<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998 Commission file number 0-18102
MATTHEWS STUDIO EQUIPMENT GROUP
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(Exact name of registrant as specified in its charter)
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
_______________________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. Yes [X] No [ ]
At December 15, 1998, the aggregate market value of the Registrant's voting
stock held by nonaffiliates of the Registrant was approximately $10,812,812.
On December 15, 1998, Registrant's outstanding voting stock consisted of
9,130,856 shares of Common Stock, no par value.
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TABLE OF CONTENTS
PART I
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PAGE
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Item 1. BUSINESS...................................................... 3
Item 2. PROPERTIES.................................................... 8
Item 3. LEGAL PROCEEDINGS............................................. 8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 8
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................... 9
Item 6 SELECTED FINANCIAL DATA....................................... 9
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................... 11
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.......................................................... 20
Item 8. FINANCIAL STATEMENTS.......................................... 20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE........................ 20
PART III
Item 10. DIRECTORS; EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT........................................................... 21
Item 11. EXECUTIVE COMPENSATION........................................ 25
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................... 27
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 30
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K................................................... 31
SIGNATURES............................................................... 32
INDEX TO FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS'
REPORT................................................................... 33
INDEX TO EXHIBITS........................................................ 58
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Page 2 of 61
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PART I
ITEM 1. BUSINESS
Matthews Studio Equipment Group (the "Company") leases, rents, sells and
distributes essential audio, video, film and production equipment to the motion
picture, television, theatrical, 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 equipment such 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.
The Company has enhanced its available product lines through acquisitions. As a
result, in recent years, Matthews Studio Equipment Group has also become a major
supplier of video cameras and theatrical production equipment, as well as film
cameras, fully operational soundstages and studios, complete with equipment
needed for productions using these 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 source
outlet for production equipment. The Company won technical achievement awards
from the Academy of Motion Picture Arts and Sciences and from the Academy of
Television Arts and Sciences in 1986 and 1989, respectively; and an award from
the Society of Operating Cameramen in 1996 for its Cam-Remote(R) Systems.
Form and Year of Organization
The Company commenced to do business in 1970. In February 1989, the company
effected its initial public offering through a reverse acquisition (exchange of
stock and pooling of interest) with a California corporation named Captech, Inc.
In connection with its initial public offering, the Company changed its name to
Matthews Studio Equipment Group. Prior to the initial public offering, the
Company conducted business under the name Matthews Studio Equipment, Inc., as a
California corporation.
Rental Equipment
Production equipment, including grip, lighting and power generation. Hollywood
Rental Company, LLC ("HRC") and HDI Holdings, Inc. ("HDI"), each of which is
wholly owned by the Company, supply the motion picture and television industry
with a diverse range of production equipment, specializing in lighting and grip
equipment, power generators and production trucks on a rental basic.
HRC offers a complete line of all levels of lighting and grip equipment, pre-
packaged trucks and production vans, as well as varied supplies and services in
support of its production packages. Additionally, Hollywood Rental Generators,
a division of HRC, offers, on a rental basis, 40-foot and 45-foot production
vans and 200 amps to 3,000 amps tow generators to support the power demands
required in production environments. HRC has facilities in Burbank, California,
Orlando, Florida, Charlotte, North Carolina, Phoenix, Arizona and Albuquerque,
New Mexico.
HRC's Orlando, Florida facility is adjacent to the Disney production facilities
located in Orlando, Florida. HRC occupies the facility and rents its production
equipment pursuant to an arrangement entered in May 1998 between the Company and
Disney Production Services, Inc. ("Disney Production Services").
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HRC is the successor by merger to Hollywood Rental Co., Inc. through an internal
reorganization, with HRC having succeeded to all of the business, assets and
liabilities of Hollywood Rental Co., Inc.
In fiscal 1996, HRC 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, 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.
HDI also offers a complete line of all levels of lighting and grip equipment,
pre-packaged trucks and production vans, as well as film cameras. HDI operates
out of several locations in Ohio, Tennessee and Kentucky. HDI also operates a
fully operational soundstage and studio in Cincinnati, Ohio, complete with
equipment needed for productions.
HRC's and HDI's rentals vary from short periods of time to the complete duration
of the filming of a feature film or television series. HRC and HDI generally
issue their 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 and HDI's usual procedure is to require the lessees to furnish a
certificate of insurance providing for comprehensive coverage, including
liability, injury and property damage.
On a combined basis, HRC's and HDI's rental activities accounted for
approximately 29% of the Company's revenues in fiscal 1998. On an individual
basis, HRC's and HDI's rental activities accounted for approximately 25% and 4%,
respectively, of the Company's revenues in fiscal 1998.
Theatrical Production Equipment. In April 1998, the Company added theatrical
production equipment rental to its business, through the acquisition of Four
Star Lighting, Inc. ("Four Star").
Four Star supplies theatrical production equipment, including lighting, lighting
support and sound equipment, to the theatrical production industry. Four Star
is headquartered in Mount Vernon, New York and Four Star's equipment is
regularly used by Broadway production companies. When a Broadway show goes on
tour, Four Star's equipment often is rented by the production company for the
tour locations as well.
Rental terms for Four Star vary with the duration of the shows it supports and
in some cases extend beyond one year or more. Four Star 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. Four Star'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.
Four Star's rental activities accounted for approximately 8% of the Company's
revenues in fiscal 1998.
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 television broadcasting events. Duke City's equipment
inventory
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is diverse enough to handle its customers' needs for productions made inside the
studio as well as outside the studio (i.e., "on location" productions). Duke
City has six operating outlets located in Dallas, Texas, Albuquerque, New
Mexico, New York, New York, Orlando, Florida, Burbank, California and Nashville,
Tennessee. The Albuquerque location also houses a small videocassette
duplication facility that operates under the name "Duke City Dubs". The Orlando,
Florida facility of Duke City is adjacent to the facility occupied by HRC. Duke
City also occupies the facility and rents its professional broadcast video
equipment under the same arrangement between the Company and Disney Production
Services.
Duke City supports both short and long term rental projects, with invoices
issued at the conclusion of the rental or monthly for extended shows. The
lessee typically assumes 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. Duke City also generally 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 16% of the Company's
revenues in fiscal 1998.
Cam-Remote(R) and Mini-Mote(R) C.A.T.(R) Systems. Matthews Studio Electronics,
Inc., a wholly owned subsidiary of the Company ("Studio Electronics"),
manufactures and rents Cam-Remote(R) and Mini-Mote(R) C.A.T. Systems (the
"Systems") under short-term rental and long-term lease arrangements. The
business of Studio Electronics is being managed by E. F. Nettmann & Associates,
Inc. ("Nettmann") 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.
The Company 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 began to market and sell the Mini-Mote(R) C.A.T.(R) Systems.
Revenues from the aggregate of these activities accounted for approximately 1%
of the Company's revenues in fiscal 1998.
Long Term Leasing. Matthews Acceptance Corporation ("MAC"), a wholly owned
subsidiary of the Company, is engaged in the leasing of equipment on a long term
basis. MAC generally purchases equipment selected by a lessee and rents such
equipment to the lessee on a long term basis. Historically MAC's leases have
been of equipment manufactured by the Manufacturing Operations - See
"Disposition of Assets" below. At September 30, 1998, the MAC portfolio of
leases consisted of 13 leases and represented approximately $385,000 of lease
receivables. Revenues from this long term leasing segment represented less than
1% of the Company's revenues in fiscal 1998.
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Sales
Production and Theatrical 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,
draperies, light bulbs, tape, paint, gels, lubricants, lumber and other
miscellaneous items. Through the acquisition of Olesen, the Company added
theatrical supplies and products to its product sales in fiscal 1998. These
supplies are sold by Matthews Studio Sales, Inc., from facilities in Hollywood
and Burbank, California, Charlotte, North Carolina, and Miami and Orlando,
Florida. Sales from these supplies accounted for approximately 23% of the
Company's revenues in fiscal 1998.
Disposition of Assets
In September of 1998, the Company sold its grip equipment manufacturing
operations (the "Manufacturing Operations") to Phillips Associates, LLC
("Phillips Associates"), an affiliate of Mr. Edward Phillips. Mr. Phillips was
a co-founder of the Company and served as a director of the Company until the
sale of the Manufacturing Operations. The sale was effected through a sale of
all of the stock of Matthews Studio Equipment, Inc. ("Studio Equipment") to
Phillips Associates. See Item 13, Certain Relationships and Related
Transactions. In fiscal 1998, the Manufacturing Operations accounted for
approximately 22% of the Company's revenues.
Sales and Marketing
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
rental equipment to a wide range of customers.
Vendors and Suppliers
The Company purchases products, components, raw materials and services as
required from numerous suppliers, no one of which accounted for more than 10% of
the Company's purchases in fiscal 1998. The Company believes that there are
adequate alternative sources of supply at commercially reasonable rates for all
products (including grip equipment), materials and services required by its
operations.
Competition
The Company competes with numerous equipment rental companies, distributors,
manufacturers, and suppliers of production and/or theatrical equipment for
commercial use. The Company believes that some of these entities are larger and
better capitalized than the Company. The principal competitive factors in the
industries serviced by the Company are product quality, product availability,
product support services, innovation and pricing.
The Company is aware of three principal competitors in the theatrical rental
market. The Company's theatrical equipment operations also compete with
numerous small rental companies. The Company is aware of two principal
competitors in the video equipment rental market. 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
Page 6 of 61
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products allow it to compete favorably in each of its business lines. 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 supply of equipment for commercial use by the
entertainment production industry (i.e., the motion picture, television,
theatrical, corporate and video production industries) and the still photography
industry.
Patents, Trademarks, and Licenses
While the Company has procured a number of trademark registrations, and one
patent related to its Cam-Remote(R) System, the Company's business is not
dependent on such protection.
Impact of Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer-programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the fiscal Company expects to complete the upgrade
of its software in the second quarter of 1999 so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company presently believes that with upgrades the Year 2000 issue will not pose
significant operational problems for its computer systems. However, if such
conversions are not made, or are not completed timely, the Year 2000 issue could
have a material impact on the operations of the Company.
The Company will be initializing formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues. However, there can be no guarantee that
the systems of other companies on which the Company's systems rely will be
timely converted and would not have an adverse effect on the Company's systems.
The Company has determined it has no exposure to contingencies related to the
Year 2000 issue for the products it has sold.
The Company will utilize both internal and external resources to upgrade and
test the Company's software for Year 2000 modifications. The Company's total
Year 2000 project cost and estimates to complete include the estimated costs and
time associated with the impact of third party Year 2000 issues based on
presently available information. The total cost of the Year 2000 project has not
yet been estimated but it is not anticipated that such costs will be
significant. To date, the Company has not incurred any costs related to the
assessment of, and preliminary efforts on, its Year 2000 project and the
development of a modification plan, purchase of new systems and systems
modifications.
Employees
The Company had approximately 326 employees at September 30, 1998 (317 full-time
and 9 part-time). Four Star's employees (approximately 30) are represented by
the International Alliance of Theatrical Stage Employees, AFL-CIO, union and
Four Star has entered into contractual arrangements with such union in respect
of its employees that expire on December 31, 2002.
Page 7 of 61
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ITEM 2. PROPERTIES
In May 1997, the Company relocated its corporate and principal rental and sales
offices to a location with approximately 193,000 square feet in Burbank,
California. This 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 $46,000 under a lease scheduled to expire in 2002.
In addition, the Company leases from other unrelated parties an aggregate of
approximately 152,000 square feet of sales office, warehouse and showroom space
in (i) Burbank, California, (ii) Miami, Florida, (iii) Dallas, Texas, (iv)
Phoenix, Arizona, (v) Charlotte, North Carolina, (vi) Las Vegas, Nevada, (vii)
Nashville and Knoxville, Tennessee, (viii) Louisville, Kentucky and (ix) New
York, New York, at an aggregate monthly rent of approximately $80,000.
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.
The Company also leases approximately 49,000 square feet of office and
warehouse space in Hollywood, California, from an affiliate of the Vice
President of Marketing for Olesen at a monthly rent of approximately $17,000,
and approximately 43,000 square feet of office, warehouse, and soundstage and
studio in Covington, Kentucky and Cincinnati, Ohio, from an affiliate of the
president of HDI at an aggregate monthly rent of approximately $31,000.
During fiscal year 1997, the Company acquired, in the Duke City acquisition,
land and a building located in Albuquerque, New Mexico, which includes a
soundstage and studio, rental office, warehouse and showroom space. The Company
also acquired, as part of the Four Star acquisition, land and a building located
in Los Angeles, California which consists of office and warehouse space
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time named as a defendant in actions brought 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
Commencing November 18, 1998, the Company's common stock is included in the
Nasdaq SmallCap Market under the symbol "MATT". Prior to that time, the
Company's common stock was included in the Nasdaq National Market under the
symbol "MATT". On November 17, 1998, the Company submitted an application with
The Nasdaq Stock Market ("Nasdaq") to have the Company's common stock listed on
the Nasdaq SmallCap Market, as a result of Nasdaq's inquiry into whether the
Company met all requirements for continued listing on the Nasdaq National
Market. On January 5, 1999, Nasdaq approved the Company's application for
Nasdaq SmallCap Market listing.
As of December 15, 1998, there were 9,130,856 shares of common stock
outstanding, held by approximately 205 shareholders of record. The Company
believes there are in excess of 1,200 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)
<S> <C> <C>
(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
(Fiscal year 1998)
December 31, 1997 $ 4 3/4 $ 3 11/16
March 31, 1998 4 1/16 3 15/32
June 30, 1998 5 3/8 4
September 30, 1998 3 5/16 2 3/8
</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, 1998 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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SELECTED FINANCIAL DATA
(in thousands, except per share data)
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues from rental operations $ 33,317 $25,589 $14,125 $12,797 $12,944
Net product sales 27,954 20,769 16,079 14,554 12,482
-------- ------- ------- ------- -------
Total revenue 61,271 46,358 30,204 27,351 25,426
Gross profit - rental operations 13,043 11,070 6,109 5,301 6,018
Gross profit - sales 8,770 6,688 5,822 4,562 3,924
-------- ------- ------- ------- -------
Total gross profit 21,813 17,758 11,931 9,863 9,942
Income (loss) before extraordinary item (Footnote 2) 49 1,706 1,003 208 (478)
Net income (loss) (Footnote 2) 49 1,512 1,003 (2,020) (478)
Net income (loss) per common share - basic (Footnote 2):
Income (loss) before extraordinary item $ 0.00 $ 0.16 $ 0.10 $ 0.02 $ (0.05)
Extraordinary item - (0.02) - (0.22) -
Net income (loss) per share 0.00 0.14 0.10 (0.20) (0.05)
Net income (loss) per common share-diluted (Footnote 2):
Income (loss) before extraordinary item 0.00 0.15 0.10 0.02 (0.05)
Extraordinary item - (0.02) - (0.22) -
Net income (loss) per share 0.00 0.13 0.10 (0.20) (0.05)
Cash provided by (used in) operations $ 4,669 $ 2,216 $ 4,698 $(1,168) $ 1,207
Cash used in investing activities (42,420) (9,476) (5,789) (3,177) (1,160)
Cash provided by (used in) financing activities 37,689 7,191 1,115 4,048 (60)
EBITDA from operations (Footnote 1) 14,011 9,650 6,043 4,849 2,466
Total assets (Footnote 2) 94,386 61,871 34,484 30,703 31,223
Working capital (Footnote 2) 2,515 9,662 7,953 7,872 4,405
Net property and equipment (Footnote 2) 51,650 35,187 20,339 17,226 16,223
Long term debt and capital lease obligations (Footnote 2) 74,691 36,715 18,914 7,664 11,597
Shareholders' equity (Footnote 2) 2,613 11,170 9,074 8,054 9,893
</TABLE>
(1) EBITDA represents earnings before taxes, interest expense, depreciation and
amortization. The EBITDA for 1998 included the $3,963,000 gain on sale of
the Manufacturing Operations. The EBITDA for 1997 and 1995 are before the
extraordinary item. 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.
(2) During the year ended September 30, 1998, the Company adopted the Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No.
128") which established standards for computing and presenting earnings
per share for publicly-held common stock or potential common stock. All
periods presented reflect the adoption of SFAS No. 128 and the impact on
amounts previously reported was not material. The income and related per
share amounts shown above for fiscal year 1998 includes a $3,963,000 gain
on sale of the Manufacturing Operations. In addition, the balance sheet
data shown above in fiscal year 1998 reflects the disposition of the
Manufacturing Operations. The total assets and liabilities of the
Manufacturing Operations on the date of sale were approximately $10,561,000
and $6,610,000, respectively. The shareholders' equity was reduced by
$9,582,000, as a result of the retirement of Company common stock received
in the transaction.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
During fiscal 1998, the Company's principal strategy was to expand and
strengthen its equipment rental operations, and at the same time to discontinue
its Manufacturing Operations. Discontinuation (and disposition) of the
Manufacturing Operations was made due to the growing inherent conflicts between
the Company's expanding rental operations and the Manufacturing Operations,
where many of the Manufacturing Operations' customers competed directly against
the Company's rental operations. The Company's decision to dispose of the
Manufacturing Operations was also based on the availability of alternative
sources of supply, at commercially reasonable rates, for the equipment which was
being manufactured by the Manufacturing Operations.
The Company's business is also continuing to evolve to meet the ongoing
technological and business changes prevalent in the entertainment production
industry and competitive pressures.
Similar to prior fiscal years, in fiscal 1998 the Company continued to focus on
opportunities to provide its products and services from outlets located in
different parts of the United States as well as expanding its product lines.
The development of a marketing and distribution network in select geographic
marketplaces throughout the United States enabled the Company to improve rental
asset utilization and expand the Company's core businesses. These activities
were funded by cash generated from operating activities and bank borrowings.
The Company's strategy for the next fiscal year is to devote its cash generated
from operating activities and other financial resources toward expansion of its
marketing and distribution network, and strengthening of its existing
operations, including the acquisition of additional rental equipment to
supplement the Company's existing rental equipment inventory. The availability
of additional rental equipment enables the Company to expand its market share
and to control sub-rental costs, which are costs incurred to rent equipment from
third parties in order to meet Company customers' needs.
Company revenues for fiscal year 1998 increased to $61,271,000, an increase of
$14,913,000 or 32% over fiscal year 1997. In addition, EBITDA (earnings before
interest expense, income taxes, depreciation and amortization) increased to
$14,011,000 in fiscal 1998 as compared to $9,650,000 in fiscal 1997. The fiscal
1998 EBITDA includes a gain of $3,963,000 from the sale of the manufacturing
operations.
The Company achieved its growth through acquisitions and expansion of existing
operations. Revenues from operations acquired in fiscal year 1998 amounted to
$13,219,000. Company revenues also includes sales from the Manufacturing
Operations of $13,452,000 for the fiscal year 1998 and $12,688,000 for fiscal
year 1997. The Manufacturing Operations were divested near the 1998 fiscal
year end.
The Company realized a gain on the sale of the Manufacturing Operations of
$3,963,000, which partially offset the loss from operations of $4,789,000.
Operations were negatively affected by general conditions in the entertainment
production industry as well as by higher expenses associated with expanded
operations and costs to improve systems and absorb new operations.
The Company's revenues from rentals of production equipment in fiscal 1998 were
affected in part by the threat of a strike by the Screen Actors Guild and the
Federation of Television and Radio Artists (the "Actors' Unions"). While this
strike did not materialize, production activities decreased significantly during
the summer of 1998 in anticipation of the strike. The strike was averted by the
successful
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completion of new contracts for the Actors' Unions and production activities
began to increase thereafter, but the increase remained only gradual throughout
the fourth quarter of fiscal 1998. Another factor that affected the Company's
revenues from rentals of production equipment in fiscal 1998 was a general
decrease in the number of large budget motion pictures undertaken by the
entertainment production industry, which resulted in a general slowdown in the
production equipment rental industry.
Revenues from the Company's rental operations grew a combined 30%, and accounted
for 54% of total revenues of the Company. Approximately 16% in 1998 and 9% in
1997 of the Company's total revenues were from rentals of professional
broadcast/video equipment by Duke City, which was acquired in fiscal 1997.
Approximately 8% of the Company's total revenues was from rentals of theatrical
production equipment by Four Star, which was acquired during the third quarter
of fiscal 1998. The Company's rental revenues from rentals of production
equipment (i.e., grip, lighting and related production equipment) by HRC and HDI
represented the remaining 29% of the Company's revenues.
The increase in revenues from the Company's rental operations was attributable
primarily to the acquisitions of Four Star and HDI and to the addition of
equipment to the Company's rental equipment inventory.
During fiscal year 1998, the Company amended and restated its senior secured
revolving credit facility with The Chase Manhattan Bank, as agent for a
syndicate of lenders ("Chase Facility"). The Chase Facility increased the credit
line from $50,000,000 to $80,000,000. A portion of the credit line was used to
fund the acquisition of Four Star and the acquisition of additional rental
equipment. Remaining funds available under the Chase Facility will be used for
the Company's working capital needs. The Chase Facility has also been further
amended in January 1999. The January 1999 amendment reset certain financial
covenants required of the Company under the facility and reduced the credit line
to $77 million.
At September 30, 1998, the Company's outstanding principal obligations under the
Chase Facility was approximately $70,227,000 with all current repayment
obligations under the facility having been met.
Year ended September 30, 1998, compared
to year ended September 30, 1997
- ----------------------------------------
Revenues from Rental Operations
Revenues from rental operations increased $7,728,000 or 30% in fiscal 1998, to
$33,317,000 from $25,589,000 in fiscal 1997. The fiscal 1998 acquisitions of
two theatrical rental operations contributed $5,250,000 to rental revenues
during the year. In addition, revenues from video equipment rentals increased
$5,694,000 or 134% in fiscal 1998, to $9,938,000 from $4,244,000 in fiscal 1997.
The increase was largely due to the fact that Duke City was acquired in May
1997.
Rental revenues from production equipment (i.e., grip, lighting and related
production equipment) decreased from $20,900,000 to $17,783,000 primarily as a
result of the industry-wide slowdown due to the threatened Actors' Unions strike
and the general decrease in the number of large budget motion pictures.
Page 12 of 61
<PAGE>
Net Product Sales
Net equipment and supply sales for fiscal 1998 were $27,954,000, an increase of
$7,185,000 or 35% from $20,769,000 in fiscal 1997. Equipment sales increased by
$2,866,000 or 21% from fiscal 1997, primarily due to continued concentrated
marketing efforts and product promotion. Sales of expendable supplies increased
by $4,318,000 as a result of the continued expansion of the expendable supplies
business in fiscal 1998, including the addition of Olesen's expendable supply
product lines. The Manufacturing Operations accounted for $13,452,000 and
$12,688,000 of the net equipment and supply sales for fiscal 1998 and fiscal
1997, respectively. As discussed above, the Manufacturing Operations were
disposed of by the Company in the fourth quarter of fiscal 1998.
Gross Profit - Rental
Gross profit on rental revenues, as a percentage of revenues, was 39% in fiscal
1998 and 43% in fiscal 1997. Higher gross profit percentages from theatrical
operations acquired during fiscal 1998 were offset by lower margins in rentals
of production and video equipment. The gross profit percentage from rentals of
production equipment (i.e., grip, lighting and related production equipment)
decreased 3% in fiscal 1998 to 41%, from 44% in fiscal 1997. Lower revenues and
increased fixed costs such as depreciation expense contributed to the decline in
gross margin. Depreciation expense increased $428,000 due to additions to
rental asset inventory, and $929,000 from a fiscal 1998 acquisition. The profit
percentages from video equipment rentals were negatively impacted by costs
associated with the geographic expansion of the operations, less activity in the
market compared to the prior year and higher depreciation expense associated
with rental inventory additions.
Gross Profit - Sales
Gross profit, as a percentage of sales, was 31% in fiscal 1998 as compared to
32% in fiscal 1997. The decrease was primarily due to increased volume in lower
margin expendable supply sales.
Selling, General and Administrative
Selling, general and administrative expenses, including provision for doubtful
accounts receivable, increased in fiscal 1998 by $8,172,000 to $20,801,000, as
compared to $12,629,000 in fiscal 1997. As a percentage of sales such expenses
increased to 34% in fiscal 1998 compared to 27% in fiscal 1997. The dollar
increase is primarily due to the acquisitions of Four Star, Olesen and HDI, as
well as a general increase in the Company's overall operations, resulting in
higher payroll, goodwill amortization costs, rent expenses and sales
commissions. Selling, general and administrative expenses as a percentage of
sales would be 36% and 27% in fiscal 1998 and 1997, respectively, if results
from the Manufacturing Operations were excluded from the calculation.
The increased selling, general and administrative expenses, as a percentage of
sales, generally relate to the traits of specific operations recently acquired
and Company's overall expansion efforts. First, relative to the original
operations of the Company, recent acquisitions in the video rental and
expendable supply operations require greater sales efforts, due to the structure
of the markets in which they compete. Second, the Company expended a
substantial amount of effort and administrative costs in completing the
acquisitions during the fiscal year. In addition, start up operations in
Orlando, Florida, video operations in New York City, New York, and sales/rental
operations in Las Vegas, Nevada, all completed in fiscal year 1998 have caused
increased levels of operating expenses.
Page 13 of 61
<PAGE>
Interest
Interest expense for fiscal 1998 was $5,836,000, an increase of $3,073,000 or
111% from $2,763,000 in fiscal 1997. The increase is attributable to increased
indebtedness in fiscal 1998 incurred to fund the Company's growth, including
capital asset acquisitions to increase the Company's rental equipment inventory
and to fund the acquisitions of Four Star, Olesen and HDI.
Income Taxes
The Company recognized a benefit for income taxes of $875,000 in fiscal 1998
compared to a provision for income taxes on income before extraordinary item of
$748,000 in fiscal 1997. The Company's effective tax rate for fiscal 1997 on
income before extraordinary item was 30%. In fiscal 1998 the income tax benefit
was recognized at a substantially higher effective rate on the pre-tax loss
because of the effect of the tax-free gain on sale of the Manufacturing
Operations.
Gain on Disposition of Assets
The Company recorded a gain on the disposition of the Manufacturing Operations
during fiscal 1998 of $3,963,000.
Year ended September 30, 1997, compared
to year ended September 30, 1996
- ---------------------------------------
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 Media Lighting
Supply Inc. ("MLS") in the southeastern United States in January 1997, which
accounted for $3,259,000 of the increase.
Page 14 of 61
<PAGE>
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, offset 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.
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 fiscal 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.
Income Taxes
The Company recognized a provision for income taxes on income before
extraordinary item of $748,000 in 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.
Page 15 of 61
<PAGE>
Liquidity and Capital Resources
During the fiscal year ended September 30, 1998, 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, as agent for the lenders ("Chase Bank")
in an aggregate principal amount of up to $17 million (the "Chase Facility").
This facility has been subsequently expanded and amended several times to
provide additional funds for acquisitions and growth and to reflect the impact
of those acquisitions, the divestiture of the manufacturing operations and
changing economic conditions.
At September 30, 1998 the Chase Facility included a $16,000,000 term loan and
$64,000,000 revolving credit loan. The term loan requires quarterly principal
payments of $500,000 commencing December 31, 1998, such payment having been made
by the Company, and increasing to $750,000 commencing December 31, 1999 with the
balance due at maturity.
Interest is payable quarterly and accrues at a rate, depending on the Company's
leverage ratio as defined in the Chase Facility, and at the Company's option at
either (a) LIBOR plus a maximum of 3.25% or (b) the greater of (i) Chase Bank's
Prime Rate plus a maximum of 1.25%, (ii) the Base CD Rate (as determined by
Chase Bank) plus a maximum of 2.25% or (iii) the Federal Funds Effective Rate
plus a maximum of 1.75%. In addition, the Company pays a fee ranging from
three-eighths of one percent to one-half of one percent on the unused credit
commitment.
The 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, leverage and debt service coverage ratios as defined in the
agreement). The Chase Facility provides for annual capital expenditure
limitations.
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. In January 1999, in connection with the
issuance of $3,000,000 letter of credit by ING in favor of the lenders, (see
below) the Company again amended the Chase Facility. As a result, the revolving
credit loan was reduced to $61,000,000, the covenants were modified for fiscal
1999 and the effects of prior defaults were eliminated either through waiver or
modification of certain covenants.
Page 16 of 61
<PAGE>
The ING Equity Partners, L.P. I Senior Subordinated Promissory Notes
In July 1995, the Company entered into a purchase agreement (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 did 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 (a "Qualifying Offering").
As amended in April 1996, 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, and the share of preferred stock issued to ING was
amended to provide voting rights only in the event of a default under the
Purchase Agreement. On September 29, 1997, the Company prepaid the $4,900,000
subordinated note. In connection with this prepayment, the Company and ING
extended the date for the Qualifying Offering to December 31, 1999.
The Purchase Agreement is being amended to reset financial covenants, including
annual capital expenditure limits, required thereunder to be similar to those
required under the Chase Facility.
Interest on the remaining $100,000 subordinated note is at the rate of 10.00%
until its maturity.
As part of the transaction with ING, the Company in July 1995 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
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, in July 1995 the Company,
Carlos D. DeMattos 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, 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.
Page 17 of 61
<PAGE>
In connection with the sale of the Manufacturing Operations, Phillips Associates
transferred 1,916,450 shares of the Company's common stock to the Company in
consideration for 100% of the stock in Matthews Studio Equipment, Inc. ING and
Mr. DeMattos waived restrictions under the Stockholders Agreement on such
transfer of Phillips Associates' stock. Mr. Phillips and his affiliates by
reason of such transfer are no longer subject to the Stockholders Agreement.
As part of the January 1999 amendment to the Amended Chase Facility, ING caused
ING (U.S.) Capital LLC to issue in favor of the lenders under the Amended Chase
Facility a $3 million letter of credit. The letter of credit expires December
31, 2000. The lenders may draw on the letter of credit only in the event the
Company files for bankruptcy protection or, due to a default under the Amended
Chase Facility, the lenders elect to declare all outstanding term and revolving
credit loans immediately due and payable and to terminate the facility. The
Company and its subsidiaries entered into a Reimbursement Agreement in favor of
ING and granted to ING subordinated a security interest in substantially all of
their respective assets. Pursuant to the Reimbursement Agreement, the Company
and its subsidiaries are obligated to reimburse ING for any amounts paid by ING
to ING (U.S.) Capital LLC by reason of a draw on the letter of credit.
As additional consideration for ING's procurement of the letter of credit, the
Company issued to ING warrants to purchase 450,000 shares of the Company's
common stock, at an exercise price of $2.50 per share. These warrants have
antidilutive rights similar to those available to ING under the ING Warrant, but
the exercise price is not subject to decrease due to failure to complete the
Qualifying Offering. Also the one share of preferred stock issued to ING does
not accord voting rights with respect to the number of shares underlying these
warrants. These warrants are entitled to the benefits of and subject to the
restrictions under the Registration Rights Agreement and the Stockholders
Agreement.
Warrants to purchase 150,000 shares will be automatically canceled in the event
the lenders release the letter of credit on or before December 31, 1999. The
lenders are obligated to release the letter of credit if the Company achieves in
any fiscal quarter leverage ratio of 4.50 or less and has an availability for
revolving credit loans under the Chase Facility of $2,000,000.
Working Capital - Cash Flows
(The following comments reflect the disposal of the Manufacturing Operations and
their effect on the consolidated financial information of the Company.)
At September 30, 1998, the Company's working capital was $2,515,000, which was a
decrease of $7,147,000 from its working capital at September 30, 1997. The
significant decrease is primarily due to the disposition of the Manufacturing
Operations.
In fiscal 1998, the Company generated cash from operating activities of
$4,669,000. The major contributor to cash from operating activities was
earnings before depreciation and amortization of $9,085,000. Partially
offsetting this major contributor to cash from operating activities was an
increase in trade accounts receivable of $1,385,000 and inventory of $1,057,000,
as a result of a general increase in business activities and expansion of the
Company through acquisitions made during fiscal year 1998.
In fiscal 1998, the Company primarily utilized cash from operating activities of
$4,669,000, augmented by additional borrowings from the Chase Facility of
$41,605,000, to finance the acquisition made to pay down debt assumed in these
acquisitions made in fiscal year 1998 and for the acquisitions of capital
equipment. The major components of the net capital equipment additions were
equipment for the Company's video equipment rental operations of approximately
$3,264,000 and equipment additions to other rental operations of approximately
$7,234,000.
Page 18 of 61
<PAGE>
During the next twelve months, the Company expects to purchase additional
capital equipment as part of the expansion of the Company's marketing and
distribution network, and to allow its operations to be more efficient 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
Securities Litigation 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 risks and uncertainties which could cause actual results
or outcomes to differ materially from those expressed in the forward-looking
statements.
The Company wishes to caution the reader that in addition to the important
factors described elsewhere in this Form 10-K, the following important factors,
among others, sometimes have affected, and in the future could affect, the
Company's actual results and could cause the Company's actual results in fiscal
1999, and beyond, to differ materially from those expressed in any forward-
looking statements made by, or on behalf of, the Company:
The Company's business remains substantially dependent on the level of
motion picture (or feature film) production undertaken from year to year by
the entertainment production industry. While the trend in fiscal 1996 and
1997 was to produce motion pictures with a large budget and substantial
requirements for special effects, the trend in fiscal 1998 and 1999 seems
to be to produce motion pictures with a smaller budget and lesser use of
special effects. This industry-wide trend will have the effect of
decreasing the need for production equipment, which in turn will very
likely result in a general decrease in the rental rates charged by
production equipment renters as they attempt to attract business in a more
difficult environment. While the Company aims to effectively utilize its
rental equipment inventory by focusing, in fiscal 1999, on efficiently
allocating the Company's inventory among its locations throughout the
United States, there is no assurance such efforts will effectively
counteract this industry-wide trend;
Since the early 1980's Canada has been competing for television and feature
film production work that has typically been serviced by the entertainment
production industry located in the Southern California area. Favorable tax
treatment offered by Canadian authorities and the weak Canadian dollar may
permit Canada to attract an increasing level of production work in the
future; and
The entertainment production industry in Southern California is
experiencing a slowdown
Page 19 of 61
<PAGE>
in activity, especially in comparison to the growth pace experienced during
the prior years. Factors that motivated this slowdown include major studios
trimming their film slates, drops in commercial production due to economic
uncertainty and cost pressures on both the television and film industry.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS
The required financial statements commence at page 35.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page 20 of 61
<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. DeMattos(5) 46 Chairman of the Board, Chief Executive Officer,
President
Ernst F. Nettmann 59 Director, President of Electronics
Jack Brehm(1)(2)(3)(4) 70 Director
John H. Donlon(1)(2)(3)(4) 53 Director
Jerome E. Farley(1)(2)(3)(4) 57 Director
Benjamin P. Giess(1)(2)(3)(4)(5) 36 Director
John F. Jastrem(1)(2)(3)(4) 43 Director
John Alonzo 64 Director
John D. Murray 57 Executive Vice President, Operations
Alan S. Unger 45 Chief Financial Officer
Carly Barber 43 President of HRC
Darren DeVerna 38 President of Four Star
</TABLE>
(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
The term of office of all directors is until the next annual meeting, which is
scheduled for April 7, 1999, and the term of office of all officers is for one
year and until their successors are chosen and qualify. The Company's Board of
Directors currently has one vacancy, which came about when the Manufacturing
Operations were sold to Phillips Associates and Mr. Phillips in connection
therewith resigned from the Board.
Page 21 of 61
<PAGE>
Carlos D. Demattos was 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. He is a co-recipient of two Technical
Achievement Awards from the Academy of Motion Picture Arts and Sciences in March
1983 and March 1985, respectively for the Tulip Crane and for the development of
the Cam-Remote(R) System. He is also a co-recipient of a Technical Achievement
Award from the Academy of Television Arts and Sciences in September 1989 for the
development of the Cam-Remote(R) System. Mr. DeMattos 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. In July
1998, he was awarded the Entrepreneur of the Year Award for the Greater Los
Angeles area, Entertainment Category. 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. Since October 15, 1998, Mr. DeMattos has been a director of Alpha
Microsystems, an information technology services provider and internet company
listed on Nasdaq.
Ernst F. (Bob) Nettmann has served as a director of the Company since February
1989. Mr. Nettmann is President of Studio Electronics. He is also President of
E.F. Nettmann & Associates Inc., a privately held corporation, which has been
managing the business of Studio Electronics since October 1, 1994 pursuant to a
management and license agreement. He is also the managing partner in the Gyron
Group, an advanced systems stabilization group. Prior to 1988, Mr. Nettmann was
President and owner of Continental Camera Systems, Inc., which designed and
rented camera systems for airborne and groundbased applications. He has
received awards for technical achievement of his designs from the Academy of
Motion Picture Arts & Sciences, the Academy of Television Arts & Sciences and
the Society of Operating Cameramen.
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. Until 1998, Mr. Brehm was a director of Zegarelli Group
International, Inc., a Nasdaq listed corporation, which manufactures and
distributes professional hair care products.
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.
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
Page 22 of 61
<PAGE>
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.
Benjamin P. Giess was elected a director of the Company in September 1995. He
has been employed by ING Equity Partners and its predecessors and affiliates
since 1992 and currently serves as a Partner responsible for originating,
structuring and managing equity and debt investments. 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. Mr. Giess serves as a director for e.spire Communications,
Inc., a Nasdaq company which is a competitive local access telecommunications
provider, as well as Alpha Microsystems, an information technology services
provider and internet company listed on Nasdaq. In addition Mr. Giess serves on
the board of several privately held companies.
John F. Jastrem was elected a director of the Company in September 1995. Since
1998 he is the Chief Executive Officer of Rapp Collins Dallas, a subsidiary of
Omnicom, a Company listed on the New York Stock Exchange. From 1997 to 1998 he
served 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. He is also a director of Medicam Ventures, LLP, a privately held
firm.
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.
John D. Murray, Executive Vice President, Operations. Mr. Murray joined the
Company as Executive Vice President, Operations in October, 1998. Between May
to October 1998, he served as a consultant for various business enterprises.
Between May 1996 to May 1998, Mr. Murray served as the Chief Operating Officer
and Chief Financial Officer of Virtual Mortgage Network, a Nevada corporation.
From 1995 to 1996, Mr. Murray was chief financial officer and executive vice
president of the Company.
Page 23 of 61
<PAGE>
From 1992 to 1995, Mr. Murray was the executive vice president and chief
operating officer of Alpha Microsystems, an information technology services
provider and internet company listed on Nasdaq. From 1988 to 1992, Mr. Murray
was the executive vice president and chief financial officer of South Coast
Communications Group, a privately held investment relations firm. From 1979 to
1988, Mr. Murray was a director, executive vice president and chief financial
officer of General Automation, Inc., a publicly held company listed on Nasdaq.
Alan S. Unger, Chief Financial Officer. Mr. Unger is a certified public
accountant and joined the Company as Chief Financial Officer in November, 1998.
Between May 1997 to November 1998, Mr. Unger served as chief financial officer
of Four Media Company ("4MC"), a Nasdaq listed corporation with revenues in
excess of $100 million. Between August 1993 to May 1997, Mr. Unger served as
Director of Mergers and Acquisitions of 4MC. He successfully structured,
negotiated and closed several acquisitions for 4MC. He also acted as chief
financial officer of 4MC Asia since its inception in 1994. Prior to joining
4MC, Mr. Unger was corporate controller for The Cheesecake Factory. Prior to
that he was with Coopers & Lybrand for 10 1/2 years. During that time he was
involved with many publicly held companies, mergers and acquisitions and other
special transactions. He left Coopers & Lybrand as senior audit manager.
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.
Darren DeVerna, President, Four Star. Mr. DeVerna has been the President of
Four Star since April 1, 1998. For the three years prior to that, he was a Vice
President of Four Star in charge of marketing, and its Director of Operations.
Between 1987 and 1995, Mr. DeVerna was Four Star's Purchasing Agent, Production
Foreman, and its liaison with theatrical designers and production electricians
for the many Broadway plays that Four Star serviced. In addition, he has been a
member of the technical staff of numerous Broadway productions. Mr. DeVerna is
the founder and co-chairman of the Tony Randall National Actor's Theater golf
tournament.
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,
1998, 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, no Form 3 has been filed by Ms.
Carly Barber, Mr. Darren DeVerna, Mr. John Murray or Mr. Alan Unger.
Page 24 of 61
<PAGE>
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, 1998, to (i) the Chief Executive Officer, (ii) the Company's
executive officers whose total salary and bonus equaled or exceeded $100,000,
and (iii) other Company employees whose total salary and bonus equaled or
exceeded $100,000 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
--------------------- ------ -------
Name and Principal Year Salary Bonus Other Restricted Securities LTIP All Other
Position ($) ($) Annual Stock Underlying Pay-outs Compen-
Compen- Awards Options/ ($) sation*
sation ($) ($) SARs (#) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carlos D. DeMattos, 1998 413,244 - - - 100,000 - 1,816
Chairman, Chief 1997 351,421 140,568 - - - - 1,230
Executive Officer, 1996 263,425 50,000 - - 200,000 - 1,462
President
Gary S. Borman, 1998 112,115 - - - - - 1,152
Vice President, 1997 100,769 30,203 - - 30,000 - 900
Corporate Controller 1996 48,462 6,000 - - 30,000 - 21
Kenneth W. Kramer, 1998 109,154 - - - - - 1,662
Vice President - 1997 - - - - 60,000 - -
Development & 1996 - - - - - - -
Operations
</TABLE>
*ALL OTHER COMPENSATION - This represents Company contributions to the Company's
401(k) plan.
The following table shows the options granted during the fiscal year ended
September 30, 1998, to the Named Executive Officers.
<TABLE>
<CAPTION>
OPTION GRANTS FOR THE YEAR ENDED SEPTEMBER 30, 1998
- -----------------------------------------------------------------------------------------------
Individual Grants
- -----------------------------------------------------------------------------------------------
Name Number of Percentage Exercise Expiration Potential Realizable
Securities of Total or Base Date Value at Assumed
Underlying Options Price Rates of Stock Price
Options Granted to $/Share Appreciation for
Granted Employees Option Term
---------------------
5% 10%
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Carlos D. DeMattos 100,000 33% $4.74 2004 $226,000 $542,000
</TABLE>
Page 25 of 61
<PAGE>
The following table shows the value of options with respect to each of the Named
Executive Officers based on the difference between the exercise price and the
closing price on September 30, 1998, as reported by Nasdaq.
<TABLE>
<CAPTION>
OPTION EXERCISES AND FY-END VALUE TABLE
<S> <C> <C> <C> <C>
Name Shares Acquired ($) Value # of Shares Underlying Value of Unexercised
On Exercise Realized Unexercised Options In-the-Money Options
Exercisable (E)/ at FY-End ($)
Unexercisable (U) Exercisable (E)/
Unexercisable (U)
Carlos D. DeMattos - - 200,000 (E)/ -- (E)/
100,000 (U) -- (U)
Gary S. Borman - - 22,000 (E)/ 16,000 (E)/
38,000 (U) 27,000 (U)
Kenneth W. Kramer - - 20,000 (E)/ 9,000 (E)/
40,000 (U) 19,000 (U)
- ----------------------------------------------------------------------------------------------------------------------------------
</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 $10,000 annually). The
Company matches from 20% to 50% of employee contributions based on individual
salary levels.
Board of Directors Remuneration
Non-employee members of the Board receive a retainer of $1,000 per month for
services rendered to the Board of Directors and Committee(s) of the Board of
Directors and for his or her attendance at the meetings. The Chairman of the
Audit Committee and Compensation Committee receives an additional fee of $500
per month. In addition, the Company's 1994 Stock Option Plan for Directors
provides that each independent Director is to receive options to purchase 15,000
shares of Common Stock. Under the terms of such plan, such options are
exercisable ratably 6, 24 and 36 months after the grant date, and the exercise
price per share is the market value at the grant date. Each of the current
independent directors has received such options for 15,000 shares, exercisable
at the market value on the date of grant, except that the options granted to Mr.
Giess and Mr. Jastrem are exercisable at $3.00 per share even though the market
value was less than $3.00 on the date on which these options were granted. Mr.
Giess has assigned to ING the compensation to which he would be entitled as an
independent Director. On December 10, 1997, options to purchase an additional
5,000 shares of Common Stock were granted to each of the Company's independent
directors. Such options were also granted under the Company's 1994 Stock Option
Plan for Directors, and are exercisable ratably 12 and 24 months after the grant
date, at an exercise price per share equal to the market value at the grant
date. Mr. Giess has also assigned to ING these additional options. The
committee administering the 1994 Stock Option Plan for Directors granted these
additional options in recognition of the extraordinary efforts required of the
Board during the year.
Page 26 of 61
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) The table below shows as of December 15, 1998 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, each Named Executive
Officer and all directors and officers of the Company as a group:
<TABLE>
<CAPTION>
Name and Address of Number of Shares Percentage of
Beneficial Owner (1) Beneficially Owned Common Stock (8)
- ------------------------------- --------------------- -------------------------
<S> <C> <C>
Carlos D. DeMattos 2,149,784 (9) 23.0%
Ernst F. Nettmann 105,000 (10) 1.1%
Jack Brehm (2) 20,500 (11) *
John H. Donlon (3) 17,500 (12) *
Jerome E. Farley (4) 17,500 (13) *
Benjamin P. Giess (5) 4,139,964 (14) 36.1%
ING Equity Partners, L.P. I (6) 4,139,964 (15) 36.1%
John F. Jastrem (7) 17,500 (16) *
John H. Alonzo 17,500 (17) *
Gary S. Borman 22,000 (18) *
Kenneth W. Kramer 27,000 (19) *
- ----------------------------------------------------------------------------------------------------------
All officers and directors as a group 6,534,248 71.6%
(13 persons)
</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: 2813 West Alameda Avenue, Burbank,
California 91506.
(4) This individual's address is: 4100 West Alameda Avenue, Burbank,
California 91505.
(5) This individual's address is: 135 East 57th Street, 16th Floor, New
York, New York 10022.
Page 27 of 61
<PAGE>
(6) This company's address is: 135 East 57th Street, 16th Floor, New York,
New York 10022.
(7) This individual's address is: 1913 Ripley Avenue, Redondo Beach,
California 90278.
(8) Based on 9,130,856 shares outstanding. Options and warrants are added
where applicable.
(9) Includes 1,674,450 shares owned by a family trust with trust management
vested in the named director as the trustee. Includes options to
purchase 233,334 shares of the Company's common stock.
(10) Includes options to purchase 100,000 shares of the Company's common
stock.
(11) Includes options to purchase 17,500 shares of the Company's common
stock.
(12) Represents options to purchase 17,500 shares of the Company's common
stock.
(13) Represents options to purchase 17,500 shares of the Company's common
stock.
(14) 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 (15).
(15) 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 ING. Also includes
options issued to ING Equity Partners, L.P. I, to purchase 17,500 shares
of the Company's common stock, as consideration for services of its
appointee, Benjamin P. Giess.
(16) Represents options to purchase 17,500 shares of the Company's common
stock.
(17) Represents options to purchase 17,500 shares of the Company's common
stock.
(18) Represents options to purchase 22,000 shares of the Company's common
stock.
(19) Includes options to purchase 20,000 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.
Page 28 of 61
<PAGE>
Employment Agreements
DeMattos Agreement
The Company entered into a written Employment Agreement with Carlos D. DeMattos
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. Mr. DeMattos was also granted options 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 vests in like installments commencing on
July 1, 1996 and the next two successive anniversaries of that date, and these
options are exercisable until July 2005. 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. DeMattos was
amended (as amended, the "DeMattos Agreement"). The term of employment under
the DeMattos Agreement will expire September 30, 2000 but, similar to the July
1, 1995 Employment Agreement, Mr. DeMattos 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 DeMattos Agreement
was increased to $400,000 effective October 1, 1997 and to $440,000 effective
October 1, 1998. Mr. DeMattos' Agreement call for him to 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 DeMattos 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. DeMattos. 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.
Phillips Agreement
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. In connection with the sale of the
Manufacturing Operations, Mr. Phillips released the Company from all obligations
under the Phillips Agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION IN COMPENSATION DECISIONS
None.
REPORT ON EXECUTIVE COMPENSATION
The compensation for the highest paid executive officers of the Company in
fiscal 1998 (whose total salary and bonus equals or exceeds $100,000) is set
forth in the Summary Compensation Table which preceded this section.
Page 29 of 61
<PAGE>
Total compensation for executive officers consists of a combination of salaries,
bonuses and contributions to the Company's 401(k) plan.
Other than the Chairman of the Board of the Company and those officers with
written agreements for incentive bonuses, incentive bonuses that are awarded
from time to time 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
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 of Studio Electronics.
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. DeMattos, 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.
On September 28, 1998, the Company sold the Manufacturing Operations to Phillips
Associates, an affiliate of Mr. Edward Phillips. Prior to that date Mr.
Phillips was a director of the Company. The Company's decision to sell the
Manufacturing Operations was based on the inherent conflicts between the
Manufacturing Operations and the Company's rental operations, where many of the
Manufacturing Operations' customers competed directly against the Company's
rental operations. The Company's decision to dispose of the Manufacturing
Operations was also based on the availability of alternative sources of supply,
at commercially reasonable rates, for the equipment which was being manufactured
by the Manufacturing Operations.
The transaction was structured as a stock for stock exchange in which the
Company transferred all of the shares of stock in Studio Equipment to Phillips
Associates in exchange for 1,916,450 shares of the Company's common stock held
by Phillips Associates and assumption of $5,000,000 of the Company's debt. In
connection with this transaction, Mr. Phillips surrendered his options to
purchase 274,000 shares of the Company's common stock in consideration for a
$75,000 payment from the Company, and released the Company from all obligations
under the Employment Agreement dated July 1, 1995, between the Company and
Studio Equipment, on the one hand, and Mr. Phillips, on the other hand.
The Company and Studio Equipment have entered into a three-year royalty-free
license agreement pursuant to which Studio Equipment is permitted to use the
trademark "Matthews" for the Manufacturing Operations. Also as part of the
transaction, PDM, a general partnership comprised of Messrs. DeMattos and
Phillips, released the Company from all obligations under the lease for real
property occupied by Studio Equipment in Burbank, California. This lease has an
expiration date of December 31, 1999 and requires approximately $40,000 in
monthly rent.
On the closing of the sale of the Manufacturing Operations, Mr. Phillips
resigned from the Company's Board of Directors and the Executive Committee of
the Company's Board of Directors.
As part of the acquisition, the Company entered into real estate leases with an
affiliate of HDI, for facilities in Covington, Kentucky and Cincinnati, Ohio
from which HDI's business was conducted. These leases have expiration dates
through October 31, 2002 and require approximately $31,000 in monthly rent.
As part of the acquisition, the Company entered into real estate leases with an
affiliate of Oleser, for facilities located in Hollywood, California, from which
Oleser's business was conducted. These leases have expiration dates through
October 31, 2002 and require approximately $17,000 in monthly rent.
Page 30 of 61
<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
33.
(a)(3) The Exhibit Index appears at page 58.
(b) Reports on Form 8-K - Form 8-K dated April 1, 1998 was filed
during the third quarter of the period covered by this report
and Form 8-K dated September 28, 1998 was filed during the
last quarter of the period covered by this report.
(c) The Exhibit Index appears at page 58 which follows the
Financial Statements.
(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 33.
Page 31 of 61
<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 10-K for
the fiscal year ended September 30, 1998, to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: January 13, 1999 MATTHEWS STUDIO EQUIPMEN GROUP
By: S/Carlos D. DeMattos
--------------------
Carlos D. De Mattos
Chairman of the Board, Chief
Executive Officer and President
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>
<CAPTION>
<S> <C> <C>
S/Carlos D. DeMattos Chairman of the Board, January 13, 1999
- ------------------------------------- Chief Executive Officer
Carlos D. De Mattos and President
S/Ernst F. Nettmann Director, President of Matthews Studio January 13, 1999
- ------------------------------------- Electronics, Inc.
Ernst F. Nettmann
S/Jack Brehm Director January 13, 1999
- -------------------------------------
Jack Brehm
S/John H. Donlon Director January 13, 1999
- -------------------------------------
John H. Donlon
S/Jerome E. Farley Director January 13, 1999
- -------------------------------------
Jerome E. Farley
S/Benjamin P. Giess Director January 13, 1999
- -------------------------------------
Benjamin P. Giess
S/John F. Jastrem Director January 13, 1999
- -------------------------------------
John F. Jastrem
S/John A. Alonzo Director January 13, 1999
- -------------------------------------
John A. Alonzo
S/Godwin Eruaga Chief Accounting Officer January 13, 1999
- -------------------------------------
Godwin Eruaga
</TABLE>
Page 32 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Index to Consolidated Financial Statements
and Financial Statement Schedule
Page No.
Report of Independent Auditors ......................................... 34
Consolidated Balance Sheets at September 30, 1998 and 1997 ............. 35
Consolidated Statements of Operations for the years ended September 30,
1998, 1997 and 1996 ................................................... 36
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 1998, 1997 and 1996 ..................................... 37
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996 ..................................... 38
Notes to Consolidated Financial Statements ............................ 39
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.
Page 33 of 61
<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, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended September 30, 1998. 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, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended September 30, 1998, 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 29, 1998
Page 34 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
<TABLE>
<CAPTION>
September 30,
1998 1997
---------------- ----------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 331 $ 393
Accounts receivable less allowance for
doubtful accounts of $1,259 in 1998 and $745 in 1997 8,981 9,144
Current portion of net investment in finance
and sales-type leases 353 829
Inventories 3,783 7,844
Prepaid expenses and other current assets 536 923
Income tax refund receivable 1,045 645
Deferred income taxes 753 894
------- -------
Total current assets 15,782 20,672
Property plant and equipment, net 51,650 35,187
Net investment in finance and sales-type leases, less current portion 248 455
Goodwill less accumulated amortization of $681 in 1998 and $303 in 1997 23,168 4,052
Other assets 3,538 1,505
------- -------
Total assets $94,386 $61,871
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 4,634 $ 5,241
Accrued liabilities 3,946 2,950
Current portion of long-term debt and capital lease obligations 4,687 2,819
------- -------
Total current liabilities 13,267 11,010
Long-term debt and capital lease obligations less current portion 74,691 36,715
Deferred income taxes 3,815 2,976
Commitments and contingencies
Shareholders' equity
Preferred stock, no par value, authorized
1,000,000 shares; issued and outstanding
one share in 1998 and 1997 - -
Common stock, no par value, authorized
20,000,000 shares; issued and outstanding 9,110,000 shares in 1998
and 10,632,000 shares in 1997 7,144 6,168
Retained earnings 5,051 5,002
------- -------
12,195 11,170
Less retired common stock (1,916,450 shares in 1998) 9,582 -
------- -------
Total shareholders' equity 2,613 11,170
------- -------
Total liabilities and shareholders' equity $94,386 $61,871
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 35 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Revenues from rental operations $33,317 $25,589 $14,125
Net product sales 27,954 20,769 16,079
------- ------- -------
61,271 46,358 30,204
Costs and expenses:
Cost of rental operations 20,274 14,519 8,016
Cost of product sales 19,184 14,081 10,257
Selling, general and administrative 20,801 12,629 8,849
Interest, net 5,801 2,675 2,044
------- ------- -------
66,060 43,904 29,166
------- ------- -------
Income (loss) from operations (4,789) 2,454 1,038
Gain on sale of manufacturing subsidiary 3,963 - -
------- ------- -------
Income (loss) before income taxes and extraordinary item (826) 2,454 1,038
Income tax provision (benefit) (875) 748 35
------- ------- -------
Income before extraordinary item 49 1,706 1,003
Extraordinary loss on early extinguishment of debt - net
of income tax benefit of $130 - (194) -
------- ------- -------
Net income $ 49 $ 1,512 $ 1,003
======= ======= =======
Income per common share - basic:
Income before extraordinary item $ 0.00 $ 0.16 $ 0.10
Extraordinary loss - (0.02) -
------- ------- -------
Net income per share $ 0.00 0.14 $ 0.10
======= ======= =======
Income per common share - diluted:
Income before extraordinary item $ 0.00 $ 0.15 $ 0.10
Extraordinary loss - (0.02) -
------- ------- -------
Net income per share $ 0.00 $ 0.13 $ 0.10
======= ======= =======
Weighted average number of common shares outstanding:
Basic 10,848 10,456 10,328
======= ======= =======
Diluted 12,223 11,108 10,330
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 36 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Consolidated Statements of Shareholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Common Stock
-------------
Retired
Number of Retained Common
shares Amount Earnings Stock Total
---------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
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 and warrants 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
Exercise of stock options and warrants 44 92 - - 92
Issuance of common stock in
connection with the acquisition of
Haehnle Dwertman, Inc. 350 884 - - 884
Retired Shares (1,916) - - (9,582) (9,582)
Net income - - 49 - 49
------ ------ ------ -------- -------
Balance at September 30, 1998 9,110 $7,144 $5,051 $(9,582) $ 2,613
====== ====== ====== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 37 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Operating activities:
Net income $ 49 $ 1,512 $ 1,003
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts 562 269 295
Depreciation and amortization
of property, plant and equipment 8,301 4,567 2,839
Amortization of intangibles 735 136 57
Deferred income taxes (834) 404 -
Gain on sale of assets (442) (330) (298)
Gain on sale of manufacturing operations (3,963) - -
Extraordinary loss on early extinguishment of debt - 194 -
Changes in operating assets and liabilities
net of effects from acquisitions and disposition:
Accounts receivable (1,385) (2,037) (1,402)
Inventories (1,057) (2,365) (406)
Net investment in leases 683 397 697
Prepaids and other assets 1,135 (633) 73
Income tax refund receivable 163 (645) 252
Accounts payable and accrued liabilities 722 747 1,588
-------- ------- -------
Net cash provided by operating activities 4,669 2,216 4,698
Investing activities:
Payment for acquisitions (30,770) (437) -
Purchase of property and equipment (12,290) (9,660) (6,905)
Proceeds from sale of property and equipment 640 621 1,116
-------- ------- -------
Net cash used in investing activities (42,420) (9,476) (5,789)
Financing activities:
Proceeds from exercise of stock options 92 24 17
Proceeds from borrowings 41,605 14,065 1,098
Repayment of borrowings (4,008) (6,898) -
-------- ------- -------
Net cash provided by financing activities 37,689 7,191 1,115
Net increase (decrease) in cash and cash equivalents (62) (69) 24
Cash and cash equivalents at beginning of period 393 462 438
-------- ------- -------
Cash and cash equivalents at end of period $ 331 $ 393 $ 462
======== ======= =======
Schedule of non-cash investing and financing transactions:
Capital lease obligations incurred $ 775 $ 160 $ 143
Common stock issued for acquired companies 884 560 -
Additional disclosures - Cash paid during year for:
Interest $ 5,268 $ 2,495 $ 1,878
Income taxes 68 853 47
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 38 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements
1. Business and Acquisitions
Business - Matthews Studio Equipment Group (the "Company") sells, leases and
rents audio, video, theatrical, film and production equipment and accessories,
to the motion picture, television, corporate, theatrical, 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. In addition, the Company has
fully operational and equipment supplied soundstages and studios.
Acquisitions - Effective January 1, 1997, the Company purchased the assets and
business of Media Lighting Supply, Inc., a lighting supply company in Miami,
Florida. This was merged into Matthews Studio Sales Inc. a newly formed entity
in September, 1998. 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,
respectively. The first anniversary installment was paid during fiscal 1998.
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 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 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 acquisitions effected during fiscal year 1997 (the "1997
Acquisitions"), goodwill amounted to $4,074,000, and the fair market value of
assets acquired was $13,091,000. The fair value of liabilities assumed in
connection with those acquisitions was $16,168,000.
Effective October 1, 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 accounted for
under the purchase method of accounting for business combinations. 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 assumed debt of $1,558,000
relating to the transaction.
Page 39 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Business and Acquisitions (continued)
As part of the acquisition, the Company entered into real estate leases with an
affiliate of HDI, for facilities in Covington, Kentucky and Cincinnati, Ohio
from which HDI's business was conducted. The Company is continuing to operate
the business acquired from HDI at those facilities.
Effective November 1, 1997, the Company purchased the assets and business of
Olesen, a theatrical supply company in Hollywood, California. The acquisition
was accounted for under the purchase method of accounting for business
combinations. 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, 1998 and
October 31, 1999. In addition, the Company assumed debt of $692,000 relating to
the transaction. As part of the acquisition, the Company entered into real
estate leases with an affiliate 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 first installment of $225,000 was paid in October 1998.
Effective April 1, 1998, the Company purchased the assets and business of Four
Star Holding, Inc. ("Four Star"), a holding company which owns 100% of Four Star
Lighting, Inc. The acquisition was accounted for under the purchase method of
accounting for business combinations. Four Star provides rentals of lighting
and other equipment for use in theatrical productions. Pursuant to a stock
purchase agreement, in exchange for all of the capital stock of Four Star, the
Company paid $18,421,000 in cash to the shareholders of Four Star and $9,104,000
in cash to reduce the long-term debt of Four Star. In addition, the Company
assumed debt of $1,907,000 relating to the transaction. Four Star has
operations in Mount Vernon, New York. It is continuing its business and
operations as a wholly-owned subsidiary of the Company.
In respect to the acquisitions made during fiscal year 1998, the excess of
purchase price over the fair market value of net assets acquired amounted to
$19,089,000 and was recorded as goodwill. The fair market value of assets
acquired was $15,387,000 and the fair value of liabilities assumed in connection
with these acquisitions was $4,157,000.
The Company's other operating subsidiaries include Hollywood Rental Company, LLC
("HRC"), Matthews Studio Electronics, Inc. ("Studio Electronics") and Matthews
Acceptance Corporation ("MAC"), each of which is wholly owned by the Company.
HRC 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 on a rental basic. HRC is the successor by
merger to Hollywood Rental Co., Inc. through an internal reorganization, with
HRC having succeeded to all of the business, assets and liabilities of Hollywood
Rental Co., Inc. Studio Electronics manufactures and rents Cam-Remote(R) and
Mini-Mote(R) C.A.T. Systems (the "Systems") under short-term rental and long-
term lease arrangements. MAC is engaged in the leasing of equipment on a long
term basis. MAC generally purchases equipment selected by a lessee and rents
such equipment to the lessee on a long term basis.
Page 40 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies
Principles of Consolidation - The financial statements include the accounts of
the Company and its subsidiaries as of the respective date each subsidiary was
acquired. All significant 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. The
carrying value of these instruments approximates market value because of their
short maturity.
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.
For the fiscal year ended September 30, 1997, a single rental customer accounted
for approximately 10.9% of total revenues.
Fair Values of Financial Instruments - The Statement of Financial Accounting
Standards No. 107 "Disclosure About Fair Value of Financial Instruments" ("SFAS
No. 107") requires disclosure of fair value information about most financial
instruments both on and off the balance sheet, if it is practicable to estimate.
SFAS No. 107 excludes certain financial instruments such as certain insurance
contracts and all non-financial instruments from its disclosure requirements. A
financial instrument is defined as a contractual obligation that ultimately ends
with the delivery of cash or an ownership interest in an entity. Disclosure
regarding the fair value of financial instruments is derived using external
market sources, estimates using present value or other valuation techniques.
Cash, accounts receivable, accounts payable, accrued and other liabilities and
short-term revolving credit agreements and variable rate long-term debt
instruments approximate their fair value.
Inventories - Inventories are principally stated at the lower of first-in,
first-out cost or market.
Other Assets - The Company purchased the grip and lighting equipment of Disney
Production Services, Inc. ("DPS") in June 1998, and concurrently entered into an
agreement to operate equipment rental and supply departments at certain DPS
locations. In connection with these transactions, the Company paid $1,500,000
for the right to operate the equipment rental and supply departments at DPS
locations and has capitalized this amount as a deferred asset to be amortized
over the seven-year term of the agreement. Also, included in other assets are
loan fees that are being amortized as interest expense over the term of the bank
facility.
Page 41 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Goodwill - Goodwill represents the excess of cost over the fair value of net
assets acquired and is amortized using the straight-line method, generally over
25 years. Useful lives are determined on a case by case basis for each business
acquired. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on estimated undiscounted
cash flows of the Company over the remaining amortization period, the Company's
carrying value would be reduced by the estimated shortfall of discounted cash
flows.
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, 1998, 1997 and 1996 were
$384,000, $409,000, and $234,000. respectively. The advertising expenses
(including media advertising and promotions) for the years ended September 30,
1998, 1997 and 1996 were $335,000, $175,000 and $139,000, respectively.
Property and Equipment - Property and equipment, including items purchased under
capital leases, are recorded at cost. 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. 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 5 - 10 years
Leasehold improvements are amortized over the estimated useful lives, or the
term of the related leases, for improvements, whichever is shorter.
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.
Per Share Data - During the year ended September 30, 1998, the Company adopted
the statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("SFAS No. 128") which established standards for computing and presenting
earnings per share ("EPS") for publicly-held common stock or potential common
stock. SFAS No. 128 supersedes the standards for computing earnings per share
previously found in APB opinion No. 15 "Earnings per Share" and simplifies the
standards for computing earnings per share. In addition, SFAS No. 128 replaces
the presentation of primary earnings per share with a presentation of basic
earnings per share, requires dual presentation of basic and diluted earnings per
share on the face of the income statement for all entities with complex capital
structures, and requires a reconciliation of the numerator and denominator on
the basic earnings per share computation to the numerator and denominator of the
diluted earnings per share computation. All periods presented reflect the
adoption of SFAS No. 128 and the impact on amounts previously reported was not
material.
Page 42 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Accounting Policies (continued)
Income Taxes - The Company utilizes the liability method to determine the
provision for income taxes. Deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. 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, 1997
and 1996 financial statements have been reclassified to conform to the September
30, 1998 presentation.
New Accounting Principles
Comprehensive Income - In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for
reporting and displaying comprehensive income and its components (revenue,
expenses, gains and losses) in financial statements. SFAS 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 adopted this
new standard in fiscal year 1998, and has determined that such new standard has
no impact on the Company's financial statements.
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 " ("SFAS 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 adopted this new standard in fiscal year 1998, and has determined
that such new standard has no impact on its financial statements.
In June 1998, the FASB issued No. 133, "Accounting for Derivative Instruments
and Hedging Activities"("SFAS 133"). This statement requires that all derivative
instruments to be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives will be recorded each period in current earnings
or other comprehensive income, depending on whether a derivative is designated a
part of a hedge transaction and, if it is, the type of hedge transaction. The
new rules will be effective the first quarter of 2000. The company is in the
process of determining the impact of this new standard and anticipates that it
will not have a material impact on the Company's financial results when
effective.
Page 43 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Earnings per Share
The following is a reconciliation of the computations for basic and diluted EPS
(in thousands, except per share data):
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------
1998 1997
--------------------------------------------------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available
to common stockholders $49 10,848 $0.00 $1,512 10,456 $0.14
===== =====
Effect of dilutive
options and warrants - 1,376 - 652
--- ------ ------ ------
Diluted EPS:
Income available to
common stockholders and
assumed conversions $49 12,223 $0.00 $1,512 11,108 $0.13
=== ====== ===== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended September 30, 1996
-------------------------------------
Income Shares Per -Share
(Numerator) (Denominator) Amount
----------------- ------------------ ----------------
<S> <C> <C> <C>
Basic EPS:
Income available
to common stockholders $1,003 10,328 $0.10
=====
Effect of dilutive
options and warrants - 2
------ ------
Diluted EPS:
Income available to
common stockholders and
assumed conversions $1,003 10,330 $0.10
====== ====== =====
</TABLE>
Options to purchase 162,000 shares of common stock at a range of $4.13 to $4.74
per share, and 673,000 shares of common stock at a range of $3.00 to $4.38 per
share, and 3,300,000 shares of common stock at a range of $2.20 to $4.13 per
share, for the year ended September 30, 1998, 1997 and 1996, respectively, were
outstanding during the periods yet excluded from the computation of diluted EPS
because the options' exercise prices were greater than the average market price
of the common stock.
Page 44 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
1998 1997
----------------------------------------------------------------------
<S> <C> <C>
Raw materials and work in process $ - $2,388
Finished Goods 3,783 5,456
------ ------
$3,783 $7,844
====== ======
</TABLE>
5. Property, Plant and Equipment
The following is a summary of property, plant and equipment (in thousands):
<TABLE>
<CAPTION>
September 30,
1998 1997
---- ----
<S> <C> <C>
Rental equipment $71,550 $47,169
Manufacturing equipment and tooling 99 1,952
Office furniture and equipment 3,421 3,627
Land and building 1,554 2,131
Leasehold improvements 1,181 1,112
------- -------
77,805 55,991
Less accumulated depreciation and amortization
(including $23,633 and $16,530 in 1998 & 1997,
respectively, for rental equipment) 26,155 20,804
------- -------
Property and equipment, net $51,650 $35,187
======= =======
</TABLE>
Amortization of capital leases is included in depreciation expense Property Plan
E and equipment also includes the following assets recorded under capital
leases. (in thousands):
<TABLE>
<CAPTION>
September 30,
1998 1997
-----------------------------------
<S> <C> <C>
Property and equipment $6,079 $5,933
Less accumulated amortization $1,645 $ 742
------ ------
$4,434 $5,191
====== ======
</TABLE>
Page 45 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Gain on Sale of Manufacturing Subsidiary
In September 1998, the Company transferred all of the shares of stock of its
subsidiary Matthews Studio Equipment, Inc. which designed and manufactured
equipment and accessories for lighting support and lighting control to Phillips
Associates, an entity owned by a trust controlled by a former shareholder and
director of the Company, in exchange for 1,916,450 shares of the Company's
common stock and assumption of $5,000,000 of the Company's bank debt. As a
result of this transaction, the Company recorded a gain of $3,963,000. The
Company's results of operations included net sales and operating income
of $13,452,000 and $763,000, in 1998 respectively, and $12,689,000 and $424,000
in 1997, and $11,489,000 and $672,000 in 1996 from this manufacturing
subsidiary.
7. Net Investment in Leases
Finance and Sales Type Leases - The Company's net investment in finance and
sales-type leases consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
1998 1997
---------------------------------------------
<S> <C> <C>
Minimum lease payments receivable $ 668 $1,398
Unearned income (67) (114)
----- ------
Net investment in leases,
including current portion of $353 in 1998
and $829 in 1997 $ 601 $1,284
===== ======
</TABLE>
Future annual minimum lease payments receivable under finance and sales-type
leases are as follows at September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $374
2000 117
2001 56
2002 53
2003 and thereafter 68
----
$668
====
</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, corporate, 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.
Page 46 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
1998 1997
---- ----
<S> <C> <C>
Revolving Credit Loan $54,227 $28,622
Term Note 16,000 -
Senior subordinated notes 100 100
------- -------
70,327 28,722
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 3,131 3,830
Capital lease obligations, with interest at approximately
6.5% to 22.6% due through 2002 4,615 6,026
Notes payable to related parties, interest at 8% to 8.75% 1,305 956
------- -------
79,378 39,534
Less current portion 4,687 2,819
------- -------
$74,691 $36,715
======= =======
</TABLE>
The aggregate annual maturities of long-term debt and payments on capital leases
consist of the following at September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
Long-Term Capital
Debt Leases
---- ------
<S> <C> <C>
1999 $ 2,562 $2,322
2000 4,017 1,803
2001 3,098 933
2002 62,733 350
2003 103 227
and thereafter 2,250 -
------- ------
74,763 5,635
Less amounts representing interest on $1,020
capital leases ------
Present value of net minimum lease payments
(including current portion of $2,125) $4,615
======
</TABLE>
Page 47 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Long-Term Debt (continued)
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, as agent for the
lenders ("Chase Bank") in an aggregate principal amount of up to $17 million
(the "Chase Facility"). This facility has been subsequently expanded and amended
several times to provide additional funds for acquisitions and growth and to
reflect the impact of those acquisitions, the divestiture of the manufacturing
operations and changing economic conditions.
At September 30, 1998 the Chase Facility included a $16,000,000 term loan and
$64,000,000 revolving credit loan. The term loan requires quarterly principal
payments of $500,000 commencing December 31, 1998, such payment having been made
by the Company, and increasing to $750,000 commencing December 31, 1999 with the
balance due at maturity.
Interest is payable quarterly and accrues at a rate, depending on the Company's
leverage ratio as defined in the Chase Facility, and at the Company's option at
either (a) LIBOR plus a maximum of 3.25% or (b) the greater of (i) Chase Bank's
Prime Rate plus a maximum of 1.25%, (ii) the Base CD Rate (as determined by
Chase Bank) plus a maximum of 2.25% or (iii) the Federal Funds Effective Rate
plus a maximum of 1.75%. In addition, the Company pays a fee ranging from
three-eighths of one percent to one-half of one percent on the unused credit
commitment.
The Chase Facility matures August 14, 2002, prohibits the payment of cash
dividends and 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, leverage and debt service coverage ratios as defined in the
agreement). The Chase Facility provides for annual capital expenditure
limitations.
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. In January 1999, in connection with the issuance
of $3,000,000 letter of credit by ING in favor of the lenders, (see below) the
Company again amended the Chase Facility. As a result, the revolving credit
loan was reduced to $61,000,000, the covenants were modified for fiscal 1999 and
the effects of prior defaults were eliminated either through waiver or
modification of certain covenants.
ING Subordinated Debt - In July 1995, the Company entered into a purchase
agreement (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 did 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 (a "Qualifying Offering").
As amended in April 1996, 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, and the share of preferred
Page 48 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Long-Term Debt (continued)
stock issued to ING was amended to provide voting rights only in the event of a
default under the Purchase Agreement. On September 29, 1997, the Company
prepaid the $4,900,000 subordinated note. In connection with this prepayment,
the Company and ING extended the date for the Qualifying Offering to December
31, 1999. 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.
The Purchase Agreement is being amended to reset financial covenants, including
annual capital expenditure limits and acquisition limits, to be similar to those
required under the Chase Facility.
Interest on the remaining $100,000 subordinated note is at the rate of 10.00%
until its maturity.
As part of the transaction with ING, the Company in July 1995 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
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, in July 1995 the Company,
Carlos D. DeMattos 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 would 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.
As part of the January 1999 amendment to the Chase Facility, ING caused ING
(U.S.) Capital LLC to issue in favor of the lenders under the Chase Facility a
$3 million letter of credit. The letter of credit expires December 31, 2000. The
lenders may draw on the letter of credit only in the event the Company files for
bankruptcy protection or, due to a default under the Chase Facility, the lenders
elect to declare all outstanding term and revolving credit loans immediately due
and payable and to terminate the facility. The Company and its subsidiaries
entered into a Reimbursement Agreement in favor of ING and granted to ING a
subordinated security interest in substantially all of their respective assets.
Pursuant to the Reimbursement Agreement, the Company and its subsidiaries are
obligated to reimburse ING for any amounts paid by ING to ING (U.S.) Capital LLC
by reason of a draw on the letter of credit.
Page 49 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
As consideration for ING's procurement of the letter of credit, the Company
issued to ING warrants to purchase 450,000 shares of the Company's common stock
at an exercise price of $2.50 per share. These warrants have antidilutive
rights similar to those available to ING under the ING Warrant, but the exercise
price is not subject to decrease due to failure to complete the Qualifying
Offering. Also the one share of preferred stock issued to ING does not accord
voting rights with respect to the number of shares underlying these warrants.
These warrants are entitled to the benefits of and subject to the restrictions
under the Registration Rights Agreement and the Stockholders Agreement.
Warrants to purchase 150,000 shares will be automatically canceled in the event
the lenders release the letter of credit on or before December 31, 1999. The
lenders are obligated to release the letter of credit if the Company achieves in
any fiscal quarter, leverage ratio of 4.50 or less and has an availability for
revolving credit loans under the Chase Facility of $2,000,000.
9. Income Taxes
Significant components of the Company's deferred tax liabilities and assets are
as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
1998 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Tax depreciation in excess of book depreciation $6,043 $3,773
Leasing income 420 551
Other 153 98
------ ------
Total deferred tax liabilities 6,616 4,422
Deferred tax assets:
Net operating loss carryforwards 2,575 560
Alternative minimum tax credit carryforwards 830 862
ITC credit carryforwards 148 148
Allowance for doubtful accounts receivable 471 237
Excess of tax basis over financial statement
basis of inventory 153 347
Other accruals 12 258
Valuation allowance (635) (72)
------ ------
Total deferred tax assets 3,554 2,340
------ ------
Net deferred tax liabilities $3,062 $2,082
====== ======
</TABLE>
Page 50 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
The provision (benefit) for income taxes on income before extraordinary item is
as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Current:
Federal $ - $ 209 $ 25
State 18 135 10
------ ----- -----
18 344 35
Deferred:
Federal (730) 335 -
State (163) 69 -
------ ----- -----
(893) 404 -
------ ----- -----
$(875) $ 748 $ 35
===== ===== =====
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense (benefit) for income, before extraordinary item, is
($ in thousands):
<TABLE>
<CAPTION>
For the Year Ended September 30,
1998 1997 1996
----- ---- ----
Amount Percent Amount Percent Amount Percent
-------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rate $ (281) (34)% $ 834 34% $ 353 34%
State income taxes, net of
federal tax benefit (96) (12) 147 6 - -
Tax free gain on sale of
manufacturing subsidiary (1,347) (163) - - - -
Permanent differences 305 37 37 1 41 4
Increase (decrease) in valuation
allowance on NOL carryforwards 563 68 (264) (11) (458) (44)
AMT rate differences
(carryforwards) - - - - 35 3
Provision to return items:
Additional depreciation - - - - 20 2
Tax effect of Electronics
dissolution - - - - 31 3
Other - - 13 1
Other - net (19) (2) (6) - - -
------- ---- ----- --- ----- ---
$ (875) (106)% $ 748 30% $ 35 3%
======= ==== ===== === ===== ===
</TABLE>
At September 30, 1998, the Company has alternative minimum tax credit
carryforwards, with no expiration date, of $715,000, and Federal net operating
loss carryforwards of approximately $6,881,000, that expire principally in the
year 2013.
Page 51 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Shareholders' Equity
At September 30, 1998, the Company had the following warrants and stock options
outstanding for the purchase of its common stock:
<TABLE>
<CAPTION>
NUMBER OF
DESCRIPTION EXPIRATION DATE SHARES ISSUABLE EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ING Warrants September 2005 2,322,464 $ 2.50
Sutro Warrants September 2005 100,000 $ 2.50
Other Warrants September 1998 to May 2002 115,000 $2.75-$4.13
1989 Plan Options. February 1999 202,400 $1.00-$3.75
1994 Plan Options. March 2004 1,101,950 $2.00-$4.74
1994 Directors' Plan Options March 2005 110,000 $2.00-$4.13
Options outside of Plans June 2005 215,000 $ 3.00
---------
Total number of common
shares issuable 4,166,814
=========
</TABLE>
Warrants - In connection with the ING transaction (see Note 8), 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, 1998, 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 stock-based compensation plans. Accordingly, no compensation
cost has been recognized for its fixed stock option plans. Had compensation
cost for the Company's option plans been determined based on the fair value at
the grant dates for awards under those plans consistent with the method of FASB
Statement 123, "Accounting for Stock-Based Compensation", the Company's net loss
and earnings per share on a pro forma basis for the year ended September 30,
1998, would have been as indicated below (in thousands, except per share data):
Page 52 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Shareholders' Equity (continued)
Net income (loss)
As reported $ 49
Pro forma (75)
Net income (loss) per share,
basic and diluted
As reported $0.00
Pro forma (0.01)
Pro forma information regarding net income and earnings per share is required by
the Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that statement. The
fair value for these options was estimated at the date of grant using the Black-
Scholes option pricing model with the weighted-average assumptions,
respectively: risk-free interest rate of 6.5%; dividend yields of 0%; expected
volatility of 0.3% to 0.5%; and expected lives of the options from 3 to 5 years.
Pro forma information regarding net income and earnings per share has not been
presented for the fiscal years 1997 and 1996, because the effect of the employee
stock options grants was immaterial.
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 1998, 1997 and 1996, no options were exercised under the 1994 Directors
Plan.
Page 53 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Shareholders' Equity (continued)
The following summarizes the option activity related to the plans:
<TABLE>
<CAPTION>
1998 1997
-------------------------------- -----------------------------------
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 $1,209 $ 2.44 870 $ 2.37
Granted 337 $ 4.09 388 $ 2.65
Exercised (44) $ 2.08 (15) $ 1.64
Forfeited (88) $ 2.72 (34) $ 3.02
------ -----
Outstanding at end of year $1,414 $ 2.83 1,209 $ 2.44
====== =====
Options exercisable at year-end $ 748 $ 2.62 622 $ 2.47
====== ========== ====== ==========
Weighted average fair value of exercisable $ 0.90
==========
options at year-end $ 1.12
==========
</TABLE>
The weighted average remaining contract life of the plan options was 4.6 years
as of September 30, 1998.
At September 30, 1998, the range of prices of exercisable options under the
plans were $1.00 to $4.38.
In addition to options under the Plans, the Company also issued options outside
of these Plans to Carlos D. DeMattos, Edward Phillips and ING during fiscal
1995. During 1998, 1997 and 1996, none of these options were exercised.
However, in connection with sale of the manufacturing subsidiary to Phillips
Associates, 200,000 of these options were terminated.
At September 30, 1998, the Company has adequately reserved common shares to
cover all outstanding options and warrants.
11. Commitments and Contingencies
The Company leases certain of its facilities under non-cancelable operating
leases with companies owned by certain members of management; such leases expire
through 2002. 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.
Future minimum payments under non-cancelable operating leases with initial terms
of one year or more consisted of the following at September 30, 1998 (in
thousands):
Page 54 of 61
<PAGE>
11. Commitments and Contingencies (continued)
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
Operating
Leases
--------------------
<S> <C>
1999 $2,485
2000 1,843
2001 1,731
2002 1,121
2003 493
------
$7,673
======
</TABLE>
Rent expense under operating leases approximated $2,860,000 for 1998, $1,687,000
for 1997, and $1,661,000 in 1996. Included in rent expense is rent for property
leased from certain officers/shareholders of $1,020,000, $479,000 and $479,000
for the years ended September 30, 1998,1997,and 1996, respectively.
The Company also entered into a registration rights agreement (the "Registration
Rights Agreement") with ING and Sutro & Co., Incorporated, which acted as the
Company's investment bankers in connection with the transaction ("Sutro"),
entitling the holders of the ING Warrant and the common stock purchase warrant
issued to Sutro with respect to the purchase of up to 100,000 shares of common
stock of the Company, to certain piggy back registration rights with respect to
the shares of common stock issuable upon exercise of the ING Warrant as well as
any shares of common stock subsequently acquired by ING. The Registration
Rights Agreement also grants ING the right to require the Company to file a
shelf registration statement with respect to the sale from time to time of the
1.4 million shares of common stock of the Company acquired by ING from a former
employee of the Company.
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.
12. Pro Forma Results
The pro forma results of operations for the years ended September 30, 1998 and
1997 assuming consummation of the 1998 and 1997 Acquisitions and disposal of the
manufacturing operations as of October 1, 1996, are as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
For the Year Ended September 30,
1998 1997
---- ----
<S> <C> <C>
Net revenue $53,900 $56,545
Net income (loss) before extraordinary item (342) 865
Net income (loss) (342) 671
Net income (loss) per common share - basic and diluted (0.03) 0.08
</TABLE>
Page 55 of 61
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. 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 $158,000 in
1998, $77,000 in 1997 and $52,000 in 1996.
Four Star's employees (approximately 30) are represented by the International
Alliance of Theatrical Stage Employees, AFL-CIO, union and Four Star has entered
into contractual arrangements with such union in respect of its employees that
expire on December 31, 2002.
Page 56 of 61
<PAGE>
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
<TABLE>
<CAPTION>
Year Charged
Ended Balance at to Costs Charged Balance
September Beginning and to Other Deductions at End
30 Description of Year Expenses Accounts - Describe of Year
---- ------------ ---------- -------- -------- ---------- -------
<C> <S> <C> <C> <C> <C> <C>
1998 Allowance for
doubtful
accounts $745 $562 $ 156 (B) $ 204 (A) $1,259
1997 Allowance for
doubtful
accounts 480 269 150 (B) 154 (A) 745
1996 Allowance for
doubtful
accounts 297 295 - 112 (A) 480
- -----------------------------------------------------------------------------------------------------
</TABLE>
(A) Uncollectible accounts written off.
(B) Amount assumed in connection with acquisitions.
Page 57 of 61
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
--- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation.
3.2 Bylaws of the Company, and amendments thereto, incorporated by reference to the
Company's Registration Statement on Form S-18 No. 33-30963 LA.
3.3 Amendment to Bylaws of the Company, incorporated by reference to the Company's
Form 10-K for the fiscal year ended September 30, 1995.
4.1 Common Stock Purchase 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 July 27, 1995.
4.2 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 the fiscal quarter ended March 31, 1996.
4.3 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 July 27, 1995.
4.4 Stockholders Agreement dated as of July 27, 1995, among the Company, ING Equity
Partners, L.P. I, Carlos D. DeMattos, Edward Phillips, C&E DM Limited
Partnership, C&E DM LLC, The Carlos and Elena DeMattos Family Trust dated
February 12, 1991 and The Edward and Norma Phillips Family Trust dated June 5,
1991, incorporated by reference to the Company's Form 8-K dated July 27, 1995.
4.5 Amendment No. 1 to Stockholders Agreement dated as of April 5, 1996, among the
Company, ING Equity Partners, L.P. I, Carlos D. DeMattos, Edward Phillips, C&E
DM Limited Partnership, C&E DM LLC, The Carlos and Elena DeMattos Family Trust
dated February 12, 1991 and the Edward and Norma Phillips Family Trust dated
June 5, 1991, incorporated by reference to the Company's Form 10-Q for the
fiscal quarter ended March 31, 1996.
4.6 $100,000 Senior Subordinated Note dated July 27, 1995, made by the Company in
favor of ING Equity Partners, L.P. I, incorporated by
</TABLE>
Page 58 of 61
<PAGE>
<TABLE>
<C> <C> <S>
reference to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996.
4.7 Common stock Purchase Warrant dated as of January 12, 1999, issued by the
Company in favor of ING Equity Partners, L.P. I, for 300,000 shares, but without
annexes, exhibits and schedules.
4.8 Common stock Purchase Warrant dated as of January 12, 1999, issued by the
Company in favor of ING Equity Partners, L.P. I, for 150,000 shares, but without
annexes, exhibits and schedules.
10.1 N/A 1989 Stock Option Plan, incorporated by reference to the Company's Registration
Statement on Form S-18 No. 33-30963 LA.
10.2 N/A Amendment to 1989 Stock Option Plan, incorporated by reference to the Company's
Form 10-K for the fiscal year ended September 30, 1991.
10.3 N/A 1994 Stock Option Plan, incorporated by reference to the Company's Proxy
Statement dated March 29, 1994.
10.4 N/A 1994 Stock Option Plan for Directors, incorporated by reference to the Company's
Proxy Statement dated March 29, 1994.
10.5 N/A Agreement of Dissolution of General Partnership between Matthews Studio
Electronics, Inc., and E.F. Nettmann & Associates, Inc., dated as of September
30, 1994, incorporated by reference to the Company's Form 10-K for the fiscal
year ended September 30, 1995.
10.6 N/A Equipment Management Services Agreement between Matthews Studio Electronics,
Inc., and E.F. Nettmann & Associates, Inc., dated as of October 1, 1994,
incorporated by reference to the Company's Form 10-K for the fiscal year ended
September 30, 1995.
10.7 N/A 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.
10.8 N/A 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 July
27, 1995.
10.9 N/A 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.
10.10 N/A Amended and Restated Credit Agreement dated as of April 1, 1998, among the
Company, Matthews Studio Equipment, Inc., Hollywood Rental Co., Inc., Matthews
Studio Electronics, Inc., Acceptance Corporation, Duke City Video, Inc., HDI
Holdings, Inc., Four Star Lighting, Inc., the guarantors named therein the
lenders named therein
</TABLE>
Page 59 of 61
<PAGE>
<TABLE>
<C> <S>
and The Chase Manhattan Bank, as agent for the lenders,
incorporated by reference to the Company's Form 8-K dated April 1, 1998.
10.11 Waiver and Amendment Agreement No. 2 dated as of September 25, 1998, among the
Company, Hollywood Rental Company, LLC, Matthews Studio Electronics, Inc.,
Matthews Acceptance Corporation, Duke City Video, Inc., HDI Holdings, Inc., Four
Star Lighting, Inc., Matthews Studio Sales, Inc., Matthews Studio Group Centers,
Inc., the guarantors named therein, The Chase Manhattan Bank, as Agent for the
lenders, and the lenders named therein, but without exhibits and schedules.
10.12 Waiver and Amendment Agreement No. 3 dated as of January 12, 1999, among the
Company, Hollywood Rental Company, LLC, Matthews Studio Electronics, Inc.,
Matthews Acceptance Corporation, Duke City Video, Inc., HDI Holdings, Inc., Four
Star Lighting, Inc., Matthews Studio Sales, Inc., Matthews Studio Group Centers,
Inc., the guarantors named therein, The Chase Manhattan Bank, as Agent for the
lenders, and the lenders named therein, but without exhibits and schedules.
10.13 Letter of Credit dated as of January 12, 1999, issued by ING (U.S.) Capital
LLC in favor of The Chase Manhattan Bank, as Agent.
10.14 Reimbursement Agreement dated as of January 12, 1999, among the Company,
Hollywood Rental Company, LLC, Matthews Studio Electronics, Inc., Matthews
Acceptance Corporation, Duke City Video, Inc., HDI Holdings, Inc., Four Star
Lighting, Inc., Matthews Studio Sales, Inc., Matthews Studio Group Centers,
Inc., Keylite Holdings, Inc., Reel Wheels, Inc., Keylite Production Services,
Inc., Duke City Holdings, Inc., Four Star Holding, Inc. and ING Equity Partners,
L.P. I.
10.15 Security Agreement dated as of January 12, 1999, among the Company, Hollywood
Rental Company, LLC, Matthews Studio Electronics, Inc., Matthews Acceptance
Corporation, Duke City Video, Inc., HDI Holdings, Inc., Four Star Lighting,
Inc., Matthews Studio Sales, Inc., Matthews Studio Group Centers, Inc., Keylite
Holdings, Inc., Reel Wheels, Inc., Keylite Production Services, Inc., Duke City
Holdings, Inc., Four Star Holding, Inc. and ING Equity Partners, L.P. I., but
without exhibits and schedules.
10.16 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 to the Company's Form 8-K dated May 2, 1997.
10.17 $585,561 Note dated as of May 2, 1997, made by Duke City Video, Inc. in favor of
Harold Jay Lefkovitz, incorporated by reference to the Company's Form 8-K dated
May 2, 1997.
10.18 Subordination Agreement made by Harold Jay Lefkovitz in favor of The Chase
Manhattan Bank, as agent, incorporated by reference to the Company's Form 8-K
dated May 2, 1997.
</TABLE>
Page 60 of 61
<PAGE>
<TABLE>
<C> <S>
10.19 Stock Exchange Agreement dated as of May 2, 1997, between Duke City Holdings,
Inc. and John E. Hensch, incorporated by reference to the Company's Form 8-K
dated May 2, 1997.
10.20 Sale Agreement dated March 20, 1998, among the Company, Four Star Associates,
L.P., Stonebridge Partners Equity Fund, L.P., Bill L. Aishman, Anthony
P.Cancellieri, Darren DeVerna, Four Star Lighting, incorporated by Company's
Form 8-K dated April 1, 1998.
10.21 Employment Agreement dated April 1, 1998, between Darren DeVerna and the
Company, incorporated by reference to the Company's Form 8-K dated April 1, 1998.
10.22 Amended and Restated Employment Agreement between the Company and Carlos D.
DeMattos dated October 1, 1997, incorporated by reference to the Company's Form
10-Q for the fiscal quarter ended December 31, 1997.
21 List of the Company's subsidiaries.
23 Consent of Independent Auditors.
27 Financial Data Schedule
99.1 Stock Exchange Agreement dated September 28, 1998, among the Company, Matthews
Studio Equipment, Inc., Phillips Associates, LLC and Edward Phillips,
incorporated by reference to the Company's Form 8-K dated September 28, 1998.
99.2 Indemnification Agreement dated September 28, 1998, among the Company, Matthews
Studio Equipment, Inc., Phillips Associates, LLC and Edward Phillips,
incorporated by reference to the Company's Form 8-K dated September 28, 1998.
99.3 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.
99.4 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.
99.5 Amendment No. 2 to Employment Agreement dated September 28, 1998, among the
Company, Matthews Studio Equipment, Inc. and Edward Phillips, incorporated by
reference to the Company's Form 8-K dated September 28, 1998.
</TABLE>
Page 61 of 61
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
--------------------
ARTICLES OF INCORPORATION
-------------------------
OF
--
MATTHEWS STUDIO EQUIPMENT GROUP
-------------------------------
Carlos D. DeMattos and Gregory Moiseeff hereby certify that:
1. They are the President and the Secretary, respectively, of Matthews Studio
Equipment Group, a California corporation.
2. The Articles of Incorporation of this corporation are amended and restated
to read as follows:
ARTICLE I
---------
The name of this corporation is Matthews Studio Equipment Group.
ARTICLE II
----------
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code. The corporation elects to be governed by all of the
provisions of the California General Corporation Law effective January 1, 1977
(including those not applicable under Chapter 23 of that Law), as same has been
amended.
ARTICLE III
-----------
The number of directors of this corporation shall be not less than
five nor more than nine, the exact number of which shall be fixed by a bylaw
adopted by the board of directors.
ARTICLE IV
----------
The total number of shares which this corporation shall have authority
to issue is twenty-one million (21,000,000) shares consisting of twenty million
(20,000,000) shares of Common Stock No Par Value and One Million (1,000,000)
shares of Preferred Stock without par value. The designations and the powers,
preferences and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, of the Preferred Stock of
the corporation shall be established by a Board of Directors resolution in
accordance with the provisions of the California statutes. The currently in
effect rights, preferences, powers, qualifications, limitations and restrictions
granted to or imposed upon the Preferred Stock are set forth in Article VII
below.
<PAGE>
ARTICLE V
---------
This corporation reserves the right to amend, alter, change, add to or
repeal any provision contained in these Articles of Incorporation, in the manner
now or hereafter prescribed by law, and all rights and powers conferred by these
Articles of Incorporation on shareholders, directors and officers are granted
subject to this reservation.
ARTICLE VI
----------
1. The liability of directors of the corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law.
2. The corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the California Corporations Code) through
Bylaw provisions, agreements with agents, vote of shareholders or disinterested
directors, or otherwise, to the fullest extent permissible under California law.
ARTICLE VII
-----------
The following is a full restatement of the rights, preferences, powers,
qualifications, limitations and restrictions granted to or imposed upon the
Preferred Stock, no par value (the "Preferred Stock") or the holders thereof,
which shall consist of and be limited to a total number of one million shares
authorized for issuance.
1. Definitions. For purposes of this Article VII, the following
-----------
definitions shall apply:
"Affiliate" shall mean, with respect to any person, any person that
---------
directly or indirectly through one or more intermediaries Controls, is
Controlled by or is under common Control with such person.
"Control" shall mean ownership of a majority of the capital stock or
-------
interests in another Person.
"EP" shall mean ING Equity Partners, L.P. I, a Delaware limited
--
partnership, or any of its Affiliates.
"Liquidation Value" has the meaning set forth in Section 4 hereof.
-----------------
"Securities Purchase Agreement" shall mean the Purchase Agreement
-----------------------------
between the corporation and EP, as such agreement may from time to
time be amended in accordance with its terms.
"Subsidiary" shall mean any corporation of which the shares of stock
----------
having a majority
<PAGE>
of the general voting power in electing the board of directors are, at
the time as of which any determination is being made, owned by the
corporation either directly or indirectly through Subsidiaries.
"Triggering Event" shall have the meaning set forth in Section 2(a)
----------------
below.
"Warrants" shall mean the Warrants of the corporation exercisable for
--------
shares of Common Stock issued to EP pursuant to the Securities
Purchase Agreement.
2. Voting Rights.
-------------
(a) Prior to Triggering Event. Except for those voting rights
-------------------------
expressly required by law or with regard to any amendment to the corporation's
Articles of Incorporation to alter or change, directly or indirectly, the
powers, designations, preferences or special rights relating to the shares of
the Preferred Stock, holders of the Preferred Stock shall have no voting rights
unless and until an Event of Default, as that term is defined in the Securities
Purchase Agreement, shall have occurred and be continuing (a "Triggering
Event").
(b) Occurrence of Triggering Event. Upon the occurrence of a
------------------------------
Triggering Event, and until such Triggering Event shall have been remedied to
the satisfaction of a majority of the holders of the Preferred Stock, each
holder of the Preferred Stock shall be entitled to vote together with the Common
Stock and any other voting stock of the corporation on all matters submitted to
the corporation's shareholders for consideration, vote or approval, in the
manner set forth in this Section 2(b). The holders of the Preferred Stock will
have in the aggregate, and will be entitled to cast in the aggregate, a number
of votes equal to the number of votes to which the shares of Common Stock,
issuable upon exercise of the then unexercised portion of the Warrants
outstanding and held by holders of the Preferred Stock as of the date the
shareholders' meeting is called or the date the written consent is solicited,
would be entitled, if such Warrants had been exercised. Each holder of the
Preferred Stock will have, and will be entitled to cast, a pro rata number of
the votes accorded to the holders of the Preferred Stock in the aggregate, as
set forth in the preceding sentence, determined based on the ratio that the
number of shares of Preferred Stock held by such holder as of the date the
----
shareholders' meeting is called or the date the written consent is solicited,
bears to the aggregate number of shares of Preferred Stock that are issued and
outstanding as of such date.
3. Dividends. The holders of the Preferred Stock shall not be entitled
---------
to receive dividend payments at any time.
4. Liquidation. Upon any liquidation, dissolution or winding up of the
-----------
corporation, before any distribution or payment is made upon any shares of any
other class of capital stock of the corporation, the holders of Preferred Stock
will be entitled to be paid an amount equal to the Liquidation Value per share,
and shall not be entitled to receive any further distribution or payment.
Neither the consolidation nor merger of the corporation into or with any other
corporation or corporations, nor the sale or transfer by the corporation of all
or any part of its assets, nor the reduction of the capital stock of the
corporation, shall be deemed to be a liquidation, dissolution or winding-up of
the corporation within the meaning of any of the provisions of this Section 4.
The "Liquidation Value" of each share of Preferred Stock will be $100 per share.
-----------------
<PAGE>
5. Mandatory Redemption.
--------------------
(a) Triggering Event. In the event that the Warrants are fully
----------------
exercised, then simultaneously with such exercise, the corporation shall redeem
the outstanding shares of Preferred Stock; however, the Preferred Stock will not
be redeemed until such time as the Warrants are exercised in full.
(b) Redemption Price. On the date of redemption, upon surrender by
----------------
the holders at the corporation's principal office of the certificate
representing the shares of the Preferred Stock, the corporation will pay to the
holders an amount in cash equal to the Liquidation Value.
(c) Cancellation of Redeemed Stock. The shares of Preferred Stock
------------------------------
redeemed pursuant to this Section 5 shall be cancelled and shall not under any
circumstances be reissued.
6. Replacement. Upon receipt of evidence reasonably satisfactory to the
-----------
corporation (an affidavit of the registered holder will be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing the shares of Preferred Stock, and in the case of any such loss,
theft or destruction, upon receipt of indemnity reasonably satisfactory to the
corporation (provided that if the holder is an institutional investor its own
agreement will be satisfactory), or, in the case of any such mutilation upon
surrender of such certificate, the corporation will (at its expense) execute and
deliver in lieu of such certificate a new certificate of like kind representing
shares of Preferred Stock, dated the date of such lost, stolen, destroyed or
mutilated certificate.
7. Notices. All notices will be in writing and will be delivered by
-------
registered or certified mail, return receipt requested, postage prepaid and will
be deemed to have been given when so mailed (i) to the corporation, at its
principal executive offices and (ii) to the holders of the Preferred Stock, at
such holders' addresses as they appear in the stock records of the corporation
(unless otherwise indicated by such holders).
3. Article II was amended and, as so amended, is set forth above. Such
amendment (including the last sentence of Article II) was duly approved by
the Board of Directors. Such amendment (other than the last sentence of
Article II) was also submitted to and approved by the required vote of the
shareholders in accordance with Section 902 of the California Corporations
Code. Only the Common Stock was entitled to vote on such amendment, the
total number of shares of Common Stock outstanding at the time the matter
was submitted to the shareholders was 10,331,591, the number of shares of
Common Stock voting in favor of the amendment exceeded the vote required,
and the vote required was a majority of the outstanding shares of Common
Stock.
4. Article III was eliminated from the Articles of Incorporation, and Articles
IV, V, VI, VII and VIII were renumbered Articles III, IV, V, VI and VII.
Such amendment was duly approved by the Board of Directors. Such amendment
was also submitted to and approved by the required vote of the shareholders
in accordance with Section 902 of the California Corporations Code. Only
the Common Stock was entitled to vote on such amendment, the total number
of shares of Common Stock outstanding at the time the matter was submitted
to the shareholders was 10,331,591, the number of shares of Common Stock
voting in favor of the amendment exceeded the vote required, and the vote
required was a majority of the outstanding shares of Common Stock.
<PAGE>
5. Pursuant to such amendments, the Board of Directors has also duly approved
the foregoing amendment and restatement of the Articles of Incorporation.
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Dated: August 15, 1997
/s/ Carlos D. DeMattos
-----------------------------------------
Carlos D. DeMattos, President
/s/ Gregory Moiseeff
---------------------
Gregory Moiseeff, Secretary
<PAGE>
Exhibit 4.7
-----------
Execution Copy
THIS WARRANT CERTIFICATE AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF THIS WARRANT CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR FILED OR
QUALIFIED UNDER THE STATE SECURITIES LAW OF CALIFORNIA OR ANY OTHER STATE AND
MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THEY HAVE BEEN
REGISTERED OR QUALIFIED UNDER SUCH LAWS OR AN EXEMPTION FROM REGISTRATION OR
QUALIFICATION IS AVAILABLE.
MATTHEWS STUDIO EQUIPMENT GROUP
Warrant to Purchase
300,000 Shares
of Common Stock
January 12, 1999
Common Stock Purchase Warrant
-----------------------------
THIS Common Stock Purchase Warrant (the "Warrant") CERTIFIES that, for value
-------
received, ING Equity Partners, L.P. I, a Delaware limited partnership, or its
registered assigns (the "Holder") is entitled to purchase from Matthews Studio
------
Equipment Group, a California corporation (the "Company"), 300,000 shares of the
-------
Common Stock, no par value (the "Common Stock"), of the Company (representing
------------
2.13% of the Common Stock outstanding on a Fully Diluted Basis at the date
hereof) at the price (the "Exercise Price") of $2.50 per share (subject to
--------------
certain adjustments as set forth in Section 3.3 hereof), at any time or from
time to time during the period commencing on the date hereof and ending at 5:00
P.M. on the tenth anniversary of the date hereof (the "Expiration Date").
---------------
This Warrant is subject to the terms and conditions, and entitled to the
benefits, of the following agreements, each dated as of July 27, 1995: (i) the
Stockholders Agreement between, among others, the Company and ING, and (ii) the
Registration Rights Agreement between, among others, the Company and ING (as
amended, supplemented or altered from time to time, the "Stockholders
------------
Agreement," and the "Registration Rights Agreement," respectively).
-----------------------------
<PAGE>
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions. Unless the context shall otherwise
-----------
require, capitalized terms used and not defined herein shall have the meanings
set forth in the Amended and Restated Credit Agreement, dated as of April 1,
1998, between, among others, the Company and The Chase Manhattan Bank (as
amended or otherwise modified from time to time, the "Credit Agreement"). In
----------------
addition, the following terms shall have the following meanings:
"Affiliate" shall mean with respect to any Person, (a) any Person
---------
which directly, or indirectly through one or more intermediaries, controls, or
is controlled by, or is under common control with, such Person, or (b) any
Person who is a director or executive officer (i) of such Person, (ii) of any
Subsidiary of such Person, or (iii) of any Person described in clause (a) above,
or with respect to any Stockholder, the Company; provided, that any Affiliate of
a corporation shall be deemed an Affiliate of such corporation's stockholders.
For purposes of this definition, "control" of a Person shall mean the power,
direct or indirect, (i) to vote or direct the voting of more than 5% of the
outstanding shares of voting stock of such Person, or (ii) to direct or cause
the direction of the management and policies of such Person, whether by contract
or otherwise.
"Assignment Form" shall mean the assignment form attached as Annex 2
--------------- -------
hereto.
"Business Day" shall mean any day other than a Saturday, Sunday or a
------------
day on which banks within New York, New York are authorized or required to be
closed.
"Closing Date" shall mean the date this Warrant was granted.
------------
"Common Stock" shall mean the Common Stock, no par value, of the
------------
Company, having the terms, conditions, rights and limitations described in the
Articles of Incorporation of the Company attached as Exhibit A hereto.
---------
"Company" shall have the meaning given to such term in the Preamble.
-------
"Convertible Securities" shall have the meaning given to such term in
----------------------
Section 3.3.1(b).
- ----------------
"Credit Agreement" shall have the meaning given to such term in the
----------------
introduction to this Section 1.1.
-----------
"Delivery Date" shall have the meaning given to such term in Section
------------- -------
3.2.
- ---
<PAGE>
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
"Exchange Form" shall mean the exchange form attached as Annex 3
------------- -------
hereto.
"Excluded Securities" shall mean:
-------------------
(i) shares of capital stock issued pursuant to a stock dividend or
a stock split or other subdivision of shares;
(ii) Common Stock issued upon exercise of the ING Warrants;
(iii) Common Stock issued by the Company in any public offering
registered under the Securities Act, which offering results in net proceeds to
the Company of at least $10,000,000 and a price per share of Common Stock of not
less than $2.50 (appropriately adjusted to reflect all recapitalization events);
(iv) securities issued upon conversion, exercise or exchange of
convertible securities, warrants, options, subscriptions, calls or other rights
to acquire Common Stock, provided that the foregoing rights are (x) outstanding
on the date hereof and are issued in conformity with such rights as issued and
in effect at the date hereof, or (y) are issued hereafter in compliance with
Section 4.2 hereof; or
- -----------
(v) Common Stock issued pursuant to the Company's Amended and
Restated 1989 Stock Option Plan, the Company's 1994 Stock Option Plan, the
Company's 1994 Stock Option Plan for Directors, options granted pursuant to the
Amended and Restated Employment Agreement dated October 1, 1997 between the
Company and Carlos D. DeMattos, the employment terms letter dated October 1,
1998 between the Company and John Murray and the Employment Agreement dated
November 23, 1998 between the Company and Alan Unger, any other employee benefit
plan (including any future adopted employee stock option plan), and pursuant to
any acquisition permitted under the Purchase Agreement and the Credit Agreement.
"Exercise Form" shall mean the exercise form attached as Annex 1
------------- -------
hereto.
"Exercise Price" shall mean $2.50 per share of Common Stock, subject
--------------
to adjustment from time to time in the manner provided in Section 3.3.
-----------
"Expiration Date" shall mean January 12, 2009.
---------------
"Fully Diluted Basis" means, as applied to the calculation of the
-------------------
number of shares of Common Stock outstanding at any time, after giving effect to
(a) all shares of Common Stock outstanding at the time of determination, (b) all
shares of Common Stock issuable upon the conversion, exercise or exchange
<PAGE>
of any convertible security, warrant, option, subscriptions, calls or other
rights to acquire Common Stock outstanding at the time of determination,
irrespective of whether such conversion, exercise or exchange is permitted,
restricted or vested at the time of determination, and irrespective of the price
or consideration required by such conversion, exercise or exchange, and (c) all
other commitments, promises or understandings to issue any shares of Common
Stock or any convertible security, warrant, option, subscription, call or other
rights outstanding at the time of determination. Such calculation will reflect
the ING Warrants, and will not be made in accordance with the "treasury method
in accordance with GAAP."
"GAAP" shall mean generally accepted accounting principles in the
----
United States of America in effect from time to time.
"Governmental Authority" shall mean any federal, state, municipal or
----------------------
other governmental department, commission, board, bureau, agency or
instrumentality, or any court, in each case whether of the United States of
America or foreign.
"Holder" shall have the meaning given to such term in the Preamble.
------
"ING" shall mean ING Equity Partners, L.P. I, a Delaware limited
---
partnership.
"ING Security Agreement" shall mean the Security Agreement, dated as
----------------------
of the Closing Date, between the Company and ING, as amended, supplemented or
altered from time to time.
"ING Warrants" shall mean all Common Stock Purchase Warrants and all
------------
Options issued to ING by the Company as of the date hereof.
"Market Price" shall mean, with respect to a share of Common Stock on
------------
any Business Day:
(a) if the Common Stock is Publicly Traded at the time of
determination, the average of the closing prices for the Common Stock on
all domestic securities exchanges on which such security may at the time be
listed, or, if there have been no sales on any such exchange on such day,
the average of the highest bid and lowest asked prices on all such
exchanges at the end of such day, or, if on any day such security is not so
listed, the average of the representative bid and asked prices quoted on
the Nasdaq Stock Market as of 4:00 P.M., New York time, on such day, or if
on any day such security is not quoted on the Nasdaq Stock Market, the
average of the highest bid and lowest asked prices on such day in the
domestic over-the-counter market as reported by the National Quotation
Bureau, Incorporated, or any similar successor organization, in each such
case averaged over a period of twenty-one (21) days
<PAGE>
consisting of the day as of which "Market Price" is being determined and
the twenty (20) consecutive Business Days prior to such day; or
(b) if the Common Stock is not Publicly Traded at the time of
determination then, solely for purposes of Section 3, then the Market Price
shall be the Market Value Per Share.
"Market Value" shall mean the highest price that would be paid for all
------------
of the Common Stock of the Company on a going-concern basis in a single arm's-
length transaction between a willing buyer and a willing seller (neither acting
under compulsion), using valuation techniques then prevailing in the securities
industry and always determined in accordance with the Valuation Procedures, and
assuming full disclosure and understanding of all relevant information and a
reasonable period of time for effectuating such sale. For the purposes of
determining the Market Value, (i) the exercise price of options, warrants or
rights to acquire Common Stock which are included for the purpose of determining
the number of shares of Common Stock outstanding on a Fully Diluted Basis shall
be deemed to have been received by the Company if and to the extent that the
aggregate Market Value of such shares of Common Stock exceeds the aggregate
exercise price of such options, warrants or rights, (ii) the liquidation
preference or indebtedness, as the case may be, represented by securities which
are included for the purpose of determining the number of shares of Common Stock
outstanding on a Fully Diluted Basis shall be deemed to be converted or
exchanged if and to the extent that the aggregate Market Value of such shares of
Common Stock exceeds the aggregate amount of such liquidation preference or
indebtedness, (iii) any contract or legal limitation in respect of the shares of
Common Stock, including their transfer, voting and other rights shall be
ignored, and (iv) any illiquidity arising by contract or law in respect of the
shares of Common Stock and any voting rights or control rights amongst the
Stockholders, shall be ignored.
"Market Value Per Share" shall mean the price per share of Common
----------------------
Stock obtained by dividing (A) the Market Value by (B) the number of shares of
Common Stock outstanding (on a Fully-Diluted Basis) at the time of
determination.
"Nasdaq Stock Market" shall mean the Nasdaq National Market or the
-------------------
Nasdaq SmallCap Market.
"Options" shall have the meaning given to such term in Section
------- -------
3.3.1(b) hereof.
- --------
"Other Anti-Dilution Instruments" shall mean any option, warrant,
-------------------------------
convertible security, subscription, call or other rights to acquire Common Stock
whether outstanding as of the date hereof or hereafter issued, together with any
agreements relating thereto, which provide for anti-dilution or other
<PAGE>
adjustments in the number of shares of Common Stock and/or exercise, exchange or
conversion price thereof.
"Person" means any individual, sole proprietorship, partnership, joint
------
venture, trust, unincorporated organization, association, corporation,
institution, public benefit corporation, limited liability company, joint stock
company, estate entity or Governmental Authority.
"Proportionate Percentage" shall mean, with respect to any Holder at
------------------------
any time, the quotient obtained by dividing (a) the aggregate number of Warrant
Shares and other shares of Common Stock then held by such Holder by (b) the
total number of shares of Common Stock then outstanding (on a Fully-Diluted
Basis).
"Publicly Traded" shall mean, with respect to any security, that such
---------------
security is (a) listed on a domestic securities exchange, (b) quoted on the
Nasdaq Stock Market or (c) traded in the domestic over-the-counter market, which
trades are reported by the National Quotation Bureau, Incorporated, and in the
cases of clauses (b) and (c), the average weekly trading volume on the 20
trading days preceding the time of determination equals or exceeds 1/2 of 1% of
the outstanding Common Stock on a Fully Diluted Basis.
"Purchase Agreement" shall mean the Purchase Agreement dated as of
------------------
July 27, 1995 between the Company and ING, as amended from time to time.
"Refused Securities" shall have the meaning given to such term in
------------------
Section 4.2(c).
- --------------
"Registration Rights Agreement" shall have the meaning given to such
-----------------------------
term in the Preamble.
"Reimbursement Agreement" means the Reimbursement Agreement, dated as
-----------------------
of the Closing Date, between the Company and ING, as amended, supplemented or
altered from time to time.
"Requisite Holders" shall mean Holders holding ING Warrants or
-----------------
securities representing at least 51% of all securities issued or issuable upon
exercise of the ING Warrants outstanding on the date of determination.
"Section 4.2 Notice of Acceptance" shall have the meaning given to
--------------------------------
such term in Section 4.2 hereof.
-----------
"Section 4.2 Offer" shall have the meaning given to such term in
-----------------
Section 4.2 hereof.
- -----------
"Section 4.2 Offer Notice" shall have the meaning given to such term
------------------------
in Section 4.2 hereof.
-----------
"Section 4.2 Offered Securities" shall have the meaning given to such
------------------------------
term in Section 4.2(a).
--------------
<PAGE>
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"Standby Letter of Credit" shall mean the Standby Letter of Credit
------------------------
issued by ING (U.S.) Capital Corporation as of the date hereof for the account
of the Company and in favor of The Chase Manhattan Bank, as agent for the
Lenders.
"Stockholders Agreement" shall have the meaning given to such term in
----------------------
the Preamble.
"Valuation Procedure" shall mean, with respect to the determination of
-------------------
any amount or value required to be determined in accordance with such procedure,
a determination (which shall be final and binding on the Company and the
Holders) made (i) by agreement among the Company and the Requisite Holders
within thirty (30) days following the event requiring such determination or (ii)
in the absence of such an agreement, by an Appraiser (as defined below) selected
in accordance with the further provisions of this definition. If required, an
Appraiser shall be selected within 10 days following the expiration of the 30-
day period referred to above, either by agreement among the Company and the
Requisite Holders or, in the absence of such agreement, by lot from a list of
four potential Appraisers remaining after the Company nominates three, the
Requisite Holders nominate three, and each side eliminates one potential
Appraiser. The Appraiser shall be instructed by the Company and the Requisite
Holders to make its determination within thirty (30) days of its selection. The
fees and expenses of an Appraiser selected hereunder shall be borne fifty
percent (50%) by the Company and fifty percent (50%) by the Holders (on a pro
---
rata basis) participating in the transaction to which the determination relates.
- ----
As used herein, "Appraiser" shall mean (a) with respect to a determination of
Market Value, a nationally-recognized investment banking firm and (b) with
respect to a determination of Liquidation Value (or any other valuation required
hereunder), a firm of the type generally considered to be qualified in making
determinations of the type required.
"Warrant" shall have the meaning given to such term in the Preamble.
-------
"Warrant Register" shall have the meaning given to such term in
----------------
Section 2.1.
- -----------
"Warrant Shares" shall mean (a) the shares of Common Stock issued or
--------------
issuable upon exercise of a Warrant in accordance with Section 4.1 or upon
-----------
exchange of a Warrant in accordance with Section 4.2 and (b) any securities of
-----------
the Company distributed with respect to the securities referred to in the
preceding clause (a). As used in this Warrant, the phrase "Warrant Shares then
----------
held" by any Holder or Holders shall mean Warrant Shares held at the time of
determination by such Holder or Holders, and shall include Warrant Shares
issuable upon exercise of ING
<PAGE>
Warrants held at the time of determination by such Holder or Holders.
SECTION 1.2. Interpretation. Unless the context of this Warrant
--------------
clearly requires otherwise, references to the plural include the singular, to
the singular include the plural, and to the part include the whole. The term
"including" is not limiting and the term "or" has the inclusive meaning
represented by the term "and/or." The words "hereof," "herein," "hereunder,"
and similar terms in this Warrant refer to this Warrant as a whole and not to
any particular provision of this Warrant. References to "Articles," "Sections,"
"Subsections," "Exhibits," and "Schedules" are to Articles, Sections,
Subsections, Exhibits and Schedules, respectively, of this Warrant, unless
otherwise specifically provided. Terms defined herein may be used in the
singular or the plural.
ARTICLE II
FORM; EXCHANGE FOR WARRANTS; TRANSFER; TAXES
SECTION 2.1. Warrant Register. Each Warrant issued, exchanged or
----------------
transferred in accordance with the terms hereof shall be registered in a warrant
register (the "Warrant Register"). The Warrant Register shall set forth the
----------------
number of each Warrant, the name and address of the Holder thereof, and the
original number of Warrant Shares purchasable upon the exercise thereof. The
Warrant Register will be maintained by the Company and will be available for
inspection by any Holder at the principal office of the Company or such other
location as the Company may designate to the Holders in the manner set forth in
Section 5.1. The Company shall be entitled to treat the Holder of any Warrant as
- -----------
the owner in fact thereof for all purposes and shall not be bound to recognize
any equitable or other claim to or interest in such Warrant on the part of any
other Person. The Company shall not be liable for complying with a request by a
fiduciary or nominee of a fiduciary to register a transfer of any Warrant which
is registered in the name of such fiduciary or nominee, unless made with the
actual knowledge that such fiduciary or nominee is committing a breach of trust
in requesting such registration of transfer, or with knowledge of such facts
that the Company's participation therein amounts to bad faith.
SECTION 2.2. Exchange of Warrants for Warrants. (a) The Holder may
---------------------------------
exchange this Warrant for another Warrant or Warrants of like kind and tenor
representing in the aggregate the right to purchase the same number of Warrant
Shares which could be purchased pursuant to the Warrant being so exchanged. In
order to effect an exchange permitted by this Section 2.2, the Holder shall
-----------
deliver to the Company such Warrant accompanied by an Exchange Form in the form
attached hereto as Annex 3 signed by the Holder thereof specifying the number
-------
and denominations of Warrants to be issued in such exchange and the names in
which
<PAGE>
such Warrants are to be issued. Within ten (10) Business Days of receipt of
such a request, the Company shall issue, register and deliver to the Holder
thereof each Warrant to be issued in such exchange.
(b) Upon receipt of evidence reasonably satisfactory to the Company
(an affidavit of the Holder being satisfactory) of the ownership and the loss,
theft, destruction or mutilation of any Warrant, and in the case of any such
loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory
to the Company (if the Holder is a creditworthy financial institution or other
creditworthy institutional investor its own agreement being satisfactory) or, in
the case of any such mutilation, upon surrender of such Warrant, the Company
shall (at its expense) execute and deliver in lieu of such Warrant a new Warrant
of like kind representing the same rights represented by and dated the date of
such lost, stolen, destroyed or mutilated Warrant. Any such new Warrant shall
constitute an original contractual obligation of the Company, whether or not the
allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time
enforceable by any Person.
(c) The Company shall pay all taxes (other than any applicable income
or similar taxes payable by a Holder of a Warrant) attributable to an exchange
of a Warrant pursuant to this Section 2.2; provided, however, that the Company
----------- -------- -------
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance of any Warrant in a name other than that of
the Holder of the Warrant being exchanged.
SECTION 2.3. Transfer of Warrant. (a) Subject to Section 2.3(c)
------------------- --------------
hereof, each Warrant may be transferred by the Holder thereof by delivering to
the Company such Warrant accompanied by a properly completed Assignment Form in
the form of Annex 2. Within ten (10) Business Days of receipt of such
-------
Assignment Form the Company shall issue, register and deliver to the Holder,
subject to Section 2.3(c) hereof, a new Warrant or Warrants of like kind and
--------------
tenor representing in the aggregate the right to purchase the same number of
Warrant Shares which could be purchased pursuant to the Warrant being
transferred. In all cases of transfer by an attorney, the original power of
attorney, duly approved, or a copy thereof, duly certified, shall be deposited
and remain with the Company. In case of transfer by executors, administrators,
guardians or other legal representatives, duly authenticated evidence of their
authority shall be produced and may be required to be deposited and remain with
the Company in its discretion.
(b) Each Warrant issued in accordance with this Section 2.3 shall
-----------
bear the restrictive legend set forth on the face of this Warrant, unless the
Holder or transferee thereof supplies to the Company an opinion of counsel,
reasonably satisfactory to the Company, that the restrictions described in such
legend are no longer applicable to such Warrant.
<PAGE>
(c) The transfer of Warrants and Warrant Shares shall be permitted,
so long as such transfer is pursuant to a transaction that (i) complies with, or
is exempt from, the provisions of the Securities Act, and the Company may
require an opinion of counsel (which may be internal counsel to a Holder) in
form and substance reasonably satisfactory to it to such effect prior to
effecting any transfer of Warrants or Warrant Shares and (ii) complies with the
applicable provisions of the Stockholders Agreement.
ARTICLE III
EXERCISE OF WARRANT; EXCHANGE FOR WARRANT SHARES
SECTION 3.1. Exercise of Warrants. On any Business Day prior to the
--------------------
Expiration Date, a Holder may exercise a Warrant, in whole or in part, by
delivering to the Company such Warrant accompanied by a properly completed
Exercise Form in the form of Annex 1 and a check in an aggregate amount equal to
-------
the product obtained by multiplying (a) the Exercise Price by (b) the number of
Warrant Shares being purchased; provided, however, in the event the Holder
-------- -------
exercises this Warrant in connection with or immediately prior to a sale by the
Holder of Warrant Shares, in lieu of paying the applicable Exercise Price
therefor, the Holder may elect to receive that number of Warrant Shares which is
equal to the number of shares for which this Warrant is being exercised less the
number of shares having a Market Price equal to such applicable Exercise Price,
where such Market Price per share shall be equal to the price per share at which
the Holder is selling Warrant Shares. Any partial exercise of a Warrant shall
be for a whole number of Warrant Shares only.
SECTION 3.2. Issuance of Common Stock. (a) Within ten (10) Business
------------------------
Days following the delivery date (the "Delivery Date") of (i) an Exercise Form
-------------
or Exchange Form in accordance with Section 3.1 or 3.2, (ii) a Warrant and (iii)
----------- ---
any required payments of the Exercise Price, the Company shall issue and deliver
to the Holder a certificate or certificates, registered in the name or names set
forth on such notice, representing the Warrant Shares being purchased or to be
received upon such exchange.
(b) If a Holder shall exercise or exchange a Warrant for less than
all of the Warrant Shares which could be purchased or received thereunder, the
Company shall issue to the Holder, within ten (10) Business Days of the Delivery
Date, a new Warrant evidencing the right to purchase the remaining Warrant
Shares. Each Warrant surrendered pursuant to Section 3.1 shall be canceled.
-----------
(c) The Company shall not be required to issue fractional shares of
Common Stock upon the exercise or exchange of a Warrant. If any fraction of a
share of Common Stock would be issuable on the exercise or exchange of any
Warrant, the
<PAGE>
Company may, in lieu of issuing such fractional share, pay to such Holder for
any such fraction of a share an amount in cash equal to the product obtained by
multiplying (i) such fraction by (ii) the Market Price in effect on the Delivery
Date.
(d) The Company shall pay all taxes (other than any applicable income
or similar taxes payable by a Holder of a Warrant) attributable to the initial
issuance of Warrant Shares upon the exercise or exchange of a Warrant; provided,
--------
however, that the Company shall not be required to pay any tax which may be
- -------
payable in respect of any transfer involved in the issuance of any Warrant or
any certificate for Warrant Shares in a name other than that of the Holder of
the Warrant being exercised or exchanged.
(e) The Person in whose name any certificate for shares of Common
Stock is issued upon exercise or exchange of a Warrant shall for all purposes be
deemed to have become the holder of record of such shares on the Delivery Date,
irrespective of the date of delivery of such certificate, except that, if the
Delivery Date is a date when the stock transfer books of the Company are closed,
such Person shall be deemed to have become the holder of record of such shares
at the close of business on the next succeeding date on which the stock transfer
books are open.
(f) Any Exercise Form or Exchange Form delivered under Section 3.1 or
-----------
2.2 may condition the exercise or exchange of any Warrant on the consummation of
- ---
a sale of Warrant Shares pursuant to a public offering registered under the
Securities Act, and such exercise or exchange shall not be deemed to have
occurred except concurrently with the consummation of any such sale.
SECTION 3.3. Adjustment of Exercise Price and Number of Warrant
--------------------------------------------------
Shares. The number and kind of Warrant Shares purchasable upon exercise of each
- ------
Warrant shall be subject to adjustment from time to time in accordance with this
Section 3.3.
- -----------
SECTION 3.3.1. Adjustment upon Issuance of Common Stock. (a) If, at
----------------------------------------
any time after the Closing Date, the Company shall issue or sell (or, in
accordance with Section 3.3.1(b), shall be deemed to have issued or sold) any
----------------
shares of Common Stock without consideration or for a consideration per share
less than either the Market Price determined as of the date of such issuance or
sale or the Exercise Price in effect immediately prior to such issuance or sale,
then, effective immediately upon such issuance or sale, the Exercise Price shall
be reduced (without regard to any other provisions hereof) to an amount equal to
the product obtained by multiplying (A) the Exercise Price in effect immediately
prior to such issuance or sale, by (B) a fraction, the numerator of which shall
be the sum of (x) the product obtained by multiplying (1) the number of shares
of Common Stock outstanding (on a Fully-Diluted Basis) immediately prior to such
issuance or sale by (2) the lesser
<PAGE>
of the Market Price as of the date of such issuance or sale and the Exercise
Price in effect immediately prior to such issuance or sale, and (y) the
consideration, if any, received by the Company upon such issuance or sale, and
the denominator of which shall be the product obtained by multiplying (C) the
number of shares of Common Stock outstanding (on a Fully-Diluted Basis)
immediately after such issuance or sale, by (D) the lesser of the Market Price
as of the date of issuance or sale and the Exercise Price in effect immediately
prior to such issuance or sale. Upon each such adjustment of the Exercise Price
hereunder, the number of Warrant Shares which may be obtained upon exercise of
such Warrant shall be increased to the number of shares determined by
multiplying (A) the number of Warrant Shares which could be obtained upon
exercise of such Warrant immediately prior to such adjustment by (B) a fraction,
the numerator of which shall be the Exercise Price in effect immediately prior
to such adjustment and the denominator of which shall be the Exercise Price in
effect immediately after such adjustment.
(b) For the purpose of determining the adjusted Exercise Price
under Section 3.3.1(a), the following shall be applicable:
----------------
(i) Issuance of Rights or Options. If the Company in any manner
-----------------------------
issues or grants any rights or options to subscribe for or to purchase (A)
Common Stock or (B) any stock or other securities convertible into or
exchangeable for Common Stock (such rights or options being herein called
"Options" and such convertible or exchangeable stock or securities being
--------
herein called "Convertible Securities"), and the price per share for which
----------------------
Common Stock is issuable upon the exercise of such Options or upon
conversion or exchange of such Convertible Securities is less than either
the Market Price determined as of the date of issuance or grant of such
Options or the Exercise Price in effect immediately prior to such issuance
or grant of such Options, then the total maximum number of shares of Common
Stock issuable upon the exercise of such Options (or upon conversion or
exchange of the total maximum amount of such Convertible Securities
issuable upon the exercise of such Options) shall be deemed to be
outstanding and to have been issued and sold by the Company for such price
per share. For purposes of this paragraph, the price per share for which
Common Stock is issuable upon exercise of Options or upon conversion or
exchange of Convertible Securities issuable upon exercise of Options shall
be determined by dividing (A) the total amount, if any, received or
receivable by the Company as consideration for the issuing or granting of
such Options, plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of all such Options, plus in the
case of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable to the
Company upon issuance or sale of such Convertible Securities and the
conversion or exchange
<PAGE>
thereof, by (B) the total maximum number of shares of Common Stock issuable
upon exercise of such Options or upon the conversion or exchange of all
such Convertible Securities issuable upon the exercise of such Options. No
further adjustment of the Exercise Price shall be made upon the actual
issuance of such Common Stock or of such Convertible Securities upon the
Exercise of such Options or upon the actual issuance of such Common Stock
upon conversion or exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Company in any
----------------------------------
manner issues or sells any Convertible Securities having an exercise or
conversion or exchange price per share of Common Stock which is less than
either the Market Price determined as of the date of such issuance or sale
or the Exercise Price in effect immediately prior to such issuance or sale,
then the maximum number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities shall be deemed to be
outstanding and to have been issued and sold by the Company for such lower
price per share. For purposes of this paragraph, the price per share for
which Common Stock is issuable upon conversion or exchange of Convertible
Securities is determined by dividing (A) the total amount received or
receivable by the Company as consideration for the issuance or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or
exchange thereof, by (B) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible
Securities. No further adjustment of the Exercise Price shall be made upon
the actual issuance of such Common Stock upon conversion or exchange of
such Convertible Securities, and if any such issuance or sale of such
Convertible Securities is made upon exercise of any Options for which
adjustments of the Exercise Price had been or are required to be made
pursuant to other provisions of this Section 3.4.1(b), no further
----------------
adjustment of the Exercise Price shall be made by reason of such issuance
or sale.
(iii) Change in Option Price or Conversion Rate. If the purchase
-----------------------------------------
price provided for in any Options, the additional consideration, if any,
payable upon the issuance, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock change at any time, then the Exercise
Price in effect at the time of such change shall be readjusted to the
Exercise Price which would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such
changed purchase price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or sold and
the number of Warrant Shares shall be correspondingly readjusted.
<PAGE>
(iv) Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. Upon the expiration of any Option or the termination of any
----------
right to convert or exchange any Convertible Securities listed on Schedule
--------
3.3.1(b)(iv) without the exercise of such Option or right, the Exercise
------------
Price then in effect and the number of Warrant Shares acquirable hereunder
shall be adjusted to the Exercise Price and the number of shares which
would have been in effect at the time of such expiration or termination had
such Option or Convertible Securities, to the extent outstanding
immediately prior to such expiration or termination, never been issued.
(v) Calculation of Consideration Received. If any Common Stock,
-------------------------------------
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, then the consideration received therefor shall be
deemed to be the net amount received by the Company therefor. If any
Common Stock, Options or Convertible Securities are issued or sold for
consideration other than cash, then the amount of the consideration other
than cash received by the Company shall be the fair value of such
consideration determined by the Board of Directors of the Company.
(vi) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time does not include shares owned or held by or
for the account of the Company or any Subsidiary of the Company, and the
disposition of any shares so owned or held shall be considered an issue or
sale of Common Stock.
(vii) Record Date. If the Company takes a record of the holders of
-----------
Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible
Securities or (B) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date shall be deemed to be the
date of the issuance or sale of the shares of Common Stock deemed to have
been issued or sold upon the declaration of such dividend or the making of
such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
SECTION 3.3.2. Subdivisions or Combinations of Common Stock. If, at
--------------------------------------------
any time after the Closing Date, (a) the number of shares of Common Stock
outstanding is increased by a dividend or other distribution payable in shares
of Common Stock or by a subdivision or split-up of shares of Common Stock or (b)
the number of shares of Common Stock outstanding is decreased by a combination
or reverse stock split of shares of Common Stock, then, in each case, effective
as of the effective date of such event retroactive to the record date, if any,
of such event, (i) the Exercise Price shall be adjusted to a price determined by
multiplying (A) the Exercise Price in effect immediately prior to such event by
(B) a fraction, the numerator of which shall be the
<PAGE>
number of shares of Common Stock outstanding immediately prior to such event and
the denominator of which shall be the number of shares of Common Stock
outstanding after giving effect to such event, and (ii) the number of Warrant
Shares subject to purchase upon the exercise of any Warrant shall be adjusted
effective at such time, to a number equal to the product of (A) the number of
Warrant Shares subject to purchase upon the exercise of such Warrant immediately
prior to such event by (B) a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding after giving effect to such event
and the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such event.
SECTION 3.3.3. Capital Reorganization or Capital Reclassifications.
---------------------------------------------------
If, at any time after the Closing Date, there shall be any capital
reorganization or any reclassification of the capital stock of the Company
(other than a change in par value or from par value to no par value or from no
par value to par value or as a result of a stock dividend or subdivision, split-
up or combination of shares), then in each case the Company shall cause
effective provision to be made so that each Warrant shall, effective as of the
effective date of such event retroactive to the record date, if any, of such
event, be exercisable or exchangeable for the kind and number of shares of
stock, other securities, cash or other property to which a holder of the number
of shares of Common Stock deliverable upon exercise or exchange of such Warrant
would have been entitled upon such reorganization or reclassification and any
such provision shall include adjustments in respect of such stock, securities or
other property that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Warrant with respect to such Warrant.
SECTION 3.3.4. Consolidations and Mergers. If, at any time after the
--------------------------
Closing Date, the Company shall consolidate with, merge with or into, or sell
all or substantially all of its assets or property to, another corporation, then
the Company shall cause effective provision to be made so that each Warrant
shall, effective as of the effective date of such event retroactive to the
record date, if any, of such event, be exercisable or exchangeable for the kind
and number of shares of stock, other securities, cash or other property to which
a holder of the number of shares of Common Stock deliverable upon exercise or
exchange of such Warrant would have been entitled upon such event.
SECTION 3.3.5. Notice; Calculations; Etc. Whenever the Exercise
-------------------------
Price and the number of Warrant Shares shall be adjusted as provided in this
Section 3.3, the Company shall provide to each Holder a statement, signed by the
- -----------
President or Chief Financial Officer/Treasurer of the Company, describing in
detail the facts requiring such adjustment and setting forth a calculation of
the Exercise Price and the number of Warrant Shares applicable to each Warrant
after giving effect to such adjustment. All calculations under this Section 3.3
-----------
shall be
<PAGE>
made to the nearest one hundredth of a cent ($.0001) or to the nearest one-tenth
of a share, as the case may be. Adjustments pursuant to Sections 3.3.1, 3.3.2
-------------- -----
and 3.3.3 shall apply to successive events or transactions of the type covered
-----
thereby.
SECTION 3.3.6. Certain Adjustments. (a) Subject to the limitations
-------------------
set forth in Section 4.5, the Company may make such reductions in the Exercise
-----------
Price or increase in the number of Warrant Shares to be received by any Holder
upon the exercise or exchange of a Warrant, in addition to those adjustments
required by this Section 3.3, as it in its sole discretion shall determine to be
-----------
advisable in order that any consolidation or subdivision of the Common Stock, or
any issuance wholly for cash of any shares of Common Stock, or any issuance
wholly for cash of shares of Common Stock or securities which by their terms are
convertible into or exchangeable for shares of Common Stock, or any stock
dividend, or any issuance of rights, options or warrants hereinafter made by the
Company to the holders of its Common Stock shall not be taxable to such holders.
(b) In the event that the Company in any manner issues or grants
Options or Convertible Securities, or any other transaction, circumstances or
events occur which give rise to anti-dilution adjustments under Other Anti-
Dilution Instruments, then the Company will promptly make proportional,
equitable and corresponding adjustments in the number of shares of Common Stock
issuable upon exercise of the Warrants to protect the Holders against dilution
as a result of such events.
SECTION 3.3.7. Excluded Transactions. Notwithstanding any other
---------------------
provision of this Warrant, no adjustment shall be made pursuant to this Section
-------
3.3 in respect of the issuance of Excluded Securities.
- ---
SECTION 3.3.8. Adjustment Rules. (a) Any adjustments pursuant to
----------------
this Section 3.3 shall be made successively whenever an event referred to herein
-----------
shall occur.
(b) Notwithstanding any other provision of this Warrant, the actual
amount payable by a Holder in connection with the exercise of a Warrant
hereunder shall not be less than the par value per share of the Common Stock,
unless and until the Exercise Price, as adjusted pursuant to this Section 3.3,
-----------
has been reduced to an amount less than 1% of the par value per share of the
Common Stock. Before taking any action which would cause an adjustment pursuant
to this Section 3.3 which would reduce the Exercise Price below 1% of the par
-----------
value per share, the Company shall be required to take any corporate action
which may be necessary in order that the Company may validly and legally issue
fully paid and nonassessable Warrant Shares at the Exercise Price as so
adjusted.
<PAGE>
ARTICLE IV
CERTAIN OTHER RIGHTS
SECTION 4.1. Payments in Respect of Dividends and Distributions. If,
--------------------------------------------------
at any time prior to the Expiration Date, the Company pays any dividend, other
than in the ordinary course of business and to the Company's public
stockholders, or makes any distribution (whether in cash, property or securities
of the Company) on its capital stock which does not result in an adjustment
under Section 3.3 then the Company shall simultaneously pay to the Holder of
-----------
each Warrant, the dividend or distribution which would have been paid to such
Holder on the Warrant Shares receivable upon the exercise in full of such
Warrant had such Warrant been fully exercised immediately prior to the record
date for such dividend or distribution or, if no record is taken, the date as of
which the record holders of Common Stock entitled to such dividend or
distribution are to be determined.
SECTION 4.2. Preemptive Rights. (a) The Company shall not issue,
-----------------
sell or exchange, agree to issue, sell or exchange, or reserve or set aside for
issuance, sale or exchange, any (i) Common Stock, (ii) any other equity security
of the Company, (iii) any debt security of the Company which by its terms is
convertible into or exchangeable for any equity security of the Company or has
any other equity feature, (iv) any security of the Company that is a combination
of debt and equity or (v) any option, warrant or other right to subscribe for,
purchase or otherwise acquire any equity security or any such debt security of
the Company, unless, in each case, the Company shall have first offered (the
"Section 4.2 Offer") to sell to each Holder its Proportionate Percentage of such
- ------------------
securities (the "Section 4.2 Offered Securities") (and to sell thereto Section
------------------------------
4.2 Offered Securities not subscribed for by other Holders as hereinafter
provided), at a price and on such other terms as shall have been specified by
the Company in a written notice (the "Section 4.2 Offer Notice") delivered to
------------------------
such Holder, which Offer by its terms shall remain open and irrevocable for a
period of ten (10) Business Days from the date it is delivered by the Company to
the Holders.
(b) Notice of each Holder's intention to accept, in whole or in part,
a Section 4.2 Offer shall be evidenced by a writing signed by such Holder and
delivered to the Company prior to the end of the 10-day period of such Section
4.2 Offer, setting forth such portion of the Section 4.2 Offered Securities as
such Holder elects to purchase (the "Section 4.2 Notice of Acceptance"). If any
--------------------------------
Holder shall subscribe for less than its Proportionate Percentage of the Section
4.2 Offered Securities available to such Holder, the other subscribing Holders
shall be entitled to purchase the balance of such Holder's Proportionate
Percentage in the same proportion in which they were initially entitled to
purchase the Section 4.2 Offered Securities (excluding for such purposes such
Holder subscribing for less
<PAGE>
than its Proportionate Percentage). The Company shall notify each other Holder
within five (5) Business Days following the expiration of the 10-day period
described above of the amount of Section 4.2 Offered Securities which each
Holder may purchase pursuant to the foregoing sentence, and each Holder shall
then have five (5) Business Days from the delivery of such notice to indicate
such additional amount, if any, that such Holder wishes to purchase.
(c) In the event that Section 4.2 Notices of Acceptance are not given
by the Holders in respect of all the Section 4.2 Offered Securities, the Company
shall have ninety (90) days from the expiration of the foregoing 10-day or 20-
day period, as applicable, to sell all or any part of such Section 4.2 Offered
Securities as to which Section 4.2 Notices of Acceptance have not been given by
the Holders (the "Refused Securities") to any other Person or Persons, but only
------------------
upon terms and conditions in all respects (including, without limitation, unit
price and interest rates) which are no more favorable, in the aggregate, to such
other Person or Persons or less favorable to the Company than those set forth in
the Section 4.2 Offer. Upon the closing of the sale of the Refused Securities,
the Holders shall purchase from the Company, and the Company shall sell to the
Holders, the Section 4.2 Offered Securities in respect of which Section 4.2
Notices of Acceptance were delivered to the Company, at the terms specified in
the Section 4.2 Offer.
(d) The preemptive rights granted in this Section 4.2 shall not apply
-----------
to the issuance or sale of Excluded Securities.
(e) The preemptive rights granted in this Section 4.2 shall apply
-----------
only to Holders who are not parties to the Stockholders Agreement.
(f) The Holder hereof and any transferee shall have the benefit of
the Registration Rights set forth in the Stockholders Agreement, whether or not
the Holder or transferee is a party to the Stockholders Agreement or the
Registration Rights Agreement.
SECTION 4.3. Fiduciary Duties of the Company. The Company and its
-------------------------------
directors shall owe the holders of the Warrants the same fiduciary duties that
the Company and its directors would owe to the Warrant Shares underlying the
Warrants.
ARTICLE V
MISCELLANEOUS
SECTION 5.1. Notices. All notices, demands and requests of any kind
-------
to be delivered to any party hereto in connection with this Warrant shall be in
writing (i) delivered personally, (ii) sent by nationally-recognized overnight
courier,
<PAGE>
(iii) sent by first class, registered or certified mail, return receipt
requested or (iv) sent by facsimile, in each case to such party at its address
as follows:
(a) if to the Company, to:
Matthews Studio Equipment Group
3111 North Kenwood Street
Burbank, California 91505
Attention: Carlos DeMattos
Telephone: (818) 525-5217
Facsimile: (818) 525-5216
with a copy to:
Francis W. Costello
Whitman Breed Abbott & Morgan
633 West Fifth Street
Los Angeles, California 90071
Telephone: (213) 896-2452
Telecopier: (213) 896-2450
(b) if to ING, to:
ING Equity Partners, L.P. I
520 Madison Avenue, 33rd Floor
New York, New York 10022
Attention: Benjamin P. Giess
Telephone: (212) 453-1708
Telecopier: (212) 750-2970
with a copy to:
James B. Carlson, Esq.
Mayer, Brown & Platt
1675 Broadway
New York, New York 10019-5820
Telephone: (212) 506-2515
Telecopier: (212) 262-1910
Any notice, demand or request so delivered shall constitute valid notice under
this Warrant and shall be deemed to have been received (i) on the day of actual
delivery in the case of personal delivery, (ii) on the next Business Day after
the date when sent in the case of delivery by nationally-recognized overnight
courier, (iii) on the fifth Business Day after the date of deposit in the U.S.
mail in the case of mailing or (iv) upon receipt in the case of a facsimile
transmission. Any party hereto may from time to time by notice in writing
served upon the other as aforesaid designate a different mailing address or a
<PAGE>
different Person to which all such notices, demands or requests thereafter are
to be addressed.
SECTION 5.2. Voting Rights; Limitations of Liability. No Warrant
---------------------------------------
shall entitle the holder thereof to any voting rights or other rights of a
stockholder of the Company, as such. No provision hereof, in the absence of
affirmative action by the Holder to purchase Warrant Shares, and no enumeration
herein of the rights or privileges of the Holder shall give rise to any
liability of such Holder for the Exercise Price of Warrant Shares acquirable by
exercise hereof or as a stockholder of the Company. Each Holder agrees this
Warrant is not a warrant issued to ING pursuant to the Purchase Agreement, as
amended to date.
SECTION 5.3. Amendments and Waivers. Any provision of this Warrant
----------------------
may be amended or waived, but only pursuant to a written agreement signed by the
Company and the Requisite Holders.
SECTION 5.4. Severability. Any provision of this Warrant which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such provision and
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of this Warrant
affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 5.5. Specific Performance. Each Holder shall have the right
--------------------
to specific performance by the Company of the provisions of this Warrant, in
addition to any other remedies it may have at law or in equity. The Company
hereby irrevocably waives, to the extent that it may do so under applicable law,
any defense based on the adequacy of a remedy at law which may be asserted as a
bar to the remedy of specific performance in any action brought against the
Company for specific performance of this Warrant by the Holders of the Warrants
or Warrant Shares.
SECTION 5.6. Binding Effect. This Warrant shall be binding upon and
--------------
inure to the benefit of the Company, each Holder and their respective successors
and assigns.
SECTION 5.7. Counterparts. This Warrant may be executed by the
------------
parties hereto in several counterparts, each of which shall be deemed to be an
original and all of which shall constitute together but one and the same
agreement. This Warrant shall become effective when counterparts hereof
executed on behalf of the Company and each Holder shall have been received.
SECTION 5.8. Governing Law; Entire Agreement. THIS WARRANT AND THE
-------------------------------
WARRANTS, SHALL EACH BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE
INTERNAL LAWS OF THE STATE OF NEW YORK. This Warrant and the Warrants,
constitute the entire understanding among the parties hereto with respect to the
subject matter hereof and supersede any prior agreements, written or oral, with
respect thereto.
<PAGE>
SECTION 5.9. Benefits of this Warrant. Nothing in this Warrant shall
------------------------
be construed to give to any Person other than the Company and each Holder of a
Warrant or a Warrant Share any legal or equitable right, remedy or claim
hereunder.
SECTION 5.10. Headings. The various headings of this Warrant are
--------
inserted for convenience only and shall not affect the meaning or interpretation
of this Warrant or any provisions hereof or thereof.
SECTION 5.11. Expenses. The Company will promptly (and in any event
--------
within thirty (30) days of receiving any statement or invoice therefor) pay all
reasonable fees, expenses and costs relating hereto, including, but not limited
to, (i) the cost of reproducing this Warrant and the Warrants, (ii) the fees and
disbursements of counsel to the Holder in preparing this Warrant, (iii) all
transfer, stamp, documentary or other similar taxes, assessments or charges
levied by any governmental or revenue authority in respect hereof or any other
document referred to herein, (iv) fees and expenses (including, without
limitation, reasonable attorneys' fees) incurred in respect of the enforcement
by Holders of the rights granted to Holders under this Warrant, and (v) the
expenses relating to the consideration, negotiation, preparation or execution of
any amendments, waivers or consents requested by the Company pursuant to the
provisions hereof, whether or not any such amendments, waivers or consents are
executed.
SECTION 5.12. Attorneys' Fees. In any action or proceeding brought
---------------
by a party to enforce any provision of this Warrant, the prevailing party shall
be entitled to recover the reasonable costs and expenses incurred by it in
connection with that action or proceeding (including, but not limited to,
attorneys' fees).
SECTION 5.13. Filings. The Company shall, at its own expense,
-------
promptly execute and deliver, or cause to be executed and delivered, to any
holder of Warrants all applications, certificates, instruments and all other
documents and papers that such holder of Warrants may reasonably request in
connection with the obtaining of any consent, approval, qualification, or
authorization of any federal, provincial, state or local government (or any
agency or commission thereof) necessary or appropriate in connection with, or
for the effective exercise of, any Warrants then held by such holder.
SECTION 5.14. Other Transactions. Nothing contained herein shall
------------------
preclude the Holder from engaging in any transaction, in addition to those
contemplated by this Warrant with the Company or any of its Affiliates in which
the Company or such Affiliate is not restricted hereby from engaging with any
other Person.
<PAGE>
SECTION 5.15. Forum Selection and Consent to Jurisdiction. ANY
-------------------------------------------
LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS
WARRANT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL
OR WRITTEN) OR ACTIONS OF THE HOLDERS OR THE COMPANY SHALL BE BROUGHT AND
MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK OR IN THE UNITED
STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; THE COMPANY HEREBY
EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE
OF NEW YORK AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF
NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND
IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION
WITH SUCH LITIGATION. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE
OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR
WITHOUT THE STATE OF NEW YORK. THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE
OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN
ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE COMPANY HAS OR
HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF FROM ANY
LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT,
ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS
PROPERTY, THE COMPANY HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS
OBLIGATIONS UNDER THIS WARRANT.
SECTION 5.16. Jury Trial. THE COMPANY HEREBY KNOWINGLY, VOLUNTARILY,
----------
AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF
ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS
WARRANT. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES HERETO CAUSING
THE ISSUANCE OF THE LETTER OF CREDIT AND ENTERING INTO THE REIMBURSEMENT
AGREEMENT AND THE ING SECURITY AGREEMENT. THE COMPANY ACKNOWLEDGES THAT IT HAS
HAD THE ASSISTANCE OF COUNSEL IN THE REVIEW AND EXECUTION OF THIS WARRANT,
INCLUDING THIS SECTION 5.16 HEREOF, AND FURTHER ACKNOWLEDGES THAT THE MEANING
AND EFFECT OF THE FOREGOING WAIVER OF JURY TRIAL HAVE BEEN FULLY EXPLAINED TO
THE COMPANY BY SUCH COUNSEL.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant to be
duly executed and delivered by their authorized officers, all as of the date and
year first above written.
MATTHEWS STUDIO EQUIPMENT GROUP
By: /s/ Carlos D. DeMattos
--------------------------
Name: Carlos D. DeMattos
Title: Chairman and Chief
Executive Officer
[CORPORATE SEAL]
ATTEST:
By: /s/ Lori Snell
------------------------
Name: Lori Snell
Title: Secretary
<PAGE>
Exhibit 4.8
-----------
Execution Copy
THIS WARRANT CERTIFICATE AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF THIS WARRANT CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR FILED OR
QUALIFIED UNDER THE STATE SECURITIES LAW OF CALIFORNIA OR ANY OTHER STATE AND
MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THEY HAVE BEEN
REGISTERED OR QUALIFIED UNDER SUCH LAWS OR AN EXEMPTION FROM REGISTRATION OR
QUALIFICATION IS AVAILABLE.
MATTHEWS STUDIO EQUIPMENT GROUP
W-__ Warrant to Purchase
150,000 Shares
of Common Stock
January 12, 1999
Common Stock Purchase Warrant
-----------------------------
THIS Common Stock Purchase Warrant (the "Warrant") CERTIFIES that, for value
-------
received, ING Equity Partners, L.P. I, a Delaware limited partnership, or its
registered assigns (the "Holder") is entitled to purchase from Matthews Studio
------
Equipment Group, a California corporation (the "Company"), 150,000 shares of the
-------
Common Stock, no par value (the "Common Stock"), of the Company (representing
------------
1.07% of the Common Stock outstanding on a Fully Diluted Basis at the date
hereof) at the price (the "Exercise Price") of $2.50 per share (subject to
--------------
certain adjustments as set forth in Section 3.3 hereof), at any time or from
time to time during the period commencing on the date hereof and ending at 5:00
P.M. on the tenth anniversary of the date hereof (the "Expiration Date").
---------------
This Warrant is subject to the terms and conditions, and entitled to the
benefits, of the following agreements, each dated as of July 27, 1995: (i) the
Stockholders Agreement between, among others, the Company and ING, and (ii) the
Registration Rights Agreement between, among others, the Company and ING (as
amended, supplemented or altered from time to time, the "Stockholders
------------
Agreement," and the "Registration Rights Agreement," respectively).
-----------------------------
<PAGE>
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions. Unless the context shall otherwise
-----------
require, capitalized terms used and not defined herein shall have the meanings
set forth in the Amended and Restated Credit Agreement, dated as of April 1,
1998, between, among others, the Company and The Chase Manhattan Bank (as
amended or otherwise modified from time to time, the "Credit Agreement"). In
----------------
addition, the following terms shall have the following meanings:
"Affiliate" shall mean with respect to any Person, (a) any Person
---------
which directly, or indirectly through one or more intermediaries, controls, or
is controlled by, or is under common control with, such Person, or (b) any
Person who is a director or executive officer (i) of such Person, (ii) of any
Subsidiary of such Person, or (iii) of any Person described in clause (a) above,
or with respect to any Stockholder, the Company; provided, that any Affiliate of
a corporation shall be deemed an Affiliate of such corporation's stockholders.
For purposes of this definition, "control" of a Person shall mean the power,
direct or indirect, (i) to vote or direct the voting of more than 5% of the
outstanding shares of voting stock of such Person, or (ii) to direct or cause
the direction of the management and policies of such Person, whether by contract
or otherwise.
"Assignment Form" shall mean the assignment form attached as Annex 2
--------------- -------
hereto.
"Business Day" shall mean any day other than a Saturday, Sunday or a
------------
day on which banks within New York, New York are authorized or required to be
closed.
"Closing Date" shall mean the date this Warrant was granted.
------------
"Common Stock" shall mean the Common Stock, no par value, of the
------------
Company, having the terms, conditions, rights and limitations described in the
Articles of Incorporation of the Company attached as Exhibit A hereto.
---------
"Company" shall have the meaning given to such term in the Preamble.
-------
"Convertible Securities" shall have the meaning given to such term in
----------------------
Section 3.3.1(b).
- ----------------
"Credit Agreement" shall have the meaning given to such term in the
----------------
introduction to this Section 1.1.
-----------
"Delivery Date" shall have the meaning given to such term in Section
------------- -------
3.2.
- ---
<PAGE>
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
"Exchange Form" shall mean the exchange form attached as Annex 3
------------- -------
hereto.
"Excluded Securities" shall mean:
-------------------
(i) shares of capital stock issued pursuant to a stock dividend or
a stock split or other subdivision of shares;
(ii) Common Stock issued upon exercise of the ING Warrants;
(iii) Common Stock issued by the Company in any public offering
registered under the Securities Act, which offering results in net proceeds to
the Company of at least $10,000,000 and a price per share of Common Stock of not
less than $2.50 (appropriately adjusted to reflect all recapitalization events);
(iv) securities issued upon conversion, exercise or exchange of
convertible securities, warrants, options, subscriptions, calls or other rights
to acquire Common Stock, provided that the foregoing rights are (x) outstanding
on the date hereof and are issued in conformity with such rights as issued and
in effect at the date hereof, or (y) are issued hereafter in compliance with
Section 4.2 hereof; or
- -----------
(v) Common Stock issued pursuant to the Company's Amended and
Restated 1989 Stock Option Plan, the Company's 1994 Stock Option Plan, the
Company's 1994 Stock Option Plan for Directors, options granted pursuant to the
Amended and Restated Employment Agreement dated October 1, 1997 between the
Company and Carlos D. DeMattos, the employment terms letter dated October 1,
1998 between the Company and John Murray and the Employment Agreement dated
November 23, 1998 between the Company and Alan Unger, any other employee benefit
plan (including any future adopted employee stock option plan), and pursuant to
any acquisition permitted under the Purchase Agreement and the Credit Agreement.
"Exercise Form" shall mean the exercise form attached as Annex 1
------------- -------
hereto.
"Exercise Price" shall mean $2.50 per share of Common Stock, subject
--------------
to adjustment from time to time in the manner provided in Section 3.3.
-----------
"Expiration Date" shall mean January 12, 2009.
---------------
"Fully Diluted Basis" means, as applied to the calculation of the
-------------------
number of shares of Common Stock outstanding at any time, after giving effect to
(a) all shares of Common Stock outstanding at the time of determination, (b) all
shares of Common Stock issuable upon the conversion, exercise or exchange
<PAGE>
of any convertible security, warrant, option, subscriptions, calls or other
rights to acquire Common Stock outstanding at the time of determination,
irrespective of whether such conversion, exercise or exchange is permitted,
restricted or vested at the time of determination, and irrespective of the price
or consideration required by such conversion, exercise or exchange, and (c) all
other commitments, promises or understandings to issue any shares of Common
Stock or any convertible security, warrant, option, subscription, call or other
rights outstanding at the time of determination. Such calculation will reflect
the ING Warrants, and will not be made in accordance with the "treasury method
in accordance with GAAP."
"GAAP" shall mean generally accepted accounting principles in the
----
United States of America in effect from time to time.
"Governmental Authority" shall mean any federal, state, municipal or
----------------------
other governmental department, commission, board, bureau, agency or
instrumentality, or any court, in each case whether of the United States of
America or foreign.
"Holder" shall have the meaning given to such term in the Preamble.
------
"ING" shall mean ING Equity Partners, L.P. I, a Delaware limited
---
partnership.
"ING Security Agreement" shall mean the Security Agreement, dated as
----------------------
of the Closing Date, between the Company and ING, as amended, supplemented or
altered from time to time.
"ING Warrants" shall mean all Common Stock Purchase Warrants and all
------------
Options issued to ING by the Company as of the date hereof.
"Market Price" shall mean, with respect to a share of Common Stock on
------------
any Business Day:
(a) if the Common Stock is Publicly Traded at the time of
determination, the average of the closing prices for the Common Stock on
all domestic securities exchanges on which such security may at the time be
listed, or, if there have been no sales on any such exchange on such day,
the average of the highest bid and lowest asked prices on all such
exchanges at the end of such day, or, if on any day such security is not so
listed, the average of the representative bid and asked prices quoted on
the Nasdaq Stock Market as of 4:00 P.M., New York time, on such day, or if
on any day such security is not quoted on the Nasdaq Stock Market, the
average of the highest bid and lowest asked prices on such day in the
domestic over-the-counter market as reported by the National Quotation
Bureau, Incorporated, or any similar successor organization, in each such
case averaged over a period of twenty-one (21) days
<PAGE>
consisting of the day as of which "Market Price" is being determined and
the twenty (20) consecutive Business Days prior to such day; or
(b) if the Common Stock is not Publicly Traded at the time of
determination then, solely for purposes of Section 3, then the Market Price
shall be the Market Value Per Share.
"Market Value" shall mean the highest price that would be paid for all
------------
of the Common Stock of the Company on a going-concern basis in a single arm's-
length transaction between a willing buyer and a willing seller (neither acting
under compulsion), using valuation techniques then prevailing in the securities
industry and always determined in accordance with the Valuation Procedures, and
assuming full disclosure and understanding of all relevant information and a
reasonable period of time for effectuating such sale. For the purposes of
determining the Market Value, (i) the exercise price of options, warrants or
rights to acquire Common Stock which are included for the purpose of determining
the number of shares of Common Stock outstanding on a Fully Diluted Basis shall
be deemed to have been received by the Company if and to the extent that the
aggregate Market Value of such shares of Common Stock exceeds the aggregate
exercise price of such options, warrants or rights, (ii) the liquidation
preference or indebtedness, as the case may be, represented by securities which
are included for the purpose of determining the number of shares of Common Stock
outstanding on a Fully Diluted Basis shall be deemed to be converted or
exchanged if and to the extent that the aggregate Market Value of such shares of
Common Stock exceeds the aggregate amount of such liquidation preference or
indebtedness, (iii) any contract or legal limitation in respect of the shares of
Common Stock, including their transfer, voting and other rights shall be
ignored, and (iv) any illiquidity arising by contract or law in respect of the
shares of Common Stock and any voting rights or control rights amongst the
Stockholders, shall be ignored.
"Market Value Per Share" shall mean the price per share of Common
----------------------
Stock obtained by dividing (A) the Market Value by (B) the number of shares of
Common Stock outstanding (on a Fully-Diluted Basis) at the time of
determination.
"Nasdaq Stock Market" shall mean the Nasdaq National Market or the
-------------------
Nasdaq SmallCap Market.
"Options" shall have the meaning given to such term in Section
------- -------
3.3.1(b) hereof.
- --------
"Other Anti-Dilution Instruments" shall mean any option, warrant,
-------------------------------
convertible security, subscription, call or other rights to acquire Common Stock
whether outstanding as of the date hereof or hereafter issued, together with any
agreements relating thereto, which provide for anti-dilution or other
<PAGE>
adjustments in the number of shares of Common Stock and/or exercise, exchange or
conversion price thereof.
"Person" means any individual, sole proprietorship, partnership, joint
------
venture, trust, unincorporated organization, association, corporation,
institution, public benefit corporation, limited liability company, joint stock
company, estate entity or Governmental Authority.
"Proportionate Percentage" shall mean, with respect to any Holder at
------------------------
any time, the quotient obtained by dividing (a) the aggregate number of Warrant
Shares and other shares of Common Stock then held by such Holder by (b) the
total number of shares of Common Stock then outstanding (on a Fully-Diluted
Basis).
"Publicly Traded" shall mean, with respect to any security, that such
---------------
security is (a) listed on a domestic securities exchange, (b) quoted on the
Nasdaq Stock Market or (c) traded in the domestic over-the-counter market, which
trades are reported by the National Quotation Bureau, Incorporated, and in the
cases of clauses (b) and (c), the average weekly trading volume on the 20
trading days preceding the time of determination equals or exceeds 1/2 of 1% of
the outstanding Common Stock on a Fully Diluted Basis.
"Purchase Agreement" shall mean the Purchase Agreement dated as of
------------------
July 27, 1995 between the Company and ING, as amended from time to time.
"Refused Securities" shall have the meaning given to such term in
------------------
Section 4.2(c).
- --------------
"Registration Rights Agreement" shall have the meaning given to such
-----------------------------
term in the Preamble.
"Reimbursement Agreement" means the Reimbursement Agreement, dated as
-----------------------
of the Closing Date, between the Company and ING, as amended, supplemented or
altered from time to time.
"Requisite Holders" shall mean Holders holding ING Warrants or
-----------------
securities representing at least 51% of all securities issued or issuable upon
exercise of the ING Warrants outstanding on the date of determination.
"Section 4.2 Notice of Acceptance" shall have the meaning given to
--------------------------------
such term in Section 4.2 hereof.
-----------
"Section 4.2 Offer" shall have the meaning given to such term in
-----------------
Section 4.2 hereof.
- -----------
"Section 4.2 Offer Notice" shall have the meaning given to such term
------------------------
in Section 4.2 hereof.
-----------
"Section 4.2 Offered Securities" shall have the meaning given to such
------------------------------
term in Section 4.2(a).
--------------
<PAGE>
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"Standby Letter of Credit" shall mean the Standby Letter of Credit
------------------------
issued by ING (U.S.) Capital Corporation as of the date hereof for the account
of the Company and in favor of The Chase Manhattan Bank, as agent for the
Lenders.
"Stockholders Agreement" shall have the meaning given to such term in
----------------------
the Preamble.
"Valuation Procedure" shall mean, with respect to the determination of
-------------------
any amount or value required to be determined in accordance with such procedure,
a determination (which shall be final and binding on the Company and the
Holders) made (i) by agreement among the Company and the Requisite Holders
within thirty (30) days following the event requiring such determination or (ii)
in the absence of such an agreement, by an Appraiser (as defined below) selected
in accordance with the further provisions of this definition. If required, an
Appraiser shall be selected within 10 days following the expiration of the 30-
day period referred to above, either by agreement among the Company and the
Requisite Holders or, in the absence of such agreement, by lot from a list of
four potential Appraisers remaining after the Company nominates three, the
Requisite Holders nominate three, and each side eliminates one potential
Appraiser. The Appraiser shall be instructed by the Company and the Requisite
Holders to make its determination within thirty (30) days of its selection. The
fees and expenses of an Appraiser selected hereunder shall be borne fifty
percent (50%) by the Company and fifty percent (50%) by the Holders (on a pro
---
rata basis) participating in the transaction to which the determination relates.
- ----
As used herein, "Appraiser" shall mean (a) with respect to a determination of
Market Value, a nationally-recognized investment banking firm and (b) with
respect to a determination of Liquidation Value (or any other valuation required
hereunder), a firm of the type generally considered to be qualified in making
determinations of the type required.
"Warrant" shall have the meaning given to such term in the Preamble.
-------
"Warrant Register" shall have the meaning given to such term in
----------------
Section 2.1.
- -----------
"Warrant Shares" shall mean (a) the shares of Common Stock issued or
--------------
issuable upon exercise of a Warrant in accordance with Section 4.1 or upon
-----------
exchange of a Warrant in accordance with Section 4.2 and (b) any securities of
-----------
the Company distributed with respect to the securities referred to in the
preceding clause (a). As used in this Warrant, the phrase "Warrant Shares then
----------
held" by any Holder or Holders shall mean Warrant Shares held at the time of
determination by such Holder or Holders, and shall include Warrant Shares
issuable upon exercise of ING
<PAGE>
Warrants held at the time of determination by such Holder or Holders.
SECTION 1.2. Interpretation. Unless the context of this Warrant
--------------
clearly requires otherwise, references to the plural include the singular, to
the singular include the plural, and to the part include the whole. The term
"including" is not limiting and the term "or" has the inclusive meaning
represented by the term "and/or." The words "hereof," "herein," "hereunder,"
and similar terms in this Warrant refer to this Warrant as a whole and not to
any particular provision of this Warrant. References to "Articles," "Sections,"
"Subsections," "Exhibits," and "Schedules" are to Articles, Sections,
Subsections, Exhibits and Schedules, respectively, of this Warrant, unless
otherwise specifically provided. Terms defined herein may be used in the
singular or the plural.
ARTICLE II
FORM; EXCHANGE FOR WARRANTS; TRANSFER; TAXES
SECTION 2.1. Warrant Register. Each Warrant issued, exchanged or
----------------
transferred in accordance with the terms hereof shall be registered in a warrant
register (the "Warrant Register"). The Warrant Register shall set forth the
----------------
number of each Warrant, the name and address of the Holder thereof, and the
original number of Warrant Shares purchasable upon the exercise thereof. The
Warrant Register will be maintained by the Company and will be available for
inspection by any Holder at the principal office of the Company or such other
location as the Company may designate to the Holders in the manner set forth in
Section 5.1. The Company shall be entitled to treat the Holder of any Warrant as
- -----------
the owner in fact thereof for all purposes and shall not be bound to recognize
any equitable or other claim to or interest in such Warrant on the part of any
other Person. The Company shall not be liable for complying with a request by a
fiduciary or nominee of a fiduciary to register a transfer of any Warrant which
is registered in the name of such fiduciary or nominee, unless made with the
actual knowledge that such fiduciary or nominee is committing a breach of trust
in requesting such registration of transfer, or with knowledge of such facts
that the Company's participation therein amounts to bad faith.
SECTION 2.2. Exchange of Warrants for Warrants. (a) The Holder may
---------------------------------
exchange this Warrant for another Warrant or Warrants of like kind and tenor
representing in the aggregate the right to purchase the same number of Warrant
Shares which could be purchased pursuant to the Warrant being so exchanged. In
order to effect an exchange permitted by this Section 2.2, the Holder shall
-----------
deliver to the Company such Warrant accompanied by an Exchange Form in the form
attached hereto as Annex 3 signed by the Holder thereof specifying the number
-------
and denominations of Warrants to be issued in such exchange and the names in
which
<PAGE>
such Warrants are to be issued. Within ten (10) Business Days of receipt of
such a request, the Company shall issue, register and deliver to the Holder
thereof each Warrant to be issued in such exchange.
(b) Upon receipt of evidence reasonably satisfactory to the Company
(an affidavit of the Holder being satisfactory) of the ownership and the loss,
theft, destruction or mutilation of any Warrant, and in the case of any such
loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory
to the Company (if the Holder is a creditworthy financial institution or other
creditworthy institutional investor its own agreement being satisfactory) or, in
the case of any such mutilation, upon surrender of such Warrant, the Company
shall (at its expense) execute and deliver in lieu of such Warrant a new Warrant
of like kind representing the same rights represented by and dated the date of
such lost, stolen, destroyed or mutilated Warrant. Any such new Warrant shall
constitute an original contractual obligation of the Company, whether or not the
allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time
enforceable by any Person.
(c) The Company shall pay all taxes (other than any applicable income
or similar taxes payable by a Holder of a Warrant) attributable to an exchange
of a Warrant pursuant to this Section 2.2; provided, however, that the Company
----------- -------- -------
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance of any Warrant in a name other than that of
the Holder of the Warrant being exchanged.
SECTION 2.3. Transfer of Warrant. (a) Subject to Section 2.3(c)
------------------- --------------
hereof, each Warrant may be transferred by the Holder thereof by delivering to
the Company such Warrant accompanied by a properly completed Assignment Form in
the form of Annex 2. Within ten (10) Business Days of receipt of such
-------
Assignment Form the Company shall issue, register and deliver to the Holder,
subject to Section 2.3(c) hereof, a new Warrant or Warrants of like kind and
--------------
tenor representing in the aggregate the right to purchase the same number of
Warrant Shares which could be purchased pursuant to the Warrant being
transferred. In all cases of transfer by an attorney, the original power of
attorney, duly approved, or a copy thereof, duly certified, shall be deposited
and remain with the Company. In case of transfer by executors, administrators,
guardians or other legal representatives, duly authenticated evidence of their
authority shall be produced and may be required to be deposited and remain with
the Company in its discretion.
(b) Each Warrant issued in accordance with this Section 2.3 shall
-----------
bear the restrictive legend set forth on the face of this Warrant, unless the
Holder or transferee thereof supplies to the Company an opinion of counsel,
reasonably satisfactory to the Company, that the restrictions described in such
legend are no longer applicable to such Warrant.
<PAGE>
(c) The transfer of Warrants and Warrant Shares shall be permitted,
so long as such transfer is pursuant to a transaction that (i) complies with, or
is exempt from, the provisions of the Securities Act, and the Company may
require an opinion of counsel (which may be internal counsel to a Holder) in
form and substance reasonably satisfactory to it to such effect prior to
effecting any transfer of Warrants or Warrant Shares and (ii) complies with the
applicable provisions of the Stockholders Agreement.
ARTICLE III
EXERCISE OF WARRANT; EXCHANGE FOR WARRANT SHARES
SECTION 3.1. Exercise of Warrants. On any Business Day prior to the
--------------------
Expiration Date, a Holder may exercise a Warrant, in whole or in part, by
delivering to the Company such Warrant accompanied by a properly completed
Exercise Form in the form of Annex 1 and a check in an aggregate amount equal to
-------
the product obtained by multiplying (a) the Exercise Price by (b) the number of
Warrant Shares being purchased; provided, however, in the event the Holder
-------- -------
exercises this Warrant in connection with or immediately prior to a sale by the
Holder of Warrant Shares, in lieu of paying the applicable Exercise Price
therefor, the Holder may elect to receive that number of Warrant Shares which is
equal to the number of shares for which this Warrant is being exercised less the
number of shares having a Market Price equal to such applicable Exercise Price,
where such Market Price per share shall be equal to the price per share at which
the Holder is selling Warrant Shares. Any partial exercise of a Warrant shall
be for a whole number of Warrant Shares only.
SECTION 3.2. Issuance of Common Stock. (a) Within ten (10) Business
------------------------
Days following the delivery date (the "Delivery Date") of (i) an Exercise Form
-------------
or Exchange Form in accordance with Section 3.1 or 3.2, (ii) a Warrant and (iii)
----------- ---
any required payments of the Exercise Price, the Company shall issue and deliver
to the Holder a certificate or certificates, registered in the name or names set
forth on such notice, representing the Warrant Shares being purchased or to be
received upon such exchange.
(b) If a Holder shall exercise or exchange a Warrant for less than
all of the Warrant Shares which could be purchased or received thereunder, the
Company shall issue to the Holder, within ten (10) Business Days of the Delivery
Date, a new Warrant evidencing the right to purchase the remaining Warrant
Shares. Each Warrant surrendered pursuant to Section 3.1 shall be canceled.
-----------
(c) The Company shall not be required to issue fractional shares of
Common Stock upon the exercise or exchange of a Warrant. If any fraction of a
share of Common Stock would be issuable on the exercise or exchange of any
Warrant, the
<PAGE>
Company may, in lieu of issuing such fractional share, pay to such Holder for
any such fraction of a share an amount in cash equal to the product obtained by
multiplying (i) such fraction by (ii) the Market Price in effect on the Delivery
Date.
(d) The Company shall pay all taxes (other than any applicable income
or similar taxes payable by a Holder of a Warrant) attributable to the initial
issuance of Warrant Shares upon the exercise or exchange of a Warrant; provided,
--------
however, that the Company shall not be required to pay any tax which may be
- -------
payable in respect of any transfer involved in the issuance of any Warrant or
any certificate for Warrant Shares in a name other than that of the Holder of
the Warrant being exercised or exchanged.
(e) The Person in whose name any certificate for shares of Common
Stock is issued upon exercise or exchange of a Warrant shall for all purposes be
deemed to have become the holder of record of such shares on the Delivery Date,
irrespective of the date of delivery of such certificate, except that, if the
Delivery Date is a date when the stock transfer books of the Company are closed,
such Person shall be deemed to have become the holder of record of such shares
at the close of business on the next succeeding date on which the stock transfer
books are open.
(f) Any Exercise Form or Exchange Form delivered under Section 3.1 or
-----------
2.2 may condition the exercise or exchange of any Warrant on the consummation of
- ---
a sale of Warrant Shares pursuant to a public offering registered under the
Securities Act, and such exercise or exchange shall not be deemed to have
occurred except concurrently with the consummation of any such sale.
SECTION 3.3. Adjustment of Exercise Price and Number of Warrant
--------------------------------------------------
Shares. The number and kind of Warrant Shares purchasable upon exercise of each
- ------
Warrant shall be subject to adjustment from time to time in accordance with this
Section 3.3.
- -----------
SECTION 3.3.1. Adjustment upon Issuance of Common Stock. (a) If, at
----------------------------------------
any time after the Closing Date, the Company shall issue or sell (or, in
accordance with Section 3.3.1(b), shall be deemed to have issued or sold) any
----------------
shares of Common Stock without consideration or for a consideration per share
less than either the Market Price determined as of the date of such issuance or
sale or the Exercise Price in effect immediately prior to such issuance or sale,
then, effective immediately upon such issuance or sale, the Exercise Price shall
be reduced (without regard to any other provisions hereof) to an amount equal to
the product obtained by multiplying (A) the Exercise Price in effect immediately
prior to such issuance or sale, by (B) a fraction, the numerator of which shall
be the sum of (x) the product obtained by multiplying (1) the number of shares
of Common Stock outstanding (on a Fully-Diluted Basis) immediately prior to such
issuance or sale by (2) the lesser
<PAGE>
of the Market Price as of the date of such issuance or sale and the Exercise
Price in effect immediately prior to such issuance or sale, and (y) the
consideration, if any, received by the Company upon such issuance or sale, and
the denominator of which shall be the product obtained by multiplying (C) the
number of shares of Common Stock outstanding (on a Fully-Diluted Basis)
immediately after such issuance or sale, by (D) the lesser of the Market Price
as of the date of issuance or sale and the Exercise Price in effect immediately
prior to such issuance or sale. Upon each such adjustment of the Exercise Price
hereunder, the number of Warrant Shares which may be obtained upon exercise of
such Warrant shall be increased to the number of shares determined by
multiplying (A) the number of Warrant Shares which could be obtained upon
exercise of such Warrant immediately prior to such adjustment by (B) a fraction,
the numerator of which shall be the Exercise Price in effect immediately prior
to such adjustment and the denominator of which shall be the Exercise Price in
effect immediately after such adjustment.
(b) For the purpose of determining the adjusted Exercise Price under
Section 3.3.1(a), the following shall be applicable:
- ----------------
(i) Issuance of Rights or Options. If the Company in any manner
-----------------------------
issues or grants any rights or options to subscribe for or to purchase (A)
Common Stock or (B) any stock or other securities convertible into or
exchangeable for Common Stock (such rights or options being herein called
"Options" and such convertible or exchangeable stock or securities being
--------
herein called "Convertible Securities"), and the price per share for which
----------------------
Common Stock is issuable upon the exercise of such Options or upon
conversion or exchange of such Convertible Securities is less than either
the Market Price determined as of the date of issuance or grant of such
Options or the Exercise Price in effect immediately prior to such issuance
or grant of such Options, then the total maximum number of shares of Common
Stock issuable upon the exercise of such Options (or upon conversion or
exchange of the total maximum amount of such Convertible Securities
issuable upon the exercise of such Options) shall be deemed to be
outstanding and to have been issued and sold by the Company for such price
per share. For purposes of this paragraph, the price per share for which
Common Stock is issuable upon exercise of Options or upon conversion or
exchange of Convertible Securities issuable upon exercise of Options shall
be determined by dividing (A) the total amount, if any, received or
receivable by the Company as consideration for the issuing or granting of
such Options, plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of all such Options, plus in the
case of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable to the
Company upon issuance or sale of such Convertible Securities and the
conversion or exchange
<PAGE>
thereof, by (B) the total maximum number of shares of Common Stock issuable
upon exercise of such Options or upon the conversion or exchange of all
such Convertible Securities issuable upon the exercise of such Options. No
further adjustment of the Exercise Price shall be made upon the actual
issuance of such Common Stock or of such Convertible Securities upon the
Exercise of such Options or upon the actual issuance of such Common Stock
upon conversion or exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Company in any
----------------------------------
manner issues or sells any Convertible Securities having an exercise or
conversion or exchange price per share of Common Stock which is less than
either the Market Price determined as of the date of such issuance or sale
or the Exercise Price in effect immediately prior to such issuance or sale,
then the maximum number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities shall be deemed to be
outstanding and to have been issued and sold by the Company for such lower
price per share. For purposes of this paragraph, the price per share for
which Common Stock is issuable upon conversion or exchange of Convertible
Securities is determined by dividing (A) the total amount received or
receivable by the Company as consideration for the issuance or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or
exchange thereof, by (B) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible
Securities. No further adjustment of the Exercise Price shall be made upon
the actual issuance of such Common Stock upon conversion or exchange of
such Convertible Securities, and if any such issuance or sale of such
Convertible Securities is made upon exercise of any Options for which
adjustments of the Exercise Price had been or are required to be made
pursuant to other provisions of this Section 3.4.1(b), no further
----------------
adjustment of the Exercise Price shall be made by reason of such issuance
or sale.
(iii) Change in Option Price or Conversion Rate. If the purchase
-----------------------------------------
price provided for in any Options, the additional consideration, if any,
payable upon the issuance, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock change at any time, then the Exercise
Price in effect at the time of such change shall be readjusted to the
Exercise Price which would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such
changed purchase price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or sold and
the number of Warrant Shares shall be correspondingly readjusted.
<PAGE>
(iv) Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. Upon the expiration of any Option or the termination of any
----------
right to convert or exchange any Convertible Securities listed on Schedule
--------
3.3.1(b)(iv) without the exercise of such Option or right, the Exercise
------------
Price then in effect and the number of Warrant Shares acquirable hereunder
shall be adjusted to the Exercise Price and the number of shares which
would have been in effect at the time of such expiration or termination had
such Option or Convertible Securities, to the extent outstanding
immediately prior to such expiration or termination, never been issued.
(v) Calculation of Consideration Received. If any Common Stock,
-------------------------------------
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, then the consideration received therefor shall be
deemed to be the net amount received by the Company therefor. If any
Common Stock, Options or Convertible Securities are issued or sold for
consideration other than cash, then the amount of the consideration other
than cash received by the Company shall be the fair value of such
consideration determined by the Board of Directors of the Company.
(vi) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time does not include shares owned or held by or
for the account of the Company or any Subsidiary of the Company, and the
disposition of any shares so owned or held shall be considered an issue or
sale of Common Stock.
(vii) Record Date. If the Company takes a record of the holders of
-----------
Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible
Securities or (B) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date shall be deemed to be the
date of the issuance or sale of the shares of Common Stock deemed to have
been issued or sold upon the declaration of such dividend or the making of
such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
SECTION 3.3.2. Subdivisions or Combinations of Common Stock. If, at
--------------------------------------------
any time after the Closing Date, (a) the number of shares of Common Stock
outstanding is increased by a dividend or other distribution payable in shares
of Common Stock or by a subdivision or split-up of shares of Common Stock or (b)
the number of shares of Common Stock outstanding is decreased by a combination
or reverse stock split of shares of Common Stock, then, in each case, effective
as of the effective date of such event retroactive to the record date, if any,
of such event, (i) the Exercise Price shall be adjusted to a price determined by
multiplying (A) the Exercise Price in effect immediately prior to such event by
(B) a fraction, the numerator of which shall be the
<PAGE>
number of shares of Common Stock outstanding immediately prior to such event and
the denominator of which shall be the number of shares of Common Stock
outstanding after giving effect to such event, and (ii) the number of Warrant
Shares subject to purchase upon the exercise of any Warrant shall be adjusted
effective at such time, to a number equal to the product of (A) the number of
Warrant Shares subject to purchase upon the exercise of such Warrant immediately
prior to such event by (B) a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding after giving effect to such event
and the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such event.
SECTION 3.3.3. Capital Reorganization or Capital Reclassifications.
---------------------------------------------------
If, at any time after the Closing Date, there shall be any capital
reorganization or any reclassification of the capital stock of the Company
(other than a change in par value or from par value to no par value or from no
par value to par value or as a result of a stock dividend or subdivision, split-
up or combination of shares), then in each case the Company shall cause
effective provision to be made so that each Warrant shall, effective as of the
effective date of such event retroactive to the record date, if any, of such
event, be exercisable or exchangeable for the kind and number of shares of
stock, other securities, cash or other property to which a holder of the number
of shares of Common Stock deliverable upon exercise or exchange of such Warrant
would have been entitled upon such reorganization or reclassification and any
such provision shall include adjustments in respect of such stock, securities or
other property that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Warrant with respect to such Warrant.
SECTION 3.3.4. Consolidations and Mergers. If, at any time after the
--------------------------
Closing Date, the Company shall consolidate with, merge with or into, or sell
all or substantially all of its assets or property to, another corporation, then
the Company shall cause effective provision to be made so that each Warrant
shall, effective as of the effective date of such event retroactive to the
record date, if any, of such event, be exercisable or exchangeable for the kind
and number of shares of stock, other securities, cash or other property to which
a holder of the number of shares of Common Stock deliverable upon exercise or
exchange of such Warrant would have been entitled upon such event.
SECTION 3.3.5. Notice; Calculations; Etc. Whenever the Exercise
-------------------------
Price and the number of Warrant Shares shall be adjusted as provided in this
Section 3.3, the Company shall provide to each Holder a statement, signed by the
- -----------
President or Chief Financial Officer/Treasurer of the Company, describing in
detail the facts requiring such adjustment and setting forth a calculation of
the Exercise Price and the number of Warrant Shares applicable to each Warrant
after giving effect to such adjustment. All calculations under this Section 3.3
-----------
shall be
<PAGE>
made to the nearest one hundredth of a cent ($.0001) or to the nearest one-tenth
of a share, as the case may be. Adjustments pursuant to Sections 3.3.1, 3.3.2
-------------- -----
and 3.3.3 shall apply to successive events or transactions of the type covered
-----
thereby.
SECTION 3.3.6. Certain Adjustments. (a) Subject to the limitations
-------------------
set forth in Section 4.5, the Company may make such reductions in the Exercise
-----------
Price or increase in the number of Warrant Shares to be received by any Holder
upon the exercise or exchange of a Warrant, in addition to those adjustments
required by this Section 3.3, as it in its sole discretion shall determine to be
-----------
advisable in order that any consolidation or subdivision of the Common Stock, or
any issuance wholly for cash of any shares of Common Stock, or any issuance
wholly for cash of shares of Common Stock or securities which by their terms are
convertible into or exchangeable for shares of Common Stock, or any stock
dividend, or any issuance of rights, options or warrants hereinafter made by the
Company to the holders of its Common Stock shall not be taxable to such holders.
(b) In the event that the Company in any manner issues or grants
Options or Convertible Securities, or any other transaction, circumstances or
events occur which give rise to anti-dilution adjustments under Other Anti-
Dilution Instruments, then the Company will promptly make proportional,
equitable and corresponding adjustments in the number of shares of Common Stock
issuable upon exercise of the Warrants to protect the Holders against dilution
as a result of such events.
SECTION 3.3.7. Excluded Transactions. Notwithstanding any other
---------------------
provision of this Warrant, no adjustment shall be made pursuant to this Section
-------
3.3 in respect of the issuance of Excluded Securities.
- ---
SECTION 3.3.8. Adjustment Rules. (a) Any adjustments pursuant to
----------------
this Section 3.3 shall be made successively whenever an event referred to herein
-----------
shall occur.
(b) Notwithstanding any other provision of this Warrant, the actual
amount payable by a Holder in connection with the exercise of a Warrant
hereunder shall not be less than the par value per share of the Common Stock,
unless and until the Exercise Price, as adjusted pursuant to this Section 3.3,
-----------
has been reduced to an amount less than 1% of the par value per share of the
Common Stock. Before taking any action which would cause an adjustment pursuant
to this Section 3.3 which would reduce the Exercise Price below 1% of the par
-----------
value per share, the Company shall be required to take any corporate action
which may be necessary in order that the Company may validly and legally issue
fully paid and nonassessable Warrant Shares at the Exercise Price as so
adjusted.
SECTION 3.4. Cancellation. If the Standby Letter of Credit is released
------------
prior to December 31, 1999, this Warrant shall be
<PAGE>
deemed to be automatically canceled, without further action required of the
Company or the Holders.
ARTICLE IV
CERTAIN OTHER RIGHTS
SECTION 4.1. Payments in Respect of Dividends and Distributions. If, at
--------------------------------------------------
any time prior to the Expiration Date, the Company pays any dividend, other than
in the ordinary course of business and to the Company's public stockholders, or
makes any distribution (whether in cash, property or securities of the Company)
on its capital stock which does not result in an adjustment under Section 3.3
-----------
then the Company shall simultaneously pay to the Holder of each Warrant, the
dividend or distribution which would have been paid to such Holder on the
Warrant Shares receivable upon the exercise in full of such Warrant had such
Warrant been fully exercised immediately prior to the record date for such
dividend or distribution or, if no record is taken, the date as of which the
record holders of Common Stock entitled to such dividend or distribution are to
be determined.
SECTION 4.2. Preemptive Rights. (a) The Company shall not issue, sell or
-----------------
exchange, agree to issue, sell or exchange, or reserve or set aside for
issuance, sale or exchange, any (i) Common Stock, (ii) any other equity security
of the Company, (iii) any debt security of the Company which by its terms is
convertible into or exchangeable for any equity security of the Company or has
any other equity feature, (iv) any security of the Company that is a combination
of debt and equity or (v) any option, warrant or other right to subscribe for,
purchase or otherwise acquire any equity security or any such debt security of
the Company, unless, in each case, the Company shall have first offered (the
"Section 4.2 Offer") to sell to each Holder its Proportionate Percentage of such
- ------------------
securities (the "Section 4.2 Offered Securities") (and to sell thereto Section
------------------------------
4.2 Offered Securities not subscribed for by other Holders as hereinafter
provided), at a price and on such other terms as shall have been specified by
the Company in a written notice (the "Section 4.2 Offer Notice") delivered to
------------------------
such Holder, which Offer by its terms shall remain open and irrevocable for a
period of ten (10) Business Days from the date it is delivered by the Company to
the Holders.
(b) Notice of each Holder's intention to accept, in whole or in part,
a Section 4.2 Offer shall be evidenced by a writing signed by such Holder and
delivered to the Company prior to the end of the 10-day period of such Section
4.2 Offer, setting forth such portion of the Section 4.2 Offered Securities as
such Holder elects to purchase (the "Section 4.2 Notice of Acceptance"). If any
--------------------------------
Holder shall subscribe for less than its Proportionate Percentage of the Section
4.2 Offered Securities available to such Holder, the other subscribing Holders
shall be
<PAGE>
entitled to purchase the balance of such Holder's Proportionate Percentage in
the same proportion in which they were initially entitled to purchase the
Section 4.2 Offered Securities (excluding for such purposes such Holder
subscribing for less than its Proportionate Percentage). The Company shall
notify each other Holder within five (5) Business Days following the expiration
of the 10-day period described above of the amount of Section 4.2 Offered
Securities which each Holder may purchase pursuant to the foregoing sentence,
and each Holder shall then have five (5) Business Days from the delivery of such
notice to indicate such additional amount, if any, that such Holder wishes to
purchase.
(c) In the event that Section 4.2 Notices of Acceptance are not given
by the Holders in respect of all the Section 4.2 Offered Securities, the Company
shall have ninety (90) days from the expiration of the foregoing 10-day or 20-
day period, as applicable, to sell all or any part of such Section 4.2 Offered
Securities as to which Section 4.2 Notices of Acceptance have not been given by
the Holders (the "Refused Securities") to any other Person or Persons, but only
------------------
upon terms and conditions in all respects (including, without limitation, unit
price and interest rates) which are no more favorable, in the aggregate, to such
other Person or Persons or less favorable to the Company than those set forth in
the Section 4.2 Offer. Upon the closing of the sale of the Refused Securities,
the Holders shall purchase from the Company, and the Company shall sell to the
Holders, the Section 4.2 Offered Securities in respect of which Section 4.2
Notices of Acceptance were delivered to the Company, at the terms specified in
the Section 4.2 Offer.
(d) The preemptive rights granted in this Section 4.2 shall not
-----------
apply to the issuance or sale of Excluded Securities.
(e) The preemptive rights granted in this Section 4.2 shall apply
-----------
only to Holders who are not parties to the Stockholders Agreement.
(f) The Holder hereof and any transferee shall have the benefit of
the Registration Rights set forth in the Stockholders Agreement, whether or not
the Holder or transferee is a party to the Stockholders Agreement or the
Registration Rights Agreement.
SECTION 4.3. Fiduciary Duties of the Company. The Company and its
-------------------------------
directors shall owe the holders of the Warrants the same fiduciary duties that
the Company and its directors would owe to the Warrant Shares underlying the
Warrants.
<PAGE>
ARTICLE V
MISCELLANEOUS
SECTION 5.1. Notices. All notices, demands and requests of any kind
-------
to be delivered to any party hereto in connection with this Warrant shall be in
writing (i) delivered personally, (ii) sent by nationally-recognized overnight
courier, (iii) sent by first class, registered or certified mail, return receipt
requested or (iv) sent by facsimile, in each case to such party at its address
as follows:
(a) if to the Company, to:
Matthews Studio Equipment Group
3111 North Kenwood Street
Burbank, California 91505
Attention: Carlos DeMattos
Telephone: (818) 525-5217
Facsimile: (818) 525-5216
with a copy to:
Francis W. Costello
Whitman Breed Abbott & Morgan
633 West Fifth Street
Los Angeles, California 90071
Telephone: (213) 896-2452
Telecopier: (213) 896-2450
(b) if to ING, to:
ING Equity Partners, L.P. I
520 Madison Avenue, 33rd Floor
New York, New York 10022
Attention: Benjamin P. Giess
Telephone: (212) 453-1708
Telecopier: (212) 750-2970
with a copy to:
James B. Carlson, Esq.
Mayer, Brown & Platt
1675 Broadway
New York, New York 10019-5820
Telephone: (212) 506-2515
Telecopier: (212) 262-1910
Any notice, demand or request so delivered shall constitute valid notice under
this Warrant and shall be deemed to have been received (i) on the day of actual
delivery in the case of
<PAGE>
personal delivery, (ii) on the next Business Day after the date when sent in the
case of delivery by nationally-recognized overnight courier, (iii) on the fifth
Business Day after the date of deposit in the U.S. mail in the case of mailing
or (iv) upon receipt in the case of a facsimile transmission. Any party hereto
may from time to time by notice in writing served upon the other as aforesaid
designate a different mailing address or a different Person to which all such
notices, demands or requests thereafter are to be addressed.
SECTION 5.2. Voting Rights; Limitations of Liability. No Warrant
---------------------------------------
shall entitle the holder thereof to any voting rights or other rights of a
stockholder of the Company, as such. No provision hereof, in the absence of
affirmative action by the Holder to purchase Warrant Shares, and no enumeration
herein of the rights or privileges of the Holder shall give rise to any
liability of such Holder for the Exercise Price of Warrant Shares acquirable by
exercise hereof or as a stockholder of the Company. Each Holder agrees this
Warrant is not a warrant issued to ING pursuant to the Purchase Agreement, as
amended to date.
SECTION 5.3. Amendments and Waivers. Any provision of this Warrant
----------------------
may be amended or waived, but only pursuant to a written agreement signed by the
Company and the Requisite Holders.
SECTION 5.4. Severability. Any provision of this Warrant which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such provision and
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of this Warrant
affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 5.5. Specific Performance. Each Holder shall have the right
--------------------
to specific performance by the Company of the provisions of this Warrant, in
addition to any other remedies it may have at law or in equity. The Company
hereby irrevocably waives, to the extent that it may do so under applicable law,
any defense based on the adequacy of a remedy at law which may be asserted as a
bar to the remedy of specific performance in any action brought against the
Company for specific performance of this Warrant by the Holders of the Warrants
or Warrant Shares.
SECTION 5.6. Binding Effect. This Warrant shall be binding upon and
--------------
inure to the benefit of the Company, each Holder and their respective successors
and assigns.
SECTION 5.7. Counterparts. This Warrant may be executed by the
------------
parties hereto in several counterparts, each of which shall be deemed to be an
original and all of which shall constitute together but one and the same
agreement. This Warrant shall become effective when counterparts hereof
executed on behalf of the Company and each Holder shall have been received.
<PAGE>
SECTION 5.8. Governing Law; Entire Agreement. THIS WARRANT AND THE
-------------------------------
WARRANTS, SHALL EACH BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE
INTERNAL LAWS OF THE STATE OF NEW YORK. This Warrant and the Warrants,
constitute the entire understanding among the parties hereto with respect to the
subject matter hereof and supersede any prior agreements, written or oral, with
respect thereto.
SECTION 5.9. Benefits of this Warrant. Nothing in this Warrant shall
------------------------
be construed to give to any Person other than the Company and each Holder of a
Warrant or a Warrant Share any legal or equitable right, remedy or claim
hereunder.
SECTION 5.10. Headings. The various headings of this Warrant are
--------
inserted for convenience only and shall not affect the meaning or interpretation
of this Warrant or any provisions hereof or thereof.
SECTION 5.11. Expenses. The Company will promptly (and in any event
--------
within thirty (30) days of receiving any statement or invoice therefor) pay all
reasonable fees, expenses and costs relating hereto, including, but not limited
to, (i) the cost of reproducing this Warrant and the Warrants, (ii) the fees and
disbursements of counsel to the Holder in preparing this Warrant, (iii) all
transfer, stamp, documentary or other similar taxes, assessments or charges
levied by any governmental or revenue authority in respect hereof or any other
document referred to herein, (iv) fees and expenses (including, without
limitation, reasonable attorneys' fees) incurred in respect of the enforcement
by Holders of the rights granted to Holders under this Warrant, and (v) the
expenses relating to the consideration, negotiation, preparation or execution of
any amendments, waivers or consents requested by the Company pursuant to the
provisions hereof, whether or not any such amendments, waivers or consents are
executed.
SECTION 5.12. Attorneys' Fees. In any action or proceeding brought
---------------
by a party to enforce any provision of this Warrant, the prevailing party shall
be entitled to recover the reasonable costs and expenses incurred by it in
connection with that action or proceeding (including, but not limited to,
attorneys' fees).
SECTION 5.13. Filings. The Company shall, at its own expense,
-------
promptly execute and deliver, or cause to be executed and delivered, to any
holder of Warrants all applications, certificates, instruments and all other
documents and papers that such holder of Warrants may reasonably request in
connection with the obtaining of any consent, approval, qualification, or
authorization of any federal, provincial, state or local government (or any
agency or commission thereof) necessary or appropriate in connection with, or
for the effective exercise of, any Warrants then held by such holder.
<PAGE>
SECTION 5.14. Other Transactions. Nothing contained herein shall
------------------
preclude the Holder from engaging in any transaction, in addition to those
contemplated by this Warrant with the Company or any of its Affiliates in which
the Company or such Affiliate is not restricted hereby from engaging with any
other Person.
SECTION 5.15. Forum Selection and Consent to Jurisdiction. ANY
-------------------------------------------
LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS
WARRANT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL
OR WRITTEN) OR ACTIONS OF THE HOLDERS OR THE COMPANY SHALL BE BROUGHT AND
MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK OR IN THE UNITED
STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; THE COMPANY HEREBY
EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE
OF NEW YORK AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF
NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND
IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION
WITH SUCH LITIGATION. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE
OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR
WITHOUT THE STATE OF NEW YORK. THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE
OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN
ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE COMPANY HAS OR
HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF FROM ANY
LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT,
ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS
PROPERTY, THE COMPANY HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS
OBLIGATIONS UNDER THIS WARRANT.
SECTION 5.16. Jury Trial. THE COMPANY HEREBY KNOWINGLY, VOLUNTARILY,
----------
AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF
ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS
WARRANT. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES HERETO CAUSING
THE ISSUANCE OF THE LETTER OF CREDIT AND ENTERING INTO THE REIMBURSEMENT
AGREEMENT AND THE ING SECURITY AGREEMENT. THE COMPANY ACKNOWLEDGES THAT IT HAS
HAD THE ASSISTANCE OF COUNSEL IN THE REVIEW AND EXECUTION OF THIS WARRANT,
INCLUDING THIS SECTION 5.16 HEREOF, AND FURTHER ACKNOWLEDGES THAT THE MEANING
AND EFFECT OF THE FOREGOING WAIVER OF JURY TRIAL HAVE BEEN FULLY EXPLAINED TO
THE COMPANY BY SUCH COUNSEL.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant to be
duly executed and delivered by their authorized officers, all as of the date and
year first above written.
MATTHEWS STUDIO EQUIPMENT GROUP
By: /s/ Carlos D. DeMattos
---------------------------
Name: Carlos D. DeMattos
Title: Chairman & Chief
Executive Officer
[CORPORATE SEAL]
ATTEST:
By: /s/ Lori Snell
----------------------
Name: Lori Snell
Title: Secretary
<PAGE>
Exhibit 10.11
-------------
WAIVER AND AMENDMENT AGREEMENT NO. 2
WAIVER AND AMENDMENT AGREEMENT NO. 2 (this "Agreement") dated as of
---------
September 25, 1998 to the Amended and Restated Credit Agreement, dated as of
April 1, 1998 (as the same has been or may be amended, restated, modified or
supplemented from time to time in accordance with its terms, the "Credit
------
Agreement"), among Matthews Studio Equipment Group, a California corporation
- ---------
("Parent"), Matthews Studio Equipment, Inc., a California corporation ("MSEI"),
- -------- ----
Hollywood Rental Co., Inc., a California corporation ("HRCI"), Matthews Studio
----
Electronics, Inc., a California corporation ("MSE"), Matthews Acceptance
---
Corporation, a California corporation ("MAC"), Duke City Video, Inc., a New
---
Mexico corporation ("Duke"), HDI Holdings, Inc., a Kentucky corporation ("HDI"),
---- ---
Four Star Lighting, Inc., a New York corporation ("Four Star", and collectively
---------
with Parent, MSEI, HRCI, MSE, MAC, Duke and HDI, each a "Borrower" and
--------
collectively, the "Borrowers"), the Guarantors named therein, the lenders named
---------
therein (collectively, the "Lenders"), and THE CHASE MANHATTAN BANK, as agent
-------
for the Lenders (in such capacity, the "Agent"). Capitalized terms used herein
-----
and not otherwise defined herein shall have the meanings ascribed to them in the
Credit Agreement.
WHEREAS, the Borrowers have requested that the Lenders consent to the
formation of a wholly-owned subsidiary of Parent named Matthews Studio Sales,
Inc., a California corporation ("MSSI"); and
----
WHEREAS, the Borrowers have requested that the Lenders consent to the
formation of a wholly-owned subsidiary of Parent named Hollywood Rental Company,
LLC, a Delaware limited liability company ("HRCL"); and
----
WHEREAS, the Borrowers have requested that the Lenders consent to the
spinning-off of certain assets of MSEI, namely the Olesen Business and the ESS
Business (each as herein defined), into MSSI; and
WHEREAS, the Borrowers have requested that the Lenders consent to the
sale of MSEI (after giving effect to the spin-off of certain assets described in
the immediately preceding whereas clause) through an exchange of the stock of
MSEI for the stock of Parent pursuant to the Stock Exchange Agreement, made and
entered into as of September 28, 1998 (the "Stock Exchange Agreement") by and
------------------------
among MSEI, Edward Phillips III, an individual, Phillips Associates, LLC, a
Delaware limited liability company and Parent; and
<PAGE>
WHEREAS, the Borrowers have requested that the Lenders consent to the
merger (the "HRC Merger") of HRCI with and into HRCL; and
----------
WHEREAS, the Borrowers and the Lenders have agreed that MSSI shall
become a Borrower and Guarantor under the Credit Agreement and become a party to
the Loan Documents; and
WHEREAS, Parent purchased certain assets (the "Disney Assets") from
-------------
Disney Production Services, Inc. ("Disney") pursuant to that certain Asset
------
Purchase Agreement, dated March 26, 1998 between Parent and Disney.
WHEREAS, the Lenders have agreed to waive certain conditions of the
Credit Agreement in connection with the transactions described above and in
connection with other events; and
WHEREAS, the Lenders and the Borrowers have agreed to amend the Credit
Agreement and the other Loan Documents as described herein;
NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and subject to the fulfillment of
the conditions set forth below, the parties hereto agree as follows:
SECTION 1. WAIVERS TO CREDIT AGREEMENT
1.1 The Lenders hereby waive Section 7.06 of the Credit Agreement as
it relates to the formation of each of MSSI and HRCL and the purchase of the
Disney Assets.
1.2 The Lenders hereby waive Section 7.05 of the Credit Agreement as
it relates to the HRC Merger.
1.3 The Lenders hereby waive Section 7.05 of the Credit Agreement as
it relates to the spinning-off of the assets principally used in the operation
of the businesses conducted under the trade names (i) "Olesen" (the "Olesen
------
Business") and (ii) "ESS", "ESS International", "ESS/Miami" and "Media Lighting"
- --------
(the businesses listed in this clause (ii) collectively, the "ESS Business").
------------
1.4 The Lenders hereby waive Sections 7.04, 7.05, 7.06, 7.14 and
subsection (m) of Article VIII of the Credit Agreement as they relate to the
sale of MSEI and the exchange of the stock of MSEI for the stock of Parent
pursuant to the Stock Exchange Agreement. All payments and proceeds received by
the Agent in connection with such sale and exchange shall be applied to the
outstanding Revolving Credit Loans and there shall be no reduction of the Total
Revolving Credit
<PAGE>
Commitment as a result of such application; provided, however, that M&E
-------- -------
Availability and Rental Equipment Availability will each be reduced accordingly.
1.5 Intentionally omitted.
1.6 Except for the specific waivers set forth in Sections 1.1, 1.2,
1.3 and 1.4 above, nothing herein shall be deemed to be a waiver of any covenant
or agreement contained in the Credit Agreement, and the Borrowers and Guarantors
hereby agree that all of the covenants and agreements contained in the Credit
Agreement are hereby ratified and confirmed in all respects.
SECTION 2. AMENDMENTS TO CREDIT AGREEMENT
2.1 By executing and delivering this Agreement, MSSI hereby becomes a
Borrower and Guarantor under the Credit Agreement and agrees to be bound by, and
to comply with the terms and provisions of the Credit Agreement in the same
manner as if it were an original signatory thereto as a Borrower and Guarantor.
2.2 Section 7.07 of the Credit Agreement is hereby amended in its
entirety to read as follows:
SECTION 7.07. Capital Expenditures. Permit the aggregate amount
--------------------
of payments made for Capital Expenditures, including Capitalized Lease
Obligations and Indebtedness secured by Liens permitted under Section
7.01(e) hereof, in each of the periods indicated below to exceed the
following amounts for the Parent and its Consolidated subsidiaries:
<TABLE>
<CAPTION>
Period Maximum Amount
------ --------------
<S> <C>
Fiscal Year ending September 30, 1998 $11,100,000
Fiscal Year ending September 30, 1999 $ 6,250,000
Fiscal Year ending September 30, 2000 $11,500,000
Fiscal Year ending September 30, 2001 $11,500,000
Fiscal Year ending September 30, 2002 $11,500,000
</TABLE>
provided, however, the maximum amount permitted in any Fiscal Year
-------- -------
(other than the Fiscal Years ending September 30, 1998 and September
30, 1999) shall be increased by 25% of such amount if in the
<PAGE>
immediately preceding Fiscal Year the ratio of total Funded
Indebtedness to EBITDA (adjusted to include EBITDA of Permitted
Acquisitions during such year) for the Parent and its Consolidated
subsidiaries was less than 3.50:1.00; and provided, further, that
-------- -------
$2,000,000 of the amount permitted to be expended with respect to the
Fiscal Year ended September 30, 1999 or any Fiscal Year thereafter (as
set forth above) may be carried over and may be expended in the
immediately succeeding Fiscal Year (but not in any other Fiscal Year).
2.3 All references to HRCI and MSEI contained in the Credit Agreement
and the other Loan Documents (as each may have been or may be amended, restated,
modified or supplemented from time to time in accordance with its respective
terms) shall hereafter be deemed to mean HRCL and MSSI, respectively.
2.4 The Credit Agreement is hereby further amended by adding the
phrase "or other equity interests" immediately after the following phrases as
each appears in the Credit Agreement:
(i) "capital stock" in paragraph (e) of the "Change of Control"
definition;
(ii) "capital stock" both times it appears in the definition of "Net
Worth";
(iii) "assets or stock" in the second to last line of subsection
2.09(d);
(iv) "capital stock" in Section 6.12;
(v) "stock" in the second line of Section 7.01;
(vi) "capital stock" both times it appears in Section 7.04; and
(vii) "common or preferred stock" in subsection 7.19 (d).
2.5 The schedules to the Credit Agreement are hereby amended as set
forth on Exhibit A.
SECTION 3. AMENDMENTS TO THE PLEDGE AGREEMENT.
3.1 The Pledgors (as defined in the Pledge Agreement) and the Agent
hereby amend Schedule I to the Pledge Agreement by deleting such schedule in its
entirety and substituting therefor Schedule I attached hereto.
3.2 The Pledgors and the Agent hereby amend the Pledge Agreement by
adding the phrase "or other equity interests" immediately after the following
phrases as each appears in the Pledge Agreement:
(i) "capital stock" in clause (a) of Section 1;
(ii) "common stock of the issuers" in clause (a) of Section 1;
<PAGE>
(iii) "capital stock" in clause (f) of Section 3;
(iv) "stock" in subsection 5(a)(iii)(b);
(v) "capital stock" in subsection 5(a)(iii)(c);
(vi) "other securities" in Section 6;
(vii) "other securities" in subsection 7(b); and
(viii) "capital stock" in subsection 7(b).
SECTION 4. AMENDMENTS TO SECURITY AGREEMENT - PATENTS AND TRADEMARKS.
SECTION 1.
4.1 By executing and delivering this Agreement, MSSI hereby becomes a
Grantor under Security Agreement - Patents and Trademarks and agrees to be bound
by, and to comply with the terms and provisions of the Security Agreement -
Patents and Trademarks in the same manner as if it were an original signatory
thereto as a Grantor.
4.2 Schedules A, B and C to the Security Agreement - Patents and
Trademarks are hereby amended by deleting such schedules in their entirety and
substituting therefor Schedules A, B, and C attached hereto.
SECTION 5. AMENDMENT TO SECURITY AGREEMENT;CONFIRMATION OF SECURITY
INTEREST.
5.1 By executing and delivering this Agreement, MSSI hereby becomes a
Grantor under the Security Agreement and agrees to be bound by, and to comply
with the terms and provisions of the Security Agreement in the same manner as if
it were an original signatory thereto as a Grantor. MSSI hereby confirms the
existing grant of a security interest in and lien on the Collateral pursuant to
the Security Agreement and further agrees that such security interest and lien
are continuing and shall, at all times, continue to be attached, perfected and
enforceable pursuant to the terms of the Security Agreement.
5.2 The Grantors and the Agent hereby amend Schedules I and II to the
Security Agreement by deleting such schedules in their entirety and substituting
therefor Schedules I and II to the Security Agreement attached hereto.
SECTION 6. FURTHER AMENDMENT.
6.1 The parties hereto agree to negotiate new levels with respect to
the covenants set forth in Sections 7.08, 7.09, 7.11, 7.12 and 7.13 of the
Credit Agreement. In the event the parties cannot unanimously agree on
amendments to all such provisions by October 20, 1998, the Borrowers and
Guarantors hereby agree that
<PAGE>
each such provision with respect to which no agreement has been reached shall
remain unchanged.
SECTION 7. PURCHASE OF DISNEY ASSETS.
7.1 The Borrowers and the Lenders hereby agree that amounts paid for
the Disney Assets shall not be included in the calculation of Capital
Expenditures for the Fiscal Year ending September 30, 1998.
7.2 The Borrowers and the Lenders hereby agree that the Disney Assets
shall not be included in any calculation of Borrowing Base until Sections 7.08,
7.09, 7.11, 7.12 and 7.13 of the Credit Agreement are amended in a manner
satisfactory to the Agent and the Lenders.
SECTION 8. MODIFICATION OF REPRESENTATION AND WARRANTY.
8.1 The Lenders and the Borrowers agree that from the date hereof
until the earlier to occur of (i) the consummation of the amendments
contemplated in Section 6.1 or (ii) October 20, 1998, any representation or
warranty made by the Borrowers pursuant to Section 5.01 of the Credit Agreement
shall be made without regard to Sections 7.08, 7.09, 7,11, 7.12 and 7.13 of the
Credit Agreement.
SECTION 9. CONFIRMATION OF LOAN DOCUMENTS
9.1 Each Loan Party, by its execution and delivery of this Agreement,
irrevocably and unconditionally ratifies and confirms in favor of the Agent that
it consents to the terms and conditions of the Credit Agreement as it has been
amended by this Agreement and that notwithstanding this Agreement, each Loan
Document to which such Loan Party is a party shall continue in full force and
effect in accordance with its terms, as it has been amended by this Agreement,
and is and shall continue to be applicable to all of the Obligations.
9.2 HRCL hereby confirms that, pursuant to the HRC Merger, it is the
successor in interest to all of the assets, liabilities and obligations of HRCI,
including, without limitation, the Obligations.
SECTION 10. CONDITIONS PRECEDENT
This Agreement shall become effective upon the execution and delivery
of counterparts hereof by all parties hereto and the fulfillment of the
following conditions:
<PAGE>
10.1 The Borrowers shall have made a prepayment of the Revolving
Credit Loan in the amount of $5,000,000.
10.2 The Borrowers shall have paid to the Agent (for the ratable
benefit of the Lenders) an amendment fee of $120,000.
10.3 The Agent shall have received a Borrowing Base Certificate dated
the date hereof which shall reflect the Borrowing Base after giving effect to
the transactions described herein (other than the purchase of the Disney
Assets).
10.4 Messrs. Kaye, Scholer, Fierman, Hays & Handler, LLP, counsel to
the Agent, shall have received payment in full for all legal fees charged, and
all costs and expenses incurred, by such counsel through the date hereof and all
legal fees charged, and all costs and expenses incurred, by such counsel in
connection with the transactions contemplated under this Agreement and the other
Loan Documents and instruments in connection herewith and therewith.
10.5 The Agent shall have received favorable written opinions of
Whitman Breed Abbott & Morgan LLP, counsel to the Borrowers, Guarantors and
Grantors, in form and substance satisfactory to the Agent and its counsel.
10.6 The Agent shall have received (i) the stock certificate
evidencing Parent's ownership of MSSI together with a stock power undated and
executed in blank and (ii) a certificate from an officer of MSSI that the stock
certificate delivered pursuant to clause (i) above represents 100% of the issued
and outstanding stock of MSSI.
10.7 The Agent shall have received (i) a certificate evidencing
Parent's ownership of HRCL together with a certificate of power of transfer
undated and executed in blank and (ii) a certificate from an officer of HRCL
that such certificate delivered pursuant to clause (i) above represents Parent's
100% ownership interest of HRCL.
10.8 The Lenders shall have received (i) a copy of the certificate or
articles of incorporation or organization or other constitutive or charter
documents, in each case as amended to date, of each of MSSI and HRCL, certified
as of a recent date by the Secretary of State or other appropriate official of
the state of its organization, and a certificate as to the good standing of each
from such Secretary of State or other official and from the Secretary of State
or other official in each other jurisdiction where such person is qualified to
do business, in each case dated as of a recent date; (ii) a certificate of the
Secretary of each of MSSI and HRCL, dated as of the date hereof and certifying
(A) that attached thereto is a true and complete copy of such person's By-laws
or limited liability company agreement, as applicable, as in
<PAGE>
effect on the date of such certificate and at all times since a date prior to
the date of the resolution described in item (B) below, (B) that attached
thereto is a true and complete copy of a resolution adopted by such person's
Board of Directors or managers authorizing the execution, delivery and
performance of this Agreement, and that such resolution has not been modified,
rescinded or amended and is in full force and effect, (C) that such person's
certificate or articles of incorporation or constitutive documents has not been
amended since the date of the last amendment thereto shown on the certificate of
good standing furnished pursuant to (i) above, and (D) as to the incumbency and
specimen signature of each of such person's officers executing this Agreement;
and (iii) a certificate of another of such person's officers as to incumbency
and signature of its Secretary.
10.9 The Lenders shall have received amended and restated Notes.
10.10 Each document (including, without limitation, each Uniform
Commercial Code financing statement) required by law or requested by the Agent
to be filed, registered or recorded in order to create in favor of the Agent for
the benefit of the Lenders a first priority perfected security interest in the
Collateral shall have been properly filed, registered or recorded in each
jurisdiction in which the filing, registration or recordation thereof is so
required or requested. The Agent shall have received evidence satisfactory to
it and its counsel of each such filing, registration or recordation.
10.11 The Agent shall have received a certified copy of the articles
of merger filed in connection with the HRC Merger.
10.12 The Agent shall have received executed copies of the Stock
Exchange Agreement and the other documents delivered in connection therewith,
including, without limitation, copies of any opinions delivered in connection
therewith, and evidence that such agreement is in full force and effect and that
the transactions contemplated therein and therewith have been consummated.
10.13 All legal matters in connection with this Agreement shall be
satisfactory to the Agent, the Lenders and their respective counsel in their
sole discretion.
10.14 The Agent shall have received a certificate signed by a
Financial Officer of each Borrower and Guarantor that both immediately prior to
and after giving effect to the transactions contemplated herein (i) all
representations and warranties contained in this Agreement or otherwise made in
writing to the Agent in connection herewith shall be true and correct, (ii)
there exists no unwaived Default or Event of Default and (iii) since June 30,
1998, no event has occurred which would result in a Material Adverse Effect.
<PAGE>
10.15 MSEI shall have transferred to Parent all of its right, title
and interest in and to the Copyrights, Patents and Trademarks described on
Schedules A, B and C to the Security Agreement - Patents and Trademarks, and
Parent shall have executed any document or certificate and make any filing
necessary to evidence such transfer.
10.16 The Agent shall have received such other documents as the
Lenders or the Agent or Agent's counsel shall reasonably deem necessary.
SECTION 11. MISCELLANEOUS
11.1 The Borrower and each Guarantor reaffirms and restates the
representations and warranties set forth in Article IV of the Credit Agreement,
as amended by this Agreement, and all such representations and warranties shall
be true and correct on the date hereof with the same force and effect as if made
on such date. Each Loan Party represents and warrants (which representations
and warranties shall survive the execution and delivery hereof) to the Agent
that:
(a) It has the corporate power and authority to execute, deliver
and carry out the terms and provisions of this Agreement and the
transactions contemplated hereby and has taken or caused to be taken all
necessary corporate action to authorize the execution, delivery and
performance of this Agreement and the transactions contemplated hereby;
(b) No consent of any other person (including, without limitation,
shareholders or creditors of any Loan Party), and no action of, or filing
with any governmental or public body or authority is required to authorize,
or is otherwise required in connection with the execution, delivery and
performance of this Agreement;
(c) This Agreement has been duly executed and delivered on behalf
of each Loan Party by a duly authorized officer, and constitutes a legal,
valid and binding obligation of each Loan Party enforceable in accordance
with its terms, subject to bankruptcy, reorganization, insolvency,
moratorium and other similar laws affecting the enforcement of creditors'
rights generally and the exercise of judicial discretion in accordance with
general principles of equity; and
(d) The execution, delivery and performance of this Agreement will
not violate any law, statute or regulation, or any order or decree of any
court or governmental instrumentality, or conflict with, or result in the
breach of, or constitute a default under any contractual obligation of any
Loan Party.
<PAGE>
11.2 Except, as herein expressly amended, the Credit Agreement is
ratified and confirmed in all respects and shall remain in full force and effect
in accordance with its terms.
11.3 All references to the Credit Agreement, the Pledge Agreement,
the Security Agreement and the Security Agreement - Patents and Trademarks in
the Credit Agreement and the other Loan Documents and the other documents and
instruments delivered pursuant to or in connection therewith shall mean such
Credit Agreement, Pledge Agreement, Security Agreement and Security Agreement -
Patents and Trademarks, as amended hereby and as may in the future be amended,
restated, supplemented or modified from time to time.
11.4 This Agreement may be executed by the parties hereto
individually or in combination, in one or more counterparts, each of which shall
be an original and all of which shall constitute one and the same agreement.
11.5 Delivery of an executed counterpart of a signature page to this
Agreement by telecopier shall be effective as delivery of a manually executed
counterpart of this Agreement.
11.6 THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD
TO CHOICE OR CONFLICT OF LAW PRINCIPLES THEREOF.
11.7 The parties hereto shall, at any time and from time to time
following the execution of this Agreement, execute and deliver all such further
instruments and take all such further actions as may be reasonably necessary or
appropriate in order to carry out the provisions of this Agreement.
[Remainder of this page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Waiver and
Amendment Agreement as of the date first above written.
THE CHASE MANHATTAN BANK, as Agent
By: /s/ Donna M. DiForio
--------------------------------
Name: Donna M. DiForio
Title: Vice President
THE CHASE MANHATTAN BANK, as Lender
By: /s/ Donna M. DiForio
---------------------------------
Name: Donna M. DiForio
Title: Vice President
PNC BANK, NATIONAL ASSOCIATION, as Lender
By: /s/ Michael D. Shover
---------------------------------
Name: Michael D. Shover
Title: Bank Officer
WELLS FARGO BANK, N.A., as Lender
By: /s/ Kevin McKhann
---------------------------------
Name: Kevin McKhann
Title: Vice President
CIBC, INC., as Lender
By: /s/ Harold Birk
---------------------------------
Name: Harold Birk
Title: Executive Director
CIBC Oppenheimer Corp., as Agent
<PAGE>
MELLON BANK, N.A., as Lender
By: /s/ George G. Cole, Jr.
------------------------------------------
Name: George G. Cole, Jr.
Title: First Vice President
MATTHEWS STUDIO EQUIPMENT GROUP,
as a Borrower and as a Guarantor
By: /s/ Carlos D. DeMattos
------------------------------------------
Name: Carlos D. DeMattos
Title: Chairman of the Board/Chief
Executive Officer
HOLLYWOOD RENTAL COMPANY, LLC., (as
successor by merger to Hollywood Rental Co.,
Inc.), as a Borrower and as a Guarantor
By: /s/ Carlos D. DeMattos
------------------------------------------
Name: Carlos D. DeMattos
Title: Manager & Chief Financial Officer
MATTHEWS STUDIO ELECTRONICS, INC.,
as a Borrower and as a Guarantor
By: /s/ Carlos D. DeMattos
------------------------------------------
Name: Carlos D. DeMattos
Title: Chief Executive Officer
MATTHEWS ACCEPTANCE CORPORATION,
as a Borrower and as a Guarantor
By: /s/ Carlos D. DeMattos
------------------------------------------
Name: Carlos D. DeMattos
Title: President
<PAGE>
DUKE CITY VIDEO, INC.,
as a Borrower and as a Guarantor
By: /s/ Carlos D. DeMattos
------------------------------------------
Name: Carlos D. DeMattos
Title: President
HDI HOLDINGS, INC.,
as a Borrower and as a Guarantor
By: /s/ Carlos D. DeMattos
------------------------------------------
Name: Carlos D. DeMattos
Title: Chairman of the Board
FOUR STAR LIGHTING, INC.,
as a Borrower and as a Guarantor
By: /s/ Carlos D. DeMattos
------------------------------------------
Name: Carlos D. DeMattos
Title: Chief Executive Officer
MATTHEWS STUDIO SALES, INC.,
as a Borrower and Guarantor
By: /s/ Carlos D. DeMattos
------------------------------------------
Name: Carlos D. DeMattos
Title: President
MATTHEWS STUDIO GROUP CENTERS, INC.
(f/k/a Matthews Medical Equipment, Inc.), as a
Guarantor
By: /s/ Carlos D. DeMattos
------------------------------------------
Name: Carlos D. DeMattos
Title: President
<PAGE>
KEYLITE HOLDINGS, INC., as a Guarantor
By: /s/ Carlos D. DeMattos
-----------------------------------
Name: Carlos D. DeMattos
Title: Chief Financial Officer
REEL WHEELS, INC., as a Guarantor
By: /s/ Carlos D. DeMattos
-----------------------------------
Name: Carlos D. DeMattos
Title: Chief Financial Officer
KEYLITE PRODUCTION SERVICES, INC., as
a Guarantor
By: /s/ Carlos D. DeMattos
-----------------------------------
Name: Carlos D. DeMattos
Title: Chief Financial Officer
DUKE CITY HOLDINGS, INC., as a Guarantor
By: /s/ Carlos D. DeMattos
-----------------------------------
Name: Carlos D. DeMattos
Title: Chief Executive Officer
FOUR STAR HOLDING, INC., as a Guarantor
By: /s/ Carlos D. DeMattos
-----------------------------------
Name: Carlos D. DeMattos
Title: President
<PAGE>
Exhibit 10.12
-------------
WAIVER AND AMENDMENT AGREEMENT NO. 3
WAIVER AND AMENDMENT AGREEMENT NO. 3 (this "Agreement") dated as of
---------
January 12, 1999 to the Amended and Restated Credit Agreement, dated as of April
1, 1998 (as the same has been or may be amended, restated, modified or
supplemented from time to time in accordance with its terms, the "Credit
------
Agreement"), among Matthews Studio Equipment Group, a California corporation
- ---------
("Parent"), Matthews Studio Sales, Inc., a California corporation ("MSSI"),
- -------- ----
Hollywood Rental Company, LLC, a Delaware limited liability company ("HRCL"),
----
Matthews Studio Electronics, Inc., a California corporation ("MSE"), Matthews
---
Acceptance Corporation, a California corporation ("MAC"), Duke City Video, Inc.,
---
a New Mexico corporation ("Duke"), HDI Holdings, Inc., a Kentucky corporation
----
("HDI"), Four Star Lighting, Inc., a New York corporation ("Four Star", and
- ----- ---------
collectively with Parent, MSSI, HRCL, MSE, MAC, Duke and HDI, each a "Borrower"
--------
and collectively, the "Borrowers"), the Guarantors named therein, the lenders
---------
named therein (collectively, the "Lenders"), and The Chase Manhattan Bank, as
-------
agent for the Lenders (in such capacity, the "Agent"). Capitalized terms used
-----
herein and not otherwise defined herein shall have the meanings ascribed to them
in the Credit Agreement.
WHEREAS, the Borrowers have requested that the Lenders agree to waive
and amend certain terms and provisions of the Credit Agreement;
WHEREAS, the Lenders have agreed to waive certain conditions of the
Credit Agreement as described herein; and
WHEREAS, the Lenders, Borrowers and Guarantors have agreed to amend
the Credit Agreement as described herein;
NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and subject to the fulfillment of
the conditions set forth below, the parties hereto agree as follows:
SECTION 1. WAIVERS TO CREDIT AGREEMENT
1.1 The Lenders hereby waive Section 7.01 of the Credit Agreement as
it applies to the ING Security Agreement, dated January 12, 1999 among ING and
the Borrowers and the Guarantors (the "ING Security Agreement") pursuant to
----------------------
which ING shall have a Lien (which Lien shall be junior to the lien of the Agent
in all respects) on all of the assets of the Borrowers and the Guarantors.
<PAGE>
1.2 The Lenders hereby waive Section 7.03 of the Credit Agreement as
it applies to the incurrence by the Borrowers and the Guarantors of obligations
to ING under the Reimbursement Agreement, dated January 12, 1999 among ING and
the Borrowers and the Guarantors, and to the repayment obligation of the
Borrowers which shall arise in the event that the Agent draws on the ING Letter
of Credit.
1.3 The Lenders hereby waive the requirements of Section 7.09 of the
Credit Agreement as it applies to the Fiscal Year ended September 30, 1998.
1.4 The Lenders hereby waive the requirements of Section 7.20 of the
Credit Agreement as it applies to the ING Letter of Credit, the ING Security
Agreement and any other document executed in connection therewith.
1.5 Except for the specific waivers set forth in Sections 1.1, 1.2,
1.3 and 1.4 above, nothing herein shall be deemed to be a waiver of any covenant
or agreement contained in the Credit Agreement, and the Borrowers and Guarantors
hereby agree that all of the covenants and agreements contained in the Credit
Agreement are hereby ratified and confirmed in all respects.
SECTION 2. AMENDMENTS TO CREDIT AGREEMENT
2.1 Schedule 2.01(b) to the Credit Agreement is hereby deleted in its
entirety and Schedule 2.01(b) attached hereto is substituted therefor.
2.2 The amount "$80,000,000" as it appears in the preamble of the
Credit Agreement is hereby deleted and the amount "$77,000,000" is substituted
therefor.
2.3 The amount "$64,000,000" as it appears in the preamble of the
Credit Agreement is hereby deleted and the amount "$61,000,000" is substituted
therefor.
2.4 The definition of "Debt Service Coverage Ratio" as it appears in
Section 1.01 of the Credit Agreement is hereby deleted in its entirety and the
following is substituted therefor:
"Debt Service Coverage Ratio" shall mean, with respect to any
---------------------------
person for any four quarter period, the ratio of (i) the sum of (x) Net
Income plus (y) depreciation and amortization minus (z) Capital
---- -----
Expenditures (including cash down payments or up-front payments, if any,
required by any Capital Leases entered into during the four fiscal quarter
period (but only including those Capital Leases entered into after
September 30, 1998), but excluding Capital Expenditures paid for with
proceeds of Revolving Credit Loans and
<PAGE>
excluding amounts required pursuant to GAAP to be recognized as the costs
of assets acquired under Capital Leases) to (ii) the aggregate Debt Service
Expense of such person for the four most recent consecutive fiscal quarters
ending on or prior to the date of determination. Notwithstanding the
foregoing sentence, for the fiscal quarters ending 6/30/99 and 9/30/99 Debt
Service Coverage Ratio shall be calculated on a building 3 and 4 fiscal
quarter basis; after 9/30/99 Debt Service Coverage shall be calculated in
accordance with the immediately preceding sentence.
2.5 The definition of "EBITDA" as it appears in Section 1.01 of the
Credit Agreement is hereby deleted in its entirety and the following is
substituted therefor:
"EBITDA" shall mean, with respect to any person for any period,
------
the sum of (i) Net Income, (ii) Interest Expense, (iii) depreciation and
amortization of intangible assets and (iv) federal, state and local income
taxes, in each case of such person for such period, computed and calculated
in accordance with GAAP. Notwithstanding the foregoing sentence and solely
for the purpose of calculating Leverage Ratio the Parent and its
subsidiaries shall be deemed to have had EBITDA of $2,656,000, $2,900,000
and $2,312,000 for the fiscal quarters ended 3/31/98, 6/30/98 and 9/30/98,
respectively.
2.6 The definition of "Interest Coverage Ratio" as it appears in
Section 1.01 of the Credit Agreement is hereby deleted in its entirety and the
following is substituted therefor:
"Interest Coverage Ratio" shall mean, with respect to any person
-----------------------
for any four-quarter period, the ratio of (i) the sum of (x) EBITDA less
----
(y) Capital Expenditures (including cash down payments or up-front
payments, if any, required by any Capital Leases entered into during the
four fiscal quarter period (but only including those Capital Leases entered
into after September 30, 1998), but excluding amounts required pursuant to
GAAP to be recognized as the costs of assets acquired under Capital Leases)
for the four most recent consecutive fiscal quarters ending on or prior to
the date of determination, to (ii) the Cash Interest Expense of such person
for such four-quarter period. Notwithstanding the foregoing sentence, for
the fiscal quarters ending 6/30/99 and 9/30/99, Interest Coverage Ratio
shall be calculated on a building 3 and 4 fiscal quarter basis; after
9/30/99 Interest Coverage Ratio shall be calculated in accordance with the
immediately preceding sentence.
2.7 The definition of "Leverage Ratio" as it appears in Section 1.01
of the Credit Agreement is hereby deleted in its entirety and the following is
substituted therefor:
<PAGE>
"Leverage Ratio" with respect to any person at the end of any fiscal
--------------
quarter shall mean the ratio of (i) total Funded Indebtedness of such
person as at the date of determination to (ii) EBITDA (adjusted to include
the trailing EBITDA of any person acquired by such person as a Permitted
Acquisition and to exclude the trailing EBITDA of MSEI, in each case on a
basis satisfactory to the Agent) of such person for the four most recent
consecutive fiscal quarters ending on or prior to the date of
determination.
2.8 The following definitions hereby added to Section 1.01 in their
proper alphabetical order:
"Disney Assets" shall mean those certain assets purchased by Parent
-------------
pursuant to that certain Asset Purchase Agreement, dated March 26, 1998
between Parent and Disney Production Services, Inc.
"ING Letter of Credit" shall mean that certain letter of credit issued by
--------------------
ING (U.S.) Capital Corporation in the face amount of $3,000,000, naming the
Agent as the beneficiary and on terms and conditions satisfactory to the
Agent
2.9 The phrase ", plus, (vi) the maximum amount potentially drawable
----
under the ING Letter of Credit at such time" is hereby added immediately before
the phrase "(this clause (1)(B) referred to herein as the "Borrowing Base")" as
--------------
it appears in Section 2.01(b) of the Credit Agreement.
2.10 The phrase "provided, however, the inclusion of the Disney Assets
-------- -------
in the Borrowing Base shall not increase the Borrowing Base more than
$1,700,000" is hereby added at the end of the penultimate sentence in the first
full paragraph of Section 2.01(b) of the Credit Agreement.
2.11 The grid contained in the definition of "Interest Margin" in
Section 1.01 of the Credit Agreement is hereby amended in its entirety to read
as follows:
<TABLE>
<CAPTION>
Leverage Ratio Alternate Base Rate LIBO Rate
- -------------- Interest Margin Interest Margin
-------------------- ----------------
<S> <C> <C>
0 - 2.00 to 1.00 0% 1.50%
2.01 - 2.50 to 1.00 0% 1.75%
2.51 - 3.00 to 1.00 0% 2.00%
3.01 - 3.50 to 1.00 0.25% 2.25%
3.51 - 4.00 to 1.00 0.50% 2.50%
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
4.01 - 5.00 to 1.00 0.75% 2.75%
5.01 or greater to 1.00 1.25% 3.25%
</TABLE>
2.12 Section 7.07 of the Credit Agreement is hereby amended in its
entirety to read as follows:
SECTION 7.07. Capital Expenditures. Permit the aggregate
--------------------
amount of payments made for Capital Expenditures, including
Capitalized Lease Obligations and Indebtedness secured by Liens
permitted under Section 7.01(e) hereof, in each of the periods
indicated below to exceed the following amounts for the Parent and
its Consolidated subsidiaries:
<TABLE>
<CAPTION>
Period Maximum Amount
------ --------------
<S> <C>
Fiscal Year ending September 30, 1998 $10,600,000
Fiscal Year ending September 30, 1999 $ 7,000,000
Fiscal Year ending September 30, 2000 $11,500,000
Fiscal Year ending September 30, 2001 $11,500,000
Fiscal Year ending September 30, 2002 $11,500,000
</TABLE>
provided, however, the maximum amount permitted in any Fiscal Year
-------- -------
(other than the Fiscal Years ending September 30, 1998 and September
30, 1999) shall be increased by 25% of such amount if in the
immediately preceding Fiscal Year the ratio of total Funded
Indebtedness to EBITDA (adjusted to include EBITDA of Permitted
Acquisitions during such year) for the Parent and its Consolidated
subsidiaries was less than 3.50:1.00; and provided, further, that
-------- -------
$2,000,000 of the amount permitted to be expended with respect to the
Fiscal Year ended September 30, 1999 or any Fiscal Year thereafter (as
set forth above) may be carried over and may be expended in the
immediately succeeding Fiscal Year (but not in any other Fiscal Year);
provided, further, that for the Fiscal Year ending September 30, 1999
-------- -------
the Capital Expenditures for all Borrowers other than Four Star shall
not in the aggregate exceed $3,000,000.
2.13 Section 7.08 of the Credit Agreement is hereby amended in its
entirety to read as follows:
<PAGE>
SECTION 7.08 Net Worth. Permit the Net Worth of the Parent and
----------
its Consolidated subsidiaries at any time to be less than the
respective amounts set forth below for the periods indicated:
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
9/30/98 $2,300,000
10/1/1998 through and
including 12/31/98 $1,020,000
1/1/1999 through and
including 3/31/99 $ 380,000
4/1/1999 through and
including 6/30/99 $ 200,000
7/1/1999 through and
including 9/29/00 $ 10,000
9/30/00 through and The sum of (x) $10,000 plus
including 9/29/2001 (y) the greater of (i)
$1,000,000 or (ii) 85% of Net
Income of the Parent and its
Consolidated subsidiaries for
Fiscal Year ending 9/30/2000.
9/30/2001 through and The sum of (x) $10,000 plus
including the Final (y) the greater of (i)
Maturity Date $4,000,000 or (ii) 85% of Net
Income of the Parent and its
Consolidated subsidiaries for
the two Fiscal Year period
ending 9/30/2001.
</TABLE>
2.14 Section 7.09 of the Credit Agreement is hereby amended in its
entirety to read as follows:
SECTION 7.09 Debt Service Coverage Ratio. Permit the Debt
---------------------------
Service Coverage Ratio of the Parent and its Consolidated subsidiaries
at the end of the fiscal quarter ending June 30, 1999 to be less than
1.00:1.00, thereafter for the fiscal quarter ending September 30, 1999
to be less than 1.10:1.00, thereafter for the fiscal quarters ending
December 31, 1999 through March 31, 2000 to be less than 1.50:1.00 and
thereafter at the end of each fiscal quarter to be less than
1.75:1.00.
<PAGE>
2.15 Section 7.11 of the Credit Agreement is hereby amended in its
entirety to read as follows:
SECTION 7.11 Interest Coverage Ratio. Permit the Interest
-----------------------
Coverage Ratio of the Parent and its Consolidated subsidiaries at the
end of the fiscal quarters set forth below to be less than the
respective amounts set forth below:
<TABLE>
<CAPTION>
Date Ratio
---- -----
<S> <C>
6/30/99 1.15:1.00
9/30/99 1.25:1.00
12/31/99 through and
including 9/29/2000 1.75:1.00
9/30/2000 through and
including 9/29/2001 2.00:1.00
9/30/2001 through and
including the Final
Maturity Date 2.25:1.00
</TABLE>
2.16 Section 7.12 of the Credit Agreement is hereby amended in its
entirety to read as follows:
SECTION 7.12 Leverage Ratio. Permit the Leverage Ratio of
---------------
the Parent and its Consolidated subsidiaries at the end of the fiscal
quarters set forth below to be greater than the respective amounts set
forth below:
<TABLE>
<CAPTION>
Date Leverage Ratio
---- --------------
<S> <C>
9/30/98 6.50:1.00
12/31/98 7.35:1.00
3/31/99 6.75:1.00
6/30/99 6.00:1.00
9/30/99 5.00:1.00
each fiscal quarter
ending thereafter 4.50:1.00
</TABLE>
<PAGE>
2.17 Section 7.13 of the Credit Agreement is hereby amended in its
entirety to read as follows:
SECTION 7.13. EBITDA. Permit EBITDA of the Parent and its
------
Consolidated subsidiaries to be less than (i)$10,000,000 for the
period October 1, 1997 through September 30, 1998, (ii)$2,750,000 for
the period October 1, 1998 through December 31, 1998, (iii)$6,000,000
for the period October 1, 1998 through March 31, 1999, (iv)
$10,000,000 for the period October 1, 1998 through June 30, 1999 and
(v)$15,000,000 for the Fiscal Year ending 9/30/99.
2.18 The term "ING Documents" as it appears in paragraph (b) of
Section 7.19 is hereby deleted and the term "Subordinated Loan Documents" is
substituted therefor.
SECTION 3. CONFIRMATION OF LOAN DOCUMENTS
3.1 Each Loan Party, by its execution and delivery of this Agreement,
irrevocably and unconditionally ratifies and confirms in favor of the Agent that
it consents to the terms and conditions of the Credit Agreement as it has been
amended by this Agreement and that notwithstanding this Agreement, each Loan
Document to which such Loan Party is a party shall continue in full force and
effect in accordance with its terms, as it has been amended by this Agreement,
and is and shall continue to be applicable to all of the Obligations.
SECTION 4. CONDITIONS PRECEDENT
This Agreement shall become effective upon the execution and delivery
of counterparts hereof by all parties hereto and the fulfillment of the
following conditions:
4.1 The Agent shall have received the original ING Letter of Credit,
a fully executed copy of the ING Security Agreement and any other document
executed in connection therewith, all in form and substance satisfactory to the
Agent.
4.2 The Borrowers shall have paid to the Agent (for the ratable
benefit of the Lenders) an amendment fee of $50,000.
4.3 The Agent shall have received a Borrowing Base Certificate dated
the date hereof which shall reflect the Borrowing Base after giving effect to
the transactions described herein.
<PAGE>
4.4 Messrs. Kaye, Scholer, Fierman, Hays & Handler, LLP, counsel to
the Agent, shall have received payment in full for all legal fees charged, and
all costs and expenses incurred, by such counsel through the date hereof and all
legal fees charged, and all costs and expenses incurred, by such counsel in
connection with the transactions contemplated under this Agreement and the other
Loan Documents and instruments in connection herewith and therewith.
4.5 All legal matters in connection with this Agreement shall be
satisfactory to the Agent, the Lenders and their respective counsel in their
sole discretion.
4.6 The Agent shall have received a certificate signed by a Financial
Officer of each Borrower and Guarantor that (i) both immediately prior to and
after giving effect to the transactions contemplated herein all representations
and warranties contained in this Agreement or otherwise made in writing to the
Agent in connection herewith shall be true and correct, (ii) after giving effect
to the transactions contemplated herein there exists no unwaived Default or
Event of Default and (iii) after giving effect to the transactions contemplated
herein since September 30, 1998, no event has occurred which would result in a
Material Adverse Effect.
4.7 The Agent shall have received a favorable opinion of counsel in
form and substance satisfactory to the Agent and its counsel.
4.8 The Agent shall have received such other documents as the Lenders
or the Agent or Agent's counsel shall reasonably deem necessary.
SECTION 5. MISCELLANEOUS
5.1 Each Borrower and each Guarantor reaffirms and restates the
representations and warranties set forth in Article IV of the Credit Agreement,
as amended by this Agreement and after giving effect to the transactions
contemplated herein, and all such representations and warranties shall be true
and correct on the date hereof with the same force and effect as if made on such
date, except to the extent that any such representations or warranties which are
not true or correct shall not in the aggregate result in a Material Adverse
Effect. Each Loan Party represents and warrants (which representations and
warranties shall survive the execution and delivery hereof) to the Agent that:
(a) It has the corporate power and authority to execute, deliver and
carry out the terms and provisions of this Agreement and the transactions
contemplated hereby and has taken or caused to be taken all necessary
corporate action to authorize the execution, delivery and performance of
this Agreement and the transactions contemplated hereby;
<PAGE>
(b) No consent of any other person (including, without limitation,
shareholders or creditors of any Loan Party), and no action of, or filing
with any governmental or public body or authority is required to authorize,
or is otherwise required in connection with the execution, delivery and
performance of this Agreement;
(c) This Agreement has been duly executed and delivered on behalf of
each Loan Party by a duly authorized officer, and constitutes a legal,
valid and binding obligation of each Loan Party enforceable in accordance
with its terms, subject to bankruptcy, reorganization, insolvency,
moratorium and other similar laws affecting the enforcement of creditors'
rights generally and the exercise of judicial discretion in accordance with
general principles of equity; and
(d) The execution, delivery and performance of this Agreement will not
violate any law, statute or regulation, or any order or decree of any court
or governmental instrumentality, or conflict with, or result in the breach
of, or constitute a default under any contractual obligation of any Loan
Party.
5.2 Except, as herein expressly amended, the Credit Agreement is
ratified and confirmed in all respects and shall remain in full force and effect
in accordance with its terms.
5.3 All references to the Credit Agreement contained in the Credit
Agreement and the other Loan Documents and the other documents and instruments
delivered pursuant to or in connection therewith shall mean the Credit
Agreement, as amended hereby and as may in the future be amended, restated,
supplemented or modified from time to time.
5.4 This Agreement may be executed by the parties hereto individually
or in combination, in one or more counterparts, each of which shall be an
original and all of which shall constitute one and the same agreement.
5.5 Delivery of an executed counterpart of a signature page to this
Agreement by telecopier shall be effective as delivery of a manually executed
counterpart of this Agreement.
5.6 THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD
TO CHOICE OR CONFLICT OF LAW PRINCIPLES THEREOF.
<PAGE>
5.7 The parties hereto shall, at any time and from time to time
following the execution of this Agreement, execute and deliver all such further
instruments and take all such further actions as may be reasonably necessary or
appropriate in order to carry out the provisions of this Agreement.
[Remainder of this page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Waiver and
Amendment Agreement as of the date first above written.
THE CHASE MANHATTAN BANK, as Agent
By: /s/ Donna M. DiForio
--------------------------------
Name: Donna M. DiForio
Title: Vice President
THE CHASE MANHATTAN BANK, as Lender
By: /s/ Donna M. DiForio
---------------------------------
Name: Donna M. DiForio
Title: Vice President
PNC BANK, NATIONAL ASSOCIATION, as Lender
By: /s/ Michael D. Shover
--------------------------------
Name: Michael D. Shover
Title: Bank Officer
WELLS FARGO BANK, N.A., as Lender
By: /s/ Kevin McKhann
--------------------------------
Name: Kevin McKhann
Title: Vice President
CIBC, INC., as Lender
By: /s/ Keith Labbate
------------------------------
Name: Keith Labbate
Title: Executive Director
CIBC Oppenheimer Corp., as Agent
<PAGE>
MELLON BANK, N.A., as Lender
By: /s/ Roger D. Attix
---------------------------------------------
Name: Roger D. Attix
Title: Vice President
MATTHEWS STUDIO EQUIPMENT GROUP,
as a Borrower and as a Guarantor
By: /s/ Carlos D. DeMattos
---------------------------------------------
Name: Carlos D. DeMattos
Title: Chairman of the Board/Chief Executive
Officer
HOLLYWOOD RENTAL COMPANY, LLC., (as
successor by merger to Hollywood Rental Co.,
Inc.), as a Borrower and as a Guarantor
By: /s/ Carlos D. DeMattos
---------------------------------------------
Name: Carlos D. DeMattos
Title: Manager & Chief Financial Officer
MATTHEWS STUDIO ELECTRONICS, INC.,
as a Borrower and as a Guarantor
By: /s/ Carlos D. DeMattos
---------------------------------------------
Name: Carlos D. DeMattos
Title: Chief Executive Officer
MATTHEWS ACCEPTANCE CORPORATION,
as a Borrower and as a Guarantor
By: /s/ Carlos D. DeMattos
---------------------------------------------
Name: Carlos D. DeMattos
Title: President
<PAGE>
DUKE CITY VIDEO, INC.,
as a Borrower and as a Guarantor
By: /s/ Carlos D. DeMattos
-----------------------------------
Name: Carlos D. DeMattos
Title: President
HDI HOLDINGS, INC.,
as a Borrower and as a Guarantor
By: /s/ Carlos D. DeMattos
-----------------------------------
Name: Carlos D. DeMattos
Title: Chairman of the Board
FOUR STAR LIGHTING, INC.,
as a Borrower and as a Guarantor
By: /s/ Carlos D. DeMattos
-----------------------------------
Name: Carlos D. DeMattos
Title: Chief Executive Officer
MATTHEWS STUDIO SALES, INC.,
as a Borrower and Guarantor
By: /s/ Carlos D. DeMattos
-----------------------------------
Name: Carlos D. DeMattos
Title: President
MATTHEWS STUDIO GROUP CENTERS, INC. (f/k/a Matthews
Medical Equipment, Inc.), as a Guarantor
By: /s/ Carlos D. DeMattos
-----------------------------------
Name: Carlos D. DeMattos
Title: President
<PAGE>
KEYLITE HOLDINGS, INC., as a Guarantor
By: /s/ Carlos D. DeMattos
-----------------------------------
Name: Carlos D. DeMattos
Title: Chief Financial Officer
REEL WHEELS, INC., as a Guarantor
By: /s/ Carlos D. DeMattos
-----------------------------------
Name: Carlos D. DeMattos
Title: Chief Financial Officer
KEYLITE PRODUCTION SERVICES, INC., as
a Guarantor
By: /s/ Carlos D. DeMattos
-----------------------------------
Name: Carlos D. DeMattos
Title: Chief Financial Officer
DUKE CITY HOLDINGS, INC., as a Guarantor
By: /s/ Carlos D. DeMattos
-----------------------------------
Name: Carlos D. DeMattos
Title: Chief Executive Officer
FOUR STAR HOLDING, INC., as a Guarantor
By: /s/ Carlos D. DeMattos
-----------------------------------
Name: Carlos D. DeMattos
Title: President
<PAGE>
Exhibit 10.13
-------------
ING (U.S.) CAPITAL LLC
135 East 57th Street
New York, New York 10022-2101 L/C No.: G74184
Telephone # (212) 409-1610 Date: 12 JAN 99
IRREVOCABLE STANDBY LETTER OF CREDIT
Irrevocable Standby Letter of Credit No. G74184
Stated Amount: $3,000,000
Dated: January 12, 1999
The Chase Manhattan Bank
600 Fifth Avenue, 4th Floor
New York, New York 10020
Ladies and Gentlemen:
At the request and for the account of Matthews Studio Equipment Group, a
California corporation (the "Account Party"), we hereby establish in your favor
-------------
this irrevocable standby Letter of Credit in the original stated amount of
$3,000,000 (THREE MILLION DOLLARS) (the "Stated Amount") in respect of any
-------------
Obligations of the Account Party to you and the Lenders pursuant to the terms
and conditions of the Amended and Restated Credit Agreement dated as of April 1,
1998 (as amended or otherwise modified from time to time, the "Credit
------
Agreement").
- ---------
SECTION 1. Definitions. The following terms when used in this Letter of
-----------
Credit shall have the meanings set forth below. Capitalized terms used but not
defined herein shall have the meanings given to them in the Credit Agreement,
which is attached as Exhibit A hereto, and such defined terms are hereby
---------
incorporated by reference.
"Beneficiary" and "you" means The Chase Manhattan Bank, a New York banking
----------- ---
corporation, as Agent for the Lenders, and all direct and indirect transferees
and assigns thereof in their capacity as Agent for the Lenders as the
beneficiary of this Letter of Credit.
"Business Day" shall mean any day (other than Saturday or Sunday) on which
------------
commercial banks located in New York, New York are not required or authorized to
be closed.
"Leverage Ratio" with respect to any person at the end of any fiscal
--------------
quarter shall mean the ratio of (i) total Funded Indebtedness of such person as
at the date of determination to (ii) EBITDA (adjusted to include the trailing
EBITDA of any person acquired by such
<PAGE>
person as a Permitted Acquisition on a basis satisfactory to the Agent) of such
person for the four most recent consecutive fiscal quarters ending on or prior
to the date of determination.
"Responsible Officer" with respect to any entity shall mean the entity's
-------------------
President, Chief Financial Officer, Controller or any Vice President.
"Stated Amount" means, at any time, the original stated amount of this
-------------
Letter of Credit set forth in the first paragraph, as such amount is reduced
---------------
from time to time in accordance with Section 4.
---------
"Stated Expiry Date" means December 31, 2000.
------------------
SECTION 2. Presentation. Drawings and funds under this Letter of Credit
------------
will be made available only to the Beneficiary, in lawful currency of the United
States of America, against receipt by us of the original signed counterpart of
the Beneficiary's written Certificate of Demand in the form of Annex 1 hereto,
-------
appropriately completed and purportedly executed by an authorized officer of the
Beneficiary accompanied by this originally executed Letter of Credit.
Presentation of each such certificate shall be made in person at our office (our
"Payment Office") located at 135 East 57th Street, New York, New York 10022,
--------------
Attention: Mark LaGreca.
SECTION 3. Payments. (a) Drawings and funds under this Letter of Credit
--------
will be available to the Beneficiary only on the terms set forth in the
Certificate of Demand in the form of Annex 1 hereto. Drawings in respect of
-------
payments under this Letter of Credit shall not exceed the lesser of (x) all
amounts owed to the Lenders by the Account Party under the Loan Documents and
(y) the Stated Amount.
(b) Subject to Sections 2 and 3(a), a single demand for payment in lawful
---------- ----
money of the United States of America may be made by you on any Business Day
under this Letter of Credit during our business hours at our Payment Office.
Partial drawings under this Letter of Credit are not permitted and any drawing
under this Letter of Credit shall reduce the Stated Amount to zero (0). If
demand for payment is made by you hereunder at or prior to 10:00 a.m., New York
time, on a Business Day, and provided that such demand for payment and the
documents presented in connection therewith strictly conform to the terms and
conditions hereof, payment shall be made to you of the amount demanded, in
immediately available funds, not later than 4:00 p.m., New York time, on the
same day. If demand for payment is made by you hereunder after 10:00 a.m., New
York time, on a Business Day, and provided that such demand for payment and the
documents presented in connection therewith strictly conform to the terms and
conditions hereof, payment shall be made to you of the amount demanded, in
immediately available funds, not later than 11:00 a.m., New York time, on the
next succeeding Business Day. If requested by you, payment under this Letter of
Credit will be made by wire transfer of same day funds to the account specified
in your demand for payment. If a demand for payment made by you hereunder does
not, in any instance, strictly conform to the terms and conditions of this
Letter of Credit, we shall give you prompt notice that the demand for payment
was not effected in accordance with the terms and conditions of this Letter of
Credit, stating the reasons therefor, and that we will (subject to your further
instructions) hold any documents which
<PAGE>
have been delivered to us by you. Upon being notified that the demand for
payment was not effected in conformity with this Letter of Credit, you may
attempt to correct any such non-conforming demand for payment to the extent that
you are then entitled and able to do so.
SECTION 4. Reduction of Stated Amount. Upon any drawing being honored by
--------------------------
us hereunder the Stated Amount shall be reduced to zero and there shall be no
reinstatement thereof. No demand for payment hereunder shall exceed the Stated
Amount in effect at such time.
SECTION 5. Discharge. Only the Beneficiary may make a demand for payment
---------
under this Letter of Credit. Upon the payment to the Beneficiary, to your
designee, or to your account of the amount demanded hereunder, we shall be fully
discharged of our obligation under this Letter of Credit and we shall not
thereafter be obligated to make any further payments under this Letter of
Credit. By paying to you, to your designee, or to your account any amount
demanded in accordance herewith, we make no representation as to the correctness
of the amount demanded.
SECTION 6. Termination. This Letter of Credit shall automatically
-----------
terminate upon the earliest to occur of the following, provided, however, that
-------- -------
if there is a continuing Event of Default at the time the event described in
Section 6(a) occurs, this Letter of Credit shall not terminate for so long as
such Event of Default continues:
(a) delivery of a compliance certificate from a Responsible Officer of
the Account Party to the Beneficiary, together with a schedule
demonstrating calculations to the reasonable satisfaction of the
Beneficiary to the effect that, at the end of the most recently completed
fiscal quarter (i) the Account Party and its Consolidated subsidiaries have
maintained a minimum Availability of $2,000,000 (excluding amounts
available under this Letter of Credit) for the preceding three months and
(ii) the Leverage Ratio of the Account Party and its Consolidated
subsidiaries is 4.50 or less, such calculation being deemed accepted by the
Beneficiary (and thereby terminating this Letter of Credit) unless
Beneficiary delivers to the Account Party and us a notice disputing the
Account Party's calculations within five Business Days following
Beneficiary's receipt thereof;
(b) the replacement of the credit facility extended to the Account
Party by the Lenders under the Credit Agreement;
(c) the making by us of the payment available to be made hereunder;
(d) the close of business at our Payment Office on December 31, 2000;
and
(e) the termination, payment or other satisfaction in full of all
Obligations to which this Letter of Credit relates.
Upon its termination, you shall promptly deliver the original counterpart of
this Letter of Credit to us for cancellation. Upon a termination pursuant to
subparagraph (a), (b) or (e) hereof, you shall deliver to us a Certificate of
Termination in the form of Annex 2 hereto,
<PAGE>
purportedly signed by an authorized officer of the Beneficiary. ING (U.S.)
Capital LLC will not investigate the accuracy of the representation contained in
a Certificate of Termination delivered to us in the form of Annex 2, but will
rely on such Certificate of Termination on its face.
SECTION 7. Notices. Except as otherwise herein provided, all notices and
-------
other communications provided for herein shall be by facsimile, registered mail
or delivery in person, in each case to an officer of the intended recipient at
the following addresses or facsimile number:
(i) If to the Beneficiary, at:
The Chase Manhattan Bank
600 Fifth Avenue, 4th Floor
New York, New York 10020
Attention: Relationship Manager - Matthews Studio Equipment Group
Facsimile No.: 212-332-4297
with a copy to:
Kaye, Scholer, Fierman, Hays & Handler, LLP
425 Park Avenue
New York, New York 10022
Attention: Jeffrey M. Epstein
Facsimile No.: 212-836-6475
(ii) If to us, at:
ING (U.S.) Capital LLC
135 East 57th Street
New York, New York 10022
Attention: Mark LaGreca
Facsimile No.: 212-750-8934
with a copy to:
ING Equity Partners, L.P. I
520 Madison Avenue, 33rd Floor
New York, New York 10022
Attention: Benjamin P. Giess
Facsimile No.: 212-750-2970
<PAGE>
and an additional copy to:
Mayer, Brown & Platt
1675 Broadway
New York, New York 10019
Attention: James B. Carlson
Facsimile No.: 212-262-1910
Except as otherwise herein provided, all notices and other communications
shall be deemed to have been duly given when received or, in the case of a
facsimile, when receipt is acknowledged.
SECTION 8. Governing Law. This Letter of Credit shall be subject to the
-------------
Uniform Customs and Practices for Documentary Credits of the International
Chamber of Commerce Publication No. 500, as adopted or amended from time to time
(the "Uniform Customs"). This Letter of Credit shall be deemed to be issued
---------------
under the internal laws of the State of New York and shall, as to matters not
governed by the Uniform Customs, be governed by and construed in accordance with
the laws of said State.
SECTION 9. Miscellaneous. This Letter of Credit sets forth in full our
-------------
undertaking, and such undertaking shall not in any way be modified, amended,
amplified or limited by reference to any document, instrument or agreement
referred to herein, and any such reference shall not be deemed to incorporate
herein by reference any document, instrument or agreement except as set forth
above.
Very truly yours,
ING (U.S.) CAPITAL LLC
By:__________________________
Title: Authorized Signatory
<PAGE>
ANNEX 1
-------
CERTIFICATE OF DEMAND FOR PAYMENT
[DATE]
ING (U.S.) Capital LLC
135 East 57th Street
New York, New York 10022
Attention: _______________
Re: Irrevocable Standby Letter of Credit No.
-------------------------------------------------
The undersigned, a duly authorized officer of The Chase Manhattan Bank (the
"Beneficiary"), hereby certifies to ING (U.S.) Capital LLC (the "Issuer") as
----------- ------
follows:
A. Unless otherwise defined, all capitalized terms used herein have
the meanings assigned thereto in the referenced Irrevocable Standby Letter
of Credit (the "Letter of Credit"), dated January __, 1999, issued by the
----------------
Issuer at the request of Matthews Studio Equipment Group (the "Account
-------
Party").
-----
B. The undersigned is an authorized officer of the Beneficiary and is
duly authorized with all necessary power on behalf of the Beneficiary to
present this certificate and make a demand for payment under the Letter of
Credit.
C. Either /1/
(1) The Account Party has (A) voluntarily commenced a proceeding or
filed a petition seeking relief under Title 11 of the United States Code
or any other Federal, state or foreign bankruptcy, insolvency liquidation
or similar law, (B) consented to the institution of, or failed to
contravene in a timely and appropriate manner, any such proceeding or the
filing of any such petition, (C) applied for or consented to the
appointment of a receiver, trustee, custodian, sequestrator or similar
official for the Account Party or for a substantial part of its property or
assets, (D) filed an answer admitting the material allegations of a
petition filed against it in any such proceeding, (E) made a general
assignment for the benefit of creditors or (F) admitted in writing its
inability to pay its debts as they become due.
- --------------------
/1/ Beneficiary shall delete the provisions of paragraph (c) that are not
applicable.
<PAGE>
[or]
(2) An Event of Default has occurred and the Agent, in accordance
with the terms and conditions of the Credit Agreement and the other Loan
Documents, has served the Account Party with a notice of acceleration and
otherwise satisfied any notification requirements thereunder and declared
all amounts then owing to the Lenders by the Account Party under the Loan
Documents due and immediately payable.
D. Consequently, the Beneficiary is making a demand for payment in
lawful money of the United States of America under the Letter of Credit in
the amount of [$__________], which amount is the lesser of (1) all amounts
owed to the Lenders by the Account Party under the Loan Documents and (2)
the Stated Amount. The amount demanded hereby does not (and will not on
the date payment hereunder is required to be made), exceed the Stated
Amount.
E. Attached to this Demand for Payment is the originally executed
Letter of Credit.
F. [Beneficiary to insert disbursement instructions.]
G. No termination of the Letter of Credit shall have occurred.
IN WITNESS WHEREOF, the Beneficiary has caused its Authorized Officer to
execute and deliver this Certificate as of the _____ day of ______, ____.
THE CHASE MANHATTAN BANK
By:_________________________
Title:
<PAGE>
ANNEX 2
-------
CERTIFICATE OF TERMINATION
[DATE]
ING (U.S.) Capital LLC
135 East 57th Street
New York, New York 10022
Attention: _______________
Re: Irrevocable Standby Letter of Credit No.
-------------------------------------------------
The undersigned, a duly authorized officer of The Chase Manhattan Bank (the
"Beneficiary"), hereby certifies to ING (U.S.) Capital LLC (the "Issuer") as
----------- ------
follows:
A. Unless otherwise defined, all capitalized terms used herein have
the meanings assigned thereto in the referenced Irrevocable Standby Letter
of Credit (the "Letter of Credit"), dated January __, 1999, issued by the
----------------
Issuer at the request of Matthews Studio Equipment Group (the "Account
-------
Party").
-----
B. The undersigned is an authorized officer of the Beneficiary and is
duly authorized with all necessary power on behalf of the Beneficiary to
present this certificate.
C. Either /2/
(1) All Obligations to which the Letter of Credit relates have been
terminated, paid or otherwise satisfied in full.
[or]
(2) The credit facility extended to the Account Party by the Lenders
under the Credit Agreement has been replaced.
[or]
(3) The Account Party and its Consolidated subsidiaries have
maintained a minimum Availability of $2,000,000 (excluding amounts
available under the Letter of
- --------------------
/2/ Beneficiary shall delete the provisions of paragraphs (c) and (d) that are
not applicable.
<PAGE>
Credit) for the fiscal quarter ending _______________, 199__ and the
Leverage Ratio of the Account Party and its Consolidated subsidiaries as of
the end of such fiscal quarter is 4.50 or less, as demonstrated to our
reasonable satisfaction.
D. Consequently, the Letter of Credit has terminated pursuant to
Section 6 [(a),(b) or (e)] thereof.
-------------- --- ----
E. Attached to this Certificate of Termination is the originally
executed Letter of Credit.
IN WITNESS WHEREOF, the Beneficiary has caused its Authorized Officer to
execute and deliver this Certificate as of the _____ day of ______, ____.
THE CHASE MANHATTAN BANK
By:_________________________
Title:
<PAGE>
Exhibit 10.14
-------------
Execution Copy
REIMBURSEMENT AGREEMENT
THIS REIMBURSEMENT AGREEMENT, (the "Agreement") dated as of January 12,
1999, is made by MATTHEWS STUDIO EQUIPMENT GROUP, a California corporation (the
"Parent), MATTHEWS STUDIO SALES, INC., a California corporation ("MSSI"),
------ ----
HOLLYWOOD RENTAL COMPANY, LLC, a Delaware limited liability company ("HRCL") (as
----
successor by merger to Hollywood Rental Co., Inc., a California corporation),
MATTHEWS STUDIO ELECTRONICS, INC., a California corporation ("MSE"), MATTHEWS
---
ACCEPTANCE CORPORATION, a California corporation ("MAC"), DUKE CITY VIDEO, INC.,
---
a New Mexico corporation ("Duke"), HDI HOLDINGS, INC., a Kentucky corporation
----
("HDI"), FOUR STAR LIGHTING, INC., a New York corporation ("Four Star"),
- ----- ---------
MATTHEWS STUDIO GROUP CENTERS, INC., a California corporation ("MSGC") (f/k/a
----
Matthews Medical Equipment, Inc.), KEYLITE HOLDINGS, INC., California
corporation ("KHI"), REEL WHEELS, INC., a California corporation ("RWI"),
--- ---
KEYLITE PRODUCTION SERVICES, INC., a California corporation ("KPS"), DUKE CITY
---
HOLDINGS, INC., a California corporation ("Duke Holdings"), and FOUR STAR
-------------
HOLDING, INC., a Delaware corporation ("Four Star Holding") (the Parent, MSSI,
-----------------
HRCL, MSE, MAC, Duke, HDI, Four Star, MSGC, KHI, RWI, KPS, Duke Holdings, and
Four Star Holding are collectively referred to herein as the "Account Party")
-------------
and ING EQUITY PARTNERS, L.P. I, a Delaware limited partnership ("ING").
---
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, pursuant to the terms of the Amended and Restated Credit
Agreement, dated as of April 1, 1998 (as amended or otherwise modified, the
"Credit Agreement"), between, among others, the Account Party and THE CHASE
- -----------------
MANHATTAN BANK, a Delaware corporation (the "Beneficiary"), as agent, the
-----------
Account Party may be obligated to pay from time to time certain Obligations to
the Beneficiary;
WHEREAS, the Account Party has requested that ING cause ING (U.S.) Capital,
LLC ("ING Capital" or the "Issuer") to issue for the account of the Account
----------- ------
Party an irrevocable standby Letter of Credit, substantially in the form of
Exhibit A hereto (such Letter of Credit, as amended from time to time, and any
- ---------
substitute or replacement therefor issued by the Issuer, being referred to
herein as the "Letter of Credit"), in favor of the Beneficiary to support
----------------
payment of the Obligations; and
WHEREAS, ING is willing to cause the issuance of the Letter of Credit on
the terms and conditions herein contained;
<PAGE>
NOW, THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.1. Defined Terms. The following terms (whether or not
-------------
underscored) when used in this Agreement, including its preamble and recitals,
shall, except where the context otherwise requires, have the following meanings
(such meanings to be equally applicable to the singular and plural forms
thereof):
"Account Party" is defined in the preamble, and shall also include its
------------- --------
permitted successors, transferees and assigns.
"Account Party Obligations" means all obligations (monetary or otherwise)
-------------------------
of the Account Party arising under or in connection with this Agreement and the
Letter of Credit.
"Agreement" means, on any date, this Reimbursement Agreement as originally
---------
in effect on the Effective Date and as thereafter from time to time amended,
supplemented, amended and restated or otherwise modified and in effect on such
date.
"Authorized Officer" means, relative to the Account Party, those of its
------------------
officers whose signatures and incumbency shall have been certified to ING
pursuant to Section 5.1.2.
-------------
"Beneficiary" is defined in the first recital of this Agreement, and also
----------- -------------
includes its successors, transferees and assigns.
"Business Day" means any day other than a Saturday, Sunday or a day on
------------
which banks are authorized or required to be closed in New York, New York.
"Contract" is defined in Section 2.3(a).
-------- --------------
"Credit Agreement" is defined in the first recital.
---------------- -------------
"Disbursement" means any payment made by the Issuer under the Letter of
------------
Credit to or for the account of the Beneficiary.
"Dollars" or the symbol "$" means dollars in the lawful money of the United
-------
States of America.
"Effective Date" means the date this Agreement becomes effective pursuant
--------------
to Section 8.7.
-----------
<PAGE>
"including" means including without limiting the generality of any
---------
description preceding such term.
"Indemnified Parties" is defined in Section 2.4.
------------------- -----------
"ING" is defined in the preamble, and also includes its successors,
--- --------
transferees and assigns.
"ING Capital" is defined in the second recital, and also includes its
----------- --------------
successors, transferees and assigns.
"ING Security Agreement" means the Security Agreement, executed and
----------------------
delivered by an Authorized Officer of the Account Party pursuant to Section
-------
5.1.3, substantially in the form of Exhibit B hereto, as amended, supplemented,
- ----- ---------
amended and restated or otherwise modified from time to time.
"ING Warrants" means the certificate(s) representing the warrants to
------------
purchase a total of 450,000 shares of Common Stock of the Company, issued by the
Company to ING as of the date hereof.
"Issuance Date" means the date on which the Letter of Credit is issued
-------------
pursuant to Section 2.1 hereof.
-----------
"Issuer" is defined in the second recital.
------ --------------
"Letter of Credit" is defined in the second recital of this Agreement.
---------------- --------------
"Loan Documents"has the meaning given to it in the Credit Agreement.
--------------
"Obligations" has the meaning given to it in the Credit Agreement.
-----------
"Organic Document" means, relative to the Account Party, its certificate or
----------------
articles of incorporation or its articles of organization, as applicable, its
by-laws or limited liability company agreement, as applicable, and all
shareholder agreements, voting trusts and similar arrangements applicable to any
of its authorized shares of capital stock.
"Person" means any natural person, corporation, partnership, limited
------
liability entity, firm, association, trust, government, governmental agency or
any other entity, whether acting in an individual, fiduciary or other capacity.
"Reimbursement Documents" means this Agreement, the ING Security Agreement
-----------------------
and each other document or instrument executed and delivered in connection
herewith or therewith.
"Reimbursement Obligation" is defined in Section 2.3.
------------------------ -----------
<PAGE>
"Stated Amount" means, as of any date, the amount that is available to be
-------------
paid under the Letter of Credit on such date pursuant to the terms thereof,
which initially shall be $3,000,000.
"Taxes" is defined in Section 4.2.
----- -----------
SECTION 1.2. Cross-References. Unless otherwise specified, references in
----------------
this Agreement to any Article or Section are references to such Article or
Section of this Agreement and, unless otherwise specified, references in any
Article, Section or definition to any clause are references to such clause of
such Article, Section or definition.
ARTICLE II
THE LETTER OF CREDIT
SECTION 2.1. Issuance of the Letter of Credit. On the terms and subject
--------------------------------
to the conditions herein set forth, ING agrees to cause the issuance and
delivery of the Letter of Credit to the Beneficiary in an amount equal to the
Stated Amount.
SECTION 2.2. Reimbursement on Demand. On (or promptly after) each date on
-----------------------
which a payment is made by ING to reimburse the Issuer for a payment made under
the Letter of Credit, ING shall notify the Account Party of the amount of such
payment and of ING's reimbursement of the Issuer for such payment, and will
promptly thereafter furnish to the Account Party copies of each certificate
accompanying any demand for payment; provided, however, that ING's failure to
-------- -------
give such notice or to provide such copies shall not affect the Account Party
Obligations hereunder. Within three Business Days following receipt of any
notice of a payment under the Letter of Credit and of ING's reimbursement of the
Issuer for such payment, the Account Party agrees that it will, as reimbursement
for such payment by ING, promptly pay to ING the amount as notified by ING to
the Account Party, together with interest on the amount to be so reimbursed at a
fixed rate per annum equal to 15%, payable on the first Business Day of each
April, July, October and January in arrears.
SECTION 2.3. Obligations Absolute. The obligation (a "Reimbursement
-------------------- -------------
Obligation") of the Account Party to reimburse ING for each payment made by ING
- ----------
to reimburse the Issuer's payment under the Letter of Credit shall be absolute,
unconditional and irrevocable under all circumstances, and shall be paid
strictly in accordance with the terms of this Agreement under all circumstances,
including, without limitation, to the extent permitted by law, the following
circumstances:
(a) any lack of validity or enforceability of the Letter of Credit or
any related contract, instrument or other agreement in support of which the
Letter of Credit has been issued or pursuant to which ING has made any
reimbursement to the Issuer (collectively referred to as a "Contract");
--------
(b) any amendment or waiver of or any consent to or departure from
the Letter of Credit or any Contract;
<PAGE>
(c) the existence of any claim, set-off, defense or other right which
the Account Party or any other Person may have at any time against the
Beneficiary (or any Persons for whom the Beneficiary may be acting), ING or
any other Person, whether in connection with this Agreement, the
transactions contemplated herein, or in the Letter of Credit, any Contract
or any unrelated transaction;
(d) any certificate or any other document presented under the Letter
of Credit proving to be forged, fraudulent or insufficient in any respect
or any statement therein being untrue or inaccurate in any respect; or
(e) any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing.
Notwithstanding the foregoing, if the Account Party has made any payment as
provided above, then the Account Party shall have a claim against ING, and ING
shall be liable to the Account Party to the extent, but only to the extent, of
any direct (as opposed to consequential or punitive) damages suffered by the
Account Party as the result of the willful misconduct or gross negligence on the
part of ING in reimbursing the Issuer for any payment made under the Letter of
Credit.
SECTION 2.4. Action in Respect of the Letter of Credit. The Account Party
-----------------------------------------
agrees to assume all risks of the acts or omissions of the Beneficiary under the
Letter of Credit with respect to its use of the Letter of Credit. Neither ING,
ING Capital nor any of their officers, directors, partners, employees or agents,
or any of their respective affiliates (collectively, the "Indemnified Parties")
-------------------
shall be liable or responsible for:
(a) the use of the Letter of Credit;
(b) the form, validity, sufficiency, legal effect, accuracy or
genuineness of certificates or other documents delivered under or in
connection with the Letter of Credit, even if such certificates or other
documents should prove to be insufficient, invalid, fraudulent or forged;
(c) the failure of the Beneficiary to comply fully with conditions
required in order to demand payment under a Letter of Credit;
(d) errors, omissions, interruptions or delays in transmission or
delivery of any messages, by mail, cable, telex, telecopy, telegraph,
wireless or otherwise; or
(e) any loss or delay in the transmission or otherwise of any
document or draft required in order to make a Disbursement under the Letter
of Credit, or errors in translation or in interpretation of technical
terms.
ING and ING Capital may accept certificates or other documents that appear on
their face to be in order, without responsibility for further investigation,
regardless of any notice or information to the contrary. In furtherance and not
in limitation of the foregoing provisions, the Account Party agrees that any
action, inaction or omission by ING or ING Capital in good
<PAGE>
faith in connection with the Letter of Credit, any reimbursement by ING of
amounts drawn thereunder or any related drafts, certificates or other documents,
shall be binding on the Account Party and shall not result in any liability of
ING or ING Capital to the Account Party.
SECTION 2.5. Indemnification. The Account Party hereby indemnifies,
---------------
exonerates and holds harmless each Indemnified Party from and against any and
all actions, causes of actions, suits, claims, losses, liabilities, costs,
damages or expenses which any Indemnified Party may incur or which may be
claimed against such Indemnified Party (whether or not such Indemnified Party is
a party to the action for which indemnification hereunder is sought) by any
Person, including reasonable attorneys' fees and disbursements by reason of or
in connection with the execution and delivery of this Agreement and the issuance
of the Letter of Credit or the payment or failure to make payment under the
Letter of Credit or the reimbursement or the failure to make reimbursement of
amounts paid under the Letter of Credit; provided, however, that the Account
-------- -------
Party shall not be required to indemnify such Indemnified Parties pursuant to
this Section 2.5 for any actions, causes of actions, suits, claims, losses,
-----------
liabilities, costs, damages or expenses to the extent caused by ING's willful
misconduct or gross negligence in determining the validity of its reimbursement
obligation to the Issuer for payments made to the Beneficiary under the Letter
of Credit or ING Capital's willful misconduct or gross negligence in making
payments under the Letter of Credit.
ARTICLE III
LETTER OF CREDIT FEE; POST-MATURITY RATES
SECTION 3.1. Letter of Credit Fee. The Account Party agrees to reimburse
--------------------
ING for all fees paid by ING in connection with the issuance of the Letter of
Credit, including any fronting fees required for the Letter of Credit.
SECTION 3.2. Post-Maturity Rates. After the date on which any
-------------------
Reimbursement Obligation is due and payable, or after any other monetary Account
Party Obligation hereunder shall have become due and payable, the Account Party
agrees to promptly pay, but only to the extent permitted by applicable law,
interest (after as well as before judgment) on such amounts at a fixed rate per
annum equal to 15%, payable on the first Business Day of each April, July,
October and January in arrears.
ARTICLE IV
CERTAIN OTHER PROVISIONS
SECTION 4.1. Increased Capital Costs. If any change in, or the
-----------------------
introduction, adoption, effectiveness, interpretation, reinterpretation or
phase-in of, any law or regulation, directive, guideline, decision or request
(whether or not having the force of law) of any court, central bank, regulator
or other governmental authority affects or would affect the amount of capital
required or expected to be maintained by ING or ING Capital, and ING or ING
<PAGE>
Capital determines (in its sole and absolute discretion) that the rate of return
on its capital as a consequence of the Letter of Credit is reduced to a level
below that which ING or ING Capital could have achieved but for the occurrence
of any such circumstance, then, in any such case upon notice from time to time
by ING to the Account Party, the Account Party agrees to immediately pay
directly to ING additional amounts sufficient to compensate ING or ING Capital
for such reduction in its rate of return. A statement of ING or ING Capital as
to any such additional amount or amounts (including calculations thereof in
reasonable detail) shall, in the absence of manifest error, be conclusive and
binding on the Account Party. In determining such amount, ING or ING Capital
may use any method of averaging and attribution that it, in its sole and
absolute discretion, shall deem applicable. The statement from ING or ING
Capital as to such additional amount(s) shall include such reasonably detailed
information as will enable the Account Party to determine the basis for ING or
ING Capital's request for such additional amount(s).
SECTION 4.2. Taxes.
-----
(a) All payments by the Account Party of any amounts payable
hereunder (including in respect of fees and Reimbursement Obligations)
shall be made free and clear of and without deduction for any present or
future income, excise, stamp or franchise taxes and other taxes, fees,
duties, withholdings or other charges of any nature whatsoever imposed by
any taxing authority, but excluding franchise taxes and taxes imposed on or
measured by ING's or ING Capital's net income or receipts (such non-
excluded items being called "Taxes"). In the event that any withholding or
-----
deduction from any payment to be made by the Account Party hereunder is
required in respect of any Taxes pursuant to any applicable law, rule or
regulation, the Account Party agrees that it will
(i) pay directly to the relevant authority the full amount
required to be so withheld or deducted;
(ii) promptly forward to ING an official receipt or other
documentation satisfactory to ING evidencing such payment to such
authority; and
(iii) pay to ING such additional amount or amounts as are
necessary to ensure that the net amount actually received by ING or
ING Capital will equal the full amount ING or ING Capital would have
received had no such withholding or deduction been required.
Moreover, if any Taxes are directly asserted against ING or ING Capital
with respect to any payment received by ING or ING Capital hereunder, ING
or ING Capital may pay such Taxes and the Account Party agrees to promptly
pay directly to ING such additional amount or amounts (including any
penalties, interest or expenses) as are necessary to ensure that the net
amount received by ING or ING Capital after the payment of such Taxes
(including any Taxes on such additional amount) will equal the full amount
ING or ING Capital would have received had no such Taxes been asserted.
<PAGE>
(b) If the Account Party fails to pay any Taxes when due to the
appropriate taxing authority or fails to remit to ING or ING Capital the
required receipts or other required documentary evidence, the Account Party
agrees that it shall indemnify ING or ING Capital for any incremental
Taxes, interest or penalties that may become payable by ING or ING Capital
as a result of any such failure. For purposes of this Section 4.2, a
distribution hereunder by ING or ING Capital to or for the Account of ING
or ING Capital shall be deemed a payment by the Account Party.
SECTION 4.3. Payments, Computations, etc.
---------------------------
(a) All payments by the Account Party to ING pursuant to this
Agreement shall be made in lawful money of the United States without
setoff, deduction or counterclaim, not later than 12:00 noon (New York City
time) on the date due, in same day or immediately available funds, to such
account as ING shall specify from time to time by notice to the Account
Party. Funds received after that time shall be deemed to have been
received by ING on the next succeeding Business Day.
(b) All interest and fees shall be computed on the basis of the
actual number of days (including the first day but excluding the last day)
occurring during the period for which such interest or fee is payable over
a year comprised of 360 days. Whenever any payment to be made shall
otherwise be due on a day which is not a Business Day, such payment shall
be made on the next succeeding Business Day and such extension of time
shall be included in computing interest and fees, if any, in connection
with such payment.
ARTICLE V
CONDITIONS TO ISSUANCE
SECTION 5.1. Conditions Precedent. The obligation of ING to cause the
--------------------
issuance of the Letter of Credit on the Issuance Date is subject to the prior
or concurrent satisfaction of each of the conditions precedent set forth in this
Article.
SECTION 5.1.1. Execution of Counterparts. ING shall have received
-------------------------
evidence that the Agreement has become effective pursuant to Section 8.7.
-----------
SECTION 5.1.2. Resolutions, etc. ING shall have received a certificate,
----------------
dated the Issuance Date, of the Secretary or Assistant Secretary of the Account
Party as to
(a) a copy of the resolutions of its Board of Directors then in full
force and effect authorizing the execution, delivery and performance of
this Agreement to be executed and delivered by it; and
(b) the incumbency and signatures of those of its officers authorized
to act with respect to this Agreement to be executed and delivered by it,
upon which certificate ING may conclusively rely until it shall have received a
further
<PAGE>
certificate of the Secretary or Assistant Secretary of the Account Party
canceling or amending such prior certificate.
SECTION 5.1.3. ING Security Agreement. ING shall have received executed
----------------------
counterparts of the ING Security Agreement, dated as of the date hereof, duly
executed and delivered by an Authorized Officer of the Account Party.
SECTION 5.1.4. ING Warrants. The Company shall have duly issued and
------------
delivered to ING the ING Warrants.
SECTION 5.1.5. Payment of Fees, etc. ING shall have received all fees,
--------------------
costs and expenses due and payable pursuant to Section 8.3, if then invoiced.
-----------
SECTION 5.1.6. Legal Opinion. ING shall have received the opinions of (i)
-------------
Whitman Breed Abbott & Morgan LLP, counsel for the Account Party, (ii)
Jacobvitz, Thuma & Matthews, New Mexico counsel for Duke and (iii) Brown, Todd &
Heyburn PLLC, Kentucky counsel for HDI, in each case dated the Issuance Date and
addressed to ING, in form and substance reasonably satisfactory to ING.
SECTION 5.1.7. Satisfactory Legal Form. All documents executed or
-----------------------
submitted pursuant hereto by or on behalf of the Account Party shall be
reasonably satisfactory in form and substance to ING and its counsel; ING and
its counsel shall have received all information, approvals, opinions, documents
or instruments as ING or its counsel may reasonably request.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
In order to induce ING to obtain the issuance by the Issuer of the Letter
of Credit, the Account Party represents and warrants to ING as set forth in this
Article.
SECTION 6.1. Organization, Corporate Power. The Account Party (i) is a
-----------------------------
corporation or limited liability company duly organized, validly existing and in
good standing under the laws of its state of incorporation or organization, (ii)
has the requisite power and authority to own its property and assets and to
carry on its business as now conducted, (iii) is qualified to do business in
every jurisdiction where such qualification is required, except where the
failure to so qualify would not have a material adverse effect on the business,
assets, operations or properties of the Account Party, and (iv) the Account
Party has the corporate power and authority to execute, deliver and perform its
obligations under this Agreement and each other Reimbursement Document.
SECTION 6.2. Authorization, etc. The execution, delivery and performance
------------------
by the Account Party of this Agreement and each other Reimbursement Document to
which it is a party has been duly authorized by all requisite corporate or
company action and, if required, shareholder or member action and will not
violate (i) any provision of law, statute, rule or regulation binding on the
Account Party or the Organic Documents of the Account Party, (ii)
<PAGE>
any order of any court, or any rule, regulation or order of any other agency of
government binding upon the Account Party or (iii) any provisions of any
indenture, agreement or other instrument to which the Account Party is a party,
or by which the Account Party or any of its properties or assets are bound.
SECTION 6.3. Governmental Approvals. No filings or registration with or
----------------------
consent or approval of, or other action by, any Federal, state or other
governmental agency, authority or regulatory body is or will be required (other
than any which have been made and obtained) in connection with the execution,
delivery and performance by the Account Party of this Agreement.
SECTION 6.4. Binding Effect. This Agreement and each other Reimbursement
--------------
Document to which it is a party, when executed and delivered by the Account
Party, will constitute a legal, valid and binding obligation of the Account
Party, enforceable in accordance with its terms (i) except to the extent limited
by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally and (ii) subject to general principles of equity
(regardless of whether considered in a proceeding in equity or at law).
ARTICLE VII
COVENANTS
SECTION 7.1. Covenants. The Account Party agrees with ING that until the
---------
Letter of Credit has been fully drawn, terminated or expired and all Account
Party Obligations (including Reimbursement Obligations) have been paid in full,
the Account Party will perform the obligations set forth in this Article.
SECTION 7.1.1. Compliance with Laws, etc. The Account Party will comply
-------------------------
in all material respects with all applicable laws, rules, regulations and
orders, such compliance to include the maintenance and preservation of its
corporate existence.
SECTION 7.1.2. Asset Dispositions, etc. The Account Party will not sell,
-----------------------
transfer, lease, contribute or otherwise convey, or grant options, warrants or
other rights with respect to all or substantially all of its assets, except as
permitted by the terms of the ING Security Agreement.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
SECTION 8.1. Waivers, Amendments, etc. The provisions of this Agreement
------------------------
may from time to time be amended, modified or waived, if such amendment,
modification or waiver is in writing and consented to by the Account Party and
ING. No failure or delay on the part of ING in exercising any power or right
under this Agreement shall operate as a
<PAGE>
waiver thereof, nor shall any single or partial exercise of any such power or
right preclude any other or further exercise thereof or the exercise of any
other power or right. No notice to or demand on the Account Party in any case
shall entitle it to any notice or demand in similar or other circumstances. No
waiver or approval by ING under this Agreement shall, except as may be otherwise
stated in such waiver or approval, be applicable to subsequent transactions. No
waiver or approval hereunder shall require any similar or dissimilar waiver or
approval thereafter to be granted hereunder.
SECTION 8.2. Notices. All notices and other communications provided to
-------
any party hereto under this Agreement shall be in writing or by facsimile and
addressed, delivered or transmitted to such party at its address or facsimile
number set forth below its signature hereto or at such other address, or
facsimile number as may be designated by such party in a notice to the other
party. Any notice, if mailed and properly addressed with postage prepaid or if
properly addressed and sent by pre-paid courier service, shall be deemed given
when received; any notice, if transmitted by facsimile, shall be deemed given
when transmitted.
SECTION 8.3. Payment of Costs and Expenses. The Account Party agrees to
-----------------------------
pay on demand all expenses of ING (including the reasonable fees and out-of-
pocket expenses of counsel to ING) in connection with the negotiation,
preparation, execution and delivery of this Agreement, the Letter of Credit,
exhibits, opinions and other documents delivered in connection with this
Agreement, and any amendments, waivers, consents, supplements or other
modifications to this Agreement as may from time to time hereafter be required.
Account Party also agrees to reimburse ING upon demand for all reasonable out-
of-pocket expenses (including reasonable attorneys' fees and legal expenses)
incurred by ING in connection with (x) the negotiation of any restructuring or
"work-out", whether or not consummated, of any Account Party Obligations and (y)
the enforcement of any Account Party Obligations.
SECTION 8.4. Survival. The obligations of the Account Party under
--------
Sections 2.5, 4.1, 4.2 and 8.3 shall survive any termination of this Agreement,
- ------------ --- --- ---
the payment in full of all Account Party Obligations and the termination or
expiration of the Letter of Credit. The representations and warranties made by
the Account Party in this Agreement shall survive the execution and delivery of
this Agreement.
SECTION 8.5. Severability. Any provision of this Agreement which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such provision and
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 8.6. Headings. The various headings of this Agreement are
--------
inserted for convenience only and shall not affect the meaning or interpretation
of this Agreement or any provisions hereof or thereof.
SECTION 8.7. Execution in Counterparts, Effectiveness, etc. This
---------------------------------------------
Agreement may be executed by the parties hereto in two or more counterparts,
each of which shall be deemed an original, but all of which shall constitute
together one and the same agreement. This
<PAGE>
Agreement shall become effective when counterparts hereof executed on behalf of
the Account Party and ING (or notice thereof satisfactory to ING) shall have
been received by ING and notice thereof shall have been given by ING to the
Account Party.
SECTION 8.8. Governing Law; Entire Agreement. THIS AGREEMENT SHALL BE
-------------------------------
DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE
STATE OF NEW YORK. This Agreement constitutes the entire understanding among
the parties hereto with respect to the subject matter hereof and supersede any
prior agreements, written or oral, with respect thereto.
SECTION 8.9. Successors and Assigns. This Agreement shall be binding upon
----------------------
and shall inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that the Account Party may not assign
-------- -------
or transfer the Account Party Obligations or its rights hereunder without the
prior written consent of ING.
SECTION 8.10. Jurisdiction. For purpose of any action or proceeding
------------
involving this Agreement, the Account Party hereby expressly submits to the
jurisdiction of all Federal and State Courts located in the City of New York,
State of New York and consents that it may be served with any process or paper
by registered mail or by personal service within or without the State of New
York, provided a reasonable time for appearance is allowed.
SECTION 8.11. Waiver of Jury Trial. ING AND THE ACCOUNT PARTY HEREBY
--------------------
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS EACH MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF,
UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER AGREEMENT CONTEMPLATED
HEREBY, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR
WRITTEN) OR ACTIONS OF ING OR THE ACCOUNT PARTY. THE ACCOUNT PARTY ACKNOWLEDGES
AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS
PROVISION AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR ING ENTERING INTO
THIS AGREEMENT AND ISSUING THE LETTER OF CREDIT.
[Remainder of Page Intentionally Blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
ING EQUITY PARTNERS, L.P. I
By: LEXINGTON PARTNERS, L.P.
its General Partner
By: LEXINGTON PARTNERS, INC.
its General Partner
By: /s/ Benjamin P. Giess
--------------------------------------
Name: Benjamin P. Giess
Title: Authorized Signatory
Address: 520 Madison Avenue
New York, New York 10022
Facsimile: 212-750-2970
Attention: Benjamin P. Giess
MATTHEWS STUDIO EQUIPMENT GROUP
By: /s/ Carlos D. DeMattos
--------------------------------------
Name: Carlos D. DeMattos
Title: Chairman of the Board & Chief
Executive Officer
Address: 3111 North Kenwood Street
Burbank, California 91505
Facsimile: 818-525-5216
Attention: Carlos D. DeMattos
MATTHEWS STUDIO SALES, INC.
By: /s/ Carlos D. DeMattos
--------------------------------------
Name: Carlos D. DeMattos
Title: President
<PAGE>
HOLLYWOOD RENTAL COMPANY, LLC (as
successor by merger to Hollywood Rental
Co., Inc.)
By: /s/ Carlos D. DeMattos
--------------------------------------
Name: Carlos D. DeMattos
Title: Chief Financial Officer
MATTHEWS STUDIO ELECTRONICS, INC.
By: /s/ Carlos D. DeMattos
--------------------------------------
Name: Carlos D. DeMattos
Title: Chief Executive Officer
MATTHEWS ACCEPTANCE CORPORATION
By: /s/ Carlos D. DeMattos
--------------------------------------
Name: Carlos D. DeMattos
Title: President
DUKE CITY VIDEO, INC.
By: /s/ Carlos D. DeMattos
------------------------------
Name: Carlos D. DeMattos
Title: President
HDI HOLDINGS, INC.
By: /s/ Carlos D. DeMattos
--------------------------------------
Name: Carlos D. DeMattos
Title: Chairman of the Board
<PAGE>
FOUR STAR LIGHTING, INC.
By: /s/ Carlos D. DeMattos
--------------------------------------
Name: Carlos D. DeMattos
Title: Chief Executive Officer
MATTHEWS STUDIO GROUP CENTERS, INC.
(f/k/a Matthews Medical Equipment, Inc.)
By: /s/ Carlos D. DeMattos
--------------------------------------
Name: Carlos D. DeMattos
Title: President
KEYLITE HOLDINGS, INC.
By: /s/ Carlos D. DeMattos
--------------------------------------
Name: Carlos D. DeMattos
Title: Chief Financial Officer
REEL WHEELS, INC.
By: /s/ Carlos D. DeMattos
--------------------------------------
Name: Carlos D. DeMattos
Title: Chief Financial Officer
KEYLITE PRODUCTION SERVICES, INC.
By: /s/ Carlos D. DeMattos
--------------------------------------
Name: Carlos D. DeMattos
Title: Chief Financial Officer
<PAGE>
DUKE CITY HOLDINGS, INC.
By: /s/ Carlos D. DeMattos
--------------------------------------
Name: Carlos D. DeMattos
Title: Chief Executive Officer
FOUR STAR HOLDING, INC.
By: /s/ Carlos D. DeMattos
--------------------------------------
Name: Carlos D. DeMattos
Title: President
<PAGE>
Exhibit 10.15
-------------
Execution Copy
ING SECURITY AGREEMENT
----------------------
THIS SECURITY AGREEMENT (this "Security Agreement"), dated as of January
------------------
12, 1999, is made by MATTHEWS STUDIO EQUIPMENT GROUP, a California corporation
(the "Parent), MATTHEWS STUDIO SALES, INC., a California corporation ("MSSI"),
------ ----
HOLLYWOOD RENTAL COMPANY, LLC, a Delaware limited liability company ("HRCL") (as
----
successor by merger to Hollywood Rental Co., Inc., a California corporation),
MATTHEWS STUDIO ELECTRONICS, INC., a California corporation ("MSE"), MATTHEWS
---
ACCEPTANCE CORPORATION, a California corporation ("MAC"), DUKE CITY VIDEO, INC.,
---
a New Mexico corporation ("Duke"), HDI HOLDINGS, INC., a Kentucky corporation
----
("HDI"), FOUR STAR LIGHTING, INC., a New York corporation ("Four Star"),
- ----- ---------
MATTHEWS STUDIO GROUP CENTERS, INC., a California corporation ("MSGC") (f/k/a
----
Matthews Medical Equipment, Inc.), KEYLITE HOLDINGS, INC., California
corporation ("KHI"), REEL WHEELS, INC., a California corporation ("RWI"),
--- ---
KEYLITE PRODUCTION SERVICES, INC., a California corporation ("KPS"), DUKE CITY
---
HOLDINGS, INC., a California corporation ("Duke Holdings"), and FOUR STAR
-------------
HOLDING, INC., a Delaware corporation ("Four Star Holding") (each of the Parent,
-----------------
MSSI, HRCL, MSE, MAC, Duke, HDI, Four Star, MSGC, KHI, RWI, KPS, Duke Holdings,
and Four Star Holding a "Grantor" and collectively, "Grantors"), in favor of ING
------- --------
EQUITY PARTNERS, L.P. I, a Delaware limited partnership ("Beneficiary").
-----------
W I T N E S S E T H:
-------------------
WHEREAS, pursuant to the terms of the Amended and Restated Credit
Agreement, dated as of April 1, 1998 (as amended or otherwise modified, the
"Credit Agreement") between Grantors and THE CHASE MANHATTAN BANK, a New York
- -----------------
banking corporation, acting as agent for the Lenders (the "Agent"), Grantors may
-----
be obligated to pay from time to time certain Obligations to the Agent;
WHEREAS, at the request of Grantors, Beneficiary will cause ING (U.S.)
Capital, LLC (the "Issuer") to issue an irrevocable standby Letter of Credit
------
(such Letter of Credit, as amended from time to time, and any substitute or
replacement therefor issued by the Issuer, being referred to herein as the
"Letter of Credit") in the maximum amount of $3,000,000 in favor of the Agent to
- -----------------
support payment of the Obligations, subject to certain terms and conditions as
set forth in the Letter of Credit;
WHEREAS, Beneficiary is willing to cause the issuance of the Letter of
Credit on the terms and conditions of the Reimbursement Agreement, dated as of
the date hereof (as amended from time to time, the "Reimbursement Agreement"),
-----------------------
between Grantors and the Beneficiary;
<PAGE>
WHEREAS, as a condition precedent to Beneficiary's causing the issuance of
the Letter of Credit and Beneficiary's execution of the Reimbursement Agreement,
each Grantor is required to execute and deliver this Security Agreement to
secure the due and prompt repayment of any and all obligations of Grantors to
Beneficiary under the Reimbursement Agreement;
WHEREAS, each Grantor has duly authorized the execution, delivery and
performance of this Security Agreement;
NOW THEREFORE, in consideration of the premises herein contained and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and in order to induce Beneficiary to cause the issuance of
the Letter of Credit, Grantors agree, for the benefit of Beneficiary, as
follows:
ARTICLE I
DEFINITIONS
1.1. Certain Terms. Unless the context shall otherwise require,
-------------
capitalized terms used and not defined herein shall have the meanings set forth
in the Credit Agreement. The following terms when used herein shall have the
following meanings:
"Copyright" shall have the meaning given to it in the Amended and Restated
---------
Security Agreement and Mortgage - Patents, Trademarks and Copyrights, dated as
of April 1, 1998, among the Grantors and the Agent, as amended from time to
time.
"Copyright License" shall mean any agreement, whether written or oral,
-----------------
providing for the grant by or to a Grantor of any right in or to any Copyright.
"Equipment" shall have the meaning given to it in the Amended and Restated
---------
Security Agreement, dated as of April 1, 1998, among the Grantors and the Agent,
as amended from time to time.
"Inventory" shall have the meaning given to it in the Amended and Restated
---------
Security Agreement, dated as of April 1, 1998, among the Grantors and the Agent,
as amended from time to time.
"Patent" shall have the meaning given to it in the Amended and Restated
------
Security Agreement and Mortgage - Patents, Trademarks and Copyrights, dated as
of April 1, 1998, among the Grantors and the Agent, as amended from time to
time.
"Patent License" shall mean any agreement, whether written or oral,
--------------
providing for the grant by or to a Grantor of any right to manufacture, use or
sell any invention covered by a Patent, and all rights of a Grantor under such
agreement.
<PAGE>
"Reimbursement Documents" shall mean this Agreement, the Reimbursement
-----------------------
Agreement and any other document or instrument executed and delivered in
connection herewith or therewith.
"Trademark" shall have the meaning given to it in the Amended and Restated
---------
Security Agreement and Mortgage - Patents, Trademarks and Copyrights dated as of
April 1, 1998, among the Grantors and the Agent, as amended from time to time.
"Trademark License" shall mean any agreement, whether written or oral,
-----------------
providing for the grant by or to a Grantor of any right to use any Trademark.
ARTICLE II
SECURITY INTEREST
2.1. Grant of Security Interest. Each Grantor hereby assigns to
--------------------------
Beneficiary, and grants to Beneficiary, its successors and its assigns, a
continuing Security Interest (the "Security Interest") in all currently existing
-----------------
and hereafter acquired or arising Collateral in order to secure prompt repayment
of any and all obligations of Grantors to Beneficiary arising under the
Reimbursement Agreement in connection with the issuance by the Issuer of the
Letter of Credit (the "Reimbursement Obligations"). Beneficiary's Security
-------------------------
Interest in the Collateral shall attach to all Collateral without further act on
the part of Beneficiary or any Grantor.
2.2. Limitation on Security Interest.
-------------------------------
(a) Subordination and Other Liens. The Beneficiary agrees that until the
-----------------------------
Grantors have indefeasibly paid in cash in full all of the Obligations, the
Security Interest granted hereunder (the "Subordinated Liens") shall be subject,
------------------
junior and subordinate to all security interests and liens granted or purported
to be granted by any Grantor in favor of the Agent (all such security interests
and liens, and any other security interests and liens granted or purported to be
granted, now or hereafter by a Grantor in favor of the Agent are collectively
referred to as the "Senior Liens"), irrespective of (i) the order of perfection
------------
of any Senior Liens and any Subordinated Liens, (ii) the failure of Agent to
perfect, or to maintain the perfection of, any security interests or liens
compromising any of the Senior Liens or (iii) the rules for determining the
priority under the Uniform Commercial Code or other relevant law.
(b) Subordination upon Payments and Distributions. Other than with
---------------------------------------------
respect to Permitted Securities, upon any payment or distribution of cash,
securities or other property of any of the Grantors of any kind or character to
creditors upon any dissolution, winding up, total or partial liquidation,
reorganization or marshaling of assets of any of the Grantors, whether voluntary
or involuntary, or in bankruptcy, insolvency, receivership proceedings or upon
assignment for the benefit of creditors: (i) all Obligations shall first be paid
in full in cash before the Beneficiary (or its successors or assigns) may
receive or retain any payment or distribution of assets (including assets as to
which any such person has a lien or security interest) and (ii) any payment or
distribution of cash, securities or other property to which the
<PAGE>
Beneficiary (or its successors or assigns) would be entitled, except for the
provisions of this section, shall be paid directly to the Agent for its benefit
and the benefit of the Lenders to the extent necessary to pay all Obligations in
full in cash, after giving effect to any concurrent payment or distribution to
the Lenders, before any such payment or distribution is made to the Beneficiary
(or their successors or assigns). For the purposes of this Section 2.2, the
-----------
term "Permitted Securities" means any securities of any of the Grantors provided
--------------------
for by a plan of reorganization, the payment of which is subordinated to the
Obligations at least to the extent provided in this Agreement, which securities
shall be distributed upon any insolvency, bankruptcy, liquidation, dissolution
or similar proceeding under any applicable bankruptcy or insolvency law and
shall be approved by a court of competent jurisdiction pursuant to a decree or
order that states that the effect of such securities and the distribution
thereof is to preserve the subordination of the Security Interest granted herein
to the Senior Liens.
(c) Release of Subordinated Liens; Disposition of Collateral. If the
--------------------------------------------------------
Agent consents to any request by a Grantor to sell or otherwise dispose of any
Collateral, the Beneficiary agrees to release any Subordinated Liens encumbering
any such Collateral sold or otherwise disposed of, and to execute and deliver
promptly such lien release documents as Agent may reasonably request in
connection therewith. If the Agent agrees with a Grantor to take possession of
or otherwise acquire any Collateral in complete or partial satisfaction of any
Obligations, the Beneficiary agrees to release any Subordinated Liens
encumbering any such Collateral acquired by Agent, and to execute and deliver
promptly such lien release documents as Agent may reasonably request in
connection therewith. The Beneficiary hereby waives any right it may have by
contract or by law to require Agent to give notice of any disposition of
Collateral contemplated by this Section 2.2(c) or any such right the Beneficiary
--------------
may have to object to or otherwise contest any such disposition, including,
without limitation, any requirement that Agent foreclose upon such Collateral
under applicable law. If Agent elects to foreclose upon any Collateral, the
Beneficiary agrees not to contest or otherwise challenge any such foreclosure
and further agree not to assert any claim or defense that any such foreclosure
was not commercially reasonable or otherwise failed to comply with applicable
law.
(d) Insurance for Collateral. Prior to indefeasible payment in full in
------------------------
cash of the Obligations and termination of the Credit Agreement in accordance
with its terms, as between the Beneficiary and the Agent, Agent shall have the
sole right, in the exercise of its reasonable credit judgment, to adjust and
compromise any claims under any insurance maintained by any of the Grantors
insuring any Collateral, to collect and receive the proceeds thereof, and to
execute and deliver all proofs of loss, receipts, vouchers and releases in
connection with such claims. Upon receipt, the Beneficiary will deliver to
Agent or any such insurer such releases, consents or other instruments as Agent
may reasonably request to implement the provisions of this Section 2.2(d). Any
--------------
insurer shall be entitled to rely on a copy of this Agreement as its irrevocable
authorization to deal solely with Agent as hereinabove described,
notwithstanding the designation of Beneficiary as loss payee, mortgagee,
additional insured or the like of any such policy of insurance.
2.3. Negotiable Collateral. In the event that any Collateral, including
---------------------
proceeds, is evidenced by or consists of negotiable instruments ("Negotiable
----------
Collateral"), the applicable Grantor or Grantors shall, immediately upon the
- ----------
request of Beneficiary, endorse and assign
<PAGE>
such Negotiable Collateral to Beneficiary and deliver physical possession of
such Negotiable Collateral to Beneficiary, subject to the respective rights of
the Lenders and Beneficiary.
2.4. Collection of Receivables. Subject to Section 2.10, (a) to expedite
------------------------- ------------
collection of Receivables of Grantors, Grantors shall, promptly upon the request
of Beneficiary (and subject to the rights of the Lenders under the Credit
Agreement and the other Loan Documents), collect any cash receipts, checks, and
other items of payment that it receives on account of the Receivables for
deposit into lockboxes or blocked accounts (the "Blocked Accounts") designated
----------------
by Beneficiary. All remittances received by Grantors shall be held in trust for
Beneficiary and Grantors will immediately deposit such collections in the
Blocked Accounts or, if requested by Beneficiary, deliver to Beneficiary said
collections in the same form as received (but with any endorsements of Grantors
necessary for deposit or collection).
(b) Beneficiary shall have the right to take any and all of the actions set
forth in paragraph (c) of this Section 2.4, at any time, without notice to
------------- -----------
Grantors, if (1) there then exists an Event of Default; (2) in Beneficiary's
good faith judgment, based upon credible evidence, Beneficiary believes that:
(A) the Blocked Accounts are being circumvented or other circumstances exist
which threaten Beneficiary's ability to maintain its dominion over cash, (B) the
proceeds of Beneficiary's Collateral are being diverted from it, or (C) the
Grantors' properties or assets are otherwise being misappropriated; or (3) in
Beneficiary's reasonable judgment, based upon credible evidence, there has
occurred a material impairment of the prospect of repayment of Grantors'
obligations or a material impairment of the validity, priority, or
enforceability of Beneficiary's Security Interest in the Collateral.
Beneficiary shall additionally have all rights of stoppage in transit,
replevin, reclamation and other rights of an unpaid seller and/or lienor under
the Uniform Commercial Code. All amounts received by Beneficiary in payment of
Receivables assigned to it, including without limitation, all amounts wired to
Beneficiary's account from the Blocked Accounts in accordance with Beneficiary's
instructions, will be credited to the account of Grantors, for purposes of
interest calculations, on the date of receipt of good funds by Beneficiary.
(c) At the times and upon the occurrence of the events described in
paragraph (b) of this Section 2.4, Beneficiary or Beneficiary's designee may:
- ------------- -----------
(i) notify customers or account debtors of any Grantor that the accounts or
Receivables have been assigned to Beneficiary or that Beneficiary has a security
interest therein; (ii) collect Receivables directly in its own name and charge
the collection costs and expenses, including reasonable attorneys' fees, to
Grantors, and (iii) receive, open and dispose of all mail addressed to any
Grantor.
2.5. Delivery of Additional Documentation Required. Subject to Section
--------------------------------------------- -------
2.10, each Grantor shall execute and deliver to Beneficiary, prior to or
- ----
concurrently with such Grantor's execution and delivery of this Security
Agreement and at any time thereafter at the request of Beneficiary, all
financing statements, continuation financing statements, fixture filings,
security agreements, chattel mortgages, pledges, assignments (of all Receivables
and all related documents), endorsements of certificates of title, applications
for title, affidavits, reports, notices, schedules of accounts, letters of
authority, and all other documents that Beneficiary may reasonably request, in
form satisfactory to Beneficiary, to perfect and
<PAGE>
continue perfected the Security Interest in the Collateral and in order to fully
consummate all of the transactions contemplated under the documents evidencing
the Reimbursement Obligations.
2.6. Power of Attorney. Subject to Section 2.10, each Grantor hereby
----------------- ------------
irrevocably makes, constitutes, and appoints Beneficiary (and any of
Beneficiary's officers, employees, or agents designated by Beneficiary) as
Grantor's true and lawful attorney, with power to:
(a) sign the name of such Grantor on any of the documents described in
Section 2.5 or on any other similar documents to be executed, recorded, or
filed in order to perfect or continue perfected the Security Interest;
(b) sign Such Grantor's name on any invoice or bill of lading relating
to any accounts, drafts against account debtors, schedules and assignments
of Receivables, verifications of Receivables, and notices to account
debtors;
(c) send requests for verification of Receivables;
(d) endorse such Grantor's name on any checks, notices, acceptances,
money orders, drafts, or other item of payment or security that may come
into Beneficiary's possession;
(e) at any time that (1) there then exists an Event of Default, (2) in
Beneficiary's good faith judgment, based upon credible evidence,
Beneficiary believes that (A) the Blocked Accounts are being circumvented
or other circumstances exist which threaten Beneficiary's ability to
maintain its dominion over cash, (B) the proceeds of Beneficiary's
Collateral are being diverted from it, or (C) such Grantor's properties or
assets are otherwise being misappropriated, or (3) in Beneficiary's
reasonable judgment, based upon credible evidence, there has occurred a
material impairment of the prospect of repayment of such Grantor's
obligations or material impairment of the validity, priority, or
enforceability of Beneficiary's Security Interest in the Collateral, notify
the post office authorities to change the address for delivery of such
Grantor's mail to an address designated by Beneficiary, receive and open
all mail addressed to such Grantor, and retain all mail relating to the
Collateral and forward all other mail to such Grantor;
(f) at any time that there exists an Event of Default or Beneficiary
deems itself insecure, make, settle, and adjust all claims under such
Grantor's policies of insurance or in respect of condemnation proceedings,
and make all determinations and decisions with respect to such policies of
insurance or condemnation proceedings; and
(g) at any time that there exists an Event of Default or Beneficiary
deems itself insecure, settle and adjust disputes and claims respecting the
Receivables directly with the applicable Debtors, for amounts and upon
terms which Beneficiary determines to be reasonable, and Beneficiary may
cause to be executed and delivered any documents and releases which
Beneficiary determines to be necessary.
<PAGE>
With respect to the matters described in clauses (f) and (g) of this
----------- ---
Section 2.6, Beneficiary shall not act pursuant to the foregoing power of
- -----------
attorney until Beneficiary has provided such Grantor with notice of
Beneficiary's intent so to act not less than ten (10) Business Days prior to any
such proposed action and, in the event such Grantor has taken the necessary
steps during such period to settle or adjust such disputes or claims in a manner
satisfactory to Beneficiary, or is otherwise proceeding toward a resolution of
such matters in a manner satisfactory to Beneficiary, Beneficiary shall allow
such Grantor to complete such settlement so long as Grantor continues to
diligently prosecute the same toward a conclusion. The appointment of
Beneficiary as each Grantor's attorney, and each and every one of Beneficiary's
rights and powers, being coupled with an interest, is irrevocable until all
Reimbursement Obligations have been fully repaid and performed and Beneficiary's
obligations hereunder are terminated.
2.7. Right to Inspect. Beneficiary (through any of its officers,
----------------
employees, or agents) shall have the right, from time to time hereafter, at
reasonable times and upon reasonable notice, to inspect Grantor's books and to
check, test, and appraise the Collateral in order to verify each Grantor's
financial condition or the amount, quality, value, condition of, or any other
matter relating to, the Collateral.
2.8. Releases Upon Termination. Upon the termination of this Security
-------------------------
Agreement and the satisfaction of and payment in full of all Reimbursement
Obligations, Beneficiary shall deliver to each Grantor upon its request therefor
and at such Grantor's expense, releases, reconveyances and satisfactions of all
financing statements, mortgages, notices of assignment and other registrations
of security, and each Grantor shall also deliver to Beneficiary an unqualified
release of all of Beneficiary's obligations under all documents evidencing
Reimbursement Obligations and an acknowledgment that the same have been
terminated.
2.9. Recourse to Security. Recourse to security shall not be required for
--------------------
any of Grantors' Reimbursement Obligations hereunder nor shall Beneficiary be
required to first marshall, dispose of, or realize upon any security or
Collateral.
2.10. Standstill Provisions. (a) So long as the Obligations have not
---------------------
been paid in full, in cash, and any Loan Document remains in effect, whether or
not any event or proceeding described in subparagraphs (f) or (g) of Article
VIII of the Credit Agreement has been commenced by or against any Grantor:
(i) no Beneficiary will (A) exercise or seek to exercise any rights
or exercise any remedies with respect to any Collateral or (B) institute
any action or proceeding with respect to such rights or remedies, including
without limitation, any action of foreclosure or (C) contest, protest or
object to any foreclosure proceeding or action brought by the Agent or any
Lender or any other exercise by the Agent or any Lender of any rights and
remedies under any Loan Documents; and
(ii) the Agent and the Lenders shall have the exclusive right to
enforce rights and exercise remedies with respect to the Collateral,
including, without limitation, the right to notify account debtors.
<PAGE>
(b) In exercising rights and remedies with respect to the Collateral, the
Agent and the Lenders may enforce the provisions of the Loan Documents and
exercise remedies thereunder, all in such order and in such manner as they may
determine in the exercise of their sole business judgment. Such exercise and
enforcement shall include, without limitation, the rights to sell or otherwise
dispose of Collateral, to incur expenses in connection with such sale or
disposition and to exercise all the rights and remedies of a secured lender
under the Uniform Commercial Code of any applicable jurisdiction.
(c) When all Obligations have been paid in full in cash and the Security
Documents no longer are in effect, the Beneficiary shall have the right to
enforce the provisions of this Security Agreement and exercise remedies
hereunder.
ARTICLE III
CONDITIONS PRECEDENT
3.1. Approval of Documents and Security Interest. Beneficiary shall have
-------------------------------------------
received evidence that all approvals and/or consents of, or other action by, any
shareholder, government, agency, or other Person whose approval or consent is
necessary or required to enable (a) the Grantor to: (1) enter into and perform
its obligations under the documents evidencing Reimbursement Obligations, and
(2) enter into Reimbursement Obligations and grant to Beneficiary the Security
Interest; and (b) all other applicable parties to execute and deliver all
documents evidencing Reimbursement Obligations, have been obtained.
3.2. Perfection of Security Interest. All filings of Uniform Commercial
-------------------------------
Code financing statements and all other filings and actions necessary to perfect
and maintain the Security Interest as valid and perfected Liens in the Property
covered thereby, subject only to Senior Liens and those Liens existing on the
date hereof which are permitted under the Credit Agreement (collectively, the
"Permitted Liens"), shall be filed within 10 days of the date of execution of
- ----------------
this Security Agreement or taken and confirmation thereof shall have been
received by Beneficiary within 10 days of such filing. Beneficiary shall have
received the original of any certificates of title or other instruments
necessary to be delivered into Beneficiary's possession in order to perfect
Beneficiary's Security Interest therein.
ARTICLE IV
COVENANTS; REPRESENTATIONS
4.1. Consents and Approvals. Except for such filings as are required to
----------------------
perfect Beneficiary's Security Interest, the consent of the Agent and the
Lenders, the approval of each Grantor's Board of Directors and Beneficiary and
any consents of parties to Contracts and as set forth on Schedule 4.1 hereto, no
------------
approvals and/or consents of, or other action by, any shareholder, government
instrumentality, agency or regulatory authority, or other Person are necessary
or required to enable each Grantor to (i) enter into and perform its obligations
<PAGE>
under the documents evidencing the Reimbursement Obligations, and (ii) enter
into Reimbursement Obligations and grant to Beneficiary the Security Interest.
4.2. Covenants. Each Grantor covenants and agrees with the Beneficiary
---------
that, from and after the date of this Security Agreement until the Reimbursement
Obligations are paid in full, and subject to Section 2.10:
------------
(a) Maintenance of Perfected Security Interests; Further
----------------------------------------------------
Documentation; Pledge of Instruments and Chattel Paper. Subject to
------------------------------------------------------
Permitted Liens, the Grantor shall maintain the Security Interest created
by this Security Agreement hereof and shall defend such Security Interest
against the claims and demands of all Persons whomsoever. At any time and
from time to time, upon the written request of the Beneficiary, and at the
sole expense of the Grantor, the Grantor will promptly and duly execute and
deliver such further instruments and documents and take such further action
as the Beneficiary may reasonably request for the purpose of obtaining or
preserving the full benefits of this Security Agreement and of the rights
and powers herein granted, including, without limitation, the filing of any
financing or continuation statements made under the Uniform Commercial Code
in effect in any jurisdiction with respect to the Liens created hereby.
The Grantor also hereby authorizes the Beneficiary to file any such
financing or continuation statement without the signature of such Grantor
to the extent permitted by applicable law. A carbon, photographic or other
reproduction of this Security Agreement shall be sufficient as a financing
statement for filing in any jurisdiction. Subject to the prior rights of
the Lenders and the Agent and with their consent, if any amount payable
under or in connection with any of the Collateral shall be or become
evidenced by any Instrument or Chattel Paper, such Instrument or Chattel
Paper shall be immediately delivered to the Beneficiary, duly endorsed in a
manner satisfactory to the Beneficiary, to be held as Collateral pursuant
to this Security Agreement.
(b) Indemnification. The Grantor agrees to pay, and to save the
---------------
Beneficiary, harmless from, any and all liabilities, costs and expenses
(including, without limitation, legal fees and expenses) (i) with respect
to, or resulting from, any delay in paying, any and all excise, sales or
other taxes which may be payable or determined to be payable with respect
to any of the Collateral, (ii) with respect to, or resulting from, any
delay in complying with any requirement of law applicable to any of the
Collateral or (iii) in connection with any of the transactions contemplated
by this Security Agreement. In any suit, proceeding or action brought by
the Beneficiary in respect of any Receivable or Reimbursement Document for
any sum owing thereunder, or to enforce any provisions of any Receivable or
Reimbursement Document, the Grantor will save, indemnify and keep the
Beneficiary harmless from and against all expense, loss or damage suffered
by reason of any defense, setoff, counterclaim, recoupment or reduction or
liability whatsoever of the account debtor or obligor thereunder, arising
out of a breach by the Grantor of any obligation thereunder or arising out
of any other agreement, indebtedness or liability at any time owing to or
in favor of such account debtor or obligor or its successors from the
Grantor, except where the same is the direct result of the Beneficiary's
gross negligence or willful misconduct.
<PAGE>
(c) Maintenance of Records. The Grantor will keep and maintain at its
----------------------
own cost and expense satisfactory and complete records of the Collateral,
including, without limitation, a record of all payments received and all
credits granted with respect to the Receivables. The Grantor will enter a
field into its financial records software or otherwise mark its books and
records pertaining to the Collateral to evidence this Security Agreement
and the Security Interest granted hereby. Subject to Section 2.10, if the
------------
Grantor is then in default under the Reimbursement Agreement the Grantor
shall turn over any books and records pertaining to the Collateral to the
Beneficiary or to its representatives during normal business hours at the
request of the Beneficiary.
(d) Right of Inspection. Upon reasonable notice (which may be
-------------------
telephonic), Beneficiary shall at all times have full and free access
during normal business hours to all the books, correspondence and records
of the Grantor and the Beneficiary or its representatives may examine the
same, take extracts therefrom and make photocopies thereof, at
Beneficiary's cost and expense, and the Grantor agrees to render to the
Beneficiary, at such Grantor's cost and expense, such clerical and other
assistance as may be reasonably requested with regard thereto. The
Beneficiary and their respective representatives shall at all times also
have the right to enter into and upon any premises where any of the
Inventory or Equipment is located for the purpose of inspecting the same,
observing its use or otherwise protecting its interests therein.
(e) Compliance with Laws, etc. The Grantor will comply in all
-------------------------
material respects with all requirements of law applicable to the Collateral
or any part thereof or to the operation of the Grantor's business;
provided, however, that the Grantor may contest any requirement of law in
-------- -------
any reasonable manner which shall not, in the reasonable opinion of the
Beneficiary, adversely affect the Beneficiary's rights or the priority of
its Liens on the Collateral.
(f) Compliance with Terms of Reimbursement Documents. The Grantor
------------------------------------------------
will perform and comply in all material respects with all its obligations
under the Reimbursement Documents and all its other obligations relating to
the Collateral.
(g) Payment of Obligations. The Grantor will pay promptly when due
----------------------
all taxes, assessments and governmental charges or levies imposed upon the
Collateral or in respect of its income or profits therefrom, as well as all
claims of any kind (including, without limitation, claims for labor,
materials and supplies) against or with respect to the Collateral, except
that no such charge need be paid if (i) the validity thereof is being
contested in good faith by appropriate proceedings, (ii) such proceedings
do not involve any material danger of the sale, forfeiture or loss of any
of the Collateral or any interest therein and (iii) such charge is
adequately reserved against on the Grantor's books in accordance with GAAP.
(h) Limitation on Liens on Collateral. The Grantor will not create,
---------------------------------
incur or permit to exist, and the Grantor shall defend the Collateral
against, and will take such other action as is necessary to remove, any
Lien or claim on or to the Collateral, other than the Liens created hereby
and Permitted Liens, and will defend the right, title and
<PAGE>
interest of the Beneficiary in and to any of the Collateral against the
claims and demands of all Persons whomsoever, other than Permitted Liens.
(i) Limitations on Dispositions of Collateral. The Grantor will not
-----------------------------------------
sell, transfer, lease or otherwise dispose of any of the Collateral, or
attempt, offer or contract to do so except for (x) sales of Inventory in
the ordinary course of its business, (y) so long as no Event of Default has
occurred and is continuing, the disposition in the ordinary course of
business of property not material to the conduct of its business, or (z)
sales, transfers and other dispositions of Collateral permitted or
consented to pursuant to the Credit Agreement and the other Loan Documents.
(j) Limitations on Modifications of Reimbursement Documents and
-----------------------------------------------------------
Agreements Giving Rise to Receivables; Exercise of Rights; Notices. Except
------------------------------------------------------------------
to the extent permitted or consented to pursuant to the Loan Documents, the
Grantor will not (i) amend, modify, terminate or waive any provision of any
Reimbursement Document or any agreement giving rise to a Receivable in any
manner which could reasonably be expected to materially adversely affect
the value of such Reimbursement Document or such Receivable as Collateral,
(ii) other than in the ordinary course of business as generally conducted
by the Grantor over a period of time, fail to exercise promptly and
diligently each and every material right which it may have under each
Reimbursement Document and each agreement giving rise to a Receivable
(other than any right of termination) or (iii) fail to deliver to the
Beneficiary a copy of each material demand, notice or document received by
it relating in any way to any Reimbursement Document or any agreement
giving rise to a Receivable that questions the validity or enforceability
of such Reimbursement Document or Receivables constituting more than 5 % of
the aggregate amount of the Receivables.
(k) Limitations on Discounts, Compromises, Extensions of Receivables.
----------------------------------------------------------------
Except to the extent permitted or consented to do otherwise pursuant to the
Loan Documents, other than in the ordinary course of business consistent
with its past practice, the Grantor will not (i) grant any extension of the
time of payment of any Receivable, (ii) compromise, compound or settle any
Receivable for less than the full amount thereof, (iii) release, wholly or
partially, any Person liable for the payment of any Receivable, or (iv)
allow any credit or discount whatsoever on any Receivable.
(l) Maintenance of Equipment. Except to the extent permitted to do
------------------------
otherwise pursuant to the Loan Documents, the Grantor will maintain each
item of Equipment in good operating condition, ordinary wear and tear and
immaterial impairments of value and damage by the elements excepted, and
will provide all maintenance, service and repairs necessary for such
purpose, except that the Grantor's obligations pursuant to this Section
-------
4(l) shall not extend to obsolete Equipment.
----
(m) Maintenance of Insurance. Except to the extent permitted to do
------------------------
otherwise pursuant to the Loan Documents, the Grantor will maintain, with
financially sound and reputable companies, insurance policies as required
under the Credit Agreement. All such insurance shall (i) provide that no
cancellation, material reduction in amount or material change in coverage
thereof shall be effective until at
<PAGE>
least 30 days after receipt by the Beneficiary of written notice thereof,
(ii) name the Beneficiary as insured party and loss payee, (iii) include a
breach of warranty clause and (iv) be reasonably satisfactory in all other
respects to the Beneficiary. The Grantor shall deliver to the Beneficiary
during the month of April in each calendar year, and from time to time as
the Beneficiary may reasonably request, certificates of insurance or other
evidence reasonably satisfactory to Beneficiary of compliance with the
foregoing.
(n) Further Identification of Collateral. The Grantor will furnish to
------------------------------------
the Agent from time to time statements and schedules further identifying
and describing the Collateral and such other reports in connection with the
Collateral as the Beneficiary may reasonably request, all in reasonable
detail.
(o) Notices. The Grantor will advise the Beneficiary promptly, in
-------
reasonable detail, at the address set forth on the signature page hereto,
(i) of any Lien (other than Liens created hereby or Permitted Liens) on, or
claim asserted against, any of the Collateral and (ii) of the occurrence of
any other event which could reasonably be expected to have a material
adverse effect on the aggregate value of the Collateral or on the Liens
created hereunder.
(p) Changes in Locations. The Grantor will not (i) change the
--------------------
location of its executive offices, (ii) maintain books and records
(including computer printouts and programs) concerning the Receivables or
permit any of the Inventory or Equipment to be kept at a location other
than those at which the same are presently maintained or kept (except when
such Inventory or Equipment are being used in the ordinary course of the
Grantor's business) or (iii) change its name, identity or corporate
structure to such an extent that any financing statement filed by the
Beneficiary in connection with this Security Agreement would become
seriously misleading, unless it shall have given the Beneficiary at least
30 days prior written notice thereof.
(q) Patents, Trademarks and Copyrights. Except to the extent
----------------------------------
permitted to do otherwise pursuant to the Loan Documents,
(i) The Grantor (either itself or through licensees) will (A)
continue to use each Trademark on each and every trademark class of
goods applicable to its current line as reflected in its current
catalogs, brochures and price lists in order to maintain such
Trademarks in full force free from any claim of abandonment for non-
use, (B) maintain as in the past the quality of products and services
offered under such Trademark, (C) employ such Trademark with the
appropriate notice of registration, (D) not adopt or use any mark
which is confusingly similar or a colorable imitation of such
Trademark unless the Beneficiary, shall obtain a perfected security
interest in such mark pursuant to this Security Agreement, and (E) not
(and not permit any licensee or sublicensee thereof to) do any act or
knowingly omit to do any act whereby any Trademark may become
invalidated;
<PAGE>
(ii) The Grantor will not do any act, or omit to do any act,
whereby any material Patent may become abandoned or dedicated;
(iii) The Grantor (either itself or through licensees) will, for
each work covered by a material Copyright, continue to publish,
reproduce, display, adopt and distribute the work with appropriate
copyright notice as necessary and sufficient to establish and preserve
the Grantor's material rights under all applicable copyright laws;
(iv) The Grantor will notify the Beneficiary immediately if it
knows, or has reason to know, that any material Patent, Trademark or
Copyright or any application or registration relating to any thereof
may become abandoned, lost or dedicated, or of any adverse
determination or development (including, without limitation, the
institution of, or any such determination or development in, any
proceeding in the United States Patent and Trademark Office, the
United States Copyright Office or any court or tribunal or similar
office in any country) regarding the Grantor's ownership of any
material Patent, Trademark or Copyright or its right to register the
same or to keep and maintain the same;
(v) The Grantor, either by itself or through any agent,
employee, licensee or designee, shall not file (A) any application for
the registration of a Patent, Trademark or Copyright, or (B) any
assignment of a patent, trademark or copyright which it may acquire
from a third party, with the United States Patent and Trademark
Office, the United States Copyright Office or any similar office or
agency in any other country or any political subdivision thereof, as
the case may be, unless the Grantor reports such filing to the
Beneficiary on or prior to the date of thereof;
(vi) The Grantor shall from time to time execute and deliver any
and all agreements, instruments, documents, and papers as the
Beneficiary may request to evidence the Beneficiary's security
interest in any Patent, Trademark or Copyright and the goodwill and
general intangibles of the Grantor relating thereto or represented
thereby, and, subject to the rights of the Lenders and the Agent, the
Grantor hereby constitutes the Beneficiary its attorney-in-fact to
execute and file all such writings for the foregoing purposes, all
acts of such attorney being hereby ratified and confirmed; such power
being coupled with an interest is irrevocable until the Reimbursement
Obligations are paid in full;
(vii) The Grantor will take all reasonable and necessary steps,
including, without limitation, in any proceeding before the United
States Patent and Trademark Office or the United States Copyright
Office, or any similar office or agency in any other country or any
political subdivision thereof, to maintain and pursue each application
(and to obtain the relevant registration) and to maintain each
registration of the Patents, Trademarks and Copyrights, including,
without limitation, timely filing of applications for renewal,
affidavits of use and affidavits of incontestability and payment of
maintenance fees;
<PAGE>
(viii) In the event that any Patent, Trademark or Copyright
included in the Collateral is infringed, misappropriated or diluted by
a third party, the Grantor shall promptly notify the Beneficiary after
it learns thereof and, at the Grantor's sole expense, shall, unless
the Grantor shall reasonably determine that such Patent, Trademark or
Copyright is of negligible economic value to the Grantor, promptly sue
for infringement, misappropriation or dilution, to seek injunctive
relief where appropriate and to recover any and all damages for such
infringement, misappropriation or dilution, or take such other actions
as the Grantor shall reasonably deem appropriate under the
circumstances to protect such Patent, Trademark or Copyright; and
(ix) Upon and during the continuance of an Event of Default and
at the reasonable request of the Beneficiary, the Grantor shall use
its reasonable efforts to obtain all requisite consents or approvals
by the licensor of each Copyright License, Patent License or Trademark
License to effect the assignment of all of the Grantor's rights, title
and interest thereunder to the Beneficiary or its designee.
(r) Vehicles. Except to the extent permitted to do otherwise
--------
pursuant to the Loan Documents, the Grantor will maintain each vehicle in
good operating condition, ordinary wear and tear and immaterial impairments
of value and damage by the elements excepted, and will provide all
maintenance, service and repairs reasonably necessary for such purpose.
(s) Inventory. None of the Inventory of the Grantor shall be
---------
evidenced by a warehouse receipt.
ARTICLE V
REMEDIES
5.1. Enforcement of Security Interest. Subject to Section 2.10,
-------------------------------- ------------
Beneficiary may enforce its rights and remedies with respect to the
Reimbursement Obligations in accordance with their respective terms, and do any
one or more of the following, all of which are authorized by each Grantor:
(i) terminate this Security Agreement and any of the other documents
evidencing Reimbursement Obligations as to any future liability or obligation of
Beneficiary, but without affecting Beneficiary's rights and Security Interest in
the Collateral and without affecting Grantor's Reimbursement Obligations and
Grantor shall continue to assign Receivables and consign Inventory to
Beneficiary and continue to turn over collections to it;
(ii) cause Grantor to hold all returned Inventory in trust for
Beneficiary, segregate all returned Inventory from all other property of Grantor
or in Grantor's possession and conspicuously label said returned Inventory as
the property of Beneficiary;
<PAGE>
(iii) without notice to or demand upon Grantor, make such payments
and do such acts as Beneficiary considers necessary or reasonable to protect its
Security Interest in the Collateral. Grantor agrees to assemble the Collateral
if Beneficiary so requires, and to make the Collateral available to Beneficiary
as Beneficiary may designate. Grantor authorizes Beneficiary to enter the
premises where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or Lien that in Beneficiary's determination appears to be
prior or superior to its Security Interest and to pay all expenses incurred in
connection therewith. With respect to any of Grantor's owned premises, Grantor
hereby grants Beneficiary a license to enter into possession of such premises
and to occupy the same, without charge, for up to one hundred twenty (120) days
in order to exercise any of Beneficiary's rights or remedies provided herein, at
law, in equity, or otherwise;
(iv) ship, reclaim, recover, store, furnish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Beneficiary is hereby granted a license or other right
to use, without charge, Grantor's Patents, Copyrights, rights of use of any
name, trade secrets, Trademarks, and advertising matter, and the goodwill
associated with any of the foregoing, or any property of a similar nature, as it
pertains to the Collateral, in completing production of, advertising for sale,
and selling any Collateral and Grantor's rights under all licenses and all
franchise agreements shall inure to Beneficiary's benefit;
(v) sell the Collateral at either a public or private sale, or both,
by way of one or more contracts or transactions, for cash or on terms, in such
manner and at such places (including Grantor's premises) as Beneficiary
determines is commercially reasonable. It is not necessary that the Collateral
be present at any such sale;
(vi) Beneficiary shall give notice of the disposition of the
Collateral as follows:
(a) Beneficiary shall give Grantor, the Agent and each holder
of a security interest in the Collateral who has filed with Beneficiary a
written request for notice, a notice in writing of the time and place of
public sale, or, if the sale is a private sale or some other disposition
other than a public sale is to be made of the Collateral, then the time on
or after which the private sale or other disposition is to be made;
(b) the notice shall be personally delivered or mailed, postage
prepaid, to Grantor as provided in Section 6.11, at least five (5) calendar
days before the date fixed for the sale, or at least five (5) calendar days
before the date on or after which the private sale or other disposition is
to be made, unless the Collateral is perishable or threatens to decline
speedily in value. Notice to persons other than Grantor claiming an
interest in the Collateral shall be sent to such addresses as they have
furnished to Beneficiary;
(c) if the sale is to be a public sale, Beneficiary also shall
give notice of the time and place by publishing a notice one time at least
five (5) calendar days
<PAGE>
before the date of the sale in a newspaper of general circulation in the
county in which the sale is to be held;
(vii) Beneficiary may credit bid and purchase at any public sale;
and
(viii) any deficiency that exists after disposition of the Collateral
as provided above will be paid immediately by Grantor. Any excess will be
returned, without interest and subject to the rights of third parties, by
Beneficiary to Grantor.
ARTICLE VI
MISCELLANEOUS
6.1. Attorneys' Fees and Other Fees and Expenses. Whether or not any of
-------------------------------------------
the transactions contemplated by this Security Agreement shall be consummated,
Grantors agree to pay to Beneficiary on demand all reasonable and documented
expenses incurred by Beneficiary in connection with the transactions
contemplated hereby (including, without limitation, any appraisal fees, title
insurance premiums and recording charges) and in connection with any amendments,
modifications or waivers (whether or not the same become effective) under or in
respect of any of the Reimbursement Obligations.
6.2. Further Assurances. From time to time, each Grantor shall execute
------------------
and deliver to Beneficiary such additional documents as Beneficiary may require
to carry out the purposes of all documents evidencing Reimbursement Obligations
and to protect Beneficiary's rights thereunder.
6.3. Taxes and Fees. Should any tax (other than taxes based upon the net
--------------
income of Beneficiary), recording or filing fees become payable in respect of
any of the Reimbursement Obligations, or any amendment, modification or
supplement thereof, the Grantors agree to pay the same to Beneficiary on demand,
together with any interest or penalties thereon attributable to any delay by
Grantors in meeting Beneficiary's demand, and agrees to hold Beneficiary
harmless with respect thereto.
6.4. Modification of This Security Agreement. No modification or waiver
---------------------------------------
of any provision of this Security Agreement shall be effective unless the same
shall be in writing, and then such waiver or consent shall be effective only in
the specific instance and for the purpose for which given. No notice to or
demand on a Grantor in any case shall entitle such Grantor to any other or
further notice or demand in the same, similar or other circumstances. No
modification of Section 2.2 or 2.10 which could reasonably be expected to be
----------- ----
adverse to the rights of the Lenders under the Loan Documents shall be effective
without the consent of the Agent.
6.5. Third Party Beneficiaries. The parties hereto acknowledge that the
-------------------------
Agent and the Lenders shall be deemed third party beneficiaries of Sections 2.2,
------------
2.10 and 6.4 hereof, entitled to rely on such provisions as if they were direct
- ---- ---
signatories to this Agreement.
<PAGE>
6.6. Headings. The headings in this Security Agreement are for purposes
--------
of reference only and shall not limit otherwise affect the meaning hereof.
6.7. Successors and Assigns. This Security Agreement shall be binding
----------------------
upon and inure to the benefit of and be enforceable by the respective successors
and assigns of the parties hereto; provided, however, that neither this Security
-------- -------
Agreement nor any rights or obligations hereunder shall be assignable by a
Grantor without the prior express written consent of Beneficiary, and any
purported assignment made in contravention hereof shall be void. No standard of
reasonableness shall attach to Beneficiary's discretion in consenting or not
consenting to any assignment.
6.8. Remedies Cumulative. All rights and remedies of Beneficiary pursuant
-------------------
to this Security Agreement, any other documents evidencing Reimbursement
Obligations or otherwise, shall be cumulative and nonexclusive, and may be
exercised singularly or concurrently. Beneficiary shall not be required to
prosecute collection, enforcement or other remedies against a Grantor before
proceeding to enforce or resort to any security, Liens, collateral or other
rights of Beneficiary.
6.9. Joint and Several Liability. Any obligations of more than one party
---------------------------
hereunder, including without limitation, any obligations of a Grantor, shall be
joint and several obligations of such parties.
6.10. APPLICABLE LAW. THIS SECURITY AGREEMENT SHALL BE DEEMED TO BE A
--------------
CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK.
FOR PURPOSES OF THIS SECTION 6.10, THIS SECURITY AGREEMENT SHALL BE DEEMED TO BE
PERFORMED AND MADE IN THE STATE OF NEW YORK.
6.11. Counterparts. This Security Agreement may be executed by the
------------
parties hereto in two or more counterparts, each of which shall be deemed an
original, but all of which shall together constitute one and the same agreement.
6.12. Severability. Any provision of this Agreement which is prohibited
------------
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any jurisdiction.
6.13. Notices. All notices required to be given under this Security
-------
Agreement shall be sent by overnight courier or by facsimile with same day
confirmation or by certified or registered mail, return receipt requested, to
Grantors at 3111 North Kenwood Street, Burbank, California 91505 or to
Beneficiary at 520 Madison Avenue, New York, New York 10022, or to such other
addresses as any party may specify to the other parties by like notice.
<PAGE>
IN WITNESS WHEREOF, this Security Agreement has been executed and
delivered by each of the parties hereto by a duly authorized officer of each
such party on the date first set forth above.
ING EQUITY PARTNERS, L.P. I
By: LEXINGTON PARTNERS, L.P.
its General Partner
By: LEXINGTON PARTNERS, INC.
its General Partner
By: /s/ Benjamin P. Giess
----------------------------
Name: Benjamin P. Giess
Title: Authorized Signatory
MATTHEWS STUDIO EQUIPMENT GROUP
By: /s/ Carlos D. DeMattos
-----------------------------
Name: Carlos D. DeMattos
Title: Chairman of the Board &
Chief Executive Officer
MATTHEWS STUDIO SALES, INC.
By: /s/ Carlos D. DeMattos
-----------------------------
Name: Carlos D. DeMattos
Title: President
HOLLYWOOD RENTAL COMPANY, LLC (as
successor by merger to Hollywood
Rental Co., Inc.)
By: /s/ Carlos D. DeMattos
-----------------------------
Name: Carlos D. DeMattos
Title: Chief Financial Officer
<PAGE>
MATTHEWS STUDIO ELECTRONICS, INC.
By: /s/ Carlos D. DeMattos
-----------------------------
Name: Carlos D. DeMattos
Title: Chief Executive Officer
MATTHEWS ACCEPTANCE CORPORATION
By: /s/ Carlos D. DeMattos
-----------------------------
Name: Carlos D. DeMattos
Title: President
DUKE CITY VIDEO, INC.
By: /s/ Carlos D. DeMattos
-----------------------------
Name: Carlos D. DeMattos
Title: President
HDI HOLDINGS, INC.
By: /s/ Carlos D. DeMattos
-----------------------------
Name: Carlos D. DeMattos
Title: Chairman of the Board
FOUR STAR LIGHTING, INC.
By: /s/ Carlos D. DeMattos
-----------------------------
Name: Carlos D. DeMattos
Title: Chief Executive Officer
MATTHEWS STUDIO GROUP CENTERS, INC.
(f/k/a Matthews Medical
Equipment, Inc.)
<PAGE>
By: /s/ Carlos D. DeMattos
-----------------------------
Name: Carlos D. DeMattos
Title: President
KEYLITE HOLDINGS, INC.
By: /s/ Carlos D. DeMattos
-----------------------------
Name: Carlos D. DeMattos
Title: Chief Financial Officer
REEL WHEELS, INC.
By: /s/ Carlos D. DeMattos
-----------------------------
Name: Carlos D. DeMattos
Title: Chief Financial Officer
KEYLITE PRODUCTION SERVICES, INC.
By: /s/ Carlos D. DeMattos
-----------------------------
Name: Carlos D. DeMattos
Title: Chief Financial Officer
DUKE CITY HOLDINGS, INC.
By: /s/ Carlos D. DeMattos
-----------------------------
Name: Carlos D. DeMattos
Title: Chief Executive Officer
FOUR STAR HOLDING, INC.
By: /s/ Carlos D. DeMattos
-----------------------------
Name: Carlos D. DeMattos
Title: President
<PAGE>
Exhibit 21
LIST OF SUBSIDIARIES
OF
MATTHEWS STUDIO EQUIPMENT GROUP
Hollywood Rental Company, LLC
- -----------------------------
State of Formation: Delaware
Names Under Which Subsidiary Conducts Business:
Hollywood Rental Company, LLC
Hollywood Rental Company
Matthews Acceptance Corporation
- -------------------------------
State of Incorporation: California
Names Under Which Subsidiary Conducts Business:
Matthews Acceptance Corporation
MAC
Matthews Studio Electronics, Inc.
- ---------------------------------
State of Incorporation: California
Names Under Which Subsidiary Conducts Business:
Matthews Studio Electronics, Inc.
Matthews Studio Electronics
Duke City Video, Inc.
- ---------------------
State of Incorporation: New Mexico
Names Under Which Subsidiary Conducts Business:
Duke City Video, Inc.
DCDUBS
Duke City Dallas
Duke City Studios
Duke City West
Matthews Studio Group Centers, Inc.
- -----------------------------------
State of Incorporation: California
Names Under Which Subsidiary Conducts Business:
Matthews Studio Group Centers, Inc.
Matthews Studio Group Centers - Nevada, Inc.
Matthews Studio Group Centers - Tennessee, Inc.
<PAGE>
Matthews Studio Sales, Inc.
- ---------------------------
State of Incorporation: California
Names Under Which Subsidiary Conducts Business:
Matthews Studio Sales, Inc.
ESS
ESS International
Expendable Supply Store
HDI Holdings, Inc.
- ------------------
State of Incorporation: Kentucky
Names Under Which Subsidiary Conducts Business:
HDI Holdings, Inc.
HDI
Four Star Lighting, Inc.
- ------------------------
State of Incorporation: New York
Names Under Which Subsidiary Conducts Business:
Four Star Lighting, Inc.
Four Star Stage
Lighting, Inc.
<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 29, 1998, 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, 1998, filed with the Securities and
Exchange Commission.
S/Ernst & Young LLP
Los Angeles, California
January 12, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR YEAR ENDED SEPTEMBER 30, 1998 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-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 331
<SECURITIES> 0
<RECEIVABLES> 10,240
<ALLOWANCES> 1,259
<INVENTORY> 3,783
<CURRENT-ASSETS> 15,782
<PP&E> 77,805
<DEPRECIATION> 26,155
<TOTAL-ASSETS> 94,386
<CURRENT-LIABILITIES> 13,267
<BONDS> 0
7,144
0
<COMMON> 0
<OTHER-SE> 5,051
<TOTAL-LIABILITY-AND-EQUITY> 94,386
<SALES> 27,954
<TOTAL-REVENUES> 61,271
<CGS> 19,184
<TOTAL-COSTS> 39,458
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,801
<INCOME-PRETAX> (826)
<INCOME-TAX> (875)
<INCOME-CONTINUING> 49
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
