan for Directors Committee.
/(2)/ Member of 1994 Stock Option Plan Committee.
/(3)/ Member of Audit
/(4)/ Committee Member of Compensation Committee
The term of office of all directors is until the next annual meeting, which is
scheduled for March 6, 1997, and the term of office of all officers is for one
year and until their successors are chosen and qualify.
CARLOS D. DE MATTOS was co-founder of the Company and has served as a director
and the Company's Chairman, President and Chief Executive Officer since January
1995, and prior thereto as the Company's co-chairman and Chief Executive Officer
from February 1989 to January 1995. Mr. De Mattos also serves as the Company's
Chief Financial Officer. He is a co-recipient of two Technical Achievement
Awards from the Academy of Motion Picture Arts and Sciences in March 1983 and
March 1985, respectively for the Tulip Crane and for the development of the Cam-
Remote(R) System. He is also a co-recipient of a Technical Achievement Award
from the Academy of Television Arts and Sciences in September 1989 for the
development of the Cam-Remote(R) System. Mr. De Mattos is an active member of
the principal trade associations pertaining to the industry serviced by the
Company. In June 1991, the government of Portugal inducted him into the select
membership of the prestigious Order of Henry the Navigator as a Knight
13
<PAGE>
Commander. He is a member of the Academy of Motion Picture Arts and Sciences,
the American Society of Cinematographers and the Portuguese-American Leadership
Council of the United States based in Washington, D.C.
EDWARD PHILLIPS has served as a director of the Company since February 1989.
Until December 31, 1994 he was the co-chairman of the Company's Board and Chief
Operating Officer from February 1989 to January 1995. Continuously since 1976,
Mr. Phillips has been Co-chairman of the Board and President of Matthews Studio
Equipment, Inc. Mr. Phillips has been responsible for the design and
engineering of most of the equipment manufactured by Matthews Studio Equipment,
Inc., since 1972. In the latter 1970s Mr. Phillips authored the first ANSI
standard covering mounting equipment interface for the motion picture industry.
Mr. Phillips continues to maintain an active role in the ongoing engineering
effort of the Company. Mr. Phillips is a co-recipient of two Technical
Achievement Awards from the Academy of Motion Picture Arts and Sciences in March
1983 and March 1985, respectively for the Tulip Crane and for the development of
the Cam-Remote(R) System. He is also a co-recipient of a Technical Achievement
Award from the Academy of Television Arts and Sciences for the Cam-Remote(R)
System in September 1989. Mr. Phillips is a past President of the Professional
Motion Picture Equipment Association and has served on many subcommittees of the
Society of Motion Picture and Television Engineers. He is a member of the
American Society of Cinematographers.
ERNST F. NETTMANN has served as a director of the Company since February 1989.
Mr. Nettmann is president of Matthews Studio Electronics, Inc. Mr. Nettmann is
President of E. F. Nettmann & Associates, Inc., a privately held corporation,
which has been managing the business of Matthews Studio Electronics, Inc.,
since October 1, 1994 pursuant to a management and license agreement. Prior to
1981, Mr. Nettmann was principal owner of Continental Camera Rental, which made
and rented his Technical Achievement Award winning camera mounts and aerial
photography optical systems. He is a co-recipient of a life award from the
Academy of Motion Picture Arts and Sciences in March 1985 and the Academy of
Television Arts and Sciences in September 1989 for the development of the Cam-
Remote(R) System.
JACK BREHM has served as a director since February 1989, and served as chief
financial officer of the Company from that date through December 1991. Mr.
Brehm was with Ernst & Young LLP from 1951 until his retirement as a partner in
1988. Since his retirement in September 1988, Mr. Brehm has acted as a
financial consultant. Mr. Brehm is a director of Cosmetics Group USA, Inc., a
Nasdaq listed corporation, which manufactures and packages cosmetic and other
beauty care products.
JEROME E. FARLEY has served as a director of the Company since April, 1994. He
is President and Chief Executive Officer of Western Security Bancorp a bank
holding company. Continuously since December 1992 he has also been President,
Chief Executive Officer and a director of Western Security Bank, a National
Banking Corporation. From 1981 through most of 1992, Mr. Farley was a director
and an executive officer of First Regional Bank. Continuously since 1979 Mr.
Farley has been a director of Regional Properties, Inc., a real estate
development company, principally active in Riverside County, California. Mr.
Farley has been a member of the State Bar of California since 1973. From 1973
through 1985 he was general counsel to a number of subsidiaries of City
Investing Company, which is listed on the New York Stock Exchange. Mr. Farley
has been a professor at the Pepperdine University School of Business and
Management since 1984.
JOHN H. DONLON has served as a director of the Company since February 1995. He
is president and director of Four Media Company ("4MC"), a privately held
corporation with revenues in excess of $75 million. 4MC employs over 600 people
worldwide, principally at its facilities in Burbank and Santa Monica,
California, and Singapore. 4MC provides post-production services to the
Hollywood television and motion picture industry along with playback and
satellite transmission services for eighteen channels of cable programming to
the USA. The Singapore subsidiary provides similar services to American
companies in Asia From 1984 to 1993, Mr. Donlon was president and chief
executive officer of Compact Video Group, Inc. ("CVG"). During his tenure, CVG
expanded its editing and sound services, consolidated its duplication and
satellite transmission, developed syndication capability and established a
successful network origination business. From 1981 to 1984 he was president of
Technicolor Videocassette where he launched a videocassette duplication facility
from the ground up. From 1977 to 1981 he was Vice President of Operations for
Technicolor, the largest motion picture and television film laboratory in the
world.
14
<PAGE>
BENJAMIN P. GIESS was elected a director of the Company in September 1995. Mr.
Giess is a partner and executive officer of ING Equity Partners, L.P.I ("ING
Equity Partners"). Mr. Giess has been employed by ING Equity Partners or its
predecessors and affiliates since 1992. From 1991 to 1992, Mr. Giess worked in
the Corporate Finance Group of ING Capital. From 1990 to 1991, Mr. Giess was
employed by the Corporate Finance Group of General Electric Capital
Corporation where he worked in the media and entertainment group. From 1986 to
1988, Mr. Giess was the credit department manager of the Boston Branch of ABN
Amro North America, Inc. From 1984 to 1986 Mr. Giess was employed by Shawmut
Bank of Boston, N.A. Mr. Giess also serves on the board of directors of
American Communication Services, Inc., a Nasdaq company, which is a competitive
local access telecommunications provider. He is also a director of CMI Holding
Corp., a privately held book retailer and specialty importer.
JOHN F. JASTREM was elected a director of the Company in September 1995. He is
Chairman and Chief Executive Officer of Hooven Direct Marketing, a privately
held corporation founded in 1922 with more than 250 employees. From 1995 to
1996 Mr. Jastrem served as President and Chief Executive Officer of Colt's
Manufacturing Company, Inc., and as a management consultant to major business
enterprises. From 1993 to 1995 Mr. Jastrem was President and Chief Operating
Officer of Acme Holdings, Inc. and Acme Acquisition Corp., the fifth largest
equipment rental business in the United States. From 1990 to 1993 Mr. Jastrem
was Senior Vice President and Chief Financial Officer of Knapp Communications
Corp., the publisher of Architectural Digest and Bon Appetit magazines which was
acquired by Conde Nast. From 1989 through 1990 Mr. Jastrem was chief financial
officer of Reliance Steel & Aluminum Company, a metals distributing company.
From 1985 to 1989 Mr. Jastrem was part of the management team of Wickes
Companies, Inc., a $6 billion manufacturer and retailer, during its successful
reorganization. From 1977 to 1985 Mr. Jastrem was a senior manager for Arthur
Andersen & Co.
JOHN A. ALONZO was elected a director of the Company in July 1996. Mr. Alonzo
is the first cinematographer to be recognized by the U.S. Library of Congress,
for his cinematography work on the feature film "Chinatown", and is a member of
the American Society of Cinematographers. Other feature films on which Mr.
Alonzo was the principal cinematographer include "Harold and Maude," "Scarface,"
"Steel Magnolias," and "Star Trek, Generations." Mr. Alonzo holds an honorary
Doctorate Degree in Humane Letters from Columbia College, Hollywood, and an
honorary Bachelors Degree from The Brooks Institute. Mr. Alonzo has given
seminars and lectures at the University of Southern California and is currently
on the faculty of The American Film Institute.
GARY S. BORMAN joined the Company as Corporate Controller and Chief Accounting
Officer in March 1996. From 1991 to 1996 Mr. Borman was the Controller of HR
Textron, Inc., an aerospace component manufacturer and a division of Textron,
Inc. From 1982 to 1991 Mr. Borman was a senior manager for Ernst & Young LLP.
Remuneration of Directors
During fiscal 1996 each independent director of the Company was paid a fee of
$1,000 per month for services rendered to the Board of Directors or Committee(s)
of the Board of Directors and attendance at the meetings. In addition, the
Chairman of the Audit Committee and Compensation Committee receives an
additional fee of $500 per month.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who own more than ten percent of a registered class of
shares of the Company's equity securities, to file by specific dates with the
SEC initial reports of ownership and reports of changes in ownership of equity
securities of the Company. Officers, directors and greater than 10 percent
stockholders are required by security regulations to furnish the Company with
copies of all Section 16(a) forms that they may file. The Company is required
to report in this Form 10-K annual report any failure of its directors and
executive officers and greater than ten percent stockholders to file by the
relevant due date any of these reports during the two preceding fiscal years.
15
<PAGE>
To the best of the Company's knowledge, based solely on review of copies of such
reports furnished to the Company during the two fiscal years ended September 30,
1996, all Section 16(a) filing requirements applicable to the Company's
officers, directors and greater than ten percent stockholders were complied
with, except: No Form 3s were filed by Directors Ernst F. Netttmann, John H.
Donlon, or John A. Alonzo. As far as the Company is aware, all transactions for
ING Equity Partners, L.P. I, and for Directors Carlos D. De Mattos, Edward
Phillips, Jack Brehm, Benjamin P. Giess, John F. Jastrem and Jerome E. Farley
were previously reported on Form 4 and there were no transactions by the
officers, directors and holders of ten percent or more of the Company's
securities which would have required reporting by such persons during such
period, except as discussed below with regard to certain late filings.
A Statement of Change of Beneficial Ownership on Form 4 (with respect to the
sale by Edward Phillips, a director and greater than 10% shareholder of the
Company, of 5,000 shares of common stock of the Company in the open market in
September 1994) was filed subsequent to its due date, due to an administrative
error. Also Statements of Change of Beneficial Ownership on Form 4 (with
respect to the issuance by the Company to ING Equity Partners, L.P. I in
November 1995 of an option to purchase 15,000 shares of the Company's common
stock) were filed by Benjamin P. Giess, a director of the Company, and ING
Equity Partners, L.P. I subsequent to their due date, due to an administrative
error.
ITEM 11. EXECUTIVE COMPENSATION
The table which follows sets forth all cash compensation paid for services
rendered in all capacities with respect to the fiscal year ended September 30,
1996, to the Chief Executive Officer and each of the Company's five highest paid
executive officers whose total salary and bonus equals or exceeds $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
------------------- ------ -------
Name and Principal Year Salary Bonus Other Restricted Securities LTIP All
Position ($) ($) Annual Stock Underlying Pay- Compen-
Compen- Awards Options/ outs ($) sation
sation ($) SARs (#)
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carlos D. De Mattos, 1996 263,425 50,000 - - - - 1,462
Chairman; President; 1995 225,866 - - - 200,000 - 1,828
Chief Financial 1994 227,631 - - - - - 1,828
Officer
Edward Phillips, 1996 263,425 100,000 - - - - 1,799
Director; 1995 225,866 - - - 200,000 - 2,249
President of MSEI 1994 227,631 - - - - - 1,994
ALL OTHER COMPENSATION - This represents Company contributions to the 401(k) plan.
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
OPTION/SAR GRANTS FOR THE YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------
Individual Grants
- - -----------------------------------------------------------------------------------------------
Name Number of Percentage Exercise Expir- Potential Realizable
Securities of Total or Base ration Value at Assumed
Underlying Options/ Price Date Rates of Stock Price
Options/ SARs $/Share Appreciation For
SARs Granted to Option Term
Granted Employees ------------------
5% 10%
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- - - - - - -
- - -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OPTION/SAR EXERCISES AND FY-END VALUE TABLE
- - -----------------------------------------------------------------------------------------------
Name Shares ($) Value (# of Shares) Value of
Acquired Realized Under- Unexercised
On lying In-the-Money
Exercise Unexercised Options and
Options and SARs SARs
Exercisable/ at FY-End ($)
Unexercisable Exercisable/
Unexercisable
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Carlos D. De Mattos - - 140,000/134,000 $21,400
Edward Phillips - - 140,000/134,000 $21,400
- - -----------------------------------------------------------------------------------------------
</TABLE>
The Company has an employee benefit plan intended to qualify under Section
401(k) of the Internal Revenue Code. Employees may contribute as deferred
compensation up to 6% of compensation (not to exceed $9,500 annually). The
Company matches from 20% to 50% of employee contributions based on individual
salary levels.
17
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) The table below shows as of December 13, 1996 the amount and class of the
Company's voting stock owned beneficially (within the meaning of Rule 13d-3
of the Securities Exchange Act of 1934, as amended) by each holder of more
than 5% of the Company's shares, each director of the Company and all
directors and officers of the Company as a group:
<TABLE>
<CAPTION>
Name and Address of Number of Shares Percentage of
Beneficial Owner /1/ Beneficially Owned Common Stock /8/
- - ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Carlos D. De Mattos 2,257,117 /9/ 21.85%
Edward Phillips 2,257,117 /10/ 21.85%
Ernst F. Nettmann 105,000 /11/ 1%
Jack Brehm/(2)/ 27,000 /12/ *
John H. Donlon/(4)/ 10,000 /13/ *
Jerome E. Farley/(3)/ 10,000 /14/ *
Benjamin P. Giess/(5)/ 4,132,464 /15/ 40.00%
ING Equity Partners, L.P.I/(6)/ 4,132,464 /16/ 40.00%
John F. Jastrem/(7)/ 10,000 /17/ *
John A. Alonzo 5,000 /18/ *
- - ----------------------------------------------------------------------------------
All officers and directors as a
group (8 persons) 8,413,698 81.44%
* Less than 1%
- - ----------------------------------------------------------------------------------
</TABLE>
/1/ Unless otherwise noted, all shares are beneficially owned and the sole
voting power is held by the person indicated, and the address of each of
these individuals is: c/o Matthews Studio Equipment Group, 2405 Empire
Avenue, Burbank, California 91504.
/2/ This individual's address is: 19501 Greenbriar Drive, Tarzana, California
91356.
/3/ This individual's address is: 4100 West Alameda Avenue, Burbank, California
91505.
/4/ This individual's address is: 2813 West Alameda Avenue, Burbank, California
91506.
/5/ This individual's address is: 135 East 57/th/ Street, 16/th/ Floor, New
York, New York 10022.
/6/ This company's address is: 135 East 57/th/ Street, 16/th/ Floor, New York,
New York 10022.
18
<PAGE>
/7/ This individual's address is: 1913 Ripley Avenue, Redondo Beach, California
90278.
/8/ Based on 10,331,591 shares outstanding.
/9/ Includes 2,016,450 shares owned by a family trust with trust management
vested in the named director as the trustee, and 100,000 shares owned by a
limited liability company owned by such family trust. Includes an option to
purchase 140,667 shares of the Company's common stock. In addition, 200,000
shares are to be sold as discussed in 16 below.
/10/ Includes 2,047,450 shares owned by a family trust with trust management
vested in the named director as the trustee and 69,000 shares held outside
of the family trust. Also includes an option to purchase 140,667 shares of
the Company's common stock. In addition, 200,000 shares are to be sold as
discussed in 16 below.
/11/ Includes options to purchase 100,000 shares of the Company's common stock.
/12/ Represents an option to purchase 15,000 shares of the Company's common
stock, and includes the exercisable portion of an option to purchase 10,000
shares of a 15,000 share grant of the Company's common stock.
/13/ Includes the exercisable portion of an option to purchase 10,000 shares of
a 15,000 share grant of the Company's common stock.
/14/ Includes the exercisable portion of an option to purchase 10,000 shares of
a 15,000 share grant of the Company's common stock.
/15/ Mr. Giess disclaims beneficial ownership of these shares. Mr. Giess is an
executive officer of Lexington Partners, Inc., which is the sole general
partner of Lexington Partners, L.P., the sole general partner of ING,
however, the Company has been advised by Mr. Giess that he does not
exercise sole or shared voting or dispositive power with respect to the
shares held by ING described in footnote (/16/).
/16/ Includes a warrant to purchase 2,322,464 shares of the Company's common
stock. Upon occurrence of an event of default under the Purchase Agreement,
ING Equity Partners, L.P.I is entitled to voting rights for the 2,322,464
shares underlying the warrant pursuant to a share of the Company's
preferred stock issued to said company. Also includes an option issued to
ING Equity Partners, L.P.I as consideration for services of its appointee,
Benjamin P. Giess, to purchase 10,000 shares of the Company's common stock
presently exercisable out of a total option grant of 15,000 shares. Also
includes 400,000 shares to be purchased by ING Equity Partners, L.P. I by
January 10, 1997 under existing agreements with Carlos D. De Mattos and
Edward Phillips (each of whom will sell 200,000 shares).
/17/ Includes the exercisable portion of an option to purchase 10,000 shares of
a 15,000 share grant of the Company's common stock.
/18/ Includes the exercisable portion of an option to purchase 5,000 shares of a
15,000 share grant of the Company's common stock.
(b) There are no arrangements, known to the Company, the operation of which
may at a subsequent date result in a change in control of the Company, except
as described in Item 7 hereof.
EMPLOYMENT AGREEMENTS
The Company entered into a written Employment Agreement ("De Mattos Agreement")
with Carlos D. De Mattos on July 1, 1995 for such individual to serve as the
Company's President and Chairman of the Board for a three-year term commencing
July 1, 1995, at an annual base salary of $257,000. The base salary increases
at 10% during the term of the De Mattos Agreement. On December 19, 1996, the
Compensation Committee approved an increase in the base salary of Mr. De Mattos
to $332,700 per year starting October 1, 1996. The De Mattos Agreement also
provides for an annual incentive bonus from 20% to 40% of the base salary, based
upon attainment by the Company of specified Earnings (as defined in the De
Mattos Agreement). Mr. De Mattos was also granted an option to purchase 200,000
shares of the Company's common stock at an exercise price of $3.00 per share.
The right to purchase up to 66,667 shares under this option vests in like
installments commencing on July 1, 1996 and the next two successive
anniversaries of that date, and the option is exercisable until July 2005. As
discussed above, Nasdaq required shareholder approval of this option. At the
Company's annual shareholder meeting held on May 30, 1996, the shareholders
approved this option. In addition, Mr. De Mattos agreed, upon termination of
the De Mattos Agreement, to render consulting services to the Company for a
period of five years from the termination date, at 50% of the base salary.
19
<PAGE>
On July 1, 1995, the Company and Studio Equipment entered into a written
Employment Agreement ("Phillips Agreement") with Edward Phillips, for him to
serve as president of Studio Equipment for a three-year term commencing July 1,
1995, at an annual base salary of $257,000. The base salary increases at 10%
during the term of the Phillips Agreement. The Phillips Agreement also provides
for an annual incentive bonus from 20% to 40% of the base salary based upon
attainment by the Company of specified Earnings (as defined in the Phillips
Agreement). Mr. Phillips was also granted an option to purchase 200,000 shares
of the Company's common stock at an exercise price of $3.00 per share. The
right to purchase up to 66,667 shares under this option vests in like
installments commencing on July 1, 1996, and the next two successive
anniversaries of that date, and the option is exercisable until July 2005. As
discussed above, Nasdaq required shareholder approval of this option. At the
Company's annual shareholder meeting held on May 30, 1996, the shareholders
approved this option. In addition, Mr. Phillips agreed, upon termination of the
Phillips Agreement, to render consulting services to the Company for a period of
five years from the termination date, at 50% of the base salary.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION IN COMPENSATION DECISIONS
None.
REPORT ON EXECUTIVE COMPENSATION
The compensation for the five highest paid executive officers of the Company in
fiscal 1996 is set forth in the Summary Compensation Table which preceded this
section.
Total compensation for executive officers consists of a combination of salaries,
bonuses and contributions to the Company's 401(k) plan.
Other than the Chairman of the Board of the Company and the President of
Matthews Studio Equipment Inc., incentive bonuses are determined by senior
management based on the financial performance of the individual subsidiaries,
responsibilities of the executive and other factors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As discussed above in Item 2, Properties, the principal facilities of the
Company are leased from PDM, a general partnership whose sole general partners
are Carlos D. De Mattos, the Chairman of the Board, President and Chief
Financial Officer of the Company, and Edward Phillips, a director of the Company
and President of Studio Equipment. The executive office, showroom and warehouse
of HRC in Sun Valley, California, discussed above in Item 2, Properties are
leased from a former director and former officers of the Company.
Nettmann, a corporation owned by a director of the Company, manages the Cam-
Remote(R) and Mini-Mote(R) C.A.T.(R) business of Studio Electronics. The
Company and Nettmann share costs under the Management Agreement. See Item 1.
Business - Cam-Remote and Mini-Mote Systems. Under the Management Agreement
Nettmann is entitled to compensation based on revenues.
At July 1, 1989, the Company had issued two promissory notes, each in the
principal sum of $107,000, to two of its officers to pay certain obligations.
These notes were paid by the Company in fiscal 1996.
For discussion of the issuance of the Subordinated Notes to ING pursuant to the
Purchase Agreement between the Company and ING, which is an affiliate of
Benjamin P. Giess, a director of the Company, as well as other agreements made
by the Company and Carlos D. De Mattos and Edward Phillips, such as the
Registration Rights Agreement and the Stockholders Agreement, see Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operation.
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) & (2) The response to this portion of Item 14 is submitted as a separate
section of this report and appears on page F-1.
(a)(3) & (c) The Exhibit Index appears at page E-1 which follows the Financial
Statements.
(b) Reports on Form 8-K -- The following reports on Form 8-K were filed
during the last quarter of the period covered by this report: None
(d) Financial Statement Schedules - the response to this portion of Item
14 is submitted as a separate section of this report and appears on page F-1.
21
<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 annual report on Form 10K for
the fiscal year ended September 30, 1996, to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: December 27, 1996 MATTHEWS STUDIO EQUIPMENT GROUP
/s/ Carlos D. De Mattos
____________________________
Carlos D. De Mattos
Chairman of the Board, President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/Carlos D. De Mattos Chairman of the Board, December 27, 1996
- - --------------------- President,
Carlos D. De Mattos Chief Financial Officer
/s/Edward Phillips Director, President of December 27, 1996
- - --------------------- Matthews Studio
Edward Phillips Equipment, Inc.
/s/Ernst F. Nettmann Director, President of December 27, 1996
- - --------------------- Matthews Studio
Ernst F. Nettmann Electronics, Inc.
/s/Jack Brehm Director December 27, 1996
- - ---------------------
Jack Brehm
/s/John H. Donlon Director December 27, 1996
- - ---------------------
John H. Donlon
/s/Jerome E. Farley Director December 27, 1996
- - ---------------------
Jerome E. Farley
/s/Benjamin P. Giess Director December 27, 1996
- - ---------------------
Benjamin P. Giess
/s/John F. Jastrem Director December 27, 1996
- - ---------------------
John F. Jastrem
/s/John A. Alonzo Director December 27, 1996
- - ---------------------
John A. Alonzo
/s/Gary S. Borman Corporate Controller, December 27, 1996
- - --------------------- (Principal
Gary S. Borman Accounting Officer)
</TABLE>
22
<PAGE>
Matthews Studio Equipment Group
Index to Consolidated Financial Statements
and Financial Statement Schedule
<TABLE>
<CAPTION>
Page No.
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheets at September 30, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended September 30,
1996, 1995 and 1994 F-5
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1996, 1995 and 1994 F-6
Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements F-9
</TABLE>
The following Consolidated Financial Statement Schedule of Matthews
Studio Equipment Group is included in Item 14(d)
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and, therefore, have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Matthews Studio Equipment Group
We have audited the accompanying consolidated balance sheets of Matthews Studio
Equipment Group and subsidiaries as of September 30, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended September 30, 1996. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Matthews Studio Equipment Group and subsidiaries at September 30, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended September 30, 1996, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Los Angeles, California
December 10, 1996
F-2
<PAGE>
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands)
<TABLE>
<CAPTION>
September 30
1996 1995
------- -------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 462 $ 438
Accounts receivable less allowance for
doubtful accounts of $480 in 1996
and $297 in 1995 5,145 4,039
Current portion of net investment in finance
and sales-type leases (Note 3) 794 979
Inventories (Note 2) 4,961 4,556
Prepaid expenses and other current assets 481 425
Income tax refund receivable - 252
Deferred income taxes (Note 6) 464 245
------- -------
Total current assets 12,307 10,934
Property and equipment, net (Notes 4 and 8) 20,339 17,226
Net investment in finance and sales-type leases,
less current portion 865 1,376
Other assets 973 1,167
------- -------
Total assets $34,484 $30,703
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
($ in thousands)
<TABLE>
<CAPTION>
September 30
1996 1995
------- -------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 2,603 $ 1,569
Accrued liabilities 1,626 1,080
Current portion of long-term debt (Note 5) 116
Current portion of capital lease obligations (Note 8) 125 297
------- -------
Total current liabilities 4,354 3,062
Long-term debt less current portion (Note 5) 18,619 17,363
Capital lease obligations, less current portion (Note 8) 295 301
Deferred income taxes (Note 6) 2,142 1,923
Commitments and contingencies (Note 9)
Shareholders' equity (Notes 5 and 7):
Preferred stock, no par value, authorized
1,000,000 shares; issued and outstanding
one share in 1996 and 1995 - -
Common stock, no par value, authorized
20,000,000 shares; issued and
outstanding shares 10,331,000 in 1996
and 10,314,000 in 1995 5,584 5,567
Retained earnings 3,490 2,487
------- -------
Total shareholders' equity 9,074 8,054
------- -------
Total liabilities and shareholders' equity $34,484 $30,703
======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Consolidated Statements of Operations
($ in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended September 30
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net product sales $ 16,079 $ 14,554 $ 12,482
Revenues from rental operations 14,125 12,797 12,944
------------- ------------- -------------
30,204 27,351 25,426
Costs and expenses:
Cost of sales 10,257 9,992 8,558
Cost of rental operations 8,016 7,496 6,926
Selling, general and administrative 8,554 7,449 7,940
Provision for doubtful accounts receivable 295 157 1,496
Interest 2,044 1,990 1,121
Minority partnership interest - - 278
------------- ------------- -------------
29,166 27,084 26,319
------------- ------------- -------------
Income (loss) before income taxes and extraordinary item 1,038 267 (893)
Provision (benefit) for income taxes (Note 6) 35 59 (415)
------------- ------------- -------------
Income (loss) before extraordinary item 1,003 208 (478)
Extraordinary loss on early extinguishment
of debt - net of income tax benefit of $221 - (2,228) -
------------- ------------- -------------
Net income (loss) $ 1,003 $ (2,020) $ (478)
============= ============= =============
Income (loss) per common share:
Income (loss) before extraordinary item $ 0.10 $ 0.02 $ (0.05)
Extraordinary loss on early
extinguishment of debt - (0.22) -
------------- ------------- -------------
Net income (loss) per share $ 0.10 $ (0.20) $ (0.05)
============= ============= =============
Weighted average number of
common shares outstanding 10,328,000 10,314,000 10,261,000
============= ============= =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock
--------------------------
Number of Retained
Shares Amount Earnings Total
----------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Balance at September 30, 1993 10,209 $ 4,704 $ 4,985 $ 9,689
Exercise of stock options and warrants 104 207 - 207
Issuance of warrants in connection with
secured financing - 475 - 475
Net loss - - (478) (478)
----------- ------------ -------------- ------------
Balance at September 30, 1994 10,313 5,386 4,507 9,893
Exercise of stock options and warrants 1 2 - 2
Repurchase of warrants - (30) - (30)
Issuance of warrants in connection with
subordinated debt financing - 209 - 209
Net loss - - (2,020) (2,020)
----------- ------------ -------------- ------------
Balance at September 30, 1995 10,314 5,567 2,487 8,054
----------- ------------ -------------- ------------
Exercise of stock options and warrants 17 17 - 17
Net income 1,003 1,003
----------- ------------ -------------- ------------
Balance at September 30, 1996 10,331 $ 5,584 $ 3,490 $ 9,074
=========== ============ ============== ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in thousands)
<TABLE>
<CAPTION>
Year ended September 30
1996 1995 1994
---------- --------- ----------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 1,003 $ (2,020) $ (478)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for doubtful accounts 295 157 1,496
Depreciation and amortization 2,896 2,829 2,072
Deferred income taxes - (127) (182)
Minority interest - - 278
Gain on sale of of assets (298) (349) (711)
Extraordinary loss on extinguishment of debt - 1,613 -
Changes in operating assets and liabilities:
Accounts receivable (1,402) (809) (725)
Inventory (406) 565 (323)
Net investment in leases 697 360 1,187
Prepaids and other assets 73 (802) (686)
Income tax refund receivable 252 8 (260)
Accounts payable and accrued liabilities 1,588 (2,593) (423)
Income taxes payable - - (38)
--------- --------- ---------
Net cash provided by (used in) operating activities 4,698 (1,168) 1,207
Investing activities:
Purchase of property and equipment (6,905) (4,107) (2,577)
Proceeds from sale of property and equipment 1,116 930 1,417
--------- --------- ---------
Net cash used in investing activities (5,789) (3,177) (1,160)
Financing activities:
Proceeds from exercise of stock options 17 2 207
Repurchase of GECC warrant - (30) -
Proceeds from borrowings 1,098 4,076 -
Repayment of borrowings - - (155)
Payments to minority interest - - (112)
--------- --------- ---------
Net cash provided by (used in) financing activities 1,115 4,048 (60)
Net increase (decrease) in cash and cash equivalents 24 (297) (13)
Cash and cash equivalents at beginning of period 438 735 748
--------- --------- ---------
Cash and cash equivalents at end of period $ 462 $ 438 $ 735
========= ========= =========
</TABLE>
See accompanying notes.
F-7
<PAGE>
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
($ in thousands)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Schedule of noncash investing and financing
transactions:
Long-term loans incurred to acquire equipment $ 143 $ 439 $ -
Issuance of warrants in connection with secured
debt financing - 209 475
Dissolution of Electronics partnership - 780 -
Additional disclosures:
Cash paid during year for:
Interest 1,878 1,635 1,284
Income taxes 47 19 68
</TABLE>
See accompanying notes.
F-8
<PAGE>
Matthews Studio Equipment Group
Notes to Consolidated Financial Statements
September 30, 1996
1. ACCOUNTING POLICIES
Business
Matthews Studio Equipment Group (the Company) designs, manufactures, sells,
leases and rents production equipment and accessories, other than cameras, for
the motion picture, television, video and photography industries. The Company
operates in one business segment and provides, as a single source, the necessary
production equipment which is otherwise only available by using many different
suppliers. The Company's manufactured products are distributed worldwide by its
sales force and by independent dealers and distributors located in North
America, Europe, Asia and South America.
Principles of Consolidation
The financial statements include the accounts of the Company and its
subsidiaries. Material intercompany balances and transactions have been
eliminated. The minority interest represents a 30% ownership interest in 1994,
by a director of the Company, in Matthews Studio Electronics, a general
partnership, which leases or rents its patented electronic Cam-Remote(R)
systems. This general partnership was dissolved in fiscal 1995, and the assets
distributed to the partners. The Company continues operating its share of the
assets through a management agreement with its former partner.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Concentration of Credit Risk
The Company's customers are located around the world and are principally engaged
in motion picture and television production, theatrical production, commercial
photography, or in providing rental equipment to companies in these industries.
The Company generally sells on credit terms of 30 days and does not require
collateral, except for items sold under capital leases in which it retains a
security interest. The Company rents equipment under short-term operating
leases on credit terms of generally 30 days and retains a security interest.
Inventories
Inventories are principally stated at the lower of first-in, first-out cost or
market.
F-9
<PAGE>
Matthews Studio Equipment Group
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (continued)
Marketing Expenses
Marketing expenses (including trade show and catalogue costs) are capitalized as
Prepaid Expenses and amortized primarily over a twelve month period. The
amounts charged to expense, including amortization of capitalized costs, for the
years ended September 30, 1996, 1995 and 1994 were $373,000, $559,000 and
$335,000, respectively.
Property and Equipment
Property and equipment, including capital leases, are stated at cost.
Depreciation and amortization is calculated using the straight-line method over
the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Rental equipment 10 years
Other fixed assets 5 - 10 years
</TABLE>
Capital leases and leasehold improvements are amortized over the estimated
useful lives, or the term of the related leases, whichever is shorter, using the
straight-line method. Amortization of capital leases is included in
depreciation expense.
Costs incurred for major renewals and betterments that extend the useful life of
the assets are capitalized, whereas repair and maintenance costs are charged to
expense as incurred. When property is retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in income.
Revenue Recognition
Revenues from certain qualifying non-cancelable lease contracts are accounted
for as sales-type leases wherein the present value of all payments, net of
executory costs, are recorded currently as revenues, and the related cost of the
asset is charged to cost of sales. Associated interest, using the interest
method, is recorded over the term of the related lease agreement.
Interest income from non-cancelable lease contracts accounted for as direct
finance leases is recognized using the interest method over the term of the
related lease agreement.
The Company recognizes revenue from rentals under operating leases in the week
in which they are earned and recognizes product sales upon shipment.
Per Share Data
Per share data has been computed based on the weighted average number of shares
of common stock outstanding as dilutive options and warrants account for less
than 3% of the outstanding common shares. For 1996, 1995 and 1994, the effect
of the stock options and warrants was antidilutive, using the modified treasury
stock method as a result of the net losses and exercise prices of options and
warrants in excess of market.
F-10
<PAGE>
Matthews Studio Equipment Group
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (continued)
Income Taxes
The Company utilizes the liability method to determine the provision for income
taxes. Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Income tax expense was reduced as a result
of recognition of net operating loss carryforwards which were reserved in prior
years due to uncertainty of realization.
Long-Lived Assets
Long-lived assets used in operations are reviewed periodically to determine that
the carrying values are not impaired and if indicators of impairment are present
or if long-lived assets are expected to be disposed of, impairment losses are
recorded.
Stock Based Compensation
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees," and intends to
continue to do so. In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation" ("FAS 123"). FAS 123 established a fair value-based
method of accounting for compensation cost related to stock options and other
stock-based compensation awards. However, FAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain proforma
disclosures are made. FAS 123 is effective for fiscal years beginning after
December 15, 1995 (the Company's 1997 fiscal year). The Company intends to
disclose the information required by FAS 123 beginning with its 1997 fiscal
year.
2. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
September 30,
1996 1995
-------------
(in thousands)
<S> <C> <C>
Raw materials and
work in process $2,747 $2,209
Finished Goods 2,214 2,347
------ ------
$4,961 $4,556
====== ======
</TABLE>
F-11
<PAGE>
Matthews Studio Equipment Group
Notes to Consolidated Financial Statements (continued)
3. NET INVESTMENT IN LEASES
Finance and Sales Type Leases
The Company's net investment in finance and sales-type leases consists of the
following:
<TABLE>
<CAPTION>
September 30,
1996 1995
----------------
(in thousands)
<S> <C> <C>
Minimum lease payments receivable $1,880 $2,914
Unearned income (221) (559)
------ ------
Net investment in leases, including
current portion of $794 in 1996 and
$979 in 1995 $1,659 $2,355
====== ======
</TABLE>
Future annual minimum lease payments receivable under finance and sales-type
leases are as follows at September 30, 1996 (in thousands):
<TABLE>
<S> <C>
1997 $ 841
1998 514
1999 235
2000 112
2001 and thereafter 178
------
$1,880
======
</TABLE>
Any unguaranteed residual value of leased property at the end of the lease term
under finance leases accrues to the benefit of the Company.
Operating Leases
The Company is lessor of equipment and accessories used in the film, television,
commercial photography and theatrical production industries. Such leases
generally range from one day to several weeks, with certain rentals of several
months. Substantially all of the leases are non-cancelable. The original cost
and accumulated depreciation of rental equipment held for operating leases was
$32,280,000 and $13,772,000, respectively, at September 30, 1996.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
September 30
1996 1995
------- -------
(in thousands)
<S> <C> <C>
Rental equipment $32,280 $27,508
Manufacturing equipment and tooling 1,872 1,710
Office furniture and equipment 2,438 1,897
Leasehold improvements 963 896
------- -------
37,553 32,011
Less depreciation and amortization 17,214 14,785
------- -------
$20,339 $17,226
======= =======
</TABLE>
F-12
<PAGE>
Matthews Studio Equipment Group
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30,
1996 1995
------- -------
(in thousands)
<S> <C> <C>
Revolving Credit Loan $13,779 $12,523
Senior subordinated notes 5,000 5,000
------- -------
18,779 17,523
Less unamortized discount (see Note 8) 160 202
------- -------
18,619 17,321
Bank and vendor notes payable, partially collateralized
by vehicles and equipment, payable in monthly installments,
interest at approximately 10% to 12% due through 2000 420 15
Notes payable to officers/directors, interest at 10% - 143
------- -------
19,039 17,479
Less current portion 125 116
------- -------
$18,914 $17,363
======= =======
</TABLE>
The General Electric Capital Corporation Senior Secured Credit Facility
On September 6, 1994, the Company entered into a Credit Agreement with General
Electric Capital Corporation ("GECC") for a senior secured credit facility in
the aggregate principal amount of up to $22 million (the "GECC Facility"),
secured by substantially all of the Company's assets. The GECC Facility
included a Revolving Credit Facility in the aggregate principal amount of up to
$7 million (including $500,000 in letters of credit), a Term Loan in the
principal amount of $10 million and an Equipment Acquisition Term Loan to be
drawn down from time to time in connection with rental equipment acquisitions in
an aggregate principal amount of up to $5 million.
On July 27, 1995, the Company entered into a Release Agreement with GECC and
repaid all amounts outstanding under the GECC Facility from borrowings under the
Chase Facility and the proceeds from the Senior Subordinated Promissory Note
with ING described in the paragraphs which follow. As a result of the
refinancing, the Company incurred an extraordinary loss of $2,228,000 net of tax
benefits, on the extinguishment of the debt to GECC.
F-13
<PAGE>
Matthews Studio Equipment Group
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (continued)
The Chase Bank Revolving Credit Facility
On July 27, 1995, the Company and its principal subsidiaries as the Borrowers
entered into an agreement for a senior secured revolving credit facility with
Chase Bank (the "Chase Facility," previously Chemical Bank), as agent for a
syndicate of lenders ("Bank"), in an aggregate principal amount of up to
$17,000,000.
Interest on outstanding borrowings under the Chase Facility is the Company's
choice of LIBOR plus 3.00% or Chase Bank's Prime Rate plus 1.00% or the Base CD
Rate (as determined by Chase Bank) plus 2.00%. At September 30, 1996, the
average rate on the outstanding borrowings was approximately 8.9% based on a mix
of current LIBOR rates and Chase Bank's Prime Rate.
The Chase Facility, as amended, matures July 27, 1999 and provides the following
declining commitment schedule: $17 million through October 1, 1997; $15 million
on October 1, 1997; $14 million on October 1, 1998. The Chase Facility requires
the Company to maintain on a quarterly basis certain levels of earnings and to
meet several financial ratios; including tangible net worth, liabilities-to-net-
worth, interest coverage and debt-to-EBITDA (earnings before interest, taxes,
depreciation and amortization). In addition the Company must maintain limits on
annual rentals and executive compensation levels.
The Chase Facility provides for annual capital expenditure limits of $5.75
million in fiscal 1996 and $4.5 million each fiscal year thereafter, and permits
acquisitions, annually, not to exceed $1.6 million in initial purchase price.
Borrowings under the Chase Facility by any of the Borrowers are cross
collateralized pursuant to a security agreement in which the Borrowers have
granted the Bank a first priority lien and security interest in substantially
all of their respective assets.
The proceeds from the Chase Facility (in combination with the proceeds from ING)
were used to repay in full the outstanding indebtedness to GECC and related fees
and expenses.
The ING Equity Partners, L.P.I, Senior Subordinated Promissory Note
Concurrently, and in connection with the refinancing, the Company entered into a
purchase agreement (as amended, the "Purchase Agreement") with ING Equity
Partners, L.P.I ("ING"), pursuant to which the Company sold to ING for a total
purchase price of $5 million (i) its senior subordinated promissory note in the
principal amount of $5 million, bearing interest at an initial rate of 10% per
annum (the "Subordinated Note"), (ii) a common stock purchase warrant (the "ING
Warrant") entitling ING to purchase 2,322,464 of the Company's outstanding
shares of common stock at an initial purchase price per share of $2.50 and
having certain antidilutive rights and (iii) a share of preferred stock of the
Company entitling ING to voting rights, in the event of default of the Purchase
Agreement, with respect to the number of shares underlying the ING Warrant.
The ING Warrant requires an adjustment of the exercise price to $2.00 per share
if the Company does not complete a public offering of its common stock at a
price of at least $2.50 per share with net proceeds to the Company of at least
$10 million by July 27, 1998. The proceeds from the offering are to be used for
general corporate purposes, working capital, retirement of bank debt and the
Subordinated Note.
F-14
<PAGE>
Matthews Studio Equipment Group
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT (continued)
As amended, the ING note provides a $100,000 subordinated note maturing July 27,
2005, and another $4,900,000 subordinated note maturing July 27, 2000. These
notes require the Company to maintain certain financial covenants similar to the
covenants required by Chase Bank and provides essentially the same capital
expenditure and acquisition limits as the Chase Facility. Interest on the
Subordinated Note is at the rate of 10.00% for the first three years of the
agreement, and, in the event the Company does not repay the note by the end of
the third year, interest increases to 12.50% for year four and 15.00% for year
five.
The Company used the proceeds received from ING to supplement the proceeds
received from the Chase Facility to refinance its existing senior secured
indebtedness and for other general working capital purposes.
Under the above arrangements the Company is restricted from paying dividends on
its common stock.
The aggregate annual maturities of long-term debt, net of original issue
discount, consist of the following at September 30, 1996 (in thousands):
<TABLE>
<S> <C>
1997 $ -
1998 -
1999 13,619
2000 4,900
2001 -
thereafter 100
----------
$ 18,619
==========
</TABLE>
6. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets are
as follows:
<TABLE>
<CAPTION>
September 30,
1996 1995
---------------------
(in thousands)
<S> <C> <C>
Deferred tax liabilities:
Tax depreciation in excess of book depreciation $ 3,167 $ 2,711
Leasing income 563 690
Other 43 60
------- -------
Total deferred tax liabilities 3,773 3,461
Deferred tax assets:
Net operating loss carryforwards 1,173 1,524
Alternative minimum tax carryforwards 654 620
Keylite ITC carryforward 148 150
Doubtful accounts receivable 207 137
Excess of tax basis over financial statement basis
of inventory 263 160
Valuation allowance (350) (808)
------- -------
Total deferred tax assets 2,095 1,783
------- -------
Net deferred tax liabilities $ 1,678 $ 1,678
======= =======
</TABLE>
The valuation allowance has decreased $1,767,000, from $3,285,000 at September
30, 1995, to $1,518,000 at September 30, 1996, as the Company utilized net
operating loss carryforwards to offset taxable income.
F-15
<PAGE>
Matthews Studio Equipment Group
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (continued)
The provision (benefit) for income taxes on income (loss) before extraordinary
item is as follows:
<TABLE>
<CAPTION>
September 30,
1996 1995 1994
------ ------- -------
(in thousands)
<S> <C> <C> <C>
Current:
Federal $ 25 $ 143 $ (211)
State 10 16 (22)
------ ------- -------
35 159 (233)
Deferred:
Federal - (171) (220)
State - 71 38
------ ------- -------
- (100) (182)
------ ------- -------
$ 35 $ 59 $ (415)
====== ======= =======
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense for income (loss) before extraordinary item, is:
<TABLE>
<CAPTION>
September 30,
1996 1995 1994
Amount Percent Amount Percent Amount Percent
------------- ------- ---------- ------- ----------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates $ 353 34 % $ 91 34 % $ (304) (34)%
State income taxes, net of
federal tax benefit - - 11 4 (15) (2)
Permanent differences 41 4 21 8 188 21
Reduction in valuation
allowance on NOL
carryforwards (458) (44) - - - -
AMT rate differences (carry-
forwards) 35 3 (66) (25) (254) (28)
Provision to return items:
Additional depreciation 20 2
Tax effect of Electronics
dissolution 31 3
Other 13 1
Other - net - - 2 1 (30) (3)
----------- ---- ---------- ---- ----------- ------
$ 35 3 % $ 59 22% $ (415) (46)%
=========== ==== ========== ==== =========== ======
</TABLE>
At September 30, 1996, the Company has alternative minimum tax credit
carryforwards, with no expiration date, of $654,000, and federal net operating
loss carryforwards of approximately $3,065,000, that expire principally in the
year 2010, and state net operating loss carryforwards of approximately
$1,569,000, that expire principally in the year 2000.
F-16
<PAGE>
Matthews Studio Equipment Group
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY
At September 30, 1996, the Company had the following warrants and stock options
outstanding for the purchase of its common stock:
<TABLE>
<CAPTION>
Number of
Description Expiration Date Shares Issuable Exercise Price
------------------------ -------------------------- --------------- --------------
<S> <C> <C> <C>
ING Warrants September 2005 2,322,464 $ 2.50
Sutro Warrants September 2005 100,000 $ 2.50
Other Warrants September 1998 to May 2002 115,000 $2.75-$4.13
1989 Plan February 1999 339,750 $1.00-$3.75
1994 Plan March 2004 480,500 $1.63-$2.94
1994 Directors' Plan March 2004 50,000 $1.75-$3.00
Options outside of Plans June 2005 415,000 $ 3.00
---------
Total number of common
shares issuable 3,822,714
=========
</TABLE>
Warrants
In connection with the ING transaction (see Note 5), the Company issued a common
stock purchase warrant (the "ING Warrant") to ING for the purchase of 2,322,464
shares of common stock (subject to certain antidilution rights) at an initial
purchase price of $2.50 per share, which expires July 27, 2005. The ING Warrant
requires an adjustment of the warrant exercise price to $2.00 per share if the
Company does not complete a public offering of its common stock at a price of at
least $2.50 per share with net proceeds to the Company of at least $10 million
by July 27, 1998. And, as part of the same transaction, the Company issued a
warrant to Sutro & Co. for the purchase of 100,000 shares of common stock at
$2.50 per share (the "Sutro Warrant") subject to certain antidilutive
provisions similar to those granted to ING. During fiscal 1991 the Company
issued a warrant to Princeton Securities for the purchase of 50,000 shares of
common stock at $3.44 per share. The Company has also issued warrants to
Centerline and DR&A in conjunction with certain marketing arrangements.
Stock Options
The 1989 Stock Option Plan (the 1989 Plan) provides for the grant of incentive
and non-qualified options to purchase up to 1,000,000 shares of common stock.
The Stock Option Committee of the Board of Directors determines the number of
shares, date of grant, exercise price, when the options become exercisable and
expiration date of each grant. The exercise price of incentive stock options
cannot be less than the fair market value of the shares at the grant date. The
outstanding options are generally exercisable 20% a year commencing one year
after date of grant.
In 1994, the Board of Directors adopted, and the shareholders approved, the 1994
Stock Option Plan (the 1994 Plan) and the 1994 Stock Option Plan for Directors
(the 1994 Directors Plan). Both plans are administered by a committee of the
Board of Directors and terminate in March 2004.
The 1994 Plan provides for the granting of options to purchase up to 1,200,000
shares of common stock. Incentive and nonqualified stock options may be granted
to any full-time salaried employees, and nonqualified options to any consultant.
The Stock Option Committee of the Board of Directors determines the number of
shares, date of grant, exercise price, when the options become exercisable and
expiration date of each grant. The exercise price of incentive stock options
cannot be less than the fair market value of the shares at the grant date. The
outstanding options are generally exercisable 20% a year commencing one year
after date of grant.
F-17
<PAGE>
Matthews Studio Equipment Group
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (continued)
During 1996 and 1995, no options were exercised under the 1994 Plan.
The 1994 Directors Plan provides for the granting of options to purchase up to
300,000 shares of common stock. As of the date of each Annual Meeting of
Shareholders, non-employee directors who have not previously received a grant
under the 1994 Directors Plan, will receive an option to purchase 15,000 shares
of common stock. Such shares are exercisable ratably 6, 24 and 36 months after
the grant date, and at the fair market value of the shares at the grant date.
During 1996 and 1995, no options were exercised under the 1994 Directors Plan.
In addition to options under the Plans, the Company also issued options outside
of these Plans to Carlos D. De Mattos, Edward Phillips and ING during fiscal
1995. During 1996 and 1995, none of these options were exercised.
At September 30, 1996, the Company has adequately reserved common shares to
cover all outstanding options and warrants.
8. LEASES
The Company leases its primary facilities under non-cancelable operating leases
with a company owned by certain officers/shareholders; such leases expire in
December 1999. The Company also leases equipment, vehicles and other premises
under capital leases and non-cancelable operating leases.
Certain leases contain escalation clauses based on inflation or fixed amounts
and generally require the Company to pay utilities, insurance, taxes and other
operating expenses.
Property and equipment includes the following assets recorded under capital
leases (in thousands):
<TABLE>
<CAPTION>
September 30
1996 1995
-------- ---------
(in thousands)
<S> <C> <C>
Property and equipment $ 775 $ 1,619
Less accumulated amortization 242 448
-------- ---------
$ 533 $ 1,171
======== =========
</TABLE>
Future minimum payments under capital leases and non-cancelable operating leases
with initial terms of one year or more consisted of the following at September
30, 1996 (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- ------------
<S> <C> <C>
1997 $ 165 $ 1,196
1998 141 778
1999 141 549
2000 58 123
2001 - -
---------- ------------
505 $ 2,646
============
Amounts representing interest 85
----------
Present value of net minimum lease payments (including
current portion of $125) $ 420
==========
</TABLE>
F-18
<PAGE>
Matthews Studio Equipment Group
Notes to Consolidated Financial Statements (continued)
8. LEASES (continued)
Rent expense under operating leases approximated $1,661,000 for 1996,
$1,530,000 for 1995, and $1,681,000 in 1994. Included in rent expense is rent
for property leased from certain officers/shareholders of $479,000, $769,000 and
$921,000, for the years ended September 30, 1996, 1995 and 1994, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company entered into five-year employment agreements with its two principal
officers, expiring December 31, 1994. Effective January 1, 1995, the employment
of each of these two officers was extended without a formal agreement at an
annual rate of $232,000.
On July 1, 1995, the Company, entered into a written Employment Agreement
("Agreement I") with Carlos D. De Mattos to serve as the Company's President and
Chairman of the Board for a three year term commencing July 1, 1995 at an annual
base salary of $257,000 ("Base Salary"). Said Base Salary increases at 10%
during the term of Agreement I. In December 1996, the Compensation Committee
approved an increase in the base salary of Mr. De Mattos to $332,700 per year
starting October 1, 1996. Agreement I provides for an annual incentive bonus
from 20% to 40% of the Base Salary based upon attainment by the Company of
specified Earnings (as defined in Agreement I). Mr. De Mattos was also granted
an option to purchase 200,000 shares of the Company's common stock at an
exercise price of $3.00 per share. The right to purchase up to 66,667 Shares
under this option vests in like installments commencing on the first and the
next two successive anniversary dates of Agreement I and the option is
exercisable until July 2005. In addition, Mr. De Mattos agreed, upon
termination of Agreement I, to render consulting services to the Company for a
period of five years from such date of termination, at 50% of his Base Salary.
On July 1, 1995, the Company and its wholly-owned subsidiary, Matthews Studio
Equipment, Inc. ("MSEI"), entered into a written Employment Agreement
("Agreement II") with Edward Phillips to serve as president of MSEI for a three
year term commencing July 1, 1995 at an annual base salary of $257,000 ("Base
Salary"). Said Base Salary increases at 10% during the term of Agreement II.
The agreement provides for an annual incentive bonus from 20% to 40% of the Base
Salary based upon attainment by the Company of specified Earnings (as defined
in Agreement II). Mr. Phillips was also granted an option to purchase 200,000
shares of the Company's common stock at an exercise price of $3.00 per share.
The right to purchase up to 66,667 Shares under this option vests in like
installments commencing on the first and the next two successive anniversary
dates of Agreement II and the option is exercisable until July 2005. In
addition, Mr. Phillips agreed, upon termination of Agreement II, to render
consulting services to the Company for a period of five years from such date of
termination, at 50% of his Base Salary.
In addition to the Purchase Agreement which the Company entered into with ING
(described in Note 5 of the "Notes to Consolidated Financial Statements"), as
part of the transaction, the Company and certain of its management shareholders
(the "Management Shareholders") entered into a Shareholders Agreement with ING
(the "Shareholders Agreement") pursuant to which the Company and the
shareholders agreed to nominate and vote for the election of two representatives
of ING to the Board of Directors of the Company, the number of members of which
would be set at nine. The Shareholders Agreement also contains certain
restrictions on the transfer of shares held by ING and the Management
Shareholders.
F-19
<PAGE>
Matthews Studio Equipment Group
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (continued)
The Company also entered into a registration rights agreement (the "Registration
Rights Agreement") with ING and Sutro & Co., Incorporated, which acted as the
Company's investment bankers in connection with the transaction ("Sutro"),
entitling the holders of the ING Warrant and the common stock purchase warrant
issued to Sutro with respect to the purchase of up to 100,000 shares of common
stock of the Company, to certain piggy back registration rights with respect to
the shares of common stock issuable upon exercise of the ING Warrant as well as
any shares of common stock subsequently acquired by ING. The Registration Rights
Agreement also grants ING the right to require the Company to file a shelf
registration statement with respect to the sale from time to time of the 1.4
million shares of common stock of the Company acquired by ING from a former
employee of the Company.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's outstanding balances under its revolving
credit facility and senior subordinated notes approximate the fair value because
the interest rates on outstanding borrowings vary according to current market
rates or are set at approximate market rates.
11. OTHER ITEMS
The Company maintains a defined contribution retirement plan ("the Plan"), which
qualifies under Section 401(k) of the Internal Revenue Code. The Plan covers
substantially all employees with over one year of service and provides for a 25%
match of the participants' eligible contributions. The Company recognized
expense under the plan of $52,000 in 1996, $29,000 in 1995 and $36,000 in 1994.
In the fourth quarter of 1995, the Company incurred an extraordinary loss on the
extinguishment of the GECC debt, of $2,449,000. The Company also recorded a
fiscal 1995 fourth quarter adjustment to reduce the carrying amount of used
equipment inventories by $276,000. The aggregate impact of these adjustments
increased the fourth quarter's pretax loss by $2,725,000.
In the fourth quarter of 1994, the Company wrote-off certain notes and accounts
receivable, principally foreign, aggregating $1,364,000. This was based on
management's determination that the ultimate collectibility of such receivables
was uncertain as a result of assessments of the debtors' underlying collateral,
and certain recent foreign currency devaluations. The Company also recorded
fiscal 1994 fourth quarter adjustments to reduce the carrying amount of
inventories by $394,000, and to recognize $129,000 in settlement of a lease
escalation clause. The aggregate impact of these adjustments increased the
fourth quarter's pretax loss by $1,887,000.
F-20
<PAGE>
Schedule II
Valuation and Qualifying Accounts
(amounts in thousands)
<TABLE>
<CAPTION>
Year Charged
Ended Balance at to Costs Charged Balance
September Beginning and to Other Deductions at End
30 Description of Year Expenses Accounts - Describe of Year
------------ ----------------------- ---------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1996 ALLOWANCE FOR DOUBTFUL
ACCOUNTS 297 295 - 112 (A) 480
1995 Allowance for doubtful
accounts 225 157 - 85 (A) 297
1994 Allowance for doubtful
accounts 199 1,496 - 1,470 (A) 225
(A) Uncollectible accounts written off.
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
- - ------- ----------------------------------------------------------------------
<C> <S>
3(a) Articles of Incorporation and amendments incorporated by reference to
the Company's Registration Statement on Form S-18 No. 33-30963 LA.
3(b) Bylaws and amendments incorporated by reference to the Company's
Registration Statement on Form S-18 No. 33-30963 LA.
3(c) Amendment to Articles of Incorporation changing the number of members
of Board of Directors, incorporated by reference to the Company's
definitive Proxy Statement dated March 1, 1990.
3(d) Amendment to Articles of Incorporation limiting directors' and
officers' liability, incorporated by reference to the Company's
definitive Proxy Statement dated March 1, 1990.
3(e) Certificate of Determination regarding Preferred Stock, incorporated
by reference to the Company's Form 8-K dated August 14, 1994.
3(f) Amendment to Bylaws, incorporated by referenced to the Company's Form
10-K for fiscal year ended September 30, 1995.
3(g) Amended and Restated Articles of Incorporation.
4(a) Subordinated Note dated as of July 27, 1995, made by the Company in
favor of ING Equity Partners, L.P. I, incorporated by reference to the
Company's Form 8-K dated August 14, 1994.
4(b) Warrant dated as of July 27, 1995 issued by the Company to ING Equity
Partners, L.P. I, incorporated by reference to the Company's Form 8-K
dated August 14, 1994.
4(c) Registration Rights Agreement dated as of July 27, 1995, between the
Company and ING Equity Partners, L.P. I, incorporated by reference to
the Company's Form 8-K dated August 14, 1994.
4(d) Stockholders Agreement dated as of July 27, 1995, among the Company,
ING Equity Partners, L.P. I, Carlos D. De Mattos, Edward Phillips, C&E
DM Limited Partnership, CE& DM LLC, The Carlos and Elena De Mattos
Family Trust dated February 12, 1991 and the Edward and Norman
Phillips Family Trust dated June 5, 1991, incorporated by reference to
the Company's Form 8-K dated August 14, 1994.
4(e) $4,900,000 Senior Subordinated Note dated July 27, 1995, and $100,000
Senior Subordinated Note dated July 27, 1995, made by the Company in
favor of ING Equity Partners, L.P. I, incorporated by reference to the
Company's Form 10-Q for fiscal quarter ended March 31, 1996.
4(f) Amendment No. 1 to Common Stock Purchase Warrant, dated as of April 5,
1996, between the Company and ING Equity Partners, L.P. I,
incorporated by reference to the Company's Form 10-Q for fiscal
quarter ended March 31, 1996.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
4(g) Amendment No. 1 to Stockholders Agreement dated as of April 5, 1996,
among the Company, ING Equity Partners, L.P. I, Carlos D. De Mattos,
Edward Phillips, C&E DM Limited Partnership, CE& DM LLC, The Carlos
and Elena De Mattos Family Trust dated February 12, 1991 and the
Edward and Norman Phillips Family Trust dated June 5, 1991,
incorporated by reference to the Company's Form 10-Q for fiscal
quarter ended March 31, 1996.
10(a) 1989 Stock Option Plan, incorporated by reference to the Company's
Registration Statement on Form S-18 No. 33-30963 LA.
10(b) Amendment to 1989 Stock Option Plan incorporated by reference to the
Company's Form 10-K for the fiscal year ended September 30, 1991.
10(c) 1994 Stock Option Plan incorporated by reference to the Company's
Proxy Statement dated March 29, 1994.
10(d) 1994 Stock Option Plan for Directors incorporated by reference to the
Company's Proxy Statement dated March 29, 1994.
10(e) Lease Agreement between PDM and the Company, incorporated by reference
to the Company's Form 10-K for the fiscal year ended September 30,
1995.
10(f) Lease Agreement between Hollywood Rental Co., Inc. and Douglas J.
Pentek and Frieda M. Pentek, incorporated by reference to the
Company's Registration Statement on Form S-18 No. 33-30963 LA.
10(g) Lease Agreement between Perimeter Woods Associates and Hollywood
Rental Co., Inc., incorporated by reference to the Company's Form 10-K
dated for the fiscal year ended September 30, 1991.
10(h) First Amendment to Lease Agreement between Perimeter Woods Associates
and Hollywood Rental Co., Inc., incorporated by reference to the
Company's Form 10-K for the fiscal year ended September 30, 1995.
10(i) Employment Agreement between the Company and Carlos D. De Mattos dated
July 1, 1995, incorporated by reference to the Company's Form 10-K for
the fiscal year ended September 30, 1995.
10(j) Employment Agreement between the Company, Matthews Studio Equipment,
Inc. and Edward Phillips dated July 1, 1995, incorporated by reference
to the Company's Form 10-K for the fiscal year ended September 30,
1995.
10(k) Agreement of Dissolution of General Partnership between Matthews
Studio Electronics, Inc., and E.F. Nettmann & Associates, Inc., dated
as of September 30, 1994, less attachments, incorporated by reference
to the Company's Form 10-K for the fiscal year ended September 30,
1995.
10(l) Equipment Management Services Agreement between Matthews Studio
Electronics, Inc., and E.F. Nettmann & Associates, Inc., dated as of
October 1, 1994, less attachments, incorporated by reference to the
Company's Form 10-K for the fiscal year ended September 30, 1995.
10(m) Assignment of License Agreement With Option of First Refusal between
Matthews Studio Electronics, a general partnership and the Company,
dated as of June 1, 1989,
</TABLE>
<PAGE>
<TABLE>
<C> <S>
incorporated by reference to the Company's Form 10-K for the fiscal
year ended September 30, 1995.
10(n) Release dated as of July 27, 1995, made by the Company, Matthews
Studio Equipment, Inc., Matthews Acceptance Corporation, Matthews
Studio Electronics, Inc., Matthews Studio Electronics, E.F. Nettmann &
Associates, Inc. in favor of General Electric Capital Corporation,
incorporated by reference to the Company's Form 8-K dated August 14,
1994.
10(o) Revolving Credit Agreement dated as of July 27, 1995 among the
Company, Matthews Studio Equipment, Inc., Hollywood Rental Co., Inc.,
Matthews Studio Electronics, Inc., Matthews Acceptance Corporation,
and Chemical Bank, incorporated by reference to the Company's Form 8-K
dated August 14, 1994, less the exhibits or schedules, but including
items 10(p) and 10(q).
10(p) Revolving Credit Note, dated as of July 27, 1995, made by the Company,
Matthews Studio Equipment, Inc., Hollywood Rental Co., Inc., Matthews
Studio Electronics, Inc., Matthews Acceptance Corporation, to Chemical
Bank, incorporated by reference to the Company's Form 8-K dated August
14, 1994.
10(q) Security Agreement, dated as of July 27, 1995, among the Company,
Matthews Studio Equipment, Inc., Hollywood Rental Co., Inc., Matthews
Studio Electronics, Inc., Matthews Acceptance Corporation, Matthews
Medical Equipment, Inc., Keylite Holdings, Inc., Keylite Production
Services, Inc., Reel Wheels, Inc., and Chemical Bank, incorporated by
reference to the Company's Form 8-K dated August 14, 1994.
10(r) Purchase Agreement dated as of July 27, 1995 between the Company and
ING Equity Partners, L.P. I, incorporated by reference to the
Company's Form 8-K dated August 14, 1994, less the exhibits or
schedules, but including items 4(a), 4(b), 4(c), 4(d), 4(e), 4(f) and
4(g) above and 10(s) below.
10(s) Amendment No. 1 to Purchase Agreement dated as of April 5, 1996,
between the Company and ING Equity Partners, L.P. I, incorporated by
reference to the Company's Form 10-Q for the fiscal quarter ended
March 31, 1996.
10(t) First Amendment to Employment Agreement, dated as April 5, 1996,
between the Company and Carlos D. De Mattos, incorporated by reference
to the Company's Form 10-Q for the fiscal quarter ended March 31,
1996.
10(t) First Amendment to Employment Agreement, dated as April 5, 1996,
between the Company and Edward Phillips, incorporated by reference to
the Company's Form 10-Q for the fiscal quarter ended March 31, 1996.
21 List of the Company's subsidiaries, incorporated by reference to the
Company's Form 10-K for the fiscal year ended September 30, 1995.
23 Consent of Independent Auditors covering the consolidated financial
statements for the fiscal year ended September 30, 1996.
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 3(g)
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
MATTHEWS STUDIO EQUIPMENT GROUP
ARTICLE I
The name of this corporation is Matthews Studio
Equipment Group.
ARTICLE II
The primary business in which this corporation
proposes to initially engage is the business of manufacturing,
buying, selling, distributing and dealing in ties of all kinds
and description and any other business incident or auxiliary
thereto.
ARTICLE III
The general purposes for which this corporation is
formed are:
1. To manufacture, buy, sell, distribute and deal
in clothing, headwear, footwear, gloves and wearing apparel of
every description, and any and all materials or articles
required for, or used or useful in connection with, all or any
of the objects aforesaid.
2. To manufacture, buy, import, export or
otherwise acquire, own, handle, sell, trade, deal in and deal
with, commodities and supplies of every kind, class and
description, and generally to carry on all or any of the
business of broker, factor, shipping and commission merchant
and warehouseman.
3. To buy, lease, exchange and otherwise acquire,
and to own or hold, deal in, sell, mortgage or otherwise
encumber and dispose of, personal property of any kind or
character, and any and all rights therein.
4. To erect and construct, make, improve or aid in
or subscribe toward the construction, making and improving of
stores, mills, factories, warehouses and buildings of every
kind in the State of California, or elsewhere.
5. To borrow money, to contract debts, and to
issue bonds, debentures, debenture bonds, notes, or other
obligations of this corporation from time to time for any of
the objects or purposes of this corporation, and to issue the
same without security or to secure the same by mortgage,
pledge, deed of trust, or otherwise.
6. To lend money on the security of mortgages,
deeds of trust, pledges or other hypothecations of real and
personal property, or without security.
<PAGE>
7. To enter into and make, perform and carry out
contracts of every kind and description made for any lawful
purpose, without limit as to amount, with any person, firm,
association or corporation, either public or private, or with
any municipality, county, state, territory, colony, province,
nation, government or agency or subdivision thereof.
8. To draw, make, accept, endorse, discount,
execute, and issue promissory notes, drafts, bills of
exchange, warrants, and other negotiable or transferable
instruments.
9. To sell or exchange the capital stock of this
corporation hereby created, or any part thereof, for the
capital stock of other corporations, and for other property or
rights, as this corporation may deem necessary for the
purposes thereof and the prosecution of its business.
10. To guarantee the payment of dividends upon
stock or interest upon bonds, notes and other evidences of
indebtedness or obligations or the performance of the
contracts or other obligations or any corporation (domestic or
foreign, public, quasi-public, or private), co-partnership,
association, syndicate, firm or individual to such extent as
may be permitted by law.
11. To purchase, hold, sell and transfer, trade and
deal in, reissue or cancel, shares of its own capital stock,
bonds, debentures and other obligations of this corporation,
secured or unsecured, from time to time, in the manner and to
the extent now or hereafter authorized or permitted by the
laws of the State of California.
12. To subscribe for, purchase or otherwise
acquire, and to own, hold, sell, hypothecate, or dispose of
shares of stock, bonds, or other securities or obligations of
any person or corporation, and while such owner to exercise
all of the rights and powers incidental thereto, including the
right to vote therein.
13. To do a general financial, industrial, mining,
manufacturing, shipping, importing and exporting, brokerage,
merchandising, farming business, and to engage in any other
business or transaction permitted by the laws of the State of
California to any commercial corporation.
14. To have one or more offices and to carry on all
or any of the objects and purposes herein enumerated, and to
conduct the business of the corporation, in all of the States
of the United States of America, the District of Columbia, the
territories of the United States, foreign countries, and their
colonies, and in any part of the world, and as principal,
agent, contractor, or otherwise, and by or through trustees,
agents or otherwise, and either alone or in partnership with
<PAGE>
or in conjunction with or for the joint account of the
corporation, and any company, firm, association or individual,
and to do all such other things as are incidental or conducive
to the attainment of the above objects and purposes, or any of
them, or necessary or incidental to the protection and benefit
of the corporation.
15. In general, to carry on any other lawful
business whatsoever in connection with the foregoing or which
is calculated directly or indirectly to promote the interest
of the corporation or to enhance the value of its properties,
and to have and exercise any and all of the powers and
privileges which are now or may hereafter be conferred by the
laws of the State of California, upon corporations formed
under the laws pursuant to and under which this corporation is
formed, as such laws are now in effect or may at any time
hereafter be amended or supplemented, and to do any and all
things hereinabove set forth to the same extent as natural
persons might or could do.
The foregoing clauses shall be construed both as
objects and purposes, and as powers, and it is hereby
expressly provided that the foregoing enumeration of specific
objects and purposes shall not be held in any manner to limit
or restrict the powers of the corporation.
ARTICLE IV
The number of directors of this corporation shall be
not less than five nor more than nine, the exact number of
which shall be fixed by a bylaw adopted by the board of
directors.
ARTICLE V
The total number of shares which this corporation
shall have authority to issue is twenty-one million
(21,000,000) shares consisting of twenty million (20,000,000)
shares of Common Stock No Par Value and One Million
(1,000,000) shares of Preferred Stock without par value. The
designations and the powers, preferences and relative,
participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, of the
Preferred Stock of the corporation shall be established by a
Board of Directors resolution in accordance with the
provisions of the California statutes. The currently in
effect rights, preferences, powers, qualifications,
limitations and restrictions granted to or imposed upon the
Preferred Stock are set forth in Article VIII below.
ARTICLE VI
This corporation reserves the right to amend, alter,
change, add to or repeal any provision contained in these
Articles of Incorporation, in the manner now or hereafter
<PAGE>
prescribed by law, and all rights and powers conferred by
these Articles of Incorporation on shareholders, directors and
officers are granted subject to this reservation.
ARTICLE VII
1. The liability of directors of the corporation
for monetary damages shall be eliminated to the fullest extent
permissible under California law.
2. The corporation is authorized to provide
indemnification of agents (as defined in Section 317 of the
California Corporations Code) through Bylaw provisions,
agreements with agents, vote of shareholders or disinterested
directors, or otherwise, to the fullest extent permissible
under California law.
ARTICLE VIII
The following is a full restatement of the rights,
preferences, powers, qualifications, limitations and
restrictions granted to or imposed upon the Preferred Stock,
no par value (the "Preferred Stock") or the holders thereof,
which shall consist of and be limited to a total number of
one million shares authorized for issuance.
1. Definitions. For purposes of this Article VIII, the
following definitions shall apply:
"Affiliate" shall mean, with respect to any person,
any person that directly or indirectly through one or more
intermediaries Controls, is Controlled by or is under common
Control with such person.
"Control" shall mean ownership of a majority of the
capital stock or interests in another Person.
"EP" shall mean ING Equity Partners, L.P. I, a
Delaware limited partnership, or any of its Affiliates.
"Liquidation Value" has the meaning set forth in
Section 4 hereof.
"Securities Purchase Agreement" shall mean the
Purchase Agreement between the corporation and EP, as such
agreement may from time to time be amended in accordance with
its terms.
"Subsidiary" shall mean any corporation of which the
shares of stock having a majority of the general voting power
in electing the board of directors are, at the time as of
which any determination is being made, owned by the
corporation either directly or indirectly through
Subsidiaries.
<PAGE>
"Triggering Event" shall have the meaning set forth
in Section 2(a) below.
"Warrants" shall mean the Warrants of the
corporation exercisable for shares of Common Stock issued to
EP pursuant to the Securities Purchase Agreement.
2. Voting Rights.
(a) Prior to Triggering Event. Except for those
voting rights expressly required by law or with regard to any
amendment to the corporation's Articles of Incorporation to
alter or change, directly or indirectly, the powers,
designations, preferences or special rights relating to the
shares of the Preferred Stock, holders of the Preferred Stock
shall have no voting rights unless and until an Event of
Default, as that term is defined in the Securities Purchase
Agreement, shall have occurred and be continuing (a
"Triggering Event").
(b) Occurrence of Triggering Event. Upon the
occurrence of a Triggering Event, and until such Triggering
Event shall have been remedied to the satisfaction of a
majority of the holders of the Preferred Stock, each holder of
the Preferred Stock shall be entitled to vote together with
the Common Stock and any other voting stock of the corporation
on all matters submitted to the corporation's shareholders for
consideration, vote or approval, in the manner set forth in
this Section 2(b). The holders of the Preferred Stock will
have in the aggregate, and will be entitled to cast in the
aggregate, a number of votes equal to the number of votes to
which the shares of Common Stock, issuable upon exercise of
the then unexercised portion of the Warrants outstanding and
held by holders of the Preferred Stock as of the date the
shareholders' meeting is called or the date the written
consent is solicited, would be entitled, if such Warrants had
been exercised. Each holder of the Preferred Stock will have,
and will be entitled to cast, a pro rata number of the votes
accorded to the holders of the Preferred Stock in the
aggregate, as set forth in the preceding sentence, determined
based on the ratio that the number of shares of Preferred
Stock held by such holder as of the date the shareholders'
meeting is called or the date the written consent is
solicited, bears to the aggregate number of shares of
Preferred Stock that are issued and outstanding as of such
date.
3. Dividends. The holders of the Preferred Stock shall
not be entitled to receive dividend payments at any time.
4. Liquidation. Upon any liquidation, dissolution or
winding up of the corporation, before any distribution or
payment is made upon any shares of any other class of capital
stock of the corporation, the holders of Preferred Stock will
<PAGE>
be entitled to be paid an amount equal to the Liquidation
Value per share, and shall not be entitled to receive any
further distribution or payment. Neither the consolidation
nor merger of the corporation into or with any other
corporation or corporations, nor the sale or transfer by the
corporation of all or any part of its assets, nor the
reduction of the capital stock of the corporation, shall be
deemed to be a liquidation, dissolution or winding-up of the
corporation within the meaning of any of the provisions of
this Section 4. The "Liquidation Value" of each share of
Preferred Stock will be $100 per share.
5. Mandatory Redemption.
(a) Triggering Event. In the event that the
Warrants are fully exercised, then simultaneously with such
exercise, the corporation shall redeem the outstanding shares
of Preferred Stock; however, the Preferred Stock will not be
redeemed until such time as the Warrants are exercised in
full.
(b) Redemption Price. On the date of redemption,
upon surrender by the holders at the corporation's principal
office of the certificate representing the shares of the
Preferred Stock, the corporation will pay to the holders an
amount in cash equal to the Liquidation Value.
(c) Cancellation of Redeemed Stock. The shares of
Preferred Stock redeemed pursuant to this Section 5 shall be
cancelled and shall not under any circumstances be reissued.
6. Replacement. Upon receipt of evidence reasonably
satisfactory to the corporation (an affidavit of the
registered holder will be satisfactory) of the ownership and
the loss, theft, destruction or mutilation of any certificate
evidencing the shares of Preferred Stock, and in the case of
any such loss, theft or destruction, upon receipt of indemnity
reasonably satisfactory to the corporation (provided that if
the holder is an institutional investor its own agreement will
be satisfactory), or, in the case of any such mutilation upon
surrender of such certificate, the corporation will (at its
expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing shares of Preferred
Stock, dated the date of such lost, stolen, destroyed or
mutilated certificate.
7. Notices. All notices will be in writing and will be
delivered by registered or certified mail, return receipt
requested, postage prepaid and will be deemed to have been
given when so mailed (i) to the corporation, at its principal
executive offices and (ii) to the holders of the Preferred
Stock, at such holders' addresses as they appear in the stock
records of the corporation (unless otherwise indicated by such
holders).
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-8 No. 333-3446) pertaining to the 1994 Stock
Option Plan and 1994 Stock Option Plan for Directors of Matthews Studio
Equipment Group and to the incorporation by reference therein of our report
dated December 10, 1996, with respect to the consolidated financial statements
and schedule of Matthews Studio Equipment Group included in its Annual Report
(Form 10-K) for the year ended September 30, 1996, filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
Los Angeles, California
December 26, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 462
<SECURITIES> 0
<RECEIVABLES> 5,625
<ALLOWANCES> 480
<INVENTORY> 4,961
<CURRENT-ASSETS> 12,307
<PP&E> 37,553
<DEPRECIATION> 17,214
<TOTAL-ASSETS> 34,484
<CURRENT-LIABILITIES> 4,354
<BONDS> 0
0
0
<COMMON> 5,584
<OTHER-SE> 3,490
<TOTAL-LIABILITY-AND-EQUITY> 9,074
<SALES> 16,079
<TOTAL-REVENUES> 30,204
<CGS> 10,257
<TOTAL-COSTS> 18,273
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,044
<INCOME-PRETAX> 1,038
<INCOME-TAX> 35
<INCOME-CONTINUING> 1,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,003
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
