-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JtY4neUhSDXemwY5IPmMhwdxea+P71gz3kjtHvjKrGBhsrqfO/pqRYKRn5rsoty0 BJ9zYOJrZIrfZHPIri+KOw== 0000898430-00-000083.txt : 20000202 0000898430-00-000083.hdr.sgml : 20000202 ACCESSION NUMBER: 0000898430-00-000083 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATTHEWS STUDIO EQUIPMENT GROUP CENTRAL INDEX KEY: 0000855575 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 951447751 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18102 FILM NUMBER: 507158 BUSINESS ADDRESS: STREET 1: 3111 N KENWOOD ST CITY: BURBANK STATE: CA ZIP: 91504 BUSINESS PHONE: 8185255200 MAIL ADDRESS: STREET 1: 2405 EMPIRE AVENUE CITY: BURBANK STATE: CA ZIP: 91504 10-K 1 FORM 10-K 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, 1999 Commission file number 0-18102 MATTHEWS STUDIO EQUIPMENT GROUP ------------------------------- (Exact name of registrant as specified in its charter) California 95-1447751 ------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3111 North Kenwood Street, Burbank, CA 91505 -------------------------------------------------------- (Address of principal executive offices) (Zip Code) (818) 525-5200 -------------- (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 [ ] No [X] At December 15, 1999, the aggregate market value of the Registrant's voting stock held by nonaffiliates of the Registrant was approximately $19,930,631. On December 15, 1999, Registrant's outstanding voting stock consisted of 9,994,252 shares of Common Stock, no par value.
TABLE OF CONTENTS PART I PAGE ---- Item 1. BUSINESS...................................................... 1 Item 2. PROPERTIES.................................................... 7 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....................................... 10 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 11 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................... 18 Item 8. FINANCIAL STATEMENTS.......................................... 18 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................ 18 PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT............ 19 Item 11. EXECUTIVE COMPENSATION....................................... 21 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................... 24 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 26 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................................. 27 SIGNATURES................................................................. 28 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE AND REPORT OF INDEPENDENT AUDITORS...................... 29 INDEX TO EXHIBITS.......................................................... 56
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, the Company 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. The Company 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. Beginning in the latter part of fiscal 1998 and continuing throughout fiscal 1999, the major producers of feature films initiated cost reduction practices, and focused on producing smaller budget films (which require less production equipment). Canada, with the benefit of favorable tax treatment and the weak Canadian dollar, has continued to compete for television and feature film production work that traditionally has been serviced by the entertainment production industry located in the Southern California area. Also, Australia recently has become a more effective competitor for motion picture production work through the use of lower costs to attract motion picture producers. These factors resulted in fewer films being shot in the United States and a significant reduction of production equipment needs which, in turn, resulted in greater competition among suppliers to the film industry. Production equipment suppliers responded to these pressures by substantially reducing their rental charges. In this fiercely competitive environment, the Company was forced to either reduce its rental charges or forego certain opportunities. The Company's profit margin from its feature film production equipment business was severely reduced during fiscal 1998 and 1999. Demands for video production services in fiscal 1999 were higher than demands in fiscal 1998. However, throughout fiscal 1999 and the first quarter of fiscal 2000, cost cutting efforts adopted by the video production industry continued and competition from Canadian and Australian video production companies remained strong. These factors also resulted in intense competition among video equipment providers and forced a significant reduction of profit margins. Conditions in the theatrical production business remained relatively constant during fiscal 1999 and 1998, and profit margins for the theatrical equipment rental business of the Company improved during fiscal 1999. Improved results from the theatrical equipment rental business were not sufficient to offset the loss of profit margin from the video equipment rental business and reduced volume experienced by the Company's (feature film) production equipment business. The Company's cash flow declined significantly during fiscal 1999. In addition, while discussions are ongoing, the Company and a potential acquirer of the Company's video equipment rental assets have not come to a definitive agreement on the transaction. In consequence, the Company's independent auditors have expressed a reservation about the Company's ability to continue as a going concern. (See Consolidated Financial Statements.) The Company has reallocated its resources during fiscal 1999 and the first quarter of fiscal 2000 to improve cash flow. The Company has closed or consolidated certain facilities. In addition, the Company has decided to dispose of certain -1- certain assets which do not contribute satisfactorily to profit or which can generate significant cash upon disposition. The Company intends to use proceeds from these sales to reduce bank debt and other debt. As noted, the Company has been in discussions with certain parties to sell the video equipment rental business conducted by the Company's Duke City Video, Inc. ("Duke City") subsidiary. Currently there is no firm commitment from any party, but the Company is continuing its negotiations with the goal of effecting a sale in the near future. The Company intends to use proceeds from a sale of this business to satisfy obligations that specifically apply to the business and then to reduce bank and other debt. The Company's management is devoting significant time and effort toward this goal. A sale of this business is subject to the consent of the Company's lenders. However, there is no assurance that the Company will succeed in effecting such a sale or that such a sale will be accomplished in the near future. The Company also has been reviewing offers for a possible sale of the theatrical equipment rental business conducted by its Four Star Lighting, Inc. ("Four Star") subsidiary. The Company intends to use proceeds from the sale to reduce bank and other debt. However, if offers received do not meet the minimum conditions established by the Company, the Company will reconsider its position with respect to selling the Four Star theatrical equipment rental business. A sale of this business is also subject to the consent of the Company's lenders. There is no assurance that the Company will succeed in its efforts to sell this business or that a sale will be consummated in the near future. Parallel with the efforts to dispose of certain businesses, the Company has been seeking equity financing to fund its operations. However, the Company's operating results for fiscal 1998 and 1999 may make obtaining such financing difficult. The Company's operating results in fiscal 1999 resulted in its inability to comply with certain financial covenants in its primary credit facilities. The Company's lenders have waived the non-compliance through September 30, 1999 and have amended the credit facilities to reset certain financial covenants going forward. As part of the amended terms of the credit facility, the bank lenders have required that the Company's term loan (of which $14,000,000 is outstanding as of September 30, 1999) be repaid from the proceeds of the sale of certain assets expected in fiscal 2000 and that the revolving credit facility ($55,830,000 outstanding as of September 30, 1999) mature on January 31, 2001. Also, if the Company were to sell its video or theatrical operations prior to June 1, 2000, the Company's revolving credit facility will be reduced from $61,000,000 to $57,000,000 and $40,000,000, respectively. In consequence, the Company will be negotiating with the bank lenders to roll the facility over. However, there is no assurance that the Company will succeed in doing so. While Company management and personnel are focused on cost cutting efforts as well as the sale of certain businesses and raising of equity financing, there is no assurance that the Company will succeed in accomplishing any or all of its goals. 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. -2- Rental Equipment Production Equipment, Including Grip, Lighting and Power Generation. Hollywood Rental Company, LLC and HDI Holdings, Inc. (collectively "HRC"), both wholly- owned subsidiaries of 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 basis. 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 to 3,000 amp tow generators to support the power demands required in production environments. HRC has facilities in Burbank, California; Orlando, Florida; Charlotte, North Carolina; Salt Lake City, Utah; Cleveland and Cincinnati, Ohio; Louisville, Kentucky; Knoxville, Tennessee and Dallas, Texas. HRC's Orlando, Florida facility is adjacent to the Disney/MGM production facilities. 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"). In fiscal 1996, HRC commenced long-term equipment management and marketing arrangements with Seattle-based Jonas Jensen Studios, Inc. and Nashville-based D R & A, Inc., whereby these dealers managed an inventory of equipment on behalf of the Company. Due to the decreased film production in the U.S. previously discussed, the Company discontinued these arrangements during fiscal 1999. HRC's rentals vary from short periods of time to the complete duration of the filming of a feature film or television series. HRC generally issues its invoices for these rentals weekly. The lessee typically is responsible for the loss, damage or destruction, whether by fire, other casualty or accident, of such equipment, and in the event of damage, the lessee also ordinarily agrees to pay the accrued rental plus the cost of necessary repairs. HRC's usual procedure is to require its lessees to furnish a certificate of insurance providing for comprehensive coverage, including liability, injury and property damage. HRC's rental activities accounted for approximately 26.3 percent of the Company's revenues in fiscal 1999. Theatrical Production Equipment. In April 1998, the Company added theatrical production equipment rental to its business, through the acquisition of 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. During fiscal 1999, Four Star's operations expanded to target the large theatrical "Broadway-type" productions in Las Vegas, Nevada. Rental terms for Four Star vary with the duration of the shows it supports and in some cases extend beyond one year. Four Star generally issues its invoices for these rentals weekly. The lessee typically is 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 19.8 percent of the Company's revenues in fiscal 1999. As discussed above, the Company is reviewing offers for the sale of Four Star. -3- Professional Broadcast Video Equipment. Duke City was acquired by the Company in 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 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 operating outlets located in Dallas, Texas and Burbank, California. 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 19.4 percent of the Company's revenues in fiscal 1999. As discussed above, the Company has been in discussions to sell the Duke City business. 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 served as a director of the Company until September 1999. 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 less than one percent of the Company's revenues in fiscal 1999. ShowbizMart.com On June 21, 1999, the Company launched its internet web site called "ShowbizMart.com". The primary purpose of this web site is to expand the Company's ability to market its products and services through business-to- business e-commerce. In addition, the web site contains segments for business- to-consumer marketing, which initially has been focused on auctions and sales of entertainment related memorabilia and merchandise. The Company continues to develop ShowbizMart.com with the goal of making this web site the entertainment industry's "one stop shop", comprehensive online resource for production news, information, professional equipment and expendables, as well as consumer- oriented merchandise. Showbizmart.com is also designed to facilitate entertainment production coordination and planning throughout North America. The products and services offered through ShowbizMart.com to the entertainment production and consumer markets are listed below: Entertainment Production Services: -4- . Equipment and expendable sales; . Online auctions of new and used production equipment; . Full service production capability; . National directories of production crews, suppliers, locations, and licensing sources; . Other value-added services including shipping, financing, and travel arrangements; and . Industry-related news, training, and safety information. Consumer Entertainment Services: . Proprietary props and industry memorabilia auctions; . Entertainment industry-related merchandise sales; . Entertainment industry news, editorial, and interactive services; and . Behind-the-scenes production information. Revenues from ShowbizMart.com accounted for less than one percent of the Company's revenues during fiscal 1999. -5- Matthews and other third party suppliers, (v) associate and referral programs with other web-based vendors with processing and fulfillment capability, (vi) full production services packaging, (vii) wholesale distribution of licensed merchandise and memorabilia, (viii) direct marketing via third party relationships. 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 the assets of Hollywood, California-based Olesen, the Company added theatrical supplies and products to its product sales in fiscal 1998. These supplies are sold by Matthews Studio Sales, Inc. (also known as Expendable Supply Sales or ESS), from facilities in Hollywood and Burbank, California; Charlotte, North Carolina; and Orlando, Florida. Sales from these supplies accounted for approximately 34.1 percent of the Company's revenues in fiscal 1999. Marketing The Company's rental equipment is rented through representatives employed by the Company. 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 percent of the Company's purchases in fiscal 1999. 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 for 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 equipment 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 rental companies. The Company believes that its domestic and international marketing network and the quality of its products allow it to compete favorably in each of its business lines other than video equipment rental. 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 enable the Company to effectively compete in the entertainment production industry 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. -6- 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 Company expects that its computer systems will function properly with respect to dates in the Year 2000 and thereafter. The Company presently believes that with the upgrades it installed, the Year 2000 issue will not pose significant operational problems for its computer systems. The Company did not incur any significant costs for Year 2000 upgrades, as most of its systems were either Year 2000 compliant or were capable of being upgraded without significant expense. The Company has communicated 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 have been converted and will 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. Employees The Company had approximately 292 employees at September 30, 1999 (284 full- time, eight part-time). Four Star's employees (approximately 34) are represented by the International Alliance of Theatrical Stage Employees, AFL- CIO, and Four Star has entered into contractual arrangements with such union in respect of its employees in New York and in Los Angeles which expire in December 31, 2002 and January 31, 2001, respectively. ITEM 2. PROPERTIES In May 1997, the Company relocated its corporate and principal rental and sales offices to a facility 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 174,000 square feet of sales office, warehouse and showroom space in (i) Burbank and Hollywood, California, (ii) Dallas, Texas, (iii) Charlotte, North Carolina, (iv) Las Vegas, Nevada, (v) Knoxville, Tennessee, (vi) Louisville and Covington, Kentucky, (vii) Mount Vernon, New York, (viii) Salt Lake City, Utah, (ix) Orlando, Florida and (x) Cincinnati, Ohio at an aggregate monthly rent of approximately $60,000. During fiscal year 1997, the Studio Electronics operation, which is managed by Nettmann, was relocated to a facility leased by Nettmann from an unrelated party. The Company reimburses 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, soundstage, and studio in Covington, Kentucky and Cincinnati, Ohio, from an affiliate of HDI Holdings, Inc. at an aggregate monthly rent of approximately $31,000. See Item 13, Certain Relationships and Related Transactions. 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. See Item 1, Business. The Company also acquired, as part of the Four Star acquisition, land and a building located in Los -7- Angeles, California which consists of office and warehouse space. This property was sold to an unrelated party on November 30, 1999. 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 The Company's annual meeting of shareholders was held on September 22, 1999. At the meeting, votes were held on the election of directors and approval of the Company's 1999 Performance Plan. The 1999 Performance Plan, which is intended to provide additional incentives for the Company's Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, provides for the issuance of non-qualified options for a total of 900,000 shares of common stock. Votes cast for, against, or withheld, as well as abstentions and broker non-votes, as to each of the matters considered at the annual meeting are set forth below. -8- Election of Directors The number of votes cast for each nominee and number of votes withheld is set forth below.
Name For Withheld ---- --- -------- Carlos D. DeMattos 5,397,531 36,600 John A. Alonzo 5,397,531 36,600 Francis W. Costello 5,397,531 36,600 Jerome E. Farley 5,397,531 36,600 Benjamin P. Giess 5,397,531 36,600 Anil Sharma 5,397,531 36,600 Frederick W. Whitridge, Jr. 5,397,531 36,600
Approval of 1999 Performance Plan
For Against Abstain Broker Non-Votes --- ------- ------- ---------------- 5,276,875 151,256 6,000 0
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." The Company's common stock was moved to the Nasdaq SmallCap Market as a result of The Nasdaq Stock Market's inquiry into whether the Company met all requirements for continued listing on the Nasdaq National Market. As of December 15, 1999, there were 9,994,252 shares of common stock outstanding, held by approximately 180 shareholders of record. The Company believes there are in excess of 2,114 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:
(High) (Low) (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 (Fiscal year 1999) December 31, 1998 $ 3 1/2 $ 1 3/4 March 31, 1999 7 1/8 2 7/8 June 30, 1999 10 7/8 4 1/8 September 30, 1999 9 3/4 3 5/8 (First Quarter Fiscal Year 2000) $3 1/8 2 15/16
-9- 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, 1999 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.
SELECTED FINANCIAL DATA (in thousands, except per share data) 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- Revenues from rental operations $ 39,434 $ 33,317 $25,589 $14,125 $12,797 Net product sales 20,368 27,954 20,769 16,079 14,554 -------- -------- ------- ------- ------- Total revenue 59,802 61,271 46,358 30,204 27,351 Gross profit - rental operations 13,526 13,043 11,070 6,109 5,301 Gross profit - sales 3,560 8,770 6,688 5,822 4,562 -------- -------- ------- ------- ------- Total gross profit 17,086 21,813 17,758 11,931 9,863 Income (loss) before extraordinary item (Footnote 2) (20,172) 49 1,706 1,003 208 Net income (loss) (Footnote 2) (20,172) 49 1,512 1,003 (2,020) Net income (loss) per common share - basic (Footnote 2): Income (loss) before extraordinary item $ (2.17) $ 0.00 $ 0.16 $ 0.10 $ 0.02 Extraordinary item - - (0.02) - (0.22) Net income (loss) per share (2.17) 0.00 0.14 0.10 (0.20) Net income (loss) per common share-diluted (Footnote 2): Income (loss) before extraordinary item (2.17) 0.00 0.15 0.10 0.02 Extraordinary item - - (0.02) - (0.22) Net income (loss) per share (2.17) 0.00 0.13 0.10 (0.20) Cash provided by (used in) operations $ 2,908 $ 4,669 $ 2,216 $ 4,698 $(1,168) Cash used in investing activities (12,840) (42,420) (9,476) (5,789) (3,177) Cash provided by financing activities 9,991 37,689 7,191 1,115 4,048 EBITDA from operations (Footnote 1) 11,550 14,011 9,650 6,043 4,849 Total assets (Footnote 2) 91,227 94,386 61,871 34,484 30,703 Working capital (Footnote 2) (10,303) 2,515 9,662 7,953 7,872 Net property and equipment (Footnote 2) 54,168 51,650 35,187 20,339 17,226 Long term debt and capital lease obligations (Footnote 2) 83,111 74,691 36,715 18,914 17,664 Shareholders' equity (accumulated deficit) (Footnote 2) (16,571) 2,613 11,170 9,074 8,054
/1/ EBITDA represents earnings before taxes, interest expense, depreciation and amortization. The EBITDA for 1999 excludes $9,228,000 of non-recurring charges described in Item 7, Management's Discussion and Analysis of Financial Condition and Results -10- of Operations. 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 tran saction. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview During fiscal 1999, the Company incurred a net loss of $20,172,000. This loss resulted from a combination of factors, the most significant of which were "runaway productions" (fewer feature films whose principal photography was conducted in the United States), shrinking margins, increased interest costs and write-downs of long-term assets (principally goodwill). See Item 1, Business, for further discussion of the Company's recent operations and the fact that the Company's independent auditors have added a paragraph to their auditors' report expressing doubt regarding the Company's ability to continue as a going concern. Also contributing to the net loss, but to a lesser extent, were provisions for costs to shut down certain of the Company's facilities, and settlement of a litigation matter in the fourth quarter. The combination of the shrinking marketplace, increased competition and operating loss has caused the Company to re-examine its allocation of resources. Among other actions, the Company has decided to close or consolidate certain facilities and attempt to dispose of certain assets which do not contribute satisfactorily to profit, or which can generate significant cash upon disposition to reduce bank debt and related interest. This reallocation of resources will continue at least into the second quarter of fiscal 2000. See Item 1, Business. The Company's operating results in fiscal 1999 resulted in its inability to comply with certain financial covenants in its principal credit facilities. The bank lenders have waived the non-compliance through September 30, 1999 and have amended the Credit Agreement to reset certain financial covenants. However, the bank lenders have also imposed accelerated maturity dates for the borrowings under the facility. See "Liquidity and Capital Resources -- The Senior Secured Credit Facility". Year ended September 30, 1999, compared to year ended September 30, 1998 - -------------------------------- Revenues from Rental Operations Revenues from rental operations increased $6,117,000 from $33,317,000 to $39,434,000. This increase was largely the result of the following factors: a full year's operation of the theatrical rental operations acquired in the third quarter of fiscal 1998, which increased from $5,250,000 in 1998 to $11,480,000 in 1999, an increase of $1,689,000 from the video rental operations from $9,938,000 to $11,627,000, offset slightly by a decrease in rentals from production equipment from $17,783,000 to $15,729,000. Rentals from production equipment were impacted by the trends of feature film production being done outside of the United States and of smaller budget productions which require less production equipment. -11- Equipment and Product Sales Net sales decreased $7,586,000 from $27,954,000 to $20,368,000. Sales of equipment decreased due to the disposition of Matthews Studio Equipment, Inc., which manufactured grip equipment, in September of 1998 (also referred to herein as the sale of the "Manufacturing Operations"). Sales by the Manufacturing Operations in fiscal 1998 were $13,452,000. Sales of theatrical equipment and expendable supplies increased $5,866,000 in 1999, partially offsetting the loss of sales from the Manufacturing Operations. This increase was primarily attributable to the Company's Las Vegas, Nevada facility, which opened in late fiscal 1998. Gross Profit - Rental Gross profit on rental revenues was 34 percent in fiscal 1999 as compared to 39 percent in fiscal 1998. The gross profit percentages from rentals of production equipment was 33 percent in 1999 as compared to 41 percent in 1998, video equipment was 12 percent in 1999 as compared to 23 percent in 1998, and theatrical equipment was 58 percent in 1999 as compared to 35 percent in 1998. Intense competition and a smaller overall marketplace contributed to the decline of production and video equipment rental margins. Theatrical rental margins improved partly due to the acquisition of new contracts, which increased revenues. The increased revenues offset increased depreciation expenses and defrayed other common costs, resulting in higher margins. Gross Profit - Sales Gross profit on sales of theatrical equipment and expendable supplies, as a percentage of gross sales, was 17 percent in fiscal 1999 versus 31 percent in fiscal 1998. This decrease is due to the absence of sales by the Manufacturing Operations in fiscal 1999, and a correspondingly higher proportion of expendable supply sales, which historically have had low margins. In addition, start-up costs for the Las Vegas facility negatively impacted gross margins, as did the discounts necessary to develop relationships with new Las Vegas hotels. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses increased from $20,801,000 in 1998 to $26,102,000 in fiscal 1999. The 1999 expenses, however, include costs of approximately $1,500,000 to settle a litigation matter which arose during the fourth quarter of fiscal 1999, and costs of approximately $1,058,000 associated with the shut down of a facility. The provision for shut down of the location includes the accrued costs of closing a facility, severance costs and the write-down of certain assets to expected realizable value. The $1,500,000 litigation settlement costs include the value of 400,000 restricted shares of the Company's common stock issued as part of the settlement, as well as a cash payment of $128,000. Excluding these one-time charges, the SG&A expenses increased $2,743,000, which mainly reflect a full year of SG&A costs from the Four Star operation acquired in fiscal 1998, and costs associated with the start-up of ShowbizMart.com. Goodwill and Long-Lived Assets Impairment As a result of management's review of certain previously acquired operations, the current business environment of these acquired operations and their continued operating losses in fiscal year 1999, the Company performed an impairment review of its long-lived assets. Based on this review and future revenue and cash flow projections, the Company believes that certain long-lived assets have been impaired. The Company determined that the estimated fair value was below the carrying value of these long-lived assets. Accordingly, in the fourth quarter of fiscal 1999, supplemental depreciation of long-term assets and amortization of goodwill pursuant to Statement of Financial Accounting Standards No. 121 was recorded as impairment charges of $5,501,000, for the write-down of goodwill, and $552,000 for the write-down of fixed assets and deferred charges. -12- Interest Interest expense for fiscal 1999 was $7,705,000 as compared to $5,836,000 in fiscal 1998. This 32 percent increase was the result of both higher average balances of debt outstanding in fiscal 1999, and higher interest rates, in fiscal 1999. The Company is committed to reducing its outstanding debt in fiscal 2000, generally with proceeds from sales of the video and theatrical operations, as discussed in Item 1, Business. Income Taxes The Company recognized a benefit for income taxes of $2,531,000 in fiscal 1999 as compared to a benefit of $875,000 in fiscal 1998. This increase is the result of the pre-tax loss offsetting the tax effect of substantially all of the reversals of book/tax timing differences recorded in prior years. Results of Operations 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 percent 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 percent 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. Net Product Sales Net equipment and supply sales for fiscal 1998 were $27,954,000, an increase of $7,185,000 or 35 percent from $20,769,000 in fiscal 1997. Equipment sales increased by $2,866,000 or 21 percent 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 percent in fiscal 1998 and 43 percent 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 three percent in fiscal 1998 to 41 percent, from 44 percent in fiscal 1997. Lower revenues and increased fixed costs such as depreciation expense contributed to the decline in gross margin. Depreciation expense increased by $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. -13- Gross Profit - Sales Gross profit, as a percentage of sales, was 31 percent in fiscal 1998 as compared to 32 percent 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 percent in fiscal 1998 compared to 27 percent in fiscal 1997. The dollar increase was 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 have been 36 percent and 27 percent 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 related to the traits of specific operations acquired and Company's overall expansion efforts. First, relative to the original operations of the Company, 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 1998 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 caused increased levels of operating expenses. Interest Interest expense for fiscal 1998 was $5,836,000, an increase of $3,073,000 or 111 percent from $2,763,000 in fiscal 1997. The increase was 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 percent. 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. Liquidity and Capital Resources During its fiscal year ended September 30, 1999 the Company incurred a net loss of $20,172,000. This amount included approximately $9,228,000 of non-recurring and non-cash charges discussed above under "Results of Operations." As the Company has little cash or cash equivalents, it is heavily dependent on its lenders to fund working capital and investing activity needs. During fiscal 1999 the Company augmented its financing activities by issuing a $10,000,000 Convertible Senior Subordinated Note to ING. As presented in the Company's Consolidated Financial Statements, expenditures for investing activities have exceeded cash inflows from operations for each of the last three years. This is one reason the Company has decided to dispose of certain assets which require significant capital -14- expenditures. The net loss resulted in the Company not being in compliance with certain financial covenants of its senior credit facilities. The lenders have waived the covenant violations for the period ended September 30, 1999 and have reset certain financial covenants for the remaining term of the credit facilities. However, the Company's future compliance with the amended covenants is based, in part, on the expectation that the Company will successfully execute its cost control efforts and will generate cash proceeds from the disposition of certain of its assets, of which there can be no assurance. The bank lenders have also imposed a shorter maturity date for such facilities. The Company intends to improve its financial condition principally through disposition of certain assets of the video and/or theatrical operations and the raising of equity capital. See Item 1, Business. Company management and personnel are devoting significant time and effort toward these goals. The Company will also seek to refinance its senior credit facility. However, there is no assurance that the Company will succeed in accomplishing any or all of these goals. In addition, the Company intends to curb the level of rental asset purchases to improve its working capital and liquidity; however, this action could have a material adverse effect on future operations. The Senior Secured Credit 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 "Senior Secured Credit 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, 1999, the Senior Secured Credit Facility included a $16,000,000 term loan, of which $14,000,000 was outstanding, and a revolving credit facility of up to $61,000,000 pursuant to which $69,830,000 in the aggregate was outstanding. Pursuant to an amendment made in January 2000, the Senior Secured Credit Facility matures January 31, 2001. Pursuant to the January 2000 amendment, the Company is required to repay the term loan in full from the proceeds of the sale of certain assets expected in fiscal 2000 (of which there can be no assurance that such events will occur). In addition, on that date, the revolving credit facility also is to reduce to $40,000,000. In the event that prior to June 1, 2000, the Company disposes of its video operations, the revolving credit facility is to reduce to $57,000,000, and in the event that prior to June 1, 2000, the Company disposes of its theatrical operations, the revolving credit facility is to reduce to $40,000,000. The Senior Secured Credit Facility, as amended, requires the Company to maintain certain levels of net worth and EBITDA (earnings before interest, taxes, depreciation and amortization), and to meet several financial ratios, as amended, (including interest coverage, leverage and debt service coverage ratios as defined in the agreement). The Senior Secured Credit Facility also imposes capital expenditure limitations. As amended, interest under the facility accrues at a rate, depending on the Company's leverage ratio (as defined in the Senior Secured Credit Facility), equal to the greater of (i) Chase Bank's Prime Rate plus a maximum of 1.50%, (ii) the Base CD Rate (as determined by Chase Bank) plus a maximum of 2.50% or (iii) the Federal Funds Effective Rate plus a maximum of 2.00%. 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. Interest is payable quarterly. Prior to the January 2000 amendment, the Company had the option of using a LIBOR based rate, which yielded a lower interest rate. A LIBOR based interest rate will be available again only when the term loan is fully repaid or the Company disposes of certain assets of its theatrical operations. Borrowings under the Senior Secured Credit 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. The Company intends to apply proceeds from any sale of certain assets of its video and/or theatrical operations to the reduction of the Senior Secured Credit Facility. It will also attempt to raise additional equity financing, although that may be difficult in light of recent operating results and there is no assurance that such efforts will be successful. The Company will also seek to negotiate with the lenders to extend the Senior Secured Credit Facility when it matures at January 31, 2001. There is, however, no assurance that the lenders will agree to extend the facility over at maturity. -15- 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 percent 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. 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. Interest on the remaining $100,000 subordinated note is at the rate of 10.00 percent until its maturity. The ING Warrant, as amended, requires 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"). Accordingly, effective January 1, 2000, the exercise price under the ING Warrant was reduced to $2.00 per share. The Company is in negotiations to amend the Purchase Agreement to reset financial covenants, including annual capital expenditure limits, required thereunder to be similar to those required under the Senior Secured Credit Facility. 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 entitling the holders of the ING Warrant to certain demand and piggyback 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 1.4 million shares of common stock of the Company acquired by ING from a former employee of the Company. The Stockholders Agreement has been further amended to require that the Company's Board of Directors will have no less than seven and no more than nine members. The Registration Rights Agreement also granted piggyback registration rights to Sutro & Co. Incorporated ("Sutro"), which acted as the Company's investment bankers in connection with the transaction with ING, with respect to a common stock purchase warrant for 100,000 shares of the common stock. Sutro has fully exercised this warrant. In addition, as part of the transaction with ING, in July 1995 the Company, Carlos D. DeMattos and Edward Phillips and their affiliates ("Management Stockholders") entered into a Stockholders' Agreement with ING (the "Stockholders Agreement") pursuant to which the Company and the Management Stockholders 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 Stockholders. In addition, the Stockholders Agreement was amended in April 1996 to provide that the obligations of the Management Stockholders, 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 occurs, in which case those obligations will terminate. 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 percent 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. -16- As part of a January 1999 amendment to the Senior Secured Credit Facility, ING caused ING (U.S.) Capital LLC to issue in favor of the lenders under the Amended Senior Secured Credit Facility a $3 million letter of credit. The letter of credit was cancelled in June 1999 in connection with ING's purchase of a $10,000,000 Convertible Senior Subordinated Note from the Company. (See discussion below --The ING Equity Partners L.P. I $10,000,000 Convertible Senior Subordinated Notes.) 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 were subject to cancellation if the Company met certain financial covenants. However, as discussed below with respect to the $10,000,000 Convertible Senior Subordinated Note purchased by ING, these warrants will remain outstanding. The ING Equity Partners L.P. I $10,000,000 Convertible Senior Subordinated Notes On June 30, 1999, the Company sold $10,000,000 of convertible senior subordinated notes ("ING Notes") to ING Equity Partners, L.P. I. The ING Notes are secured by a junior and subordinated general security interest in the Company's and its subsidiaries' assets, will mature on June 30, 2005, and bear interest at 12 percent for the first year and 18 percent thereafter. At the Company's option, interest on the ING Notes may be paid in cash or in kind (i.e., by the issuance of additional notes similar to the ING Notes). As of September 30, 1999, the balance of the ING Notes was $10,300,000, including accrued interest. However, in the event of an equity offering by the Company which results in gross proceeds of $25,000,000 (including the converted ING Notes, as discussed below) or more on or prior to June 30, 2000 (a "Qualified Equity Offering"), the principal amount of the ING Notes then outstanding plus accrued and unpaid interest thereon will automatically convert into shares of common stock of the Company at the subscription price to investors in such Qualified Equity Offering. If a Qualified Equity Offering has not been consummated on or prior to June 30, 2000, the Company will issue to the holders of the ING Notes 500,000 warrants to purchase common stock at $0.01 per share, for each $10,000,000 of principal outstanding under the ING Notes. In connection with this ING Notes transaction, the Company and ING agreed that warrants to purchase 150,000 shares of common stock issued as partial consideration for the letter of credit will not be cancelled but will remain outstanding. 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 2000, and beyond, to differ materially from those expressed in any forward- looking statements made by, or on behalf of, the Company: -17- The entertainment production industry in Southern California in the last couple of years has experienced a slowdown in activity, especially in comparison to the growth pace experienced during 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 industries. 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, 1999 and 2000 seems to be to produce motion pictures with a smaller budget and decreased use of special effects. This industry-wide trend will have the effect of decreasing the need for production equipment, which in turn has resulted 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 2000, 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 has permitted and may continue to permit Canada to attract an increasing level of production work in the future. Australia recently has become a more effective competitor for motion picture production work. Australia is also using lower costs as a tool to attract motion picture producers. Australia's highly diverse terrain of cities, deserts, mountains and jungles also has proven to be a significant attraction for motion picture producers. While Canada remains an aggressive and effective competitor for thin-profit productions on tight shooting schedules such as television movies, Australia has been able to lure certain large budget motion picture productions that can afford to spend months on location. The Australian entertainment production industry also seems focused on expanding its competitive niche. The Company is focused on improving its liquidity and cash flow through the sale of certain operations and the raising of equity financing. However, the current difficult industry environment, and other factors, may prevent the Company from effecting any sale. Also, the current difficult industry environment and the Company's operating results for fiscal 1998 and 1999 may make it difficult for the Company to raise equity financing. While the Company will seek to rollover or refinance the Senior Secured Credit Facility, there is no assurance that the Company will be able to do so. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations) ITEM 8. FINANCIAL STATEMENTS The required financial statements are listed in the Index at Item 14(a). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -18- PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
(Name) (Age) (Position) ------ ---- --------- Carlos D. DeMattos/(1)//(3)/ 47 Chairman of the Board Anil Sharma/(3)/ 48 Director, President and Chief Financial Officer Jerome E. Farley/(1)//(2)/ 61 Director Benjamin P. Giess/(1)//(3)/ 37 Director John Alonzo/(2)/ 65 Director Francis W. Costello 53 Director Frederick W. Whitridge/(1)//(2)/ 44 Director Carly Barber 44 President of HRC Darren DeVerna 39 President of Four Star
/(1)/ Member of Audit Committee /(2)/ Member of Compensation/Stock Option Committee /(3)/ Member of Executive Committee The term of office of all directors is until the next annual shareholders meeting, and the term of office of all officers is for one year and until their successors are chosen and qualify. Messrs. Francis W. Costello, Anil Sharma and Frederick W. Whitridge, Jr. were duly elected as Board members at the 1999 annual shareholders meeting on September 22, 1999. 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. 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 -19- 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. 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. Francis W. Costello has been a partner in the law firm of Whitman Breed Abbott & Morgan LLP since 1982 and is a member of that firm's Executive Committee. He has been resident in the firm 's Los Angeles office since 1976 and is Chairman of its Corporate Department. He is a member of the New York and California State Bars. Mr. Costello has Bachelor's and Law Degrees from Columbia University and currently serves as a Director of a number of privately held corporations, including JTB Americas, Inc., Japan Travel Bureau International, Inc., Sunritz Corporation and Oregon Central Corporation. Darren DeVerna, President, Four Star. Mr. DeVerna has been the President of Four Star since April 1, 1998. For the three years prior to April 1998, 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. Jerome E. Farley has served as a director of the Company since April, 1994. He is President and Chief Executive Officer of Western Security Bancorp, a bank holding company. Continuously since December 1992 he has also been President, Chief Executive Officer and a director of Western Security Bank, a National Banking Corporation. From 1981 through most of 1992, Mr. Farley was a director and an executive officer of First Regional Bank. From 1979 to 1997 Mr. Farley has been a director of Regional Properties, Inc., a real estate development company, principally active in Riverside County, California. Mr. Farley has been a member of the State Bar of California since 1973. From 1973 through 1985 he was general counsel to a number of subsidiaries of City Investing Company, which was listed on the New York Stock Exchange. Mr. Farley has been a professor at the Pepperdine University School of Business and Management since 1984. Benjamin P. Giess was elected a director of the Company in September 1995. He has been employed by Hampshire Equity Partners, formerly 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 of 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. Mr. Giess has an undergraduate degree from Dartmouth College and an MBA from the Wharton School of the University of Pennsylvania. Anil Sharma was appointed President and Chief Financial Officer of the Company on December 1, 1999. Prior to December 1, 1999, Mr. Sharma served as the Executive Vice President, Chief Financial Officer and a Director of Raleigh Enterprises. Raleigh Enterprises is a Santa Monica based, privately owned company with over 40 years of operation in records management, luxury hotels, and film, television and commercial production. Mr. Sharma has more than 20 years of experience in entertainment, real estate investment and development, luxury hospitality and records management. Mr. Sharma has a Bachelor's Degree in Hotel Administration and Behavioral Sciences and a Masters of Business Administration, with honors, from De Paul University in Chicago. Mr. Sharma has been a visiting lecturer at Cornell University in Chicago. He is also a Certified Public Accountant. -20- Frederick W. Whitridge, Jr. is the President, founder and majority shareholder of Archipelago Corporation, which is in the business of investing in other companies and providing merger and acquisition services. From 1988 to 1993, he held various positions with Investor International (U.S., Inc.), the North American office for Sweden's Wallenberg Group, Inc., including the position of President and Chief Investment Officer. Mr. Whitridge holds a Bachelor's Degree from Yale University and a M.P.P.M. degree from the Yale School of Management. Since November 1996, he has been a director of Adaptive Broadband, a Nasdaq National Market company which produces microwave radio products. 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 ten 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, 1999, 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 or Mr. Darren DeVerna. The form filed by Mr. John D. Murray with respect to 225,000 options to purchase the Company's Common Stock granted in October 1998, was filed after its due date; and the Form 3 filed by Mr. Alan S. Unger with respect to 120,000 options to purchase the Company's Common Stock granted in November 1998, was filed after its due date. 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, 1999, 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 $100,000 (the "Named Executive Officers"): -21-
SUMMARY COMPENSATION TABLE Long Term Compensation Annual Compensation Awards Payouts ------------------- ------------- --------- Name and Principal Year Salary Bonus Other Restricted Securities LTIP All Other Position ($) ($) Annual Stock Underlying Pay-outs Compen- Compen- Awards Options/ ($) sation* sation ($) ($) SARs (#) ($) - --------------------------------------------------------------------------------------------------------------------------------- Carlos D. DeMattos, 1999 458,440 - - - - - 2,954 Chairman 1998 413,244 - - - 100,000 - 1,816 1997 351,421 140,568 - - - - 1,230 John Murray, 1999 211,653 - - - 225,000 - 3,131 Chief Operating Officer/(1)/ Alan Unger, 1999 111,056 - - - 120,000 - 60 Chief Financial Officer/(2)/
(1) John Murray resigned from the position of Chief Operating Officer on September 22, 1999 but remains as an employee of the Company. (2) Alan Unger resigned from the Company prior to the end of fiscal 1999. *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, 1999, to the Named Executive Officers.
OPTION GRANTS FOR THE YEAR ENDED SEPTEMBER 30, 1999 - --------------------------------------------------------------------------------------------- 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% - --------------------------------------------------------------------------------------------- John Murray 225,000 70% $2.94 2004 $225,000 $510,000
As of October 1, 1999, only 75,000 of these options remained outstanding and were fully vested at that date. -22- The following table shows the value of options with respect to each of the Named Executive Officers based on the difference between the exercise price and the closing price on September 30, 1999, as reported by Nasdaq.
OPTION EXERCISES AND FISCAL YEAR END VALUE TABLE Name Shares Acquired ($) 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 - - 233,333 (E)/ 408,667 (E)/ 66,667 (U) 17,333 (U) John Murray - - - (E)/ - (E)/ 225,000 (U) 463,500 (U) - -----------------------------------------------------------------------------------------------------------------------------------
Total compensation for executive officers consists of a combination of salaries, bonuses, stock options 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. On September 22, 1999, the Company's shareholders and the Board of Directors approved the 1999 Performance Plan, which provides for the issuance of up to 600,000 non-qualified options to the Company's Chief Executive Officer, 200,000 options to the Company's Chief Operating Officer and 100,000 options to the Company's Chief Financial Officer. This plan is administered by the Company's Compensation/Stock Option Committee. The committee will determine the number of options to be granted to any particular officer and the performance goals to be met in order for options to vest. Options when granted will have an exercise price equal to the market price of the Company's common stock on the date of grant. As of January 13, 2000, no options have been granted under this plan. 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 six percent of compensation (not to exceed $10,000 annually). The Company matches from 20 percent to 50 percent 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 Stock Option Plan for Directors provides that each independent Director is to receive options to purchase 15,000 shares of Common Stock upon election of the Board of Directors. Under the terms of such plan, such options become 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 -23- 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. On September 22, 1999, the Stock Option Plan for Directors was amended to increase the exercise period after a director ceases to be a director from thirty to ninety days. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) The table below shows as of December 15, 1999 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 percent 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:
Name and Address of Number of Shares Percentage of Beneficial Owner/(1)/ Beneficially Owned Common Stock/(5)/ - -------------------- ----------------- Carlos D. DeMattos/(2)/ 2,083,117/(6)/ 20.3% Jerome E. Farley 20,000/(7)/ * Benjamin P. Giess/(3)/ 4,592,464/(8)/ 35.9% ING Equity Partners, L.P. I/(4)/ 4,592,464/(9)/ 35.9% John H. Alonzo 20,000/(10)/ * Francis W. Costello 0 - Anil Sharma 0 - Frederick W. Whitridge, Jr. 0 - - ---------------------------------------------------------------------------------------------------------------- All officers and directors as a group 6,715,581 51.4% (nine persons) - ----------------------------------------------------------------------------------------------------------------
*Less than one percent (1) Unless otherwise noted, all shares are beneficially owned and the sole voting power is held by the person indicated. (2) This individual's address is: c/o Matthews Studio Equipment Group, 3111 North Kenwood Street, Burbank, California 91505. (3) This individual's address is: 520 Madison Avenue, 33rd Floor, New York, New York 10022. (4) This company's address is: 520 Madison Avenue, 33rd Floor, New York, New York 10022. (5) Based on 9,994,252 shares outstanding. For purposes of calculating a holder's ownership percentage, warrants and options held by that holder are counted on an as if exercised basis. (6) Includes 1,547,450 shares owned by a family trust with trust management vested in the named director as the trustee and 69,000 shares in name of the director. Includes options to purchase 266,667 shares of the Company's common stock. (7) Represents options to purchase 20,000 shares of the Company's common stock. (8) 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 -24- 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 (9). (9) 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. Includes other warrants to purchase 450,000 shares of the Company's common stock. Also includes options issued to ING Equity Partners, L.P. I, to purchase 20,000 shares of the Company's common stock, as consideration for services of its appointee, Mr. Giess. (10) Represents 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 Note 9 above and Item 7 hereof with respect to the ING Notes. Employment Agreements DeMattos Agreement The Company entered into a written Employment Agreement with Carlos D. DeMattos on July 1, 1995 for Mr. DeMattos 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 percent 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 has agreed to defer a portion of his salary for the first and second quarters of fiscal 2000, in light of the Company's cash position. The DeMattos Agreement called for Mr. DeMattos to receive an incentive bonus for fiscal year 1998 ranging from 20 percent to 100 percent of his base salary, based upon attainment by the Company of specific earnings per share levels (described in more detail in the DeMattos Agreement). No bonus was paid to Mr. DeMattos for fiscal year 1998, and Mr. DeMattos has informed the Board of Directors that he will forego any bonus payment under the Employment Agreement for fiscal year 1999. The annual incentive bonus for fiscal year 2000 will be based on performance levels to be established by the Company's Compensation Committee. As part of the 1997 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. Sharma Agreement The Company entered into a written Employment Agreement with Anil Sharma on December 1, 1999 for Mr. Sharma to serve as the Company's President and Chief Financial Officer for a one-year term commencing December 1, 1999. Mr. Sharma was also granted options to purchase 200,000 restricted shares of the Company's common stock at an exercise price of $3.375. The Employment Agreement also entitles Mr. Sharma to purchase an additional 150,000 restricted shares of the Company's common stock upon the surrender by ING of warrants to purchase 150,000 shares of the Company's common stock out of the ING Warrants. -25- COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS None. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Nettmann, a corporation owned by Ernst Nettmann, manages the Cam-Remote(R) and Mini Mote(R) C.A.T. (R) business of Studio Electronics. Mr. Nettmann served as a director of the Company for several years up to the time of his resignation on September 22, 1999. 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 Operations. On September 28, 1998, the Company sold the Manufacturing Operations to Phillips Associates, an affiliate of Mr. Edward Phillips. The transaction was structured as a stock for stock exchange and was valued at $14,582,000. Prior to that date Mr. Phillips was a director of the Company. 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 had an expiration date of December 31, 1999 and required approximately $40,000 in monthly rent. As part of an 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 an 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. These leases have expiration dates through October 31, 2002 and require approximately $17,000 in monthly rent. Mr. Costello is a partner in the law firm of Whitman Breed Abbott & Morgan LLP. Such firm has served as outside counsel to the Company since 1993. -26- 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 [29]. (a)(3) The Exhibit Index appears at page 56 (b) Reports on Form 8-K - Form 8-K dated June 30, 1999 was filed during the fourth quarter of the period covered by this report. (c) The Exhibit Index appears at page 56, 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 29. -27- 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, 1999, to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: January 13, 2000 MATTHEWS STUDIO EQUIPMENT GROUP By: S/Carlos D. De Mattos Carlos D. De Mattos Chairman of the Board 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.
S/Carlos D. DeMattos Chairman of the Board January 11, 2000 Carlos D. De Mattos S/Anil Sharma Director, President and January 11, 2000 Anil Sharma Chief Financial Officer S/Jerome E. Farley Director January 11, 2000 Jerome E. Farley S/Benjamin P. Giess Director January 11, 2000 Benjamin P. Giess S/John A. Alonzo Director January 11, 2000 John A. Alonzo S/Francis W. Costello Director January 11, 2000 Francis W. Costello S/Fredrick W. Whitridge, Jr. Frederick W. Whitridge, Jr. Director January 11, 2000
-28- Matthews Studio Equipment Group and Subsidiaries Index to Consolidated Financial Statements and Financial Statement Schedule
Page No. Report of Independent Auditors ....................................................................................... 30 Consolidated Balance Sheets at September 30, 1999 and 1998 ........................................................... 31 Consolidated Statements of Operations for the years ended September 30, 1999, 1998 and 1997 .................................................................................................. 32 Consolidated Statements of Shareholders' Equity (Accumulated Deficit) for the years ended September 30, 1999, 1998 and 1997 ................................................................ 33 Consolidated Statements of Cash Flows for the years ended September 30, 1999, 1998 and 1997 .................................................................................... 34 Notes to Consolidated Financial Statements ........................................................................... 35
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. 29 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, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity (accumulated deficit), and cash flows for each of the three years in the period ended September 30, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with accounting principles generally accepted in the United States. 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. The accompanying consolidated financial statements have been prepared assuming that Matthews Studio Equipment Group will continue as a going concern. As more fully described in Note 8, the Company has incurred operating losses in the current year and has a working capital deficiency. These conditions raise substantial doubt about the Company's ability to continue as a going concern. (Management's plans in regard to these matters are also described in Note 8.) The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /S/Ernst & Young LLP Los Angeles, California January 11, 2000 30 Matthews Studio Equipment Group and Subsidiaries Consolidated Balance Sheets ($ in thousands)
September 30, 1999 1998 ---------------- ----------------- ASSETS: Current assets: Cash and cash equivalents $ 390 $ 331 Accounts receivable less allowance for doubtful accounts of $1,420 in 1999 and $1,259 in 1998 9,893 8,981 Current portion of net investment in finance and sales-type leases 264 353 Inventories 3,312 3,783 Prepaid expenses and other current assets 489 536 Income tax refund receivable 36 1,045 Deferred income taxes - 753 -------- ------- Total current assets 14,384 15,782 Property plant and equipment, net 54,168 51,650 Net investment in finance and sales-type leases, less current portion 150 248 Goodwill less accumulated amortization of $6,344 in 1999 and $681 in 1998 17,358 23,168 Other assets 5,167 3,538 -------- ------- Total assets $ 91,227 $94,386 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY (ACCUMULATED DEFICIT): Current liabilities: Accounts payable $ 11,673 $ 4,634 Accrued liabilities 7,610 3,946 Current portion of long-term debt and capital lease obligations 5,404 4,687 -------- ------- Total current liabilities 24,687 13,267 Long-term debt and capital lease obligations less current portion 83,111 74,691 Deferred income taxes - 3,815 Commitments and contingencies Shareholders' equity (accumulated deficit): Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding one share in 1999 and 1998 - - Common stock, no par value, authorized 20,000,000 shares; issued and outstanding 9,585,000 shares in 1999 and 9,110,000 shares in 1998 (1,916,450 shares were retired in 1998) 8,132 7,144 Accumulated deficit (24,703) (4,531) -------- ------- Total shareholders' equity (accumulated deficit) (16,571) 2,613 -------- ------- Total liabilities and shareholders' equity (accumulated deficit) $ 91,227 $94,386 ======== =======
The accompanying notes are an integral part of these consolidated financial statements. 31 Matthews Studio Equipment Group and Subsidiaries Consolidated Statements of Operations (in thousands, except per share data)
Year ended September 30, -------------------------------------------------------------------- 1999 1998 1997 ------------------ ------------------ ------------------ Revenues from rental operations $ 39,434 $33,317 $25,589 Net product sales 20,368 27,954 20,769 -------- ------- ------- 59,802 61,271 46,358 Costs and expenses: Cost of rental operations 25,908 20,274 14,519 Cost of product sales 16,808 19,184 14,081 Selling, general and administrative 26,102 20,801 12,629 Goodwill and long-lived asset impairment 6,053 - - Interest, net 7,634 5,801 2,675 -------- ------- ------- 82,505 66,060 43,904 -------- ------- ------- Income (loss) from operations (22,703) (4,789) 2,454 Gain on sale of manufacturing subsidiary - 3,963 - -------- ------- ------- Income (loss) before income taxes and extraordinary item (22,703) (826) 2,454 Income tax provision (benefit) (2,531) (875) 748 -------- ------- ------- Income (loss) before extraordinary item (20,172) 49 1,706 Extraordinary loss on early extinguishment of debt - net of income tax benefit of $130 - - (194) -------- ------- ------- Net income (loss) $(20,172) $ 49 $ 1,512 ======== ======= ======= Income (loss) per common share - basic: Income (loss) before extraordinary item $ (2.17) $ 0.00 $ 0.16 Extraordinary loss - - (0.02) -------- ------- ------- Net income (loss) per share $ (2.17) $ 0.00 0.14 ======== ======= ======= Income (loss) per common share - diluted: Income (loss) before extraordinary item $ (2.17) $ 0.00 $ 0.15 Extraordinary loss - - (0.02) -------- ------- ------- Net income (loss) per share $ (2.17) $ 0.00 $ 0.13 ======== ======= ======= Weighted average number of common shares outstanding: Basic 9,305 10,848 10,456 ======== ======= ======= Diluted 9,305 12,223 11,108 ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 32 Matthews Studio Equipment Group and Subsidiaries Consolidated Statements of Shareholders' Equity (Accumulated Deficit) (in thousands)
Common Stock Retained Earnings Number of (Accumulated shares Amount Deficit) Total ---------------- ----------------- ------------------ --------------- 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 (4,531) 2,613 Exercise of stock options and warrants 475 988 - 988 Net loss - - (20,172) (20,172) ---------------- ----------------- ------------------ ---------------- Balance at September 30, 1999 9,585 $8,132 $(24,703) $(16,571) ================ ================= ================== ===============
The accompanying notes are an integral part of these consolidated financial statements. 33 Matthews Studio Equipment Group and Subsidiaries Consolidated Statements of Cash Flows (in thousands)
Year ended September 30, 1999 1998 1997 ------------------ ------------------- ----------------- Operating activities: Net income $(20,172) $ 49 $ 1,512 Adjustments to reconcile net income to net cash Provided by operating activities: Provision for doubtful accounts 481 562 269 Depreciation 10,725 8,301 4,567 Amortization of intangibles 1,276 735 136 Goodwill and long-lived asset impairment 6,053 - - Deferred income taxes (3,062) (834) 404 Gain on sale of assets (743) (442) (330) 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 (1,393) (1,385) (2,037) Inventories 471 (1,057) (2,365) Net investment in leases 187 683 397 Prepaids and other assets (1,152) 1,135 (633) Income tax refund receivable 1,009 163 (645) Accounts payable and accrued liabilities 9,228 722 747 -------- -------- ------- Net cash provided by operating activities 2,908 4,669 2,216 Investing activities: Payment for acquisitions - (30,770) (437) Purchase of computer equipment and leasehold improvements (13,591) (12,290) (9,660) Proceeds from sale of property and equipment 751 640 621 -------- -------- ------- Net cash used in investing activities (12,840) (42,420) (9,476) Financing activities: Proceeds from exercise of stock options 988 92 24 Proceeds from borrowings 10,287 41,605 14,065 Repayment of borrowings (1,284) (4,008) (6,898) -------- -------- ------- Net cash provided by financing activities 9,991 37,689 7,191 Net increase (decrease) in cash and cash equivalents 59 (62) (69) Cash and cash equivalents at beginning of period 331 393 462 -------- -------- ------- Cash and cash equivalents at end of period $ 390 $ 331 $ 393 ======== ======== ======= Schedule of non-cash investing and financing transactions: Capital lease obligations incurred $ 1,699 $ 775 $ 160 Common stock issued for acquired companies - 884 560 Notes received for sale of assets 1,525 - - Additional disclosures - Cash paid during year for: Interest $ 6,401 $ 5,268 $ 2,495 Income taxes 241 68 853
The accompanying notes are an integral part of these consolidated financial statements. 34 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. 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. as 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. The remaining payments are being withheld pending calculations and settlement of purchase price adjustments. 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 payment of $382,000, of which $237,000 was paid on closing, with the remaining portion of the purchase price paid in fiscal year 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 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. 35 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, and is 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"), which is wholly owned by the Company and 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 basis. 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. 36 1. Business and Acquisitions (continued) 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):
For the Year Ended September 30, 1998 1997 ---- ---- 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
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 percent of total revenues. No customer accounted for more than 10 percent of total revenues in fiscal 1999 or 1998. Fair Values of Financial Instruments - The carrying value of financial instruments such as cash, accounts receivable, accounts payable, accrued and other liabilities and short-term revolving credit agreements approximate their fair value based on the short-term maturities of these instruments. The carrying value of long-term debt approximates its fair value based on references to similar instruments. Inventories - Inventories are principally stated at the lower of first-in, first-out cost or market and consist of finished goods. 37 2. Accounting Policies (continued) 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. Capitalized computer software costs of approximately $943,000, and loan fees that are being amortized as interest expense over the term of the bank facility, are included in other assets. Capitalized computer software costs consist of costs to purchase and develop software. The Company capitalizes internally developed software costs based on a project-by-project analysis of each project's significance to the Company and its estimated useful life. All capitalized software costs are amortized on a straight line method over a period of five years. Amortization expense related to capitalized computer software costs charged to operations was $149,000 for the year ended September 30, 1999. 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 (See Note 5). Marketing and Advertising Expenses - Marketing expenses, including amortization of capitalized costs, for the years ended September 30, 1999, 1998 and 1997 were $357,000, $384,000 and $409,000, respectively. The advertising expenses (including media advertising and promotions) are expensed when incurred and for the years ended September 30, 1999, 1998 and 1997 were $172,000, $335,000 and $175,000, respectively. Property and Equipment - Property and equipment, including items acquired 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 the statement of operations. 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, 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. 38 2. Accounting Policies (continued) 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"). 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. 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 year ended September 30, 1997, 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. In fiscal year 1999, income tax benefits resulting from net operating loss carryforwards generated during the year were partially reserved 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 at a loss, impairment losses are recorded (See Note 5). Stock-Based Compensation - The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. Financial Statement Presentation - Certain balances from the September 30, 1998 and 1997 financial statements have been reclassified to conform to the September 30, 1999 presentation. 39 3. Earnings per Share ("EPS") The following is a reconciliation of the computations for basic and diluted EPS (in thousands, except per share data):
For the Year Ended September 30, -------------------------------- 1999 1998 ------------------------------------------ ---------------------------------------- Loss Shares Per -Share Income Shares Per -Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- ----------- ----------- ------------- ---------- Basic EPS: Income (loss) available to common stockholders $(20,172) 9,305 $(2.17) $ 49 10,848 $0.00 ====== ===== Effect of dilutive options and warrants - - - 1,376 -------- ----- ----- ------ Diluted EPS: Income (loss) available to common stockholders and assumed conversions $(20,172) 9,305 $(2.17) $ 49 12,223 $0.00 ======== ===== ====== ===== ====== =====
For the Year Ended September 30, 1997 -------------------------------------- Income Shares Per -Share (Numerator) (Denominator) Amount ----------------- ------------------- ---------------- Basic EPS: Income available to common stockholders $1,512 10,456 $0.14 ===== Effect of dilutive options and warrants - 652 ------ ------ Diluted EPS: Income available to common stockholders and assumed conversions $1,512 11,108 $0.13 ====== ====== =====
Options to purchase 3,968,000 shares of common stock at a range of $2.00 to $6.31 per share, for the year ended September 30, 1999, were excluded from the calculation of EPS because of their dilutive effect on the net loss per share. 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, for the years ended September 30, 1998 and 1997, 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. 40 4. Property, Plant and Equipment The following is a summary of property, plant and equipment (in thousands):
September 30, 1999 1998 --------------- --------------- Rental equipment $81,785 $71,550 Office furniture and equipment 3,183 3,520 Land and building 1,554 1,554 Leasehold improvements 1,206 1,181 ------- ------- 87,728 77,805 Less accumulated depreciation and amortization (including $29,689 and $23,633 in 1999 & 1998, respectively, for rental equipment) 33,560 26,155 ------- ------- Property, plant and equipment, net $54,168 $51,650 ======= =======
Amortization of capital leases is included in depreciation expense. Property, plant and equipment also includes the following assets recorded under capital leases (in thousands):
September 30, 1999 1998 ---------------------------------------- Property, plant and equipment $ 5,759 $ 6,079 Less accumulated amortization (1,291) (1,645) ---------- ------- $ 4,468 $ 4,434 ========== =======
41 5. Asset Impairment and Other Charges During its fiscal year ended September 30, 1999 the Company incurred a net loss of $20,172,000. This amount included approximately $9,228,000 of non-recurring and non-cash charges. The significant charges relate to the write-down of certain long-term assets, the closing of a Company site and an accrual for a litigation matter. As a result of management's review of certain acquisitions, including the current business environment and their continued operating losses in fiscal year 1999, the Company performed an impairment review of its long-lived assets. Based on this review and future revenue and cash flow projections, the Company believes that certain long-lived assets have been impaired. The Company determined that the estimated fair value was below the carrying value of the long-lived assets. Accordingly, in the fourth quarter of fiscal year 1999, supplemental depreciation of long-term assets and amortization of goodwill pursuant to Statement of Financial Accounting Standards No. 121 was recorded as impairment charges of $5,028,000, for the write-down of goodwill and $1,025,000, for the write-down of property, plant and equipment and deferred charges. Additionally, in 1999 the Company recorded in selling, general and administrative expenses a provision of approximately $1,058,000 to close an underperforming location and $1,500,000 related to the settlement of a litigation matter which arose in the fourth quarter. The provision for closure of the location includes the accrued costs of closing the facility, moving certain physical assets to other locations, severance costs and the write-down of certain assets to expected realizable value. The litigation matter was settled by the Company through the issuance of 400,000 restricted shares of the Company's common stock and a cash payment of $128,000, each subsequent to September 30, 1999. 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, from this manufacturing subsidiary. 42 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):
September 30, ----------------------------------------------- 1999 1998 --------------------- --------------------- Minimum lease payments receivable $ 457 $ 668 Unearned income (43) (67) Net investment in leases, including current $ 414 $ 601 portion of $264 in 1999 and $353 in 1998 ===================== =====================
Future annual minimum lease payments receivable under finance and sales-type leases are as follows at September 30, 1999 (in thousands): 2000 $264 2001 42 2002 44 2003 49 2004 and thereafter 58 ------------- $457 =============
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. 43 8. Long-Term Debt Long-term debt consists of the following (in thousands):
September 30, 1999 1998 ------------------ ------------------ Revolving Credit Loan $55,830 $54,227 Term Note 14,000 16,000 Senior subordinated notes 10,400 100 ------- ------- 80,230 70,327 Bank and vendor notes payable, partially collateralized by land, building, vehicles and equipment, payable in monthly installments, with interest at approximately 5% to 10% due through 2004 2,864 3,131 Capital lease obligations, with interest at approximately 6.5% to 22.6% due through 2003 4,330 4,615 Notes payable to related parties, interest at 8% to 8.75% 1,091 1,305 ------- ------- 88,515 79,378 Less current portion 5,404 4,687 ------- ------- $83,111 $74,691 ======= =======
The aggregate annual maturities of long-term debt and payments on capital leases consist of the following at September 30, 1999 (in thousands):
Long-Term Capital Debt Leases -------------------- -------------------- 2000 $ 3,496 $2,278 2001 68,284 1,440 2002 161 863 2003 171 377 2004 86 - and thereafter 11,987 - ------- ------ $84,185 4,958 ======= Less amounts representing interest on capital leases $ 628 ------ Present value of net minimum lease payments (including current portion of $1,908) $4,330 ======
44 8. Long-Term Debt (continued) Beginning in the latter part of fiscal 1998 and continuing throughout fiscal 1999, the major producers of feature films initiated cost reduction practices, and focused on producing smaller budget films (which require less production equipment). These practices resulted in fewer films being shot in the United Sates which, in turn, resulted in greater competition among suppliers to the film industry. Production equipment suppliers responded to these pressures by substantially reducing their rental charges. In this fiercely competitive environment, the Company was forced to either reduce its rental charges or forego certain opportunities. The Company's profit margin from its feature film production equipment business was severely reduced during fiscal 1999 and 1998. As a result of the above, the Company's working capital and profitability declined significantly while the Company's outstanding indebtedness increased significantly during fiscal year 1999. These matters raise substantial doubt about the Company's ability to continue as a going concern. At September 30, 1999, the Company had negative working capital of approximately $10,303,000. The Company intends to improve its liquidity and capital resources principally through a combination of the disposition of certain assets from its video and/or theatrical operations, the raising of equity capital, and implementing cost cutting efforts. The Company will also seek to refinance its senior credit facility. However, there is no assurance that the Company will succeed in accomplishing any or all of these goals. In addition, the Company intends to curb the level of rental asset purchases to improve its working capital and liquidity, however, this action could have a material adverse effect on future operations. The Company has reallocated its resources during fiscal 1999 and the first quarter of fiscal 2000 to improve cash flow. The Company has closed or consolidated certain facilities. In addition, the Company has decided to dispose of businesses which do not contribute satisfactorily to profit, or which can generate significant cash upon disposition. The Company intends to use proceeds from these sales to reduce bank debt and trade payables. 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. During its fiscal year ended September 30, 1999 the Company incurred a net loss of $20,172,000. The net loss resulted in the Company not being in compliance with certain financial covenants of its bank credit facility. The lenders waived the covenant violations for the period through September 30, 1999, and certain financial covenants have been reset on a going forward basis. However, the Company's future compliance with the amended covenants is based, in part, on the expectation that the Company will successfully execute its cost control efforts and will generate cash proceeds from the disposition of certain of its assets, of which there can be no assurance. In addition, the lenders have also imposed a shorter maturity date for the facility. At September 30, 1999, the Chase Facility included a $16,000,000 term loan and a $61,000,000 revolving credit facility. The term loan requires quarterly principal payments of $500,000 commencing December 31, 1998, and increasing to $750,000 commencing December 31, 1999, with the balance due 45 at maturity. All such payments have been made by the Company through December 31, 1999, and the current balance of the term loan is $14,000,000. Pursuant to an amendment made in January 2000, interest under the facility accrues at a rate, depending on the Company's leverage ratio (as defined in the Chase Facility) equal to the greater of (i) Chase Bank's Prime Rate plus a maximum of 1.50%, (ii) the Base CD Rate (as determined by Chase Bank) plus a maximum of 2.50% or (iii) the Federal Funds Effective Rate plus a maximum of 2.00%. 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. Interest is payable quarterly. Prior to the January 2000 amendment, the Company had the option of using a LIBOR based rate, which yielded a lower interest rate. A LIBOR based interest rate will be available again only when the term loan is fully repaid or the Company disposes of its theatrical operations. As amended, the Chase Facility matures January 31, 2001. Pursuant to the January 2000 amendment, the Company is required to repay the term loan in full from the proceeds of the sale of certain assets expected in fiscal 2000 (of which there can be no assurance that such events will occur). In addition, on that date, the revolving credit facility also is to reduce to $40,000,000. In the event that prior to June 1, 2000, the Company disposes of its video operations, the revolving credit facility is to reduce to $57,000,000, and in the event that prior to June 1, 2000, the Company disposes of its theatrical operations, the revolving credit facility is to reduce to $40,000,000. The facility prohibits the payment of cash dividends and requires the Company to maintain certain levels of net worth and 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). In addition, the Chase Facility imposes 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. 46 8. Long-Term Debt (continued) 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. 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 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. Interest on the remaining $100,000, required under the subordinated note is at the rate of 10.00% until its maturity. The Company is in negotiations to amend the Purchase Agreement to reset financial covenants, including annual capital expenditure limits an acquisition limits to be similar to those required under the Chase Facility. The ING Warrant, as amended, requires 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"). Accordingly, effective January 1, 2000, the exercise price under the ING Warrant was reduced to $2.00 per share. 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, entitling the holders of the ING Warrant to certain demand and 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. The Registration Rights Agreement also granted piggyback registration rights to Sutro & Co. Incorporated ("Sutro"), which acted as the Company's investment bankers in connection with the transaction with ING, with respect to a common stock purchase warrant for 100,000 shares of the common stock. Sutro has fully exercised this warrant. 47 8. Long-Term Debt (continued) In addition, as part of the transaction with ING, in July 1995 the Company, Carlos D. DeMattos and Edward Phillips and their affiliates ("Management Stockholders") entered into a Stockholders' Agreement with ING (the "Stockholders Agreement") pursuant to which the Company and the Management Stockholders 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 Stockholders. In addition, the Stockholders Agreement was amended in April 1996 to provide that the obligations of the Management Stockholders 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. The Stockholders Agreement has been further amended to require that the Company's Board of Directors will have no less than seven and no more than nine directors. 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 was cancelled in June 1999 in connection with ING's purchase of a $10,000,000 Convertible Senior Subordinated Note from the Company. 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 timely effect a 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 were subject to cancellation if the Company met certain financial covenants required to cause the letter of credit to be released. However, as discussed below, these warrants are no longer subject to cancellation. ING Convertible Senior Subordinated Notes. On June 30, 1999, the Company sold $10,000,000 of convertible senior subordinated notes ("ING Notes") to ING. The proceeds from the transaction were used for general corporate purposes. The ING Notes are secured by a junior and subordinated general security interest in the Company's and its subsidiaries' assets, will mature on June 30, 2005, and bear interest at twelve percent for the first year and eighteen percent thereafter. At the Company's option, interest on the ING Notes may be paid in cash or in kind (i.e., by the issuance of additional notes similar to the ING Notes.) At September 30, 1999, the balance of these notes was $10,300,000, including accrued interest. However, in the event of an equity offering by the Company which results in gross proceeds of $25,000,000 (including the converted ING Notes, as discussed below) or more on or prior to June 30, 2000 (a "Qualified Equity Offering"), the principal amount of the ING Notes then outstanding plus accrued and unpaid interest thereon will automatically convert into shares of the Company's common stock at the subscription price to investors in such Qualified Equity Offering. If a Qualified Equity Offering has not been consummated on or prior to June 30, 2000, the Company will issue to the holders of the ING Notes 500,000 warrants to purchase the Company's common stock at $0.01 per share for each $10,000,000 of principal outstanding under the ING Notes. As part of this ING Notes transaction, the common stock purchase warrants dated January 48 12, 1999, which granted ING the right to purchase 150,000 shares at $2.50 per share were not canceled and have remained outstanding. 9. Income Taxes Significant components of the Company's deferred tax liabilities and assets are as follows (in thousands):
September 30, 1999 1998 ------------------- ------------------- Deferred tax liabilities: Tax depreciation in excess of book depreciation $ 5,209 $6,043 Leasing income 574 420 Other 15 153 ------- ------ Total deferred tax liabilities $ 5,798 $6,616 Deferred tax assets: Net operating loss carryforwards $ 9,684 $2,575 Alternative minimum tax credit carryforwards 830 830 ITC credit carryforwards 148 148 Allowance for doubtful accounts receivable 513 471 Excess of tax basis over financial statement basis of inventory 77 153 Other accruals 98 12 Valuation allowance (5,552) (635) ------- ------ Total deferred tax assets 5,798 3,554 ------- ------ Net deferred tax liabilities $ - $3,062 ======= ======
The provision (benefit) for income taxes on income before extraordinary item is as follows (in thousands):
September 30, ---------------------------------------------------------------------- 1999 1998 1997 -------------------- -------------------- -------------------- Current: Federal $ - $ - $ 209 State 331 18 135 ------- ----- ----- 331 18 344 Deferred: Federal (1,918) (730) 335 State (944) (163) 69 ------- ----- ----- (2,862) (893) 404 ------- ----- ----- $(2,531) $(875) $ 748 ======= ===== =====
49 9. Income Taxes (continued) 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):
For the Year Ended September 30, ----------------------------------------------------------------- 1999 1998 1997 --------- -------- ------- Amount Percent Amount Percent Amount Percent --------- -------- -------- -------- ------- -------- Tax at U.S. statutory rate $(7,685) (34)% $ (281) (34)% $ 834 34% State income taxes, net of (534) (2) (96) (12) 147 6 Federal tax benefit Tax free gain on sale of - - (1,347) (163) - - manufacturing subsidiary Permanent differences 45 - 30 4 37 1 Goodwill 1,927 9 275 33 - - Increase (decrease) in valuation 4,918 22 563 68 (264) (11) allowance Adjustments to cumulative book/tax (1,202) (5) (19) (2) (6) - differences and other ------- ---- ------- ----- ----- --- $(2,531) (10)% $ (875) (106)% 748 30%
At September 30, 1999, the Company has alternative minimum tax credit carryforwards, with no expiration date of $715,000, and federal net operating loss carryforwards of approximately $25,218,000 that expire in years 2010 through 2014. 10. Shareholders' Equity At September 30, 1999, the Company had the following warrants and stock options outstanding for the purchase of its common stock:
Number of Description Expiration Date Shares Issuable Exercise Price - --------------------------------------------------------------------------------------------------------------------- ING Warrants September 2005 2,322,464 $ 2.50 ING Warrants January 2009 450,000 $ 2.50 1994 Plan Options March 2004 830,066 $2.00-$4.74 1994 Directors' Plan Options March 2005 150,000 $2.00-$6.31 Options outside of Plans June 2005 215,000 $ 3.00 --------- Total number of common shares issuable 3,967,530 =========
50 10. Shareholders' Equity (continued) 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. Accordingly, effective January 1, 2000, the exercise price under the ING Warrant was reduced to $2.00 per share. Stock Options - At September 30, 1999, the Company has three stock-based compensation plans, which are described below. 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 the Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") the Company's net loss and earnings per share on a pro forma basis, would have been as indicated below (in thousands, except per share data):
September 30, 1999 1998 ---- ---- Net income (loss): As reported $(20,172) $ 49 Pro forma (20,401) (75) Net income (loss) per share, Basic and diluted As reported (2.17) 0.00 Pro forma (2.19) (0.01)
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, 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%; and expected lives of the options from 3 to 5 years. 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. 51 10. Shareholders' Equity (continued) 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 1999, options for 5,000 of these shares were exercised; however, for 1998 and 1997, no options were exercised under the 1994 Directors Plan. The following summarizes the option activity related to the plans:
1999 1998 1997 ------------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Shares Exercise Shares Exercise Shares Exercise Description (000's) Price (000's) Price (000's) Price - -------------------------------- ------- -------- ------- -------- ------- -------- Fixed Options: Outstanding, at beginning of 1,414 $2.83 1,209 $2.44 870 $2.37 year Granted 241 $3.57 337 $4.09 388 $2.65 Exercised (350) $2.35 (44) $2.08 (15) $1.64 Forfeited ( 325) $2.45 (88) $2.72 (34) $3.02 ------ ----- ----- Outstanding at end of year 980 $3.28 1,414 $2.83 1,209 $2.44 ====== ===== ===== Options exercisable at year-end 541 $2.98 748 $2.62 622 $2.47 ====== ======= ===== ====== ===== ===== Weighted average fair value of exercisable options at year-end $1.58 $1.12 $0.90 ======= ====== =====
The weighted average remaining contract life of the plan options was 4.5 years as of September 30, 1999. At September 30, 1999, the range of prices of exercisable options under the plans were $2.00 to $6.31. In addition to options under the Plans, the Company also issued options outside of these Plans to certain employees in fiscal 1999 and Carlos D. DeMattos, Edward Phillips and ING during fiscal 1995. During 1999, 1998 and 1997, none of these options were exercised. However, in connection with sale of the manufacturing subsidiary in fiscal year 1998, to Phillips Associates, 200,000 of these options were terminated. At September 30, 1999, the Company has adequately reserved common shares to cover all outstanding options and warrants. 52 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, 1999 (in thousands):
Operating Leases --------------- 2000 $2,131 2001 1,820 2002 1,211 2003 391 2004 73 thereafter 298 ------ $5,924 ======
Rent expense under operating leases approximated $2,698,000 for 1999, $2,860,000 for 1998 and $1,687,000 in 1997. Included in rent expense is rent for property leased from certain officers/shareholders of $590,000, $1,020,000 and $479,000 for the years ended September 30, 1999, 1998 and 1997, respectively. The Company also entered into a registration rights agreement (the "Registration Rights Agreement") with ING, entitling the holders of the ING Warrant to certain demand and piggy back registration rights with respect to the shares of common stock issuable upon exercise of the ING Warrant as well as any shares of common stock subsequently acquired by ING. The Registration Rights Agreement also grants ING the right to require the Company to file a shelf registration statement with respect to the sale from time to time of the 1.4 million shares of common stock of the Company acquired by ING from a former employee of the Company. The Company is from time to time named as a defendant in legal proceedings, in the ordinary course of its business. In the opinion of management, after consultation with outside counsel, there are no outstanding suits or claims that may reasonably result in a material adverse effect on the business, financial condition or results of operations of the Company. 53 12. Benefit Plans 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 30% 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 $154,000 in 1999, $158,000 in 1998 and $77,000 in 1997. Four Star's employees (approximately 34) are represented by the International Alliance of Theatrical Stage Employees, AFL-CIO and Four Star has entered into contractual arrangements with such union in respect of its employees that expire in December 31, 2002 and January 31, 2001, respectively. 13. Subsequent Events Duke City The Company is engaged in discussions to sell the rental assets of Duke City Video, the net book value of which at September 30, 1999 is approximately $12 million. Currently, there is no firm commitment from any party, but the Company is continuing negotiations with the goal of effecting a sale in the near future. 54 Schedule II VALUATION AND QUALIFYING ACCOUNTS (amounts in thousands) Year Charged Ended Balance at to Costs Charged Balance September Beginning and to Other at End 30 Description of Year Expenses Accounts Deductions of Year ---------- ----------------- ---------- --------- -------- ---------- ------- 1999 Allowance for doubtful accounts $1,259 $481 $ - $ 320(A) $1,420 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 - ---------------------------------------------------------------------------------------------------
(A) Uncollectible accounts written off. (B) Amount assumed in connection with acquisitions. 55 INDEX TO EXHIBITS
Exhibit No. Description ---- ----------- 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 Amendment No. 2 to Stockholders Agreement dated as of August 30, 1999, among the Company, ING Equity Partners L.P. I, Carlos D. DeMattos and The Carlos and Elena DeMattos Family Trust. 4.7 $100,000 Senior Subordinated Note dated July 27, 1995, made by the Company in favor of ING Equity Partners, L.P. I, incorporated by reference to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996.
56
Exhibit No. Description ---- ----------- 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 300,000 shares, incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30, 1998. 4.9 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, incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30, 1998. 4.10 Convertible Senior Subordinated Note dated June 30, 1999, executed by the Company in favor of ING Equity Partners, L.P. I, incorporated by reference to the Company's Form 8-K dated June 30, 1999. 4.11 Form of Common Stock Purchase Warrant issuable under the Note Purchase Agreement dated June 30, 1999, between the Company and the Purchasers listed on Schedule I thereto, incorporated by reference to the Company's Form 8-K dated June 30, 1999. 10.1 1989 Stock Option Plan, incorporated by reference to the Company's Registration Statement on Form S-18 No. 33-30963 LA. 10.2 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 1994 Stock Option Plan, incorporated by reference to the Company's Proxy Statement dated March 29, 1994. 10.4 Amended and Restated 1994 Stock Option Plan for Directors. 10.5 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 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 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 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.
57
Exhibit No. Description ---- ----------- 10.9 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 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 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, incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30, 1998. 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, incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30, 1998. 10.13 Waiver and Amendment Agreement No. 4 dated June 30, 1999 to the Amended and Restated Credit Agreement dated April 1, 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.; Keylite Holdings, Inc.; Reel Wheels Inc.; Keylite Production Services, Inc.; Duke City Holdings, Inc.; Four Star Holding, Inc.; ShowbizMart.com Inc.; The Chase Manhattan Bank; PNC Bank, National Association; Wells Fargo Bank, N.A.; CIBC, Inc.; Mellon Bank, N.A.; and The Chase Manhattan Bank, as agent for the lenders, incorporated by reference to the Company's Form 8-K dated June 30, 1999.
58
Exhibit No. Description ---- ----------- 10.14 Waiver and Amendment Agreement No. 5 dated January __, 2000 to the Amended and Restated Credit Agreement dated April 1, 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.; Keylite Holdings, Inc.; Reel Wheels Inc.; Keylite Production Services, Inc.; Duke City Holdings, Inc.; Four Star Holding, Inc.; ShowbizMart.com Inc.; The Chase Manhattan Bank; PNC Bank, National Association; Wells Fargo Bank, N.A.; CIBC, Inc.; Mellon Bank, N.A.; and The Chase Manhattan Bank, as agent for the lenders, but without schedules and exhibits. 10.15 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, incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30, 1998. 10.16 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, incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30, 1998. 10.17 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. 10.18 $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. 10.19 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. 10.20 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.
59
Exhibit No. Description ---- ---------------------------------------------------------------------------------- 10.21 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 reference to the Company's Form 8-K dated April 1, 1998. 10.22 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. 10.23 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. 10.24 Note Purchase Agreement dated June 30, 1999, between the Company and the Purchasers listed on Schedule I thereto, incorporated by reference to the Company's Form 8-K dated June 30, 1999. 10.25 Amended and Restated Security Agreement dated June 30, 1999, among: the Company; Matthews Studio Sales, Inc.; Hollywood Rental Company, LLC; Matthews Studio Electronics, Inc.; Matthews Acceptance Corporation; Duke City Video, Inc.; HDI Holdings, Inc.; Four Star Lighting, Inc.; Matthews Studio Group Centers, Inc.; Keylite Holdings, Inc.; Reel Wheels, Inc.; Keylite Production Services, Inc.; Duke City Holdings, Inc.; Four Star Holding, Inc.; ShowbizMart.com Inc.; and ING Equity Partners, L.P. I, incorporated by reference to the Company's Form 8-K dated June 30, 1999. 10.26 Employment Agreement between the Company and Anil Sharma dated December 1, 1999. 10.27 Stock Option Agreement between the Company and Anil Sharma dated December 1, 1999. 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.
60
Exhibit No. Description ---- ---------------------------------------------------------------------------------- 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.
61 EX-4.6 2 AMENDMENT NO. 2 TO STOCKHOLDERS AGREEMENT Exhibit 4.6 ----------- AMENDMENT NO. 2 TO STOCKHOLDERS AGREEMENT AMENDMENT NO. 2 TO STOCKHOLDERS AGREEMENT, dated as of August 30, 1999 (this "Amendment") to that certain Stockholders Agreement dated as of July 27, --------- 1995, among Matthews Studio Equipment Group (the "Company"), ING Equity ------- Partners, L.P.I ("ING"), and the Management Stockholders, as amended by --- Amendment No. 1 to the Stockholders Agreement, dated as of April 5, 1996, among the Company, ING and the Management Stockholders (as amended, the "Stockholders ------------ Agreement"), is made by and among the Company, ING, Carlos D. DeMattos - --------- ("DeMattos") and The Carlos and Elena DeMattos Family Trust dated February 12, -------- 1991. Capitalized terms used herein, except as otherwise defined herein, shall have the meanings given to such terms in the Stockholders Agreement. WHEREAS, DeMattos is the only remaining Management Stockholder under the Stockholders Agreement; WHEREAS, the Company, ING and DeMattos mutually desire to amend the Stockholders Agreement to modify the parties' obligations with respect to the size of the Company's Board of Directors; NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements hereinafter set forth, and other good and valuable consideration, the value and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Amendment to Stockholders Agreement. The Stockholders Agreement is ----------------------------------- hereby amended as of the date hereof as follows. Subsection (i) of Section 2.1(a) is hereby amended and restated in full as follows: "the number of directors on the Board of Directors shall be no less than seven nor more than nine: and" 2. No Implied Amendments. Except as herein amended, the Stockholders --------------------- Agreement shall remain in full force and effect and is ratified in all respects. On and after the effectiveness of this Amendment, each reference in the Stockholders Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference to the Stockholders Agreement in any other agreements, documents or instruments executed and delivered in connection with the Stockholders Agreement, shall mean and be a reference to the Stockholders Agreement, as amended by this Amendment. 3. Counterparts. This Amendment 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. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. Matthews Studio Equipment Group By: /s/ Carlos D. DeMattos ---------------------------------- Name: Carlos D. DeMattos Title: Chairman of the Board, Chief Executive Officer 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: ------------------------ /s/ Carlos D. DeMattos ------------------------------------- Carlos D. DeMattos The Carlos and Elena DeMattos Family Trust dated February 12, 1991 By: /s/ Carlos D. DeMattos ---------------------------------- Carlos D. DeMattos, as Trustee -2- EX-10.4 3 AMENDED AND RESTATED 1994 STOCK OPTION PLAN Exhibit 10.4 ------------ Matthews Studio Equipment Group Amended and Restated 1994 Stock Option Plan for Directors 1. Purpose. The purpose of this Matthews Studio Equipment Group 1994 Stock Option Plan for Directors (the "Plan") is to advance the interests of Matthews Studio Equipment Group (the "Company") and its shareholders by providing non- employee directors of the Company, through the grant of options to purchase shares of the Company's common stock (the "Common Stock"), with a larger personal and financial interest in the success of the Company. 2. Administration. The Plan shall be administered by a committee (the "Committee") consisting of at least two members of the Board of Directors of the Company (the "Board"). The Committee shall be appointed, and vacancies shall be filled, by the Board. The Committee shall have full power and authority to (i) determine the terms and conditions, not inconsistent with the provisions of the Plan, governing each option granted under the Plan; (ii) interpret the Plan and any option granted thereunder; (iii) establish such rules and regulations as it deems appropriate for the administration of the Plan; and (iv) take such other action as its deems necessary or desirable for the administration of the Plan. Any action of the Committee with respect to the administration of the Plan shall be taken by majority vote. The Committee's interpretation and construction of any provision of the Plan or the terms of any option shall be conclusive and binding on all parties. 3. Participants. Only directors who are not full-time salaried employees of the Company or an affiliate of the Company ("non-employee directors") shall be eligible to be granted options under the Plan. Nothing contained in the Plan, or in any option granted pursuant to the Plan, shall confer upon any director any right to the continuation of his or her directorship or limit in any way the right of the Company to terminate his or her directorship at any time. 4. Effectiveness and Termination of Plan. The Plan shall become effective on the date of its adoption by the Board, subject to the ratification of the Plan by the affirmative vote of holders of a majority of the issued and outstanding shares of Common Stock. The Plan shall terminate 10 years from the date of its adoption or date of shareholder approval if earlier, or such earlier date as the Board may determine. Any option outstanding under the Plan at the time of its termination shall remain in effect in accordance with its terms and conditions and those of the Plan. 5. The Shares. Options may be granted from time to time under the Plan for the purchase, in the aggregate, of not more than 300,000 shares of Common Stock (subject to adjustment pursuant to Section 14). Such shares of Common Stock may be set aside out of the authorized but unissued shares of Common Stock not reserved for any other purpose or out of previously issued shares acquired by the Company and held in its treasury. Any shares of Common Stock which, by reason of the termination or expiration of an option or otherwise, are no longer subject to purchase pursuant to an option granted under the Plan may again be subjected to an option under the Plan. 6. Options. On the date of each Annual Meeting of Shareholders held on or after the effective date of the 1994 Directors Plan, there shall be granted to each non-employee director who is elected or reelected as a director of the Company on such date, and who at no time prior to such date has been granted an option under the 1994 Directors Plan, an option to purchase 15,000 shares of the Common Stock (subject to adjustment pursuant to Section 14). 7. Price. The price at which shares of Common Stock may be purchased upon the exercise of an option granted under the Plan shall be the fair market value of such shares on the date of grant of such option. For purpose of this Plan, the fair market value of a share of Common Stock on a specified date shall be the mean between the high "bid" and low "ask" prices for shares of Common Stock on such date in the over-the-counter market, as reported by the National Association of Securities Dealers Automated Quotation System (NASDAQ) (or other quotation service), or, if such shares are then traded on a national stock exchange, the closing price on such date of the Common Stock on such national securities exchange. 8. Term and Exercisability of Options. Options may be granted for terms of not more than 10 years and, except as otherwise provided in Section 9, shall first become exercisable (i) with respect to 5,000 shares as of the date six months after the date of grant of the option and (ii) with respect to an additional 5,000 shares as of each of the second and third anniversaries of the date of grant of the option. 9. Termination of Directorship. Except as otherwise provided in this Section 9, no person may exercise an option more than 90 days after the first date on which he or she ceases to be a director of the Company. If a participant ceases to be a director of the Company by reason of death or disability, the participant or his or her estate may exercise any options held by the director within 12 months after the date he or she ceases to be a director of the Company. An option may be exercised following the date a participant ceases to be a director with respect only to such number of shares of Common Stock as to which the right of exercise had accrued on or before such date. In no event may any option be exercised after the expiration of the term of such option. 10. Payment. Full payment of the purchase price for shares of Common Stock purchased upon the exercise, in whole or in part, of an option granted under the Plan shall be made at the time of such exercise. The purchase price may be paid in cash or by certified check or cashier's check. Alternatively, an option may be exercised in whole or in part by delivering a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds necessary to pay the purchase price, and such other documents as the Committee may determine. 11. Nontransferability. Options granted under the Plan shall not be transferable other than by will or by the laws of descent and distribution, and, during a participant's lifetime, shall be exercisable only by him or her, regardless of any community property interest therein of the -2- participant's spouse or such spouse's successors in interest. If a participant's spouse has acquired a community property interest in any option, the participant or his or her permitted successor in interest may exercise the option on behalf of the participant's spouse or the spouse's successor in interest. 12. Status of Options. Options granted under the Plan are nonstatutory options not qualifying as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended. 13. Issuance of Shares. If a participant so requests, shares purchased upon the exercise of an option may be issued or transferred in the name of the participant and another person jointly with the right of survivorship. 14. Adjustment of Shares. In the event of any change in the outstanding Common Stock by reason of any stock dividend, stock split, combination of shares, recapitalization, or other similar change in the capital stock of the Company, or in the event of the merger or consolidation of the Company into or with any other corporation or the reorganization of the Company, there shall be substituted for or added to each share of Common Stock theretofore appropriated for the purposes of the Plan or thereafter subject, or which may become subject, to an option under the Plan, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each such share shall be exchanged or to which each such share shall be entitled, as the case may be. Outstanding options shall be appropriately amended as to price and other terms in a manner consistent with the aforementioned adjustment to the shares of Common Stock subject to the Plan. 15. Amendment. The Board may amend the Plan in any respect from time to time; provided, however, that no amendment shall become effective unless approved by - -------- ------- affirmative vote of the Company's shareholders if such approval is necessary for the continued validity of the Plan or if the failure to obtain such approval would adversely affect the compliance of the Plan with Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act") or any other rule or regulation; and provided, further, that the Plan shall not be amended more than -------- ------- once in any six-month period. No amendment may, without the consent of a participant, impair his or her rights under any option previously granted under the Plan. The Board shall have the power, in the event of any disposition of substantially all of the assets of the Company, its dissolution, any merger or consolidation of the Company with or into any other corporation, or the merger or consolidation of any other corporation into the Company, to amend all outstanding options to permit their exercise prior to the effectiveness of any such transaction and to terminate such options as of such effectiveness. If the Board shall exercise such power, all options then outstanding shall be deemed to have been amended to permit the exercise thereof in whole or in part by the holder at any time or from time to time as determined by the Board prior to the effectiveness of such transaction and such options shall be deemed to terminate upon such effectiveness. 16. Legal and Regulatory Requirements. No option shall be exercisable and no shares will be delivered under the Plan except in compliance with all applicable federal and state laws and regulations including, without limitation, compliance with withholding tax requirements and -3- with the rules of all domestic stock exchanges on which the Common Stock may be listed. Any share certificate issued to evidence shares for which an option is exercised may bear such legends and statements as the Committee shall deem advisable to assure compliance with federal and state laws and regulations. No option shall be exercisable, and no shares shall be delivered under the Plan, until the Company has obtained consent or approval from regulatory bodies, federal or state, having jurisdiction over such matters as the Committee may deem advisable. In the case of the exercise of an option by a person or estate acquiring the right to exercise the option by bequest or inheritance, the Committee may require reasonable evidence as to the ownership of the option and may require consents and releases of taxing authorities that it may deem advisable. 17. Construction. It is the intent of the Company that the Plan comply in all respects with applicable provisions of Rule 16b-3 under the Exchange Act, so that any grant of options to or other transaction by a participant who is subject to the reporting requirements of Section 16(b) of the Exchange Act shall not result in short-swing profits liability under Section 16(b) (except for any transaction exempted under alternative Exchange Act rules or intended by such participant to be a non-exempt transaction). Accordingly, if any provision of this Plan or any agreement relating to an option does not comply with such requirements of Rule 16b-3 as then applicable to any such transaction so that such a participant would be subject to Section 16(b) liability, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements, and the participant shall be deemed to have consented to such construction or amendment. -4- EX-10.14 4 WAIVER OF AMENDMENT AGREEMENT NO. 5 Exhibit 10.14 ------------- WAIVER AND AMENDMENT AGREEMENT NO. 5 WAIVER AND AMENDMENT AGREEMENT NO. 5 (this "Agreement") dated as of --------- January 13, 2000 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, Four Star has sold (the "Mission Road Sale") the real ----------------- property known as 3935 North Mission Road, Los Angeles, California pursuant to the Non-Residential Standard Offer, Agreement and Escrow Instructions for Purchase of Real Estate between Four Star and Cruz and Mary Sandoval dated August 25, 1999 (the "Mission Road Sale Agreement") attached hereto as Exhibit --------------------------- A; WHEREAS, the Borrowers have requested that the Lenders agree to consent to the Mission Road Sale and 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. CONSENT 1.1 The Lenders hereby consent to the Mission Road Sale on the terms and conditions set forth in the Mission Road Sale Agreement, provided, however, that -------- ------- notwithstanding the provisions of Section 2.09(f) and (j) of the Credit Agreement, all cash proceeds of the Mission Road Sale (in an amount not less than $226,000) shall have been applied to the payment of the Term Loan installment due on December 31, 1999. The Lenders acknowledge having received such cash proceeds. SECTION 2. WAIVERS TO CREDIT AGREEMENT 2.1 The Lenders hereby waive Section 7.12 of the Credit Agreement as it applies to the four fiscal quarter period ending September 30, 1999, provided, -------- that the Leverage Ratio for such period is not greater than 14.04:1.00. 2.2 The Lenders hereby waive Section 7.13 of the Credit Agreement as it applies to the Fiscal Year ending September 30, 1999, provided, that EBITDA for -------- such period is not less than $2,985,000. 2.3 The Lenders hereby waive Sections 2.09(f) and (j) of the Credit Agreement as they relate to the application of the cash proceeds of the Mission Road Sale, provided such proceeds were applied in the manner and in the amount -------- provided in Section 1.1 above. The Lenders acknowledge having received such cash proceeds in the manner and in the amount provided in Section 1.1 above. 2.4 Except for the specific waivers set forth in Sections 2.1, 2.2 and 2.3 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 3. AMENDMENTS TO CREDIT AGREEMENT 3.1 The definition of "Final Maturity Date" as it appears in Section 1.01 of the Credit Agreement is hereby deleted in its entirety and the following is substituted therefor: "Final Maturity Date" shall mean January 31, 2001." ------------------- 3.2 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 fiscal 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 fiscal quarter period. Notwithstanding the foregoing sentence, beginning with the fiscal quarter ending on December 31, 1999, Debt Service Coverage Ratio shall be calculated on a building one, two, three and four quarter basis. 3.3 The definition of "M&E Availability" as it appears in Section 1.01 of the Credit Agreement is hereby deleted in its entirety and the following is substituted therefor: "M&E Availability" shall mean (i) $52,000,000 on the Closing Date ---------------- reducing each April 20, July 20, October 20 and January 20 thereafter, commencing April 20, 1998, by $1,950,000, plus (ii) up to 85% of orderly ---- liquidation value, based on appraisals in form and substance satisfactory to the Agent, of hereafter acquired machinery and equipment not subject to any Liens except in favor of the Agent through Permitted Acquisitions, provided there is compliance with Section 6.12, commencing with the first day of the fiscal quarter following acquisition and delivery of satisfactory appraisals, such additional availability to reduce on the twentieth day of each subsequent fiscal quarter by 3.75% of initial availability; provided, however, that the scheduled reductions in -------- ------- availability pursuant to clauses (i) and (ii) above which would otherwise occur on January 20, 2000 and April 20, 2000 shall instead each occur on the earlier of (i) May 20, 2000 or (ii) the repayment in full of the Term Loan. 3.4 The definition of "Rental Equipment Availability" as it appears in Section 1.01 of the Credit Agreement is hereby deleted in its entirety and the following is substituted therefor: "Rental Equipment Availability" shall mean up to 75% of the amount ----------------------------- (subject to verification of amounts exceeding $10,000 satisfactory to the Agent following delivery of relevant invoices to the Agent) of Capital Expenditures made after the Closing Date for the purchase of Rental Assets (excluding Rental Assets acquired through Permitted Acquisitions to the extent already included in M&E Availability) not subject to any Lien except in favor of the Agent, 3 commencing with the twentieth day of the fiscal quarter following such Expenditure and verification, such availability to reduce on the twentieth day of each subsequent fiscal quarter by 3.75% of initial availability, provided, however, that the reductions which would otherwise occur on ----------------- January 20, 2000 and April 20, 2000 shall instead both occur on the earlier of (i) May 20, 2000 or (ii) the repayment in full of the Term Loan. 3.5 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:
Period Maximum Amount ------ -------------- two consecutive fiscal quarter period ending March 31, 2000 $1,985,000 three consecutive fiscal quarter period ending June 30, 2000 $2,290,000 Fiscal Year ending September 30, 2000 $2,600,000 the fiscal quarter ending December 31, 2000 $ 750,000
3.6 Section 7.08 of the Credit Agreement is hereby amended in its entirety to read as follows: 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:
Period Amount ------ ------ 12/31/99 ($18,200,000) 1/1/00 through and including 3/31/00 ($19,900,000)
4 4/1/00 through and including 6/30/00 ($20,775,000) 7/1/2000 through and including 9/30/00 ($22,000,000) 10/1/00 and thereafter ($22,500,000)
3.7 Section 7.09 of the Credit Agreement is hereby amended in its entirety to read as follows: 1.1 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 September 30, 2000 and thereafter at the end of each fiscal quarter to be less than 1.00:1.00. 3.8 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:
Date Ratio ---- ----- 12/31/99 through and including 6/30/2000 1.00:1.00 Each fiscal quarter ending thereafter 1.05:1.00
3.9 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 (or such other dates set forth below) to be greater than the respective amounts set forth below: Date Leverage Ratio ---- -------------- 5 12/31/99 14.60:1.00 3/31/00 14.35:1.00 04/30/00 8.30:1.00 6/30/00 8.75:1.00 9/30/00 6.00:1.00 each fiscal quarter ending thereafter 6.00:1.00 3.10 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)$2,850,000 for the period October 1, 1999 through December 31, 1999, (ii)$5,050,000 for the period October 1, 1999 through March 31, 2000, (iii)$7,000,000 for the period October 1, 1999 through June 30, 2000 and (iv)$8,600,000 for the Fiscal Year ending September 30, 2000. SECTION 4. ADDITIONAL AGREEMENTS 4.1 The Borrowers agree to pay to the Agent, for the pro rata benefit of the Lenders, an amendment fee in the amount of $75,000 on the earliest to occur of (i) the sale or other disposition by the Parent or Four Star Holding of all or substantially all of its ownership interests in Four Star Holding or Four Star, respectively, or the sale or other disposition of all or substantially all of the assets of Four Star, (ii) the repayment in full of the Term Loan or (iii) May 20, 2000. 4.2 Notwithstanding the provisions of Section 2.02(c) of the Credit Agreement, the Borrowers, the Agent and the Lenders agree that from the date hereof until the earlier to occur of (i) the sale or other disposition by the Parent or Four Star Holding of all or substantially all of its ownership interests in Four Star Holding or Four Star, respectively, or the sale or other disposition of all or substantially all of the assets of Four Star or (ii) the repayment in full of the Term Loan, no new Eurodollar Loans will be available to the Borrowers. 4.3 Notwithstanding any provisions of the Credit Agreement, the 6 Borrowers, the Agent and the Lenders agree that immediately upon the sale or other disposition by the Parent or Duke City Holdings, Inc. ("Duke Holdings") of ------------- all or substantially all of its ownership interest in Duke Holdings or Duke, respectively, or the sale or other disposition of all or substantially all of the assets of Duke (other than the real property owned by Duke in Albuquerque, New Mexico), the Total Revolving Credit Commitment shall be permanently reduced from $61,000,000 to $57,000,000, unless the Total Revolving Credit Commitment has otherwise been permanently reduced to a lesser amount. 4.4 Notwithstanding any provisions of the Credit Agreement, the Borrowers, the Agent and the Lenders agree that immediately upon the earlier to occur of (i) the sale or other disposition by the Parent or Four Star Holding of all or substantially all of its ownership interests in Four Star Holding or Four Star, respectively, or the sale or other disposition of all or substantially all of the assets of Four Star or (ii) June 1, 2000, the Total Revolving Credit Commitment shall be permanently reduced to $40,000,000 and the Term Loan shall be repaid in full. SECTION 5. CONFIRMATION OF LOAN DOCUMENTS 5.1 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 6. 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: 6.1 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. 6.2 All legal matters in connection with this Agreement shall be 7 satisfactory to the Agent, the Lenders and their respective counsel in their sole discretion. 6.3 The Agent shall have received a certificate signed by a Financial Officer of each Borrower and Guarantor that (i) immediately 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, 1999, no event has occurred which would result in a Material Adverse Effect. 6.4 The Agent shall have received such other documents as the Lenders or the Agent or Agent's counsel shall reasonably deem necessary. SECTION 7. MISCELLANEOUS 7.1 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. 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 8 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. 7.2 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. 7.3 All references to the Credit Agreement 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. 7.4 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. 7.5 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. 7.6 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. 7.7 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.] 9 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/ Name: Title: THE CHASE MANHATTAN BANK, as Lender By: /s/ Name: Title: PNC BANK, NATIONAL ASSOCIATION, as Lender By: /s/ Name: Title: WELLS FARGO BANK, N.A., as Lender By: /s/ Name: Title: CIBC, INC., as Lender By: /s/ Name: Title: 10 MELLON BANK, N.A., as Lender By: /s/ Name: Title: 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 HOLLYWOOD RENTAL COMPANY, LLC., 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 11 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 12 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 SHOWBIZMART.COM INC., as a Guarantor and a Grantor By: /s/ Carlos D. DeMattos ----------------------------------- Name: Carlos D. DeMattos Title: Treasurer 13 EX-10.26 5 EMPLOYMENT AGREEMENT Exhibit 10.26 ------------- EMPLOYMENT AGREEMENT -------------------- This Employment Agreement ("Agreement") is made and entered into this First --------- day of December, 1999, by and between Matthews Studio Equipment Group, a California corporation (the "Company"), and Anil Sharma, an individual ------- ("Employee"). - ---------- W I T N E S S E T H: WHEREAS, the Company desires to be assured of the association and services of Employee; and WHEREAS, Employee is willing and desires to be employed by the Company, and the Company is willing to employ Employee, upon the terms, covenants and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual terms, covenants and conditions hereinafter set forth, the parties hereto do hereby agree as follows: 1. Employment. The Company hereby employs Employee in the initial capacities ---------- of President and Chief Financial Officer of the Company, reporting to the Company's Chairman of the Board (the "Chairman"). -------- 2. Location and Travel. Employee shall perform his duties for the Company from ------------------- the Company's facilities located in Burbank, California. Employee shall travel as is required or appropriate to carry out his duties. 3. Term. The period of employment hereunder shall be from December 1, 1999 ---- through November 30, 2000, subject to termination as hereinafter provided (the "Term"). ----- 4. Compensation. ------------ (a) For all services rendered by Employee under this Agreement, the Company shall pay Employee a base salary of One Hundred Fifty Thousand Dollars ($150,000.00) per annum ("Base Salary"), payable weekly in equal ----------- installments. Any increase to the Base Salary shall be pursuant to the decision of the Company's Board of Directors. (b) In addition to the Base Salary, Employee shall be paid such bonus as is provided for in Section 5 below. (c) Employee shall be reimbursed for all reasonable "out-of-pocket" business expenses for business travel and business entertainment incurred in connection with the performance of his duties under this Agreement. Such reimbursement shall be upon periodic presentation to the Company of valid receipts and other appropriate documentation and upon approval by the Company of such receipts and documentation; provided, however, any individual expense greater than One Thousand Dollars ($1,000) shall not be incurred without prior written approval of the Chairman. (d) Employee shall be entitled to a car allowance in the amount of One Thousand Five Hundred Dollars ($1,500.00) per month. (e) Employee shall also be entitled to such other employee benefits (such as vacation, and medical, disability and life insurance coverage, but excluding car allowance) as the Company may generally make available to its executive employees. (f) Employee shall be entitled to options to purchase two hundred thousand (200,000) restricted shares of the Company's common stock, at an exercise price equal to the mean between the high "bid" and low "ask" prices for shares of the Company's Common Stock on December 1, 1999, in the over-the-counter market, as reported by the National Association of Securities Dealers Automated Quotation System, and otherwise in accordance with the Stock Option Agreement dated the same date herewith between Employee and the Company. Employee shall be entitled to purchase an additional one hundred fifty thousand (150,000) restricted shares of the Company's common stock on the same terms and conditions as set forth in said Stock Option Agreement upon the surrender to the Company by ING Equity Partners, L.P. I of one hundred fifty thousand (150,000) of its warrants to purchase common stock of the Company represented by that certain Common Stock Purchase Warrant, dated July 27, 1995, as amended. 5. Performance Bonus. ----------------- (a) In addition to the Base Salary, the Company shall pay Employee a bonus which may be up to forty percent (40%) of Employee's then applicable Base Salary if the Company achieves specific performance goals for the applicable fiscal year. Such goals shall be determined for each fiscal year by the Compensation Committee of the Company's Board of Directors. (b) Notwithstanding anything contained herein to the contrary, Employee shall only be entitled to receive the bonus for a fiscal year if he remains employed by the Company, and continues to render services on a full-time basis to the Company, through the third month following the end of such fiscal year. Payment of any such bonus earned by Employee shall be made by no later than the one hundred eightieth (180th) day following the end of such fiscal year. 6. Scope of Duties. --------------- (a) Until otherwise instructed by the Chairman or the Board of Directors of the Company, Employee shall have responsibility for the Company's business, day to day operations, and financing and accounting matters. (b) Employee shall have such other duties as may be assigned to him from time to time by the Chairman or the Company's Board of Directors. -2- (c) Employee shall perform his duties subject to the control and supervision of the Company's Chairman and Board of Directors, and Employee shall be subject to the Company's policies and procedures generally applicable to executive employees of the Company. (d) Employee hereby agrees to devote his full time, abilities and energy to the faithful performance of duties assigned to him and to the promotion and forwarding of the business affairs of the Company. Notwithstanding the foregoing, during the period commencing from December 1, 1999 through February 29, 2000, Employee shall be entitled to provide Raleigh Enterprises with reasonable assistance to facilitate the transition from Employee to Employee's replacement at Raleigh Enterprises. Employee also agrees not to divert any business opportunities from the Company to himself or to any other person or business entity. (e) Employee shall not, during the term of this Agreement, be engaged in any other employment or business activity without the prior consent of the Chairman and the Board of Directors of the Company; provided, however, that this restriction shall not be construed as preventing Employee from investing his personal assets in passive investments in business activities that are not in competition with the Company or any "Affiliate" of the Company. The term "Affiliate" means, with respect to any person or entity, any other person or --------- entity which, directly or indirectly through one or more intermediaries, is in control of, is controlled by or is under common control with, such person or entity. "Control of", "controlled by" and "under common control with" means the ---------- ------------- ------------------------- possession, directly or indirectly, of the power to direct or cause the direction of the management policies of a person or entity, whether through the ownership of voting securities, by contract or credit arrangement, as trustee or executor, or otherwise. The term "Affiliate" includes, but is not limited to, each and every subsidiary of the Company. (f) Employee hereby agrees to promote and develop all business opportunities that come to his attention relating to current or anticipated future business of the Company or any Affiliate of the Company, in general, in a manner consistent with the best interests of the Company, or its Affiliates, as applicable, and with his duties under this Agreement. 7. Term and Termination. -------------------- (a) This Agreement shall automatically terminate on the death of Employee and, subject to applicable law, this Agreement shall terminate in the event of the continued "incapacity" of Employee for a period of one hundred eighty (180) consecutive days. "Incapacity" shall mean the physical or mental ---------- incapacity or inability of Employee to fully discharge Employee's duties hereunder. (b) The Company shall have the right to terminate Employee's employment for "cause" at any time without prior notice, if any of the following, which shall constitute "cause", shall occur: (i) Employee is convicted of a felony or a ----- crime of moral turpitude; (ii) Employee's act of dishonesty or fraud against the interest of the Company; and (iii) Employee's breach of any provision of this Agreement. (c) Employee may terminate this Agreement if there shall be a breach by the Company of a material obligation hereunder and, to the extent such breach can be cured, such -3- breach remains uncured for a period of ten (10) days following receipt by the Company's Board of Directors of written notice thereof from Employee, if such breach can be cured by the payment of money, or a period of thirty (30) days following receipt by the Company's Board of Directors of written notice thereof from Employee, if such breach can be cured by other than the payment of money. (d) In the event of termination of Employee's employment for "cause", commencing on the date of termination, Employee shall be entitled to no further compensation or employee benefits, except for those salary amounts and employee benefits accrued and unpaid as of the date of termination and except for any bonus due under Section 5 above. 8. Insurance. Employee hereby acknowledges and agrees that the Company shall --------- have the right to procure insurance to insure against the risk of death or disability of Employee during the term of this Agreement. If the Company so elects to purchase such insurance, such insurance shall name the Company as the beneficiary in the event of Employee's death or disability. Employee hereby agrees to cooperate with the Company in connection with the procurement and maintenance of such insurance. 9. Arbitration. ----------- (a) Except as provided in this Agreement, any dispute, controversy or claim arising out of or relating to this Agreement or breach thereof (including, but not limited to, claims for wrongful discharge, breach of contract, wrongful demotion, wrongful termination in violation of public policy, breach of the covenant of good faith and fair dealing, discrimination, harassment, and any and all claims under the California Fair Employment and Housing Act, as amended, Government Code Sections 12900 et seq., Title VII of the Civil Rights Act of -- --- 1964, as amended, the Americans with Disabilities Act, the Age Discrimination in Employment Act, or 42 USC Section 1981), shall be settled by binding arbitration heard by one arbitrator, in accordance with the American Arbitration Association's National Rules for the Resolution of Employment Disputes (the "Rules"). The parties hereto agree that the venue of such arbitration shall be ----- Los Angeles, California. The party intending to arbitrate shall serve a written notice of intention to commence arbitration on the other party. The arbitrator shall be appointed in accordance with the Rules. (b) The arbitrator shall be bound by the terms and conditions of this Agreement and shall have no power, in rendering the award, to alter or depart from any express provision of this Agreement, and his failure to observe this limitation shall constitute grounds for vacating the award. Any award of the arbitrator shall be final and binding upon the parties and judgment may be entered in any court of competent jurisdiction, including, without limitation, the courts of the State of California or any Federal court in California or any court of competent jurisdiction in the United States. The award and judgment thereon shall include interest at the legal rate from the date that the sum awarded to the prevailing party was originally due and payable. (c) All provisional remedies shall be the exclusive jurisdiction of the courts. The parties may seek and obtain provisional remedies prior to or contemporaneously with arbitration. -4- (d) If any legal action or dispute arises under this Agreement, arises by reason of any asserted breach of it, or arises between the parties and is related in any way to the subject matter of the Agreement, the prevailing party shall be entitled to recover all costs and expenses, including reasonable attorneys' fees, arbitration costs, investigative costs, reasonable accounting fees and charges for experts. Attorneys' fees and expenses incurred in enforcing any judgment are recoverable as a separate item and shall be severable from other provisions of this Agreement, shall survive any judgment and shall not be merged into such judgment. (e) Except as otherwise provided in this Agreement, each of the parties consents and submits to the exclusive jurisdiction and venue of the State of California for the adjudication of any dispute between the parties pertaining to this Agreement or the alleged breach of any provision hereof. 10. Severability. Nothing contained herein shall be construed to require the ------------ commission of any act contrary to law. Should there be any conflict between any provision hereof and any present or future statute, law, ordinance, regulation, or other pronouncement having the force of law, the latter shall prevail, but the provision of this Agreement affected thereby shall be curtailed and limited only to the extent necessary to bring it within the requirements of the law, and the remaining provisions of this Agreement shall remain in full force and effect. 11. Governing Law. This Agreement is made under and shall be construed ------------- pursuant to the laws of the State of California. 12. Counterparts. This Agreement may be executed in counterparts and all ------------ documents so executed shall constitute one agreement, binding on all of the parties hereto, notwithstanding that all of the parties did not sign the original or the same counterparts. 13. Entire Agreement. This Agreement constitutes the entire agreement and ---------------- understanding of the parties with respect to the subject matter hereof and supersedes all prior oral or written agreements, arrangements, and understandings with respect thereto. No representation, promise, inducement, statement or intention has been made by any party hereto that is not embodied herein, and no party shall be bound by or liable for any alleged representation, promise, inducement, or statement not so set forth herein. 14. Modification. This Agreement may be modified, amended, superseded, or ------------ canceled, and any of the terms, covenants, representations, warranties or conditions hereof may be waived, only by a written instrument executed by the parties hereto. 15. Waiver. The waiver by either of the parties, express or implied, of any ------ right under this Agreement or any failure to perform under this Agreement by the other party, shall not constitute or be deemed as a waiver of any other right under this Agreement or of any other failure to perform under this Agreement by the other party, whether of a similar or dissimilar nature. 16. Cumulative Remedies. Each and all of the several rights and remedies ------------------- provided in this Agreement, or by law or in equity, shall be cumulative, and no one of them shall be exclusive of any other right or remedy, and the exercise of any one or such rights or remedies shall not be deemed a waiver of, or an election to exercise, any other such right or remedy. -5- 17. Headings. The section and other headings contained in this Agreement are -------- for reference purposes only and shall not in any way affect the meaning and interpretation of this Agreement. 18. Notices. All notices, requests, demands and other communications required ------- or permitted hereunder shall be in writing and shall be deemed to have been given immediately when delivered by hand or by confirmed facsimile transmission, or three (3) days after being mailed, certified or registered mail with postage prepaid, to: (a) if to Employee: 100 Wilshire Boulevard, 8th Floor Santa Monica, California 90401 Facsimile No.: (b) if to the Company: 3111 North Kenwood Street Burbank, CA 91505 Attention: Mr. Carlos D. DeMattos Facsimile No.: (818) 525-5216 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first set forth above. /s/ Anil Sharma --------------- ANIL SHARMA MATTHEWS STUDIO EQUIPMENT GROUP By: /s/ Carlos D. DeMattos ---------------------- Name: Carlos D. DeMattos Title: Chairman -6- EX-10.27 6 STOCK OPTION AGREEMENT Exhibit 10.27 ------------- STOCK OPTION AGREEMENT ---------------------- This STOCK OPTION AGREEMENT (the "Agreement") is made and entered into as --------- of December 1, 1999, by and between Matthews Studio Equipment Group, a California corporation (the "Company"), and Anil Sharma, an individual (the ------- "Optionee"). - --------- WITNESSETH: WHEREAS, the Company has agreed to grant to Optionee non-qualified options to purchase one hundred fifty thousand (150,000) restricted shares of common stock of the Company outside of the Matthews Studio Equipment Group 1994 Stock Option Plan (the "Plan"); and ---- WHEREAS, the Company and Optionee wish to more fully set forth the terms of these options issued to Optionee outside the Plan by entering into this Agreement; NOW THEREFORE, it is agreed by and between the parties hereto as follows: 1. Subject to the terms set forth below, the Company hereby evidences and confirms the grant to Optionee of options (the "Options") to purchase two ------- hundred thousand (200,000) restricted shares of the Company's Common Stock at an exercise price of Three Dollars and 375/1000 Dollars ($3.375) per share (the "Option Shares"). - -------------- 2. The Options shall vest in three (3) installments, with the first installment of sixty-six thousand six hundred sixty-six (66,666) Options to vest on November 30, 2000, the second installment of sixty-six thousand six hundred sixty-six (66,666) Options to vest on November 30, 2001 and the third installment of sixty-six thousand six hundred sixty-seven (66,667) Options to vest on November 30, 2002, provided that Optionee's employment with the Company remains uninterrupted for the twelve-month period preceding the respective vesting date. The foregoing vesting schedule notwithstanding, all Options shall vest (i) immediately prior to the consummation of a merger, consolidation or other reorganization of the Company into or with another entity which is not an Affiliate (as defined below) of the Company, or (ii) on the date on which Optionee's employment is terminated by the Company for a reason other than (a) death, Disability (as defined below), or (c) for "cause" (the term "cause" is as ----- described in the Employment Agreement dated of even date herewith between the Company and Optionee, as same may be amended from time to time (the "Employment ---------- Agreement")). The term "Disability" as used herein shall mean the mental or - --------- ---------- physical incapacity or inability of Optionee to fully discharge Optionee's duties under the Employment Agreement. The term "Affiliate" shall mean, with --------- respect to any person or entity, any other person or entity which, directly or indirectly through one or more intermediaries, is in control of, is controlled by or is under common control with, such person or entity. "Control of", ---------- "controlled by" and "under common control with" mean the possession directly or - -------------- ------------------------- indirectly, of the power to direct or cause the direction of the management policies of a person or entity, by contract or credit arrangement, as trustee or executor, or otherwise. The term "Affiliate" includes, but is not limited to, --------- each and every subsidiary of the Company. 1 3. The Options shall expire on the earlier of (i) November 30, 2009, or (ii) immediately subsequent to the consummation of a merger, consolidation or other reorganization of the Company into or with another entity which is not an Affiliate of the Company; and in any event the Options are subject to earlier cancellation or termination as provided in this Agreement. In no event may Options be exercised after the expiration date specified in the preceding sentence. The Options shall be exercised only with respect to full shares of Common Stock; no fractional shares of stock shall be issued. 4. The Options are nonstatutory options and do not qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended. 5. Any vested and unexercised Options automatically shall terminate and have no further force or effect whatsoever (i) upon the termination of Optionee's employment by the Company for "cause" (the term "cause" is as defined in the Employment Agreement), or (ii) upon Optionee's termination of employment with the Company in breach of the Employment Agreement, or (iii) upon Optionee's termination of employment with the Company to become associated with a competitor of the Company. Except as set forth in Section 2(ii) above, any ------------- Options which shall not have vested on the date Optionee's employment with the Company terminates (regardless of whether such termination is for "cause", to become associated with a competitor or by reason of death or Disability), shall automatically be terminated and have no further force or effect. 6. If Optionee ceases to be an employee of the Company by reason of Disability, all vested and unexercised Options shall be exercisable by Optionee, his guardian or other authorized legal representative within the period of one (1) year following the date of cessation of employment. In the event cessation of employment shall be because of death, all vested and unexercised Options shall be exercisable within the period of one (1) year following the date of death by the estate of Optionee or by the person or persons to whom Optionee's rights under the Options shall pass by Optionee's will or the laws of descent and distribution. If Optionee ceases to be an employee of the Company under circumstances other than (i) termination for "cause" as described in Section 5, --------- (ii) such termination being in breach of the Employment Agreement, (iii) to become associated with a competitor of the Company or (iv) due to Disability or death, as described above in this Section 6, all Options which on the date of --------- such termination are vested and remain unexercised shall be exercisable within three (3) months following such date of termination. (For clarification purposes, Options that become immediately vested pursuant to Section 2(ii) above ------------- shall also be exercisable within three (3) months following the date of termination.) All vested but unexercised Options shall terminate at the end of the one-year or three-month period described in this Section 6, provided that in --------- no event may Options be exercised after the expiration date specified in Section ------- 3 above. - - 7. In order to exercise the Options, in whole or in part, Optionee shall give written notice to the Company, specifying the number of Option Shares to be purchased and the purchase price being paid, and accompanied by payment of the purchase price. Such purchase price may be paid in cash or by a certified check or cashier's check payable to the Company. Alternatively, the Options may be exercised in whole or in part by delivering a properly executed notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds necessary to pay the purchase price and applicable withholding 2 taxes, and such other documents as the Company may determine. Upon receipt of payment, the Company shall deliver to Optionee (or other person entitled to exercise the Options) a certificate or certificates for the Option Shares. 8. Optionee shall be required to pay in cash to the Company the amount of any taxes the Company is required by law to withhold with respect to the exercise of the Options. If any provision of this Agreement is determined not to comply with the requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Act"), as then applicable to any such --- transaction so that Optionee would be subject to liability under Section 16(b) of the Act, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements, and Optionee shall be deemed to have consented to such construction or amendment. In the event that, at Optionee's request, the Company agrees to a transaction involving the withholding of shares of the Company's Common Stock in lieu of a payment from Optionee, the shares to be withheld shall be valued at the "fair market value". The "fair market value" of a share of Common Stock on a specified date shall be the mean between the high "bid" and low "ask" prices for shares of Common Stock on such date in the over-the-counter market, as reported by the National Association of Securities Dealers Automated Quotation System (or other quotation service) or, if such shares are then traded on a national stock exchange, the closing price of the Common Stock on such date on such national stock exchange. 9. During the lifetime of Optionee, the Options shall be exercisable only by Optionee or, if Optionee is disabled, by his guardian or other authorized legal representative (regardless of any community property interest of Optionee's spouse, if any). If Optionee's spouse has acquired a community property interest in any Option, Optionee or his permitted successor in interest may exercise the Option on behalf of Optionee's spouse or the spouse's successor in interest. Except as otherwise provided in Section 6 and this Section, the --------- Options shall not be assigned, transferred, pledged, hypothecated in any way or otherwise disposed of (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. 10. The Options shall not be exercisable and no Option Shares will be delivered hereunder except in compliance with all applicable federal and state laws and regulations including, without limitation, compliance with withholding tax requirements and with the rules of all stock exchanges and/or The Nasdaq Stock Market on or with which the Company's Common Stock may be listed. Any share certificate issued to evidence Option Shares for which the Options are exercised may bear such legends and statements as the Company shall deem advisable to assure compliance with federal and state laws and regulations. No Options shall be exercisable, and no Option Shares shall be delivered hereunder, until the Company has obtained consent or approval from regulatory bodies, federal or state, having jurisdiction over such matters as the Company may deem advisable. In the case of the exercise of the Options by a person or estate acquiring the right to exercise the Options by bequest or inheritance, the Company may require reasonable evidence as to the ownership of the Options and may require consents and releases of taxing authorities that it may deem advisable. 11. In connection with the parties' execution of this Agreement, Optionee shall execute and deliver to the Company an Investor's Certificate in form and substance satisfactory 3 to the Company. Any other person or persons entitled to exercise the Options under the provisions of this Agreement shall also furnish to the Company the same documentation, should the Company require. 12. In the event of any change in the outstanding Common Stock of the Company by reason of any stock dividend, stock split, combination of shares, recapitalization, or other similar change in the capital stock of the Company, there shall be substituted for or added to each Option Share theretofore appropriated for the purposes of this Agreement or thereafter subject, or which may become subject to an Option under this Agreement, the number and kind of Option Shares, stock or other securities into which each outstanding Option Share shall be so changed or for which each such Option Share shall be exchanged or to which each such Option Share shall be entitled, as the case may be. Outstanding Options shall be appropriately amended as to price and other terms in a manner consistent with the aforementioned adjustment to the Option Shares or the Company's Common Stock subject to this Agreement. Adjustments under this Section 12 will be made by the Company's Board of Directors, whose determination - ---------- as to what adjustments will be made, and the extent thereof, will be final, binding and conclusive. 13. Nothing contained in this Agreement shall confer upon Optionee any right to the continuation of his employment or limit in any way the right of the Company to terminate his employment at any time. Neither Optionee nor any other person legally entitled to exercise the Options will be entitled to any of the rights or privileges of a shareholder of the Company in respect of any Option Shares issuable upon any exercise of Options unless and until a certificate or certificates representing such shares has actually been issued and delivered to him. 14. This Agreement shall be construed and enforced in accordance with the laws of the State of California, and shall be binding upon and inure to the benefit of any successor or assign of the Company and any permitted assign of Optionee, and any executor, administrator, legal representative, legatee, or distributee entitled by law to exercise Optionee's rights hereunder. 15. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall be deemed not to affect any other provision of this Agreement, but this Agreement shall be construed as if such provision held to be invalid or illegal or unenforceable had never been contained herein and such provision shall be reformed so that it would be valid, legal and enforceable to the maximum extent possible. 4 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. MATTHEWS STUDIO EQUIPMENT GROUP By:/s/ Carlos D. DeMattos ---------------------------------- Carlos D. DeMattos, Chairman of the Board /s/ Anil Sharma ------------------------------------ ANIL SHARMA 5 EX-21 7 LIST OF THE COMPANY'S SUBSIDIARIES Exhibit 21 ---------- List of Subsidiaries of Matthews Studio Equipment Group 1. Hollywood Rental Company, LLC ----------------------------- State of Formation: Delaware Names Under Which Subsidiary Conducts Business: Hollywood Rental Company, LLC Hollywood Rental Company 2. Matthews Acceptance Corporation ------------------------------- State of Incorporation: California Names Under Which Subsidiary Conducts Business: Matthews Acceptance Corporation MAC 3. Matthews Studio Electronics, Inc. --------------------------------- State of Incorporation: California Names Under Which Subsidiary Conducts Business: Matthews Studio Electronics, Inc. Matthews Studio Electronics 4. 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 5. 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. 6. Matthews Studio Sales, Inc. --------------------------- State of Incorporation: California Names Under Which Subsidiary Conducts Business: Matthews Studio Sales, Inc. ESS ESS International Expendable Supply Store 7. HDI Holdings, Inc. ------------------ State of Incorporation: Kentucky Names Under Which Subsidiary Conducts Business: HDI Holdings, Inc. HDI 8. Four Star Lighting, Inc. ------------------------ State of Incorporation: New York Names Under Which Subsidiary Conducts Business: Four Star Lighting, Inc. Four Star Stage Lighting, Inc. 9. ShowbizMart.com Inc. -------------------- State of Incorporation: Delaware Names Under Which Subsidiary Conducts Business: ShowbizMart.com -2- EX-23 8 CONSENT OF INDEPENDENT AUDITORS 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 January 11, 2000, 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, 1999, filed with the Securities and Exchange Commission. Los Angeles, California /S/ Ernst & Young LLP January 11, 2000 EX-27 9 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from form 10K year ended September 30, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS SEP-30-1999 OCT-01-1998 SEP-30-1999 390 0 11,313 1,420 3,312 14,384 87,728 33,560 91,227 24,687 0 0 0 8,132 (24,703) 91,227 20,368 59,802 16,808 42,716 0 481 7,634 (22,703) (2,531) (20,172) 0 0 0 (20,172) (2.17) (2.17)
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