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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, 1997 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.)
3111 NORTH KENWOOD STREET, BURBANK, CA 91505
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(Address of principal executive offices) (Zip CODE)
(818) 525-5200
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(Registrant's telephone number, including area code)
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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. [ ]
At December 15, 1997, the aggregate market value of the Registrant's voting
stock held by nonaffiliates of the Registrant was approximately $20,123,416.
On December 15, 1997, Registrant's outstanding voting stock consisted of
10,988,806 shares of Common Stock, each no par value.
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TABLE OF CONTENTS
PART I
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PAGE
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Item 1. BUSINESS................................................................................. 1
Item 2. PROPERTIES............................................................................... 4
Item 3. LEGAL PROCEEDINGS........................................................................ 4
Item 4. SUBMISSION OF MATTTERS 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..................................................................... 13
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................................................... 13
PART III
Item 10. DIRECTORS; EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT...................................................................................... 14
Item 11. EXECUTIVE COMPENSATION................................................................... 18
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................................................... 19
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... 23
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.............................................................................. 24
SIGNATURES............................................................................................ 25
INDEX TO FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS'
REPORT................................................................................................ F-1
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PART I
ITEM 1. BUSINESS
Matthews Studio Equipment Group (the "Company") designs, manufactures, sells,
distributes, leases and rents essential audio, video, film and production
equipment, to the motion picture, television, corporate, 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,
professional video equipment, 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.
Matthews Studio Equipment Group has additionally enhanced its available product
line through carefully selected acquisitions and is also a major supplier of
film and video cameras and fully operational and equipment supplied soundstages
and studios.
Matthews Studio Equipment Group believes that it plays a significant role in
both the entertainment and corporate industries by providing a single outlet
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 (Matthews Studio
Equipment Group) name after a reverse acquisition (exchange of stock and pooling
of interest) with Matthews Studio Equipment, Inc., a California corporation
incorporated in January 1970, which is now a wholly owned subsidiary of the
Company.
RENTAL EQUIPMENT
PRODUCTION EQUIPMENT, INCLUDING GRIP, LIGHTING AND POWER GENERATION. 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. HRC offers varied supplies and services in support of its
production packages and offers a complete line of all levels of lighting and
grip equipment, pre-packaged trucks and production vans. Additionally, Hollywood
Rental Generators, a division of HRC, offers, on a rental basis, 40 foot and 45
foot production vans and tow generators from 200 amps to 3000 amps to support
the power demands necessitated in production environments. HRC has facilities in
Burbank, California, Charlotte, North Carolina, Phoenix, Arizona, Albuquerque,
New Mexico and Cincinnati, Ohio.
The HRC rentals vary from short periods of time to the complete duration of the
filming of a feature film or television series. 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.
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.
HRC's rental activities accounted for approximately 45% of the Company's
revenues in fiscal 1997.
PROFESSIONAL BROADCAST VIDEO EQUIPMENT. Duke City Video, Inc. ("Duke City"), was
acquired by the Company in May of 1997. Duke City specializes in the rental of
professional broadcast video equipment (including cameras) to all sectors of the
production community. Duke City provides video equipment production packages to
its customers for use in television broadcasting events, inside the studio as
well as outside, for "on location" productions. Duke City has three operating
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outlets in Dallas, Texas, Albuquerque, New Mexico and Burbank, California. The
Albuquerque location also houses a small videocassette duplication facility that
operates under the name Duke City Dubs and is the primary videocassette
duplication facility in Albuquerque, New Mexico.
Duke City supports both short and long term rental projects with corresponding
invoices issued at the conclusion of the rental or monthly for extended shows.
The lessee typically retains responsibility for 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. Similar to HRC's procedure, Duke
City also usually requires each of its lessees to furnish a certificate of
insurance providing for comprehensive coverage, including liability, injury and
property damage.
Duke City's rental activities accounted for approximately 9% of the Company's
revenues in fiscal 1997.
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") to manufacture and market the Systems.
On 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 an exclusive license for
technology relating to the Systems and under a management agreement between
Nettmann and Studio Electronics ("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.
Matthews Studio Equipment Group and Nettmann jointly support the
invention and marketing of products that fall under the auspices of
Studio Electronics. 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. The Systems are available
for rental or long term lease and 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 2% of the Company's revenues in
fiscal 1997.
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 28% of the Company's revenues in fiscal
1997.
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
Burbank, California and Charlotte, North Carolina. During fiscal year 1997, the
Company acquired the assets and operations of Media Lighting Supply Inc.
("MLS"), a production supply distributor in Miami, Florida., thereby adding
another location for sales of these supplies. Sales from these supplies
accounted for approximately 16% of the Company's revenues in fiscal 1997.
EQUIPMENT LEASING. Matthews Acceptance Corporation ("MAC"), a wholly owned
subsidiary of the Company, is 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 the equipment to the lessee. At
September 30, 1997, the MAC portfolio of leases consisted of 19 leases and
represented approximately $1,027,000 of lease receivables. Revenues from this
lease segment represented less than 1% of the Company's revenues in fiscal 1997.
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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 appointed
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'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
product sales revenues. However, in fiscal year 1997, a single customer
accounted for 19% of annual rental revenues, from rental of the Company's
equipment for the production of a large budget feature film, which was
completed in the second quarter of the fiscal year.
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,
and several small competitors in other markets, 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 is also aware of two principal competitors in the video equipment
rental market, with operations located in each of the Company's primary customer
bases for video equipment. The Company's video equipment operations also compete
with numerous small rental companies.
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.
PATENTS, TRADEMARKS, AND LICENSES
While the Company has procured a number of trademark registrations and patents
for its manufactured products, and one patent related to its Cam-Remote(R)
System, the Company's business is not dependent on such protection.
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YEAR 2000
The Company believes that entering into the year 2000 will have little or no
impact on its systems.
EMPLOYEES
The Company had approximately 339 employees at September 30, 1997 (336 full time
and 3 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 manufacturing and design 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 May 1997, the Company relocated its corporate and principal rental and sales
offices to a new location with approximately 91,000 square feet in Burbank,
California. This new facility also houses the Company's principal warehouse and
showroom space. The facility is leased from an unrelated party, at an aggregate
monthly rent of approximately $41,000, under a lease scheduled to expire in
2002. In addition, the Company leases from other unrelated parties an aggregate
of approximately 58,000 square feet of sales office, warehouse and showroom
space (i) in Burbank and Hollywood, California, (ii) in Miami and Orlando,
Florida, (iii) in Dallas, Texas, (iv) in Tempe, Arizona and (v) in Charlotte,
North Carolina, at an aggregate monthly rent of approximately $27,000. During
fiscal year 1997, the Studio Electronics operations which is managed by Nettmann
was relocated to a facility leased by Nettmann from an unrelated party. The
Company will reimburse Nettmann approximately $3,000 per month in rental costs.
During fiscal year 1997, the Company acquired , in the Duke City acquisition,
land and a building located in Albuquerque, New Mexico, which includes sound
stage and studio, rental office, warehouse and showroom space.
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 15, 1997, there were 10,988,806 shares
of common stock outstanding, held by approximately 209 shareholders of record.
The Company believes there are in excess of 1,300 beneficial holders based on
prior proxy listings. The following table sets forth the high and low bid
prices for the Company's common stock, for the quarterly periods ended as shown:
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(High) (Low)
(Fiscal year 1996)
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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
(Fiscal year 1997)
December 31, 1996 2 1/2 2 1/4
March 31, 1997 2 5/8 2 3/16
June 30, 1997 4 3 1/8
September 30, 1997 4 3/8 3 11/16
</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, 1997 are derived from the consolidated financial statements of
Matthews Studio Equipment Group and subsidiaries, 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.
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<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
1997 1996 1995 1994 1993
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Rental revenues $ 25,589 $ 14,125 $ 12,797 $ 12,944 $ 11,522
Net product sales 20,769 16,079 14,554 12,482 14,132
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46,358 30,204 27,351 25,426 25,654
Gross profit - rental operations 11,070 6,109 5,301 6,018 5,398
Gross profit - sales 6,688 5,822 4,562 3,924 4,815
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17,758 11,931 9,863 9,942 10,213
Income (loss) before extraordinary item 1,706 1,003 208 (478) (390)
Net income (loss) 1,512 1,003 (2,020) (478) (390)
Income (loss) per common share primary:
Before extraordinary item $ 0.16 0.10 $ 0.02 (0.05) $ (0.04)
extraordinary item (0.02) - (0.22) - -
Net income (loss) per share 0.14 0.10 (0.20) (0.05) (0.04)
Income (loss) per common share
assuming full dilution:
Income (loss) before extraordinary item 0.15 0.10 0.02 (0.05) (0.04)
extraordinary item (0.02) - (0.22) - -
Net income (loss) per share 0.13 0.10 (0.20) (0.05) (0.04)
Cash provided by (used in) operations $ 2,216 $ 4,698 $ (1,168) $ 1,207 $ 1,788
Cash used in investing activities (9,476) (5,789) (3,177) (1,160) (1,511)
Cash provided by (used in) financing activities 7,191 1,115 4,048 (60) (33)
EBITDA (Footnote 1) 9,650 6,043 4,849 2,466 4,250
Total assets 61,871 34,484 30,703 31,223 32,274
Working capital 9,662 7,953 7,872 4,405 2,857
Net property and equipment 35,187 20,339 17,226 16,223 16,391
Long term debt and capital lease obligations 36,715 18,914 17,664 11,597 10,813
Shareholders' equity 11,170 9,074 8,054 9,893 9,689
</TABLE>
/1/ EBITDA represents earnings before taxes, interest expense, depreciation and
amortization. The EBITDA for fiscal 1997 and 1995 are 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
operating performance and leverage ratios. 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 continued the trends from fiscal year 1996 of growth and improved
operating results. The Company's business is continuing to evolve to meet the
ongoing technological and business changes prevalent in the entertainment
production industry and competitive pressures.
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The Company is particularly addressing the need to provide its products and
services throughout the United States as well as expanding its product lines.
Through development of a marketing and distribution network in select
geographic marketplaces, the Company has increased opportunities to improve
rental asset utilization and expand core businesses.
During fiscal year 1997, the Company amended and restated its senior secured
revolving credit facility with The Chase Manhattan Bank as agent for a syndicate
of lenders. The amended facility increased the credit line from $17,000,000, to
$50,000,000, the proceeds from which have been used to fund the acquisition of
rental equipment and to pay down higher interest senior subordinated debt
($4,900,000). Remaining funds available under the credit line will be used for
the Company's working capital needs and future growth.
At September 30, 1997, the Company's outstanding principal obligations under
the credit facility were approximately $28,622,000 with all current
repayment obligations under the credit facility having been met.
Revenues from the Company's manufacturing, video and production equipment rental
business grew a combined 54%, with income before income taxes and an
extraordinary item (from early extinguishment of debt) having increased by 136%
over last year. Approximately 13% of the total revenue of fiscal year 1997 was
from large budget film projects which were completed during the year. In
addition, approximately 9% of the total revenue of fiscal year 1997 was from
video camera rental by Duke City, which was acquired during the third quarter of
fiscal year 1997. Also contributing to the increase in the Company's total
revenues was the addition of equipment to the Company's rental inventory base.
Capital asset investments made in fiscal 1997 for the Company's equipment rental
business permitted the Company to increase rental revenue and at the same time
control subrental costs (i.e., costs to rent production equipment from third-
parties to meet Company customers' needs).
Concentrated marketing efforts on certain higher margin manufactured products
continued during fiscal 1997, and permitted the Company to increase sales of its
manufactured equipment. Industry-wide favorable conditions during fiscal 1997
also contributed to increases in sales and equipment rental revenues.
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Year ended September 30, 1997, compared
to year ended September 30, 1996
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Revenues from Rental Operations
Revenues from rental operations were $25,589,000 in fiscal 1997, an increase of
$11,464,000 or 81% from $14,125,000 in fiscal 1996. Rental revenues at HRC
increased by $7,177,000 to $20,900,000, as compared to $13,723,000 in fiscal
1996. This increase is primarily due to availability of additional rental
equipment acquired during fiscal 1996 and 1997, industry-wide favorable
conditions, including several large budget film projects and expansion in new
geographic areas. In addition, the acquisition of Duke City in May 1997
accounted for $4,244,000 of the increased revenues.
Net Product Sales
Net equipment and supply sales for fiscal 1997 were $20,769,000, an increase of
$4,690,000 or 29% from $16,079,000 in fiscal 1996. Equipment sales increased by
$708,000 or 6% from fiscal 1996, primarily due to continued concentrated
marketing efforts with expanded sales staff and product promotion. Sales of
expendable supplies increased by $3,982,000 as a result of the renewed focus on
the expendable supply business, including the acquisition of MLS in the
southeastern United States in January 1997, which accounted for $3,259,000 of
the increase.
Gross Profit - Rental
Gross profit on rental revenues, as a percentage of revenues, was 43% in fiscal
1997 and fiscal 1996. HRC's gross profit increased to 44%, compared to 43% in
fiscal 1996. The increase in HRC's gross profit percentage was primarily due to
increased rental activities, made possible partly from an increase of the
Company's rental equipment inventory and partly from industry-wide favorable
conditions, off set by higher sub-rental costs to support the substantial
increases in rental demand. In addition, $1,403,000 of increased depreciation
expenses were incurred in connection with additions to the rental equipment
inventory and the acquisition of Duke City, since its acquisition in the third
quarter of fiscal year 1997.
Gross Profit - Sales
Gross profit, as a percentage of sales, was 32% in fiscal 1997 as compared to
36% in fiscal 1996. The decrease was primarily due to an increase in lower-
margin production supply sales in fiscal 1997. Gross profit on equipment sales,
as a percentage of sales, decreased to 38% in fiscal 1997 from 39% in fiscal
1996 primarily due to a decrease in sales of higher-margin retail products.
Selling, General and Administrative
Selling, General and Administrative expenses including provision for doubtful
accounts receivable increased $3,780,000 in 1997 from $8,849,000 to $12,629,000.
As a percentage of sales such expenses decreased 2% to 27% in 1997, compared to
29% in 1996. The dollar increase is primarily due to the acquisitions of Duke
City and MLS as well as a general increase in the Company's overall operations
resulting in higher payroll, sales commission and bonus expenses.
Interest
Interest expense for fiscal 1997 was $2,763,000, an increase of $612,000 or 28%
from $2,151,000 in fiscal 1996. The increase is attributable to increased
indebtedness in fiscal 1997 incurred to fund the Company's growth including
capital asset acquisitions to increase the Company's rental equipment inventory.
Interest income in fiscal 1997 was $88,000, a decrease of $19,000 from $107,000
in fiscal 1996.
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Income Taxes
The Company recognized a provision for income taxes on income before
extraordinary item of $748,000 fiscal 1997 compared to $35,000 in fiscal 1996.
The Company's effective tax rate for fiscal 1997 was 30% compared to 3% in
fiscal 1996, on income before extraordinary item. The difference between the
effective tax rates is attributable to substantially lower recognition of net
operating loss carryforwards in fiscal year 1997 compared to fiscal 1996.
Extraordinary Loss on the Early Extinguishment of Debt
The Company incurred an extraordinary loss on the early extinguishment of debt
during fiscal 1997 of $194,000, net of income tax benefit of $130,000. These
costs were incurred as a result of the early repayment of the Company's senior
subordinated note to ING.
Year ended September 30, 1996, compared
to year ended September 30, 1995
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Revenues from Rental Operations
Revenues from rental operations were $14,125,000 in fiscal 1996, an increase of
$1,328,000 or 10% 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.
Net Product Sales
Net equipment and supply sales for fiscal 1996 were $16,079,000, an increase of
$1,525,000 or 11% from $14,554,000 in fiscal 1995. Equipment sales increased
by $978,000 or 8% 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.
Gross Profit - Rental
Gross profit on rental revenues, as a percentage of revenues, was 43% in
fiscal 1996 as compared to 41% in fiscal 1995. HRC's gross profit increased
to 43%, compared to 41% 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.
Gross Profit - Sales
Gross profit, as a percentage of sales, was 36% in fiscal 1996 as compared to
31% in fiscal 1995. Gross profit on equipment sales, as a percentage of
sales, increased to 39% in fiscal 1996 from 35% in fiscal 1995. The
increase was primarily due to a 8% increase in equipment sales in fiscal 1996,
and to increased sales of the Company's higher margin products, which were
introduced in fiscal 1995.
Selling, General and Administrative
Selling, General and Administrative expenses including provision for doubtful
accounts receivable were 29% as percentage of sales in fiscal 1996, as compared
to 28% in fiscal 1995. The dollar increase is primarily due to higher payroll,
allowance for doubtful accounts receivable, sales commission and bonus expenses,
a significant portion of which resulted from the Company's generally increased
business.
9
<PAGE>
Interest
Interest expense for fiscal 1996 was $2,151,000, an increase of $23,000 or 1%
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.
Also, 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% 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.
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, 1997, the Company financed its
operations primarily through bank borrowings and internally generated funds.
The Chase Bank Facility
On July 27, 1995, the Company and its then principal subsidiaries (the
"Borrowers") entered into an agreement for a senior secured revolving credit
facility with The Chase Manhattan Bank (the "Chase Facility"), in an aggregate
principal amount of up to $17 million.
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.
On August 14, 1997, the Borrowers (including Duke City, which became a
Borrower, as of that date) amended and restated its senior secured revolving
credit facility with The Chase Manhattan Bank (the "Amended Chase Facility"), as
agent for a syndicate of lenders ("Bank").
The Amended Chase Facility provides for revolving credit loans in an aggregate
principal amount not in excess of $50 million at any time outstanding. The
proceeds of the Amended Chase Facility may be used, 1) for general working
capital purposes, 2) to finance the repayment of certain capitalized lease
obligations, 3) to repay in full certain subordinated debt, 4) for the financing
of future acquisitions with $10 million designated for such activities, and 5)
to repurchase securities of the Company, with $5 million designated for such
activities, all within the limits specified in the agreement.
Interest on outstanding borrowings under the Amended Chase Facility at the
Company's choice is at LIBOR plus a maximum of 2.75% or the greater of (i) Chase
Manhattan Bank's Prime Rate plus a maximum of .75%, (ii) the Base CD Rate (as
determined by the Bank) plus a maximum of 1.75% or (iii) the Federal Funds
Effective Rate plus a maximum of 1.25%. In each case, the interest margin
charged on outstanding loans may be reduced if specified ratios are achieved by
the Company. In addition, the Company pays interest at a rate from three-
eight's of one percent to one-half of one percent on the unused credit
commitment.
10
<PAGE>
The Amended Chase Facility matures August 14, 2002. The Amended Chase Facility
requires the Company to maintain certain levels of net worth and on a quarterly
basis certain levels of EBITDA (earnings before interest, taxes, depreciation
and amortization), and to meet several financial ratios including interest
coverage and debt-to-EBITDA.
The Amended Chase Facility provides for annual capital expenditure limits of
$9.0 million in fiscal 1997 and from $7.8 million to $8.6 million, for the
fiscal years thereafter. Amounts (up to $2.0 million) permitted to be expended
in a given fiscal year may be carried over (if not spent) and expended in the
succeeding fiscal year. In addition, the annual limits will be increased by 25%
in years when specified ratios have been achieved.
At September 30, 1997, the Company had an outstanding principal balance of
$28,622,000 and had $10,229,000 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.
The Company is also contingently liable to Chase Bank for an open Letter of
Credit of $535,000.
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, with respect to
the number of shares underlying the ING Warrant. The ING Warrant required 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
(a "Qualifying Offering").
The Company amended these agreements in April 1996 primarily to 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 provided for a $100,000 subordinated note
maturing July 27, 2005, and a $4,900,000 subordinated note maturing July 27,
2000.
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 of the Company), to certain piggy back
registration rights with respect to the shares of common stock issuable upon
11
<PAGE>
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.
On September 29, 1997, the Company prepaid the $4,900,000 Subordinated Note with
the anticipated maturity date of July 27, 2000. In connection with this
prepayment, the Company and ING extended the date for the Qualifying Offering to
December 31, 1999. The amendment of the ING related documents (but not the
prepayment of the $4,900,000 Subordinated Note) become effective upon approval
by the Bank, which approval the Company expects to receive.
Working Capital - Cash Flows
At September 30, 1997, the Company's working capital was $9,662,000 which was an
increase of $1,709,000 from its working capital at September 30, 1996.
In fiscal 1997, the Company generated cash from operating activities of
$2,216,000. The major contributor to cash from operating activities was earnings
before depreciation and amortization of $6,215,000. Partially offsetting the
major contributor to cash from operating activities was an increase in trade
accounts receivable of $2,037,000 and inventory of $2,365,000, as a result of a
general increase in business activity and expansion of companies acquired during
fiscal year 1997.
In fiscal 1997, the Company primarily utilized cash from operating activities of
$2,216,000, augmented by additional borrowings from the Company's bank line of
$14,065,000, to finance the acquisition of capital equipment and to pay down
subordinated debt of $4,900,000 and other debt assumed in acquisitions made in
fiscal year 1997. The major components of the net capital equipment additions
were equipment for the Company's video equipment rental operations of
approximately $3,754,000 and equipment additions to other rental operations of
approximately $4,051,000.
During the next twelve months, the Company expects to purchase new capital
equipment to allow its operations to be more efficient, support growth and to
minimize the sub-rental of equipment necessary to meet customer orders. The
Company expects to finance its capital acquisition program through a combination
of cash generated from operations and additional borrowings under the Amended
Chase Facility. The Company believes it will have sufficient funds from
operations and bank borrowings to meet its anticipated requirements for working
capital during the next twelve months.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this Form 10-K
to make applicable and take advantage of safe harbor provisions of the Private
Security Reform Act of 1995 for any forward looking statements made by, or on
behalf of, the Company. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. From time to time, the Company may publish or otherwise
make available forward-looking statements of this nature. All such subsequent
forward-looking statements, whether written or oral, and whether made by or on
behalf of the Company, are also expressly qualified by these cautionary
statements. Certain statements contained herein are forward-looking statements
and accordingly involve risk and uncertainties which could cause actual results
or outcomes to differ materially from those expressed in the forward-looking
statements.
12
<PAGE>
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.
13
<PAGE>
PART III
ITEM 10. DIRECTORS; EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Carlos D. De Mattos/(5)/ 45 Chairman of the Board, Chief Executive Officer,
President, Chief Financial Officer
Edward Phillips/(5)/ 51 Director, President of Studio Equipment
Ernst F. Nettmann 58 Director, President of Electronics
Jack Brehm/(1)(2)(3)(4)/ 69 Director
John H. Donlon/(1)(2)(3)(4)/ 52 Director
Jerome E. Farley/(1)(2)(3)(4)/ 56 Director
Benjamin P. Giess/(1)(2)(3)(4)(5)/ 35 Director
John F. Jastrem/(1)(2)(3)(4)/ 42 Director
John Alonzo 63 Director
Gary S. Borman 40 Vice President, Corporate Controller
(Principal Accounting Officer)
Kenneth W. Kramer 39 Vice President, Development and Operations
Carly Barber 42 President of HRC
Robert M. Johnston 37 President, Expendable Supply Store Division
of Studio Equipment
Jay Lefkovitz 45 President of Duke City
- ---------------------------------------------------------------------------------------------
/(1)/ Member of 1994 Stock Option Plan
for Directors Committee.
/(2)/ Member of 1994 Stock Option Plan
Committee.
/(3)/ Member of Audit
Committee
/(4)/ Member of Compensation
Committee
/(5)/ Member of Executive Committee
</TABLE>
The term of office of all directors is until the next annual meeting, which is
scheduled for March 18, 1998, 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-
14
<PAGE>
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 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 was co-founder of the Company and 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 continuously
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 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 Zegarelli Group International,
Inc., a Nasdaq listed corporation, which manufactures and distributes
professional hair 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. From 1979 to 1997 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 was 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 Nasdaq listed
corporation with revenues in excess of $100 million. 4MC employs over 700 people
worldwide, principally at its facilities in Universal City, 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.
15
<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, as well as TransCare
Corporation, a privately held ambulance operator.
JOHN F. JASTREM was elected a director of the Company in September 1995. He
serves as a management consultant to major business enterprises. From 1996 to
1997, he served as 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. From 1993 to 1995 Mr. Jastrem was
President and Chief Operating Officer of Acme Holdings, Inc. and Acme
Acquisition Corp. (currently Rental Services 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 LLP.
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, and as Vice President since March 1997. 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.
KENNETH W. KRAMER joined the Company in December 1996 as Vice President,
Developments and Operations. Prior to joining the Company, Mr. Kramer was
employed by Technicolor Video Services, Inc., from February 1995 to December
1996, where he served as Senior Vice President and Chief Financial Officer.
From June 1981 to February 1995 Mr. Kramer was a senior manager for Ernst &
Young, LLP, serving in their Chicago, National/Cleveland and Los Angeles
offices.
CARLY BARBER, President, HRC. Ms Barber joined the Company in March of 1986.
From 1984 to 1986, Ms Barber was the manager of Cinepro, a Panavision
expendables, camera, lighting and grip company. From 1981 to 1984, Ms. Barber
worked for Samuelsons Film Services, an international supplier of rental
cameras and lighting equipment as a representative of the company on production.
ROBERT M. JOHNSTON, President, Expendable Supply Store. Mr. Johnston joined the
Company in October 1996. Prior to joining the Company, he was a consultant, with
responsibility for the marketing and sales of production supplies and products,
to William F. White, LTD, Canada's largest supplier of television, motion
picture and theatrical equipment.
JAY LEFKOVITZ, President, Duke City. Mr. Lefkovitz joined the Company in May
1997. Mr. Lefkovitz co-founded Duke City in 1979 and was President and Chief
Executive Officer of Duke City, with responsibility for all day-to-day
operations of Duke City.
16
<PAGE>
Remuneration of Directors
During fiscal 1997 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 preceding fiscal year.
To the best of the Company's knowledge, based solely on review of copies of such
reports furnished to the Company during the fiscal year ended September 30,
1997, all Section 16(a) filing requirements applicable to the Company's
officers, directors and greater than ten percent stockholders were complied
with, except: due to administrative errors: (i) the Form 3 filed by Mr. Gary
Borman with respect to 60,000 options to purchase the Company's common stock
granted in March, 1997, was filed after its due date, (ii) the Form 3 filed by
Mr. Ken Kramer with respect to 60,000 options to purchase the Company's common
stock granted in March, 1997, was filed after its due date, (iii) the Form 4
filed by Mr. Kramer with respect to 5,000 shares of the Company's common stock
acquired in September, 1997, was filed after its due date, and (iv) no Form 3
has been filed by Ms. Carly Barber.
ITEM 11. EXECUTIVE COMPENSATION
The table which follows sets forth all cash compensation paid and/or accrued for
services rendered in all capacities with respect to the fiscal year ended
September 30, 1997, to the Chief Executive Officer and each of the Company's
five highest paid executive officers whose total salary and bonus equals or
exceeds $100,000:
17
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
AWARDS PAYOUTS
Other
Name and Principal Year Salary Bonus Annual Restricted Securities LTIP All Other
Position ($) ($) Compen- Stock Underlying Pay- Compen-
sation Awards Options/ outs ($) sation
($) ($) SARs (#) ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carlos D. De Mattos, 1997 351,421 140,568 - - - - 1,230
Chairman; Chief 1996 263,425 50,000 - - - - 1,462
Executive Officer; 1995 225,866 - - - 200,000 - 1,828
President; Chief
Financial Officer
Edward Phillips, 1997 295,747 118,299 - - - - 1,512
Director; 1996 263,425 100,000 - - - - 1,799
President of Studio 1995 225,866 - - - 200,000 - 2,249
Equipment
Carly Barber, 1997 111,291 23,000 - - - - 1,094
President of HRC 1996 88,002 7,000 - - 15,000 - 1,219
1995 83,189 - - - - - -
Gary S. Borman, 1997 100,769 30,203 - - 30,000 - 900
Vice President, 1996 48,462 6,000 - - 30,000 - 21
Corporate Controller 1995 - - - - - - -
</TABLE>
ALL OTHER COMPENSATION - This represents Company contributions to the 401(k)
plan.
18
<PAGE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS FOR THE YEAR ENDED SEPTEMBER 30, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Individual Grants
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Name Number of Percentage Exercise Expir- Potential
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%
- -----------------------------------------------------------------------------------------------------------------------------------
Gary S. Borman 30,000 8% $ 2.50 March, $ 33,000 $ 83,000
2004
- -----------------------------------------------------------------------------------------------------------------------------------
OPTION/SAR EXERCISES AND FY-END VALUE TABLE
- -----------------------------------------------------------------------------------------------------------------------------------
Name Shares ($) Value (# of Shares) Under- Value of
Acquired Realized lying Unexercised Unexercised
On Options and SARs In-the-Money
Exercise Exercisable/ Options and SARs
Unexercisable at FY-End ($)
Exercisable/
Unexercisable
- -----------------------------------------------------------------------------------------------------------------------------------
Carlos D. De Mattos - - 207,000/67,000 $ 309,000 /$ 92,000
Edward Phillips - - 207,000/67,000 $ 309,000 /$ 92,000
Carly Barber - - 27,000/9,000 $ 51,000 /$ 21,000
Gary S. Borman - - 6,000/54,000 $ 14,000 /$ 113,000
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a)The table below shows as of December 17, 1997 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:
19
<PAGE>
<TABLE>
<CAPTION>
Number of
Name and Address of Shares Beneficially Percentage of
Beneficial Owners/1/ Owned Common Stock/8/
-------------------- ------------------- ---------------
<S> <C> <C>
Carlos D. De Mattos 2,123,784/9/ 19.3%
Edward Phillips 2,123,784/10/ 19.3%
Ernst F. Nettmann 105,000/11/ 1 %
Jack Brehm/(2)/ 17,000/12/ *
John H. Donlon/(4)/ 15,000/13/ *
Jerome E. Farley/(3)/ 15,000/14/ *
Benjamin P. Giess/(5)/ 4,137,464/15/ 37.7%
ING Equity Partners, 4,137,464/16/ 37.7%
L.P.I /(6)/
John F. Jastrem/(7)/ 15,000/17/ *
John A. Alonzo 10,000/18/ *
Gary S. Borman 6,000/19/ *
Kenneth W. Kramer 7,000 *
Carly Barber 27,000/20/ *
- -------------------------------------------------------------------------------
All officers and directors
as a group (12 persons) 8,602,032 78.3%
</TABLE>
* Less than 1%
- -------------------------------------------------------------------------------
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, 3111 North Kenwood
Street, Burbank, California 91505.
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.
7
This individual's address is: 1913 Ripley Avenue, Redondo Beach, California
90278.
8
Based on 10,988,806 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 options to
purchase 207,333
20
<PAGE>
shares of the Company's common stock.
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 options to purchase 207,333 shares of the
Company's common stock.
11
Includes options to purchase 100,000 shares of the Company's common stock.
12
Includes options to purchase 15,000 shares of the Company's common stock.
13
Represents options to purchase 15,000 shares of the Company's common stock.
14
Represents options to purchase 15,000 shares 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 exercise 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, to purchase 15,000 shares of the Company's common
stock, as consideration for services of its appointee, Benjamin P. Giess.
17
Includes options to purchase 15,000 shares of the Company's common stock.
18
Represents options to purchase 10,000 shares of the Company's common stock.
19
Represents options to purchase 6,000 shares of the Company's common stock.
20
Includes options to purchase 27,000 shares 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.
21
<PAGE>
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 Chief Executive Officer, President and Chairman of the Board for a
three-year term commencing July 1, 1995, at an annual base salary of $257,000.
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.
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,
shareholder approval of these options was required. At the Company's annual
shareholder meeting held on May 30, 1996, the shareholders approved these
options.
Effective as of October 1, 1997, the Employment Agreement with Mr. De
Mattos was amended (as amended, the "De Mattos Agreement") by the Compensation
Committee. The term of the employment under the De Mattos Agreement will expire
September 30, 2000 but, similar to the July 1, 1995 Employment Agreement, Mr. De
Mattos has agreed to provide consulting services to the Company for a period of
five years following the termination date, at 50% of the base salary. The base
salary under the De Mattos Agreement was increased to $400,000 and will increase
10% at each anniversary date. Mr. De Mattos will receive an incentive bonus for
fiscal year 1998 ranging from 20% to 100% of his base salary, based upon
attainment by the Company of specific earnings per share levels (described in
more detail in the De Mattos Agreement). The annual incentive bonus for fiscal
years 1999 and 2000 will be based on performance levels to be established by the
Company's Compensation Committee. As part of the amendment, options to purchase
an additional 100,000 shares of the Company's common stock at an exercise price
of $4.74 per share were granted to Mr. De Mattos. These options are in addition
to the options to purchase 200,000 shares of the Company's common stock granted
under the July 1, 1995 Employment Agreement. These additional options will vest
at one-third increments on October 1, 1998 and on the next two successive
anniversaries of that date, and were granted under and are subject to the terms
of the Company's 1994 Stock Option Plan. The De Mattos Agreement has been
approved by unanimous vote of the independent directors on the Compensation
Committee of the Company's Board of Directors. Further, the agreement is to be
submitted to the full Board for approval and is expected to be approved.
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 10% at
each anniversary date 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, shareholder approval of these options was required.
At the Company's annual shareholder meeting held on May 30, 1996, the
shareholders approved these options. 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 1997 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.
22
<PAGE>
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, certain 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. Until May 30, 1997, the executive office, showroom and
warehouse of HRC in Sun Valley, California, was 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.
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.
23
<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 - Form 8-K dated August 14, 1997 was filed during the
last quarter of the period covered by this report.
(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.
24
<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, 1997, to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: December 26, 1997 MATTHEWS STUDIO EQUIPMENT GROUP
/s/ Carlos D. De Mattos
----------------------------
Carlos D. De Mattos
Chairman of the Board, Chief Executive Officer,
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, Chief Executive Officer, December 26, 1997
- -----------------------------
Carlos D. De Mattos President, Chief Financial Officer
/s/ Edward Phillips Director, President of Matthews Studio December 26, 1997
- -----------------------------
Edward Phillips Equipment, Inc.
/s/ Jack Brehm Director December 26, 1997
- -----------------------------
Jack Brehm
/s/ John H. Donlon Director December 26, 1997
- -----------------------------
John H. Donlon
/s/ Jerome E. Farley Director December 26, 1997
- -----------------------------
Jerome E. Farley
/s/ Benjamin P. Giess Director December 26, 1997
- -----------------------------
Benjamin P. Giess
/s/ John F. Jastrem Director December 26, 1997
- -----------------------------
John F. Jastrem
/s/ John A. Alonzo Director December 26, 1997
- -----------------------------
John A. Alonzo
/s/ Gary S. Borman Vice President, Corporate Controller December 26, 1997
- -----------------------------
Gary S. Borman (Principal Accounting Officer)
</TABLE>
25
<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, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended September 30,
1997, 1996 and 1995 F-5
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1997, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the years ended
September 30, 1997, 1996 and 1995 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, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended September 30, 1997. 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, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended September 30, 1997, 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 12, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands)
September 30
1997 1996
---------- ----------
<S> <C> <C>
ASSETS :
Current Assets:
Cash and cash equivalents $ 393 $ 462
Accounts receivable less allowance for
doubtful accounts of $745 in 1997
and $480 in 1996 9,144 5,145
Current portion of net investment in finance
and sales-type leases (Note 3) 829 794
Inventories (Note 2) 7,844 4,961
Prepaid expenses and other current assets 923 481
Income tax refund receivable 645 -
Deferred income taxes (Note 5) 894 464
---------- ----------
Total current assets 20,672 12,307
Property and Equipment (Notes 1 & 7):
Rental equipment 47,169 32,280
Manufacturing equipment and tooling 1,952 1,872
Office furniture and equipment 3,627 2,438
Land and building 2,131 -
Leasehold improvements 1,112 963
---------- ----------
55,991 37,553
Less accumulated depreciation and amortization 20,804 17,214
---------- ----------
Property and equipment, net 35,187 20,339
Net investment in finance and sales-type leases,
less current portion 455 865
Goodwill (Note 10) 4,052 -
Other assets 1,505 973
---------- ----------
Total assets $ 61,871 $ 34,484
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
($ in thousands)
<TABLE>
<CAPTION>
September 30
1997 1996
-------- --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 5,241 $ 2,603
Accrued liabilities 2,950 1,626
Current portion of long-term debt (Notes 4 & 7) 693 -
Current portion of capital lease obligations (Note 7) 2,126 125
------- -------
Total current liabilities 11,010 4,354
Long-term debt, less current portion (Note 4) 31,859 18,619
Notes payable to related parties (Notes 4 & 10) 956 -
Capital lease obligations, less current portion (Notes 4 & 7) 3,900 295
Deferred income taxes (Note 5) 2,976 2,142
Commitments and contingencies (Note 8)
Shareholders' equity (Note 6):
Preferred stock, no par value, authorized
1,000,000 shares; issued and outstanding
one share in 1997 and 1996 - -
Common stock, no par value, authorized
20,000,000 shares; issued and
outstanding shares 10,632,000 in 1997
and 10,331,000 in 1996 6,168 5,584
Retained earnings 5,002 3,490
------- -------
Total shareholders' equity 11,170 9,074
------- -------
Total liabilities and shareholders' equity $61,871 $34,484
======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Consolidated Statements of Operations
($ in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended September 30
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues from rental operations $ 25,589 $ 14,125 $ 12,797
Net product sales 20,769 16,079 14,554
----------- ----------- -----------
46,358 30,204 27,351
Costs and expenses:
Cost of rental operations 14,519 8,016 7,496
Cost of sales 14,081 10,257 9,992
Selling, general and administrative 12,360 8,554 7,449
Provision for doubtful accounts
receivable 269 295 157
Interest 2,675 2,044 1,990
----------- ----------- -----------
43,904 29,166 27,084
----------- ----------- -----------
Income before income taxes and
extraordinary item 2,454 1,038 267
Provision for income taxes (Note 5) 748 35 59
----------- ----------- -----------
Income before extraordinary item 1,706 1,003 208
Extraordinary loss on early extinguishment
of debt - net of income tax benefit of $130
in 1997 and $221 in 1995 (194) - (2,228)
----------- ----------- -----------
Net income (loss) $ 1,512 $ 1,003 $ (2,020)
----------- ----------- -----------
Income (loss) per common share and
common equivalent share (Note 1):
Income before extraordinary item $ 0.16 $ 0.10 $ 0.02
Extraordinary loss on early
extinguishment of debt (0.02) - (0.22)
----------- ----------- -----------
Net Income (loss) per share $ 0.14 $ 0.10 $ (0.20)
=========== =========== ===========
Income (loss) per common share
assuming full dilution (Note 1):
Income before extraordinary item $ 0.15 $ 0.10 $ 0.02
Extraordinary loss on early
extinguishment of debt (0.02) - (0.22)
----------- ----------- -----------
Net income (loss) per share $ 0.13 $ 0.10 $ (0.20)
=========== =========== ===========
Weighted average number of
shares 12,526,000 10,328,000 10,314,000
=========== =========== ===========
</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, 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
Exercise of stock options 15 24 - 24
Issuance of common stock in
connection with the acquisition of
Duke City Video, Inc. 286 560 - 560
Net income - - 1,512 1,512
------- ------- -------- -------
Balance at September 30, 1997 10,632 $6,168 $ 5,002 $11,170
======= ======= ======== =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in thousands)
<TABLE>
<CAPTION>
Year ended September 30
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 1,512 $ 1,003 $ (2,020)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for doubtful accounts 269 295 157
Depreciation and amortization 4,703 2,896 2,829
Deferred income taxes 404 - (127)
Gain on sale of assets (330) (298) (349)
Extraordinary loss on early extinguishment of debt 194 - 1,613
Changes in operating assets and liabilities
net of effects from acquisitions (Note 10):
Accounts receivable (2,037) (1,402) (809)
Inventories (2,365) (406) 565
Net investment in leases 397 697 360
Prepaids and other assets (633) 73 (802)
Income tax refund receivable (645) 252 8
Accounts payable and accrued liabilities 747 1,588 (2,593)
------------- ------------ ------------
Net cash provided by (used in) operating activities 2,216 4,698 (1,168)
Investing activities:
Payment for acquisitions (Note 10) (437) - -
Purchase of property and equipment (9,660) (6,905) (4,107)
Proceeds from sale of property and equipment 621 1,116 930
------------- ------------ ------------
Net cash used in investing activities (9,476) (5,789) (3,177)
Financing activities:
Proceeds from exercise of stock options 24 17 2
Proceeds from borrowings 14,065 1,098 4,046
Repayment of borrowings (6,898)
------------- ------------ ------------
Net cash provided by financing activities 7,191 1,115 4,048
Net increase (decrease) in cash and cash equivalents (69) 24 (297)
Cash and cash equivalents at beginning of period 462 438 735
------------- ------------ ------------
Cash and cash equivalents at end of period $ 393 $ 462 $ 438
============= ============ ============
</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
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Schedule of noncash investing and financing
transactions:
Long-term loans incurred to acquire equipment $ 160 $ 143 $ 439
Issuance of warrants in connection with secured
debt financing - - 209
Common stock issued for acquired company 560 - -
Dissolution of Electronics partnership - - 780
Additional disclosures:
Cash paid during year for:
Interest 2,495 1,878 1,635
Income taxes 853 47 19
</TABLE>
See accompanying notes.
F-8
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements
1. ACCOUNTING POLICIES
Business
Matthews Studio Equipment Group (the Company) designs, manufactures, sells,
leases and rents audio, video, film and production equipment and accessories to
the motion picture, television, corporate, 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 supplies equipment such as lights, grip
lighting supports, professional video equipment, camera mounts, tripods,
pedestals, fluid heads, camera dollies, portable camera cranes, power generators
and production trucks. 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. In addition, the Company has
fully operational and equipment supplied sound stages and studios.
Principles of Consolidation
The financial statements include the accounts of the Company and its
subsidiaries. Material intercompany balances and transactions have been
eliminated.
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, corporate
video, 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.
Goodwill
The goodwill, which arose from acquisitions made during fiscal year 1997, is
amortized over a period of twenty five years.
F-9
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
Marketing and Advertising Expenses
Marketing expenses (including trade show and catalogue costs) are capitalized as
prepaid expenses and amortized over six to twenty four month periods. The
marketing expenses, including amortization of capitalized costs, for the years
ended September 30, 1997, 1996 and 1995 were $409,000, $234,000 and $413,000,
respectively. The advertising expenses (including media advertising and
promotions) for the years ended September 30, 1997, 1996 and 1995 were $175,000,
$139,000 and $146,000, 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:
Rental equipment 5 - 10 years
Buildings and improvements 10 - 40 years
Other fixed assets 5 - 10 years
Capital leases and leasehold improvements are amortized over the estimated
useful lives, or the term of the related leases, for improvements, 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
The Company recognizes revenue from rentals under operating leases in the week
in which they are earned and recognizes product sales upon shipment.
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.
Per Share Data
The computation of earnings per common and common equivalent shares is based
upon the weighted average number of common shares outstanding during the period
plus (in periods in which they have a dilutive effect) the effect of common
shares contingently issuable, primarily from the assumed exercise of stock
options and warrants to purchase common stock.
Prior to the year ended September 30, 1997, per share data had been computed
based on the weighted average number of shares of common stock outstanding as
dilutive options and warrants accounted for less than 3% of the outstanding
common shares, as a result of exercise prices of options and warrants in excess
of the existing market prices.
For the year ended September 30, 1997, earnings per share is computed under the
modified treasury stock method which assumes the exercise of all outstanding
stock options and warrants to purchase common stock, and the use of the assumed
proceeds thereof to purchase up to a maximum of 20% of the then outstanding
common stock of the Company. Excess
F-10
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
proceeds derived from the assumed purchase of such shares are assumed to be
utilized to reduce the outstanding balances of notes payable. As a result, for
purposes of determining primary earnings per share, net income is adjusted for
the hypothetical reduction in interest expense of $236,000, and $79,000 for
fully diluted earnings per share, for the year ended September 30, 1997, such
adjustments being made net of income taxes.
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. For the years ended September 30, 1997 and
1996 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.
Financial Statement Presentation
Certain balances from the September 30, 1996, financial statements have been
reclassified to conform to the September 30, 1997 presentation.
New Accounting Principles
Earnings per share: In February 1997, the Financial Accounting Standards Board
issued statement of Financial Accounting Standards No. 128, "Accounting for
Earnings Per Share" ("FAS 128") This statement establishes standards for
computing and presenting earnings per share (EPS) and applies to entities with
publicly held common stock or potential common stock. This Statement simplifies
the standards for computing earnings per share previously found in APB Opinion
No. 15, Earnings Per Share, and makes them comparable to international EPS
standards. It is effective for financial statements issued for periods ending
after December 15, 1997. The Company will adopt this new standard in fiscal
year 1998, and has not yet determined the potential impact on the financial
statements.
Comprehensive Income: In June 1997, the Financial Accounting Standards Board
issued statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for reporting
and displaying comprehensive income and its components (revenue, expenses, gains
and losses) in financial statements. FAS 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statements that is displayed
with same prominence as other financial statements. It is effective for fiscal
years beginning after December 15, 1997. The Company intends to disclose
the information required by FAS 130 beginning with its 1998 fiscal year.
F-11
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
Segment Reporting: In June 1997, the Financial Accounting Standards Board
issued statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information " ("FAS 131") This statement
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. It is effective for fiscal years beginning after December 15, 1997.
The Company intends to adopt this new standard in fiscal year 1998, and does
not believe that this statement will have significant impact on it financial
statements.
2. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
September 30
1997 1996
--------------------
(in thousands)
<S> <C> <C>
Raw materials and work in process $2,388 $2,747
Finished Goods 5,456 2,214
------ ------
$7,844 $4,961
====== ======
</TABLE>
F-12
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
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
1997 1996
---------------------------
(in thousands)
<S> <C> <C>
Minimum lease payments
receivable $1,398 $1,880
Unearned income (114) (221)
------ ------
Net investment in leases,
including current portion of
$829 in 1997 and
$794 in 1996 $1,284 $1,659
====== ======
</TABLE>
Future annual minimum lease payments receivable under finance and sales-type
leases are as follows at September 30, 1997 (in thousands):
<TABLE>
<S> <C>
1998 $ 853
1999 239
2000 122
2001 56
2002 and thereafter 128
------
$1,398
======
</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 the lessor of equipment and accessories used in the film, video,
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 $47,169,000 and $16,530,000, respectively, at September 30,
1997, and $32,280,000 and $13,772,000, respectively at September 30, 1996.
F-13
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30
-------------------------
(in thousands)
1997 1996
-------- --------
<S> <C> <C>
Revolving Credit Loan $28,622 $13,779
Senior subordinated notes 100 5,000
------- -------
28,722 18,779
Less unamortized discount - 160
------- -------
28,722 18,619
Bank and vendor notes payable, partially collateralized by land,
building, vehicles and equipment, payable in monthly installments,
with interest at approximately 6.4% to 10.4% due through 2016 3,830 -
Capital lease obligations, with interest at approximately 6.5% to 22.6%
due through 2002. 6,026 420
Notes payable to related parties, interest at 8% to 8.75% 956 -
------- -------
39,534 19,039
Less current portion 2,819 125
------- -------
$36,715 $18,914
======= =======
</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, in fiscal year 1995, the Company incurred an extraordinary loss of
$2,228,000 net of tax benefits, on the extinguishment of the debt to GECC.
F-14
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. 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
The Chase Manhattan Bank as agent for a syndicate of lenders, in an aggregate
principal amount of up to $17,000,000.
On August 14, 1997, the Company amended and restated its senior secured
revolving credit facility with The Chase Manhattan Bank (the "Amended Chase
Facility"), as agent for a syndicate of lenders ("Bank").
The Amended Chase Facility provides for revolving credit loans in an aggregate
principal amount not in excess of $50 million at any time outstanding. The
proceeds of the Amended Chase Facility may be used, 1) for general working
capital purposes, 2) to finance the repayment of certain capitalized lease
obligations, 3) to repay in full certain subordinated debt, 4) for the financing
of future acquisitions with $10 million designated for such activities, and 5)
to repurchase securities of the Company with $5 million designated for such
activities, all within the limits specified in the agreement.
Interest on outstanding borrowings under the Amended Chase Facility at the
Company's choice is at LIBOR plus a maximum of 2.75% or the greater of (i) Chase
Manhattan Bank's Prime Rate plus a maximum of .75%, (ii) the Base CD Rate (as
determined by the Bank) plus a maximum of 1.75% or (iii) the Federal Funds
Effective Rate plus a maximum of 1.25%. In each case, the interest margin
charged on outstanding loans may be reduced if specified ratios are achieved by
the Company. In addition, the Company pays from three-eights of one percent to
one-half of one percent on the unused credit commitment.
The Amended Chase Facility matures August 14, 2002. The Amended Chase Facility
requires the Company to maintain certain levels of net worth and on a quarterly
basis certain levels of EBITDA (earnings before interest, taxes, depreciation
and amortization), and to meet several financial ratios including interest
coverage and debt-to-EBITDA.
The Amended Chase Facility provides for annual capital expenditure limits of
$9.0 million in fiscal 1997, and from $7.8 million to $8.6 million for the
fiscal years thereafter. Amounts (up to $2.0 million) permitted to be expended
in a given fiscal year may be carried over (if not spent) and expended in the
succeeding fiscal year. In addition, the annual limits will be increased by 25%
in years when specified ratios have been achieved.
At September 30, 1997, the Company had an outstanding principal balance of
$28,622,000 and had $10,229,000 available for borrowing under the facility, and
was in compliance with all covenants.
Borrowings under the Amended Chase Facility by the Company and its subsidiaries
are cross collateralized pursuant to a security agreement in which the Company
and its subsidiaries has granted the Bank a first priority lien in all of their
respective assets.
In connection with the amendment and restatement of the Chase Facility, the
Company incurred $562,000 of legal, bank fees and other related costs, which are
being amortized over the term of the facility.
F-15
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LONG TERM DEBT (CONTINUED)
The ING Equity Partners, L.P.I, Senior Subordinated Promissory Note
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, with respect to
the number of shares underlying the ING Warrant. The ING Warrant required 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
(a "Qualifying Offering").
The Company amended these agreements in April 1996 primarily to 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 provided for a $100,000 subordinated note
maturing July 27, 2005, and a $4,900,000 subordinated note maturing July 27,
2000.
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.
On September 29, 1997, the Company prepaid the $4,900,000 Subordinated Note with
the anticipated maturity date of July 27, 2000. In connection with this
prepayment, the Company and ING extended the date for the Qualifying Offering to
December 31, 1999. The amendment of the ING related documents (but not the
prepayment of the $4,900,000 Subordinated Note) become effective upon approval
by the Bank, which approval the Company expects to receive.
F-16
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
In connection with the early extinguishment of debt, the Company recognized a
loss of $194,000, net of tax benefits of $130,000.
Also on September 29, 1997, the Purchase Agreement was amended to conform with
financial covenants and capital expenditure and acquisition limits under the
Purchase Agreement to those of the Amended Chase Facility. Following
prepayment of the $4,900,000 subordinated note, the $100,000 subordinated note
accrues interest at the rate of 10% until maturity.
Under the above arrangements the Company is restricted from paying dividends on
its common stock.
The aggregate annual maturities of long-term debt, consist of the following at
September 30, 1997 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 693
1999 598
2000 101
2001 74
2002 28,695
thereafter 3,347
--------
$ 33,508
========
</TABLE>
5. INCOME TAXES
Significant components of the Company's deferred tax liabilities
and assets are as follows:
<TABLE>
<CAPTION>
September 30
1997 1996
---------- ----------
<S> <C> <C>
(in thousands)
Deferred tax liabilities:
Tax depreciation in excess of book depreciation $ 3,773 $ 3,167
Leasing income 551 563
Other 98 43
--------- ---------
Total deferred tax liabilities 4,422 3,773
Deferred tax assets:
Net operating loss carryforwards 560 1,173
Alternative minimum tax credit carryforwards 862 654
ITC credit carryforwards 148 148
Allowance for doubtful accounts receivable 237 207
Excess of tax basis over financial statement basis
of inventory 347 263
Other accruals 258 -
Valuation allowance (72) (350)
--------- ---------
Total deferred tax assets 2,340 2,095
--------- ---------
Net deferred tax liabilities $ 2,082 $ 1,678
========= =========
</TABLE>
F-17
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes on income (loss) before extraordinary
item is as follows:
<TABLE>
<CAPTION>
September 30,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
(in thousands)
Current :
Federal $ 209 $ 25 $ 143
State 135 10 16
------- ----- ------
344 35 159
Deferred:
Federal 335 - (171)
State 69 - 71
------- ----- ------
404 - (100)
------- ----- ------
$ 748 $ 35 $ 59
====== ===== ======
</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, 1997 September 30, 1996 September 30, 1995
AMOUNT PERCENT Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates $ 834 34 % $ 353 34 % $ 91 34 %
State income taxes, net of
federal tax benefit 147 6 - - 11 4
Permanent differences 37 1 41 4 21 8
Reduction in valuation
allowance on NOL
carryforwards (264) (11) (458) (44) - -
AMT rate differences (carry-
forwards) - - 35 3 (66) (25)
Provision to return items:
Additional depreciation - - 20 2
Tax effect of Electronics
dissolution - - 31 3
Other - - 13 1
Other - net (6) - - - 2 1
------- ------ ------- ------ ------- -----
$ 748 30 % $ 35 3 % $ 59 22 %
======= ====== ====== ====== ======= =====
</TABLE>
F-18
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
At September 30, 1997, the Company has alternative minimum tax credit
carryforwards, with no expiration date, of $862,000, and federal net operating
loss carryforwards of approximately $1,645,000, that expire principally in the
year 2010.
F-19
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. SHAREHOLDERS' EQUITY
At September 30, 1997, 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 EXERCISE PRICE
ISSUABLE
- ----------------------------- ----------------- ------------ ---------------
<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 115,000 $2.75-$4.13
to May 2002
1989 Plan February 1999 300,750 $1.00-$3.75
1994 Plan March 2004 828,300 $1.63-$4.38
1994 Directors' Plan March 2004 80,000 $1.75-$3.00
Options outside of Plans June 2005 415,000 $ 3.00
----------
Total number of common
shares issuable 4,161,514
==========
</TABLE>
Warrant
In connection with the ING transaction (see Note 4), the Company issued 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. As amended, 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 December 31,
1999. And, as part of the same July 27, 1995 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 the owner of an entity
with whom the Company has established a marketing arrangement.
Stock Options
At September 30, 1997, the Company has three stock-based compensation plans,
which are described below. The Company applies APB Opinion 25, Accounting for
Stock Issued to Employees, and related Interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its fixed stock
option plans.
In accordance with the statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, pro forma information regarding net
income and earnings per share has not been presented because the effect of the
employee stock option grants is immaterial in fiscal years 1997 and 1996.
F-20
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. SHAREHOLDERS' EQUITY (CONTINUED)
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.
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 1997 and 1996, no options were exercised under the 1994 Directors Plan.
The following summarizes the option activity related to the plans:
<TABLE>
<CAPTION>
1997 1996
--------------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE
DESCRIPTION (000'S) PRICE (000'S) PRICE
-------------------------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C>
Fixed Options:
Outstanding, at beginning of year 870 $2.37 675 $2.40
Granted 388 $2.65 304 $2.00
Exercised (15) $1.64 (17) $1.00
Forfeited (34) $3.02 (92) $1.80
----- ----
Outstanding at end of year 1,209 $2.44 870 $2.37
===== ====
Options exercisable at year-end 622 $2.47 533 $2.50
Weighted average fair value of exercisable
options at year-end $ .90 $ .69
</TABLE>
The weighted average remaining contract life of the plan options was 5.5 years
as of September 30, 1997.
At September 30, 1997, the range of prices of exercisable options under the
plans were $1.00 to $3.75.
F-21
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. SHAREHOLDERS' EQUITY (CONTINUED)
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 (see Note 8). During 1997 and 1996, none of these options were exercised.
At September 30, 1997, the Company has adequately reserved common shares to
cover all outstanding options and warrants.
7. LEASES
The Company leases certain of its manufacturing facilities under non-cancelable
operating leases with a company owned by certain officers/shareholders; such
leases expire in December 1999. The Company also leases its primary facilities,
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:
<TABLE>
<CAPTION>
September 30,
1997 1996
------------------------
<S> <C> <C>
(in thousands)
Property and equipment $ 5,933 $ 775
Less accumulated amortization 742 242
--------- ---------
$ 5,191 $ 533
========= =========
</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, 1997 (in thousands):
F-22
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statments (continued)
7. LEASES (CONTINUED)
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------------------------
<S> <C> <C>
1998 $2,379 $1,588
1999 2,159 1,202
2000 1,451 1,087
2001 639 701
2002 175 319
------ ------
6,803 $4,897
======
Amounts representing interest 777
------
Present value of net minimum lease
payments (including
current portion of $2,126) $6,026
======
</TABLE>
Rent expense under operating leases approximated $1,687,000 for 1997,
$1,661,000 for 1996, and $1,530,000 in 1995. Included in rent expense is rent
for property leased from certain officers/shareholders of $479,000, $479,000 and
$769,000, for the years ended September 30, 1997, 1996 and 1995, respectively.
F-23
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES
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. 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. 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, shareholder approval of these options was required.
At the Company's annual shareholder meeting held on May 30, 1996, the
shareholders approved these options.
Effective as of October 1, 1997, the Employment Agreement with Mr. De Mattos was
amended (as amended, the "De Mattos Agreement") by the Compensation Committee.
The term of the employment under the De Mattos Agreement will expire September
30, 2000 but, similar to the July 1, 1995 Employment Agreement, Mr. De Mattos
has agreed to provide consulting services to the Company for a period of five
years following the termination date, at 50% of the base salary. The base salary
under the De Mattos Agreement was increased to $400,000 and will increase 10% at
each anniversary date. Mr. De Mattos will receive an incentive bonus for fiscal
year 1998 ranging from 20% to 100% of his base salary, based upon attainment by
the Company of specific earnings per share levels (described in more detail in
the De Mattos Agreement). The annual incentive bonus for fiscal years 1999 and
2000 will be based on performance levels to be established by the Company's
Compensation Committee. As part of the amendment, options to purchase an
additional 100,000 shares of the Company's common stock at an exercise price of
$4.74 per share were granted to Mr. De Mattos. These options are in addition to
the options to purchase 200,000 shares of the Company's common stock granted
under the July 1, 1995 Employment Agreement. These additional options will vest
in one-third increments on October 1, 1998 and on the next two successive
anniversaries of that date, and were granted under and are subject to the terms
of the Company's 1994 Stock Option Plan. The De Mattos Agreement has been
approved by unanimous vote of the independent directors on the Compensation
Committee of the Company's Board of Directors. Further, the agreement is to be
submitted to the full Board for approval and is expected to be approved.
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 10% at
each anniversary date 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, shareholder approval of these options was required.
At the Company's annual shareholder meeting held on May 30, 1996, the
shareholders approved these options. 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.
In addition to the Purchase Agreement which the Company entered into with ING
(see Note 4), 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-24
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. 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 demand and 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.
The Company is from time to time named as a defendant in legal proceedings, 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.
9. 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.
10. ACQUISITIONS
The following acquisitions are included in the results of operations of the
Company beginning as of the effective date of the transactions.
Effective May 1, 1997, the Company acquired Duke City Video, Inc. ("Duke City"),
pursuant to stock exchange agreements dated as of May 2, 1997, among the
shareholders of Duke City and Duke City Holdings Inc., a wholly-owned subsidiary
of the Company. The acquisition was accounted for under the purchase method of
accounting for business combinations. Pursuant to the stock exchange agreements
the Duke City shareholders received 285,715 restricted and unregistered shares
of the Company's common stock in exchange for all of the common stock of Duke
City, in a transaction exempt from registration under the Securities Act of
1933. In connection with the transaction, the Company reissued a note payable to
an officer of Duke City in the amount of $580,000.
Effective January 1, 1997, the Company purchased the assets and business of
Media Lighting Supply, Inc., a lighting supply company in Miami, Florida. The
acquisition was accounted for under the purchase method of accounting for
business combinations. The acquisition was made for cash of $425,000. In
addition, the Company incurred debt of $1,505,000 related to the transaction.
Cash of $200,000 was paid on closing, with the remaining portion of the purchase
price becoming due in installments of $100,000, $100,000 and $25,000 on the
first, second and third anniversaries of the closing.
Effective June 1, 1997, the Company purchased the assets and business of
Centerline Stage & Studio Lighting, Inc. of Tempe Arizona. The acquisition was
accounted for under the purchase method of accounting for business combinations.
The acquisition was made for cash of $382,000 of which $237,000 was paid on
closing, with the remaining portion of the purchase price becoming due on
January 1, 1999. In addition, the Company assumed debt of $164,000 related to
the transaction.
In respect of the above acquisitions, the excess of purchase price over the fair
market value of net assets acquired ("goodwill") amounted to $4,074,000, and the
fair market value of assets acquired was $13,091,000. In connection with the
acquisitions the fair value of liabilities assumed was $16,168,000.
F-25
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. ACQUISITIONS (CONTINUED)
The pro forma results of operations for the years ended September 30, 1997 and
1996, assuming consummation of the purchases as of October 1, 1995, are
as follows:
<TABLE>
<CAPTION>
For the Year Ended September 30
1997 1996
------------------ ------------------
($ in thousands, except per share data)
<S> <C> <C>
Net revenue $52,958 $43,617
Net income before extraordinary item 1,003 903
Net income 809 903
Net income per common share primary 0.08 0.09
Net income per common share fully
diluted 0.07 0.09
</TABLE>
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. The Company makes
matching contributions between 20% and 50% of the participant's deferral
depending on the participant's annual salary up to a maximum of 6% of
compensation. The Company recognized expense under the plan of $77,000 in 1997,
$52,000 in 1996 and $29,000 in 1995.
In the fourth quarter of 1997, the Company incurred an extraordinary loss on the
extinguishment of the ING debt, of $324,000 before the related tax benefit of
$130,000.
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.
For the fiscal year ended September 30, 1997, a single rental customer accounted
for approximately 10.9% of total revenues.
F-26
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. SUBSEQUENT EVENTS
On October 17, 1997, the Company purchased the assets and business of Haehnle
Dwertman, Inc. (HDI), a grip, lighting and video camera rental company in
Covington, Kentucky and Cincinnati, Ohio. The acquisition was made for cash of
$800,000 and 350,000 restricted and unregistered shares of the Company's common
stock in exchange for all of the common stock of HDI, in a transaction exempt
from registration under the Securities Act of 1933. In addition, the Company
incurred debt of $1,511,000, and recorded $300,000 of goodwill relating to the
transaction. As part of the acquisition, the Company entered into real estate
leases with an affiliate of HDI, for Cincinnati, Ohio and Covington, Kentucky
facilities from which HDI's business was conducted. The Company is continuing to
operate the business acquired from HDI at those facilities.
On October 31, 1997, the Company purchased the assets and business of Olesen, a
theatrical supply company in Hollywood, California. The acquisition was made for
cash of $1,450,000 of which $1,000,000 of cash was paid on closing, with the
remaining portion of the purchase price becoming due in two equal installments
on October 31, 1999 and October 31, 2000. In addition, the Company incurred debt
of $605,000 and recorded goodwill of $690,000, relating to the transaction. As
part of the acquisition, the Company entered into real estate leases with
affiliates of Olesen, for facilities located in Hollywood, California from which
Olesen's business was conducted. The Company is continuing to operate the
business acquired from Olesen from those facilities.
The acquisition of both HDI and Olesen have been accounted for under the
purchase method of accounting for business combinations.
F-27
<PAGE>
Matthews Studio Equipment Group
<TABLE>
<CAPTION>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
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>
1997 ALLOWANCE FOR DOUBTFUL
ACCOUNTS $480 $269 $150 (B) $154 (A) $745
1996 Allowance for doubtful
accounts 297 295 - 112 (A) 480
1995 Allowance for doubtful
accounts 225 157 - 85 (A) 297
</TABLE>
(A) Uncollectible accounts written off.
(B) Amount assumed in connection with acquisitions.
F-28
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- ---------------------------------------------------------------------
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, incorporated by
reference to the Company's 8-K dated August 14, 1997.
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.
<PAGE>
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.
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,
<PAGE>
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, 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 (u) 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.
10 (v) Stock Exchange Agreement and Plan of Reorganization dated as of May 2,
1997, among Patricia M. Brusati, Harold Jay Lefkovitz, Louise K.
Lefkovitz, Stephen F. Ward, Duke City Video, Inc.and Duke City
Holdings, Inc., incorporated by reference from the Company's Form 8-K
filed May 2, 1997.
10 (w) Subordination Agreement made by Harold Jay Lefkovitz in favor of Chase
Manhattan Bank, as agent, incorporated by reference from the Company's
Form 8-K filed May 2, 1997.
10 (x) Stock Exchange Agreement dated as of May 2, 1997, between Duke City
Holdings, Inc. and John E. Hensch, incorporated by reference from the
Company's Form 8-K filed May 2, 1997.
10 (y) Amended and Restated Credit Agreement, incorporated by reference from
the Company's Form 8-K filed August 14, 1997.
11 Statements Re: Computation of Per Share Earnings
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.
<PAGE>
23 Consent of Independent Auditors covering the consolidated financial
statements for the fiscal year ended September 30, 1997.
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
Exhibit (11)-Statement Re: Computation of Earnings Per Share
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Computation of Primary and Fully Diluted Per Share Earnings
($ in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended
September 30,
1997
---------------
<S> <C>
PRIMARY PER SHARE EARNINGS:
Weighted average shares outstanding 10,456
Net effect of dilutive stock options and warrants 2,070
--------
Total 12,526
Net income $ 1,512
Reduction in interest expense resulting from the assumed
exercise of stock options and warrants to purchase
common stock and the assumed reduction of outstanding
notes payable, net of income taxes 236
--------
Net income, as adjusted $ 1,748
Per share amount $ 0.14
=======
FULLY DILUTED PER SHARE EARNINGS:
Weighted average shares outstanding 10,456
Net effect of dilutive stock options and warrants 2,070
--------
Total 12,526
Net income $ 1,512
Reduction in interest expense resulting from the assumed
exercise of stock options and warrants to purchase
common stock and the assumed reduction of outstanding
notes payable, net of income taxes 79
--------
Net income, as adjusted $ 1,591
========
Per share amount $ $0.13
========
</TABLE>
Note: the above computation is after the extraordinary loss on early
extinguishment of debt, which amounted to $0.02 per share.
<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 12, 1997, 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, 1997, filed with the Securities and
Exchange Commission.
S/Ernst & Young LLP
Los Angeles, California
December 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10 K
FOR PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 393
<SECURITIES> 0
<RECEIVABLES> 9,889
<ALLOWANCES> 745
<INVENTORY> 7,844
<CURRENT-ASSETS> 20,672
<PP&E> 55,991
<DEPRECIATION> 20,804
<TOTAL-ASSETS> 61,871
<CURRENT-LIABILITIES> 11,010
<BONDS> 0
0
0
<COMMON> 6,168
<OTHER-SE> 5,002
<TOTAL-LIABILITY-AND-EQUITY> 61,871
<SALES> 20,769
<TOTAL-REVENUES> 46,358
<CGS> 14,081
<TOTAL-COSTS> 28,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,675
<INCOME-PRETAX> 2,454
<INCOME-TAX> 748
<INCOME-CONTINUING> 1,706
<DISCONTINUED> 0
<EXTRAORDINARY> (194)
<CHANGES> 0
<NET-INCOME> 1,512
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
</TABLE>
