-----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, MyZVL7ROIwFVUeKI9z2KvFKnlBKZbRq6T1U1MnX/T6sAXa1mA6S86mab0LyWQr4V P/HgbrGGWIzy8++OQRyWKA== 0000898430-97-005473.txt : 19971230 0000898430-97-005473.hdr.sgml : 19971230 ACCESSION NUMBER: 0000898430-97-005473 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971229 SROS: NASD 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: 97745695 BUSINESS ADDRESS: STREET 1: 3111 N KENWOOD ST CITY: BURBANK STATE: CA ZIP: 91504 BUSINESS PHONE: 8436715X32 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, 1997 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. [ ] At December 15, 1997, the aggregate market value of the Registrant's voting stock held by nonaffiliates of the Registrant was approximately $20,123,416. On December 15, 1997, Registrant's outstanding voting stock consisted of 10,988,806 shares of Common Stock, each no par value. - -------------------------------------------------------------------------------- TABLE OF CONTENTS PART I
PAGE ---- Item 1. BUSINESS................................................................................. 1 Item 2. PROPERTIES............................................................................... 4 Item 3. LEGAL PROCEEDINGS........................................................................ 4 Item 4. SUBMISSION OF MATTTERS TO A VOTE OF SECURITY HOLDERS..................................... 4 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................................................................... 5 Item 6. SELECTED FINANCIAL DATA.................................................................. 5 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................... 6 Item 8. FINANCIAL STATEMENTS..................................................................... 13 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................................... 13 PART III Item 10. DIRECTORS; EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT...................................................................................... 14 Item 11. EXECUTIVE COMPENSATION................................................................... 18 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................................................... 19 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... 23 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.............................................................................. 24 SIGNATURES............................................................................................ 25 INDEX TO FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT................................................................................................ F-1
i PART I ITEM 1. BUSINESS Matthews Studio Equipment Group (the "Company") designs, manufactures, sells, distributes, leases and rents essential audio, video, film and production equipment, to the motion picture, television, corporate, video and photography industries. The Company provides, as a single source, the necessary production equipment which is otherwise only available by using many different suppliers. The Company supplies such equipment as lights, grip lighting supports, professional video equipment, camera mounts, tripods, pedestals, fluid heads, camera dollies, portable and foldable camera cranes, power generators and production trucks and its patented electronic Cam-Remote(R) and Mini- Mote(R)C.A.T.(R) Systems. Matthews Studio Equipment Group has additionally enhanced its available product line through carefully selected acquisitions and is also a major supplier of film and video cameras and fully operational and equipment supplied soundstages and studios. Matthews Studio Equipment Group believes that it plays a significant role in both the entertainment and corporate industries by providing a single outlet source for production equipment. The Company's manufactured products are distributed worldwide by its sales force and by independent dealers and distributors located in North America, Europe, Asia and South America. The Company has won a number of awards for its manufactured products, including two technical achievement awards from the Academy of Motion Picture Arts and Sciences in March 1983 and March 1985 and one from the Academy of Television Arts and Sciences in September 1989. FORM AND YEAR OF ORGANIZATION The Company was incorporated in California in May 1958. In February 1989, it changed its corporate name from Captech, Inc. to its present (Matthews Studio Equipment Group) name after a reverse acquisition (exchange of stock and pooling of interest) with Matthews Studio Equipment, Inc., a California corporation incorporated in January 1970, which is now a wholly owned subsidiary of the Company. RENTAL EQUIPMENT PRODUCTION EQUIPMENT, INCLUDING GRIP, LIGHTING AND POWER GENERATION. Hollywood Rental Co., Inc. ("HRC"), a wholly owned subsidiary of the Company, supplies the motion picture and television industry with a diverse range of production equipment, specializing in lighting and grip equipment, power generators and production trucks. HRC offers varied supplies and services in support of its production packages and offers a complete line of all levels of lighting and grip equipment, pre-packaged trucks and production vans. Additionally, Hollywood Rental Generators, a division of HRC, offers, on a rental basis, 40 foot and 45 foot production vans and tow generators from 200 amps to 3000 amps to support the power demands necessitated in production environments. HRC has facilities in Burbank, California, Charlotte, North Carolina, Phoenix, Arizona, Albuquerque, New Mexico and Cincinnati, Ohio. The HRC rentals vary from short periods of time to the complete duration of the filming of a feature film or television series. HRC generally issues its invoices for these rentals weekly. The lessee is typically responsible for the loss, damage or destruction, whether by fire, other casualty or accident, of such equipment, and in the event of damage, the lessee also ordinarily agrees to pay the accrued rental plus the cost of necessary repairs. HRC's usual procedure is to require each of its lessees to furnish a certificate of insurance providing for comprehensive coverage, including liability, injury and property damage. In fiscal 1996, the Company commenced long-term equipment management and marketing arrangements ("Marketing Center") with Seattle-based Jonas Jensen Studios, Inc. and Nashville-based D R & A, Inc. For each Marketing Center arrangement completed in fiscal 1996, the Company acquired the production equipment of the independent dealer and added other production equipment to such inventory, to create a mix of equipment more capable of fully servicing the needs of customers. HRC's rental activities accounted for approximately 45% of the Company's revenues in fiscal 1997. PROFESSIONAL BROADCAST VIDEO EQUIPMENT. Duke City Video, Inc. ("Duke City"), was acquired by the Company in May of 1997. Duke City specializes in the rental of professional broadcast video equipment (including cameras) to all sectors of the production community. Duke City provides video equipment production packages to its customers for use in television broadcasting events, inside the studio as well as outside, for "on location" productions. Duke City has three operating 1 outlets in Dallas, Texas, Albuquerque, New Mexico and Burbank, California. The Albuquerque location also houses a small videocassette duplication facility that operates under the name Duke City Dubs and is the primary videocassette duplication facility in Albuquerque, New Mexico. Duke City supports both short and long term rental projects with corresponding invoices issued at the conclusion of the rental or monthly for extended shows. The lessee typically retains responsibility for loss, damage or destruction, whether by fire, other casualty or accident, of such equipment, and in the event of damage, the lessee also ordinarily agrees to pay the accrued rental plus the cost of necessary repairs. Similar to HRC's procedure, Duke City also usually requires each of its lessees to furnish a certificate of insurance providing for comprehensive coverage, including liability, injury and property damage. Duke City's rental activities accounted for approximately 9% of the Company's revenues in fiscal 1997. CAM-REMOTE(R) AND MINI-MOTE(R) C.A.T.(R) SYSTEMS ("SYSTEMS"). Prior to October 1, 1994, Matthews Studio Electronics, Inc., a wholly owned subsidiary of the Company ("Studio Electronics"), conducted its business in partnership with E. F. Nettmann & Associates, Inc. ("Nettmann") to manufacture and market the Systems. On October 1, 1994, the partnership was dissolved and the assets were distributed to the partners in accordance with their partnership interests. Since October 1, 1994, the assets distributed to and owned by the Company are being marketed and managed by Nettmann pursuant to an exclusive license for technology relating to the Systems and under a management agreement between Nettmann and Studio Electronics ("Management Agreement"). Nettmann's president and principal shareholder is Ernst F. Nettmann, who is a director of the Company. See Item 13, Certain Relationships and Related Transactions. Matthews Studio Equipment Group and Nettmann jointly support the invention and marketing of products that fall under the auspices of Studio Electronics. The Systems utilize state of the art electronic circuitry to duplicate delicate hand motions and enable the operator remotely to pan, tilt, zoom and focus any film or video camera. The Systems are available for rental or long term lease and in fiscal 1996, the Company also commenced to market and sell the Mini-Mote(R) C.A.T.(R) Systems. Revenues from the aggregate of these activities accounted for approximately 2% of the Company's revenues in fiscal 1997. PRODUCTS EQUIPMENT AND ACCESSORIES FOR LIGHTING SUPPORT, CAMERA SUPPORT AND LIGHTING CONTROL. Matthews Studio Equipment, Inc. ("Studio Equipment"), a wholly owned subsidiary of the Company, designs and manufactures grip lighting supports, grip accessories and accessories to control lighting, grip camera supports, camera mounts, tripods, pedestals, fluid heads, camera dollies, portable and foldable camera cranes, equipment and accessories that are used in the production of motion pictures, television and video programs, still photography, theatrical productions and certain retail applications. All of Studio Equipment's products are sold under the "Matthews/TM/" trademark. Sales of these products by Studio Equipment accounted for approximately 28% of the Company's revenues in fiscal 1997. PRODUCTION SUPPLIES AND PRODUCTS. As part of its goal to be a full service, one-source supplier to the entertainment industry, the Company sells many different supplies which are generally consumed in the production process. These include art and cleaning products, hardware and tools, light bulbs, tape, paint, gels, lubricants, lumber and other miscellaneous items. These items are sold chiefly as an adjunct of equipment rentals at the Company's facilities in Burbank, California and Charlotte, North Carolina. During fiscal year 1997, the Company acquired the assets and operations of Media Lighting Supply Inc. ("MLS"), a production supply distributor in Miami, Florida., thereby adding another location for sales of these supplies. Sales from these supplies accounted for approximately 16% of the Company's revenues in fiscal 1997. EQUIPMENT LEASING. Matthews Acceptance Corporation ("MAC"), a wholly owned subsidiary of the Company, is engaged in the leasing of equipment manufactured by the Company on a long term basis. After Company equipment is selected by a credit worthy lessee, MAC purchases and rents the equipment to the lessee. At September 30, 1997, the MAC portfolio of leases consisted of 19 leases and represented approximately $1,027,000 of lease receivables. Revenues from this lease segment represented less than 1% of the Company's revenues in fiscal 1997. 2 SALES AND MARKETING The Company's manufactured equipment (other than the Systems) is sold through sales representatives employed by the Company. The Company also has appointed independent dealers in North America, Europe, Asia and South America. These independent dealers purchase the Company's products for sale or lease to their customers. The Company's rental equipment is rented through representatives employed by the Company, and by the Marketing Centers. The Company's Cam- Remote(R) and Mini-Mote(R) C.A.T.(R) Systems are rented by the Company's representatives and by independent dealers in North America, Europe and Asia. The Company supplies its manufactured and rental equipment to a wide range of customers. No one customer accounted for more than 10% of the Company's annual product sales revenues. However, in fiscal year 1997, a single customer accounted for 19% of annual rental revenues, from rental of the Company's equipment for the production of a large budget feature film, which was completed in the second quarter of the fiscal year. MANUFACTURING AND SUPPLIERS The Company purchases raw materials, components, products and services as required from numerous suppliers, no one of which accounted for more than 10% of the Company's annual purchases. The Company believes that there are adequate alternative sources of supply at commercially reasonable rates for all products, materials and services required by its operations. COMPETITION The Company competes with numerous manufacturers, distributors, equipment rental companies and suppliers of production equipment for commercial use. The Company believes that some of these entities are larger and better capitalized than the Company. The Company also competes with numerous small rental and equipment sellers. The principal competitive factors in the industries serviced by the Company are product quality, product availability, product support services, innovation and pricing. The technology for remote, electronically controlled camera operating systems is continually developing. It is difficult to predict how these developments will affect the sales and rentals of the Company's Cam-Remote(R) and Mini-Mote(R) C.A.T.(R) Systems in the future. Although no assurance can be given, the Company believes that its expertise in the area of remote, electronically controlled equipment for film and television camera operation will enable the Company to adapt successfully to such technological developments as may occur. The Company is aware of eight companies which are manufacturing products similar to the Company's foldable camera cranes, seven companies which are manufacturing products similar to the Company's grip lighting and camera support lines and nine companies which are manufacturing remote camera operating systems that have features similar to the Company's Cam-Remote(R) and Mini-Mote(R) C.A.T.(R) Systems. In addition to the seven major studios located in Southern California, and several small competitors in other markets, the Company is aware of six non- studio independent production equipment rental companies which are its principal competitors in the Southern California rental market. The Company is also aware of two principal competitors in the video equipment rental market, with operations located in each of the Company's primary customer bases for video equipment. The Company's video equipment operations also compete with numerous small rental companies. The Company believes that its domestic and international marketing network and the quality of its manufactured products allow it to compete favorably in each of its business segments. The Company believes that the quality and quantity of its production equipment rental inventory coupled with the Company's reputation for reliability, versatility, performance and competitive pricing will provide the Company with a continuing competitive edge in the production and supply of equipment for commercial use by the entertainment production equipment rental supply business, the entertainment production industry and the still photography industry. PATENTS, TRADEMARKS, AND LICENSES While the Company has procured a number of trademark registrations and patents for its manufactured products, and one patent related to its Cam-Remote(R) System, the Company's business is not dependent on such protection. 3 YEAR 2000 The Company believes that entering into the year 2000 will have little or no impact on its systems. EMPLOYEES The Company had approximately 339 employees at September 30, 1997 (336 full time and 3 part-time). The Company is not a party to any collective bargaining agreements and its employees are not represented by a labor union. ITEM 2. PROPERTIES The Company's manufacturing and design facilities are located in Burbank, California, totalling approximately 68,000 square feet in five separate but adjacent buildings. Three such buildings, accounting for approximately 50,000 square feet, are leased under a master lease with PDM, a general partnership whose sole partners are Carlos D. De Mattos, the Chairman of the Board, President and Chief Financial Officer of the Company, and Edward Phillips, a director of the Company and President of Studio Equipment. During fiscal 1995, the Company and PDM agreed to cancel the then in effect master lease (which would have expired December 31, 1996), and entered into the current master lease with PDM. For purposes of this lease negotiation, the Company acted through and by its directors and executive officers other than Carlos D. De Mattos and Edward Phillips. Rent payable under the current master lease represents the averaging of lease payments that remained under the prior lease (i.e., 15 months at $1.23 per square foot) with lease payments for 36 months at $0.62 per square foot (which was at the time of such negotiations the prevailing rental rate for like property in the Burbank area). The average resulting rent for the entire 51- month period is $0.80 per square foot, and is the rental due to PDM under the current master lease, which commenced October 1, 1995 and will expire December 31, 1999. The Company also has the option to extend the term of the current master lease with PDM. In May 1997, the Company relocated its corporate and principal rental and sales offices to a new location with approximately 91,000 square feet in Burbank, California. This new facility also houses the Company's principal warehouse and showroom space. The facility is leased from an unrelated party, at an aggregate monthly rent of approximately $41,000, under a lease scheduled to expire in 2002. In addition, the Company leases from other unrelated parties an aggregate of approximately 58,000 square feet of sales office, warehouse and showroom space (i) in Burbank and Hollywood, California, (ii) in Miami and Orlando, Florida, (iii) in Dallas, Texas, (iv) in Tempe, Arizona and (v) in Charlotte, North Carolina, at an aggregate monthly rent of approximately $27,000. During fiscal year 1997, the Studio Electronics operations which is managed by Nettmann was relocated to a facility leased by Nettmann from an unrelated party. The Company will reimburse Nettmann approximately $3,000 per month in rental costs. During fiscal year 1997, the Company acquired , in the Duke City acquisition, land and a building located in Albuquerque, New Mexico, which includes sound stage and studio, rental office, warehouse and showroom space. ITEM 3. LEGAL PROCEEDINGS The Company is from time to time named as a defendant in the ordinary course of its business. In the opinion of management, after consultation with outside counsel, there are no outstanding suits or claims that may reasonably result in a material adverse effect on the business, financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 4 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is included in the Nasdaq National Market System under the symbol "MATT". As of December 15, 1997, there were 10,988,806 shares of common stock outstanding, held by approximately 209 shareholders of record. The Company believes there are in excess of 1,300 beneficial holders based on prior proxy listings. The following table sets forth the high and low bid prices for the Company's common stock, for the quarterly periods ended as shown:
(High) (Low) (Fiscal year 1996) December 31, 1995 2 1/8 1 1/2 March 31, 1996 2 5/8 1 1/2 June 30, 1996 2 3/16 1 7/8 September 30, 1996 2 1/8 1 1/2 (Fiscal year 1997) December 31, 1996 2 1/2 2 1/4 March 31, 1997 2 5/8 2 3/16 June 30, 1997 4 3 1/8 September 30, 1997 4 3/8 3 11/16
The quotations for the common stock set forth above represent bid quotations between dealers, do not include retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions and "real time" sale prices. The source of the bid information is Nasdaq. The Company has never paid dividends and does not expect to declare or pay any dividends in the foreseeable future. The Company's senior credit facility prohibits the payment of cash dividends. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data as of and for the five years ended September 30, 1997 are derived from the consolidated financial statements of Matthews Studio Equipment Group and subsidiaries, which have been audited by Ernst & Young LLP, independent auditors. The data set forth in this table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's Consolidated Financial Statements and the Notes thereto and the other financial information included elsewhere in this Annual Report on Form 10-K. 5
SELECTED FINANCIAL DATA (in thousands, except per share data) 1997 1996 1995 1994 1993 --------------------------------------------------------------------------- Rental revenues $ 25,589 $ 14,125 $ 12,797 $ 12,944 $ 11,522 Net product sales 20,769 16,079 14,554 12,482 14,132 --------------------------------------------------------------------------- 46,358 30,204 27,351 25,426 25,654 Gross profit - rental operations 11,070 6,109 5,301 6,018 5,398 Gross profit - sales 6,688 5,822 4,562 3,924 4,815 --------------------------------------------------------------------------- 17,758 11,931 9,863 9,942 10,213 Income (loss) before extraordinary item 1,706 1,003 208 (478) (390) Net income (loss) 1,512 1,003 (2,020) (478) (390) Income (loss) per common share primary: Before extraordinary item $ 0.16 0.10 $ 0.02 (0.05) $ (0.04) extraordinary item (0.02) - (0.22) - - Net income (loss) per share 0.14 0.10 (0.20) (0.05) (0.04) Income (loss) per common share assuming full dilution: Income (loss) before extraordinary item 0.15 0.10 0.02 (0.05) (0.04) extraordinary item (0.02) - (0.22) - - Net income (loss) per share 0.13 0.10 (0.20) (0.05) (0.04) Cash provided by (used in) operations $ 2,216 $ 4,698 $ (1,168) $ 1,207 $ 1,788 Cash used in investing activities (9,476) (5,789) (3,177) (1,160) (1,511) Cash provided by (used in) financing activities 7,191 1,115 4,048 (60) (33) EBITDA (Footnote 1) 9,650 6,043 4,849 2,466 4,250 Total assets 61,871 34,484 30,703 31,223 32,274 Working capital 9,662 7,953 7,872 4,405 2,857 Net property and equipment 35,187 20,339 17,226 16,223 16,391 Long term debt and capital lease obligations 36,715 18,914 17,664 11,597 10,813 Shareholders' equity 11,170 9,074 8,054 9,893 9,689
/1/ EBITDA represents earnings before taxes, interest expense, depreciation and amortization. The EBITDA for fiscal 1997 and 1995 are also before the extraordinary item. The EBITDA for fiscal 1993 is also before the restructuring charge. The Company believes that EBITDA serves as a financial analysis tool for measuring financial information such as operating performance and leverage ratios. EBITDA should not be considered by the reader as an alternative to net income as an indicator of the Company's performance or as an alternative to cash flows as a measure of liquidity. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company continued the trends from fiscal year 1996 of growth and improved operating results. The Company's business is continuing to evolve to meet the ongoing technological and business changes prevalent in the entertainment production industry and competitive pressures. 6 The Company is particularly addressing the need to provide its products and services throughout the United States as well as expanding its product lines. Through development of a marketing and distribution network in select geographic marketplaces, the Company has increased opportunities to improve rental asset utilization and expand core businesses. During fiscal year 1997, the Company amended and restated its senior secured revolving credit facility with The Chase Manhattan Bank as agent for a syndicate of lenders. The amended facility increased the credit line from $17,000,000, to $50,000,000, the proceeds from which have been used to fund the acquisition of rental equipment and to pay down higher interest senior subordinated debt ($4,900,000). Remaining funds available under the credit line will be used for the Company's working capital needs and future growth. At September 30, 1997, the Company's outstanding principal obligations under the credit facility were approximately $28,622,000 with all current repayment obligations under the credit facility having been met. Revenues from the Company's manufacturing, video and production equipment rental business grew a combined 54%, with income before income taxes and an extraordinary item (from early extinguishment of debt) having increased by 136% over last year. Approximately 13% of the total revenue of fiscal year 1997 was from large budget film projects which were completed during the year. In addition, approximately 9% of the total revenue of fiscal year 1997 was from video camera rental by Duke City, which was acquired during the third quarter of fiscal year 1997. Also contributing to the increase in the Company's total revenues was the addition of equipment to the Company's rental inventory base. Capital asset investments made in fiscal 1997 for the Company's equipment rental business permitted the Company to increase rental revenue and at the same time control subrental costs (i.e., costs to rent production equipment from third- parties to meet Company customers' needs). Concentrated marketing efforts on certain higher margin manufactured products continued during fiscal 1997, and permitted the Company to increase sales of its manufactured equipment. Industry-wide favorable conditions during fiscal 1997 also contributed to increases in sales and equipment rental revenues. 7 Year ended September 30, 1997, compared to year ended September 30, 1996 - -------------------------------- Revenues from Rental Operations Revenues from rental operations were $25,589,000 in fiscal 1997, an increase of $11,464,000 or 81% from $14,125,000 in fiscal 1996. Rental revenues at HRC increased by $7,177,000 to $20,900,000, as compared to $13,723,000 in fiscal 1996. This increase is primarily due to availability of additional rental equipment acquired during fiscal 1996 and 1997, industry-wide favorable conditions, including several large budget film projects and expansion in new geographic areas. In addition, the acquisition of Duke City in May 1997 accounted for $4,244,000 of the increased revenues. Net Product Sales Net equipment and supply sales for fiscal 1997 were $20,769,000, an increase of $4,690,000 or 29% from $16,079,000 in fiscal 1996. Equipment sales increased by $708,000 or 6% from fiscal 1996, primarily due to continued concentrated marketing efforts with expanded sales staff and product promotion. Sales of expendable supplies increased by $3,982,000 as a result of the renewed focus on the expendable supply business, including the acquisition of MLS in the southeastern United States in January 1997, which accounted for $3,259,000 of the increase. Gross Profit - Rental Gross profit on rental revenues, as a percentage of revenues, was 43% in fiscal 1997 and fiscal 1996. HRC's gross profit increased to 44%, compared to 43% in fiscal 1996. The increase in HRC's gross profit percentage was primarily due to increased rental activities, made possible partly from an increase of the Company's rental equipment inventory and partly from industry-wide favorable conditions, off set by higher sub-rental costs to support the substantial increases in rental demand. In addition, $1,403,000 of increased depreciation expenses were incurred in connection with additions to the rental equipment inventory and the acquisition of Duke City, since its acquisition in the third quarter of fiscal year 1997. Gross Profit - Sales Gross profit, as a percentage of sales, was 32% in fiscal 1997 as compared to 36% in fiscal 1996. The decrease was primarily due to an increase in lower- margin production supply sales in fiscal 1997. Gross profit on equipment sales, as a percentage of sales, decreased to 38% in fiscal 1997 from 39% in fiscal 1996 primarily due to a decrease in sales of higher-margin retail products. Selling, General and Administrative Selling, General and Administrative expenses including provision for doubtful accounts receivable increased $3,780,000 in 1997 from $8,849,000 to $12,629,000. As a percentage of sales such expenses decreased 2% to 27% in 1997, compared to 29% in 1996. The dollar increase is primarily due to the acquisitions of Duke City and MLS as well as a general increase in the Company's overall operations resulting in higher payroll, sales commission and bonus expenses. Interest Interest expense for fiscal 1997 was $2,763,000, an increase of $612,000 or 28% from $2,151,000 in fiscal 1996. The increase is attributable to increased indebtedness in fiscal 1997 incurred to fund the Company's growth including capital asset acquisitions to increase the Company's rental equipment inventory. Interest income in fiscal 1997 was $88,000, a decrease of $19,000 from $107,000 in fiscal 1996. 8 Income Taxes The Company recognized a provision for income taxes on income before extraordinary item of $748,000 fiscal 1997 compared to $35,000 in fiscal 1996. The Company's effective tax rate for fiscal 1997 was 30% compared to 3% in fiscal 1996, on income before extraordinary item. The difference between the effective tax rates is attributable to substantially lower recognition of net operating loss carryforwards in fiscal year 1997 compared to fiscal 1996. Extraordinary Loss on the Early Extinguishment of Debt The Company incurred an extraordinary loss on the early extinguishment of debt during fiscal 1997 of $194,000, net of income tax benefit of $130,000. These costs were incurred as a result of the early repayment of the Company's senior subordinated note to ING. Year ended September 30, 1996, compared to year ended September 30, 1995 - -------------------------------- Revenues from Rental Operations Revenues from rental operations were $14,125,000 in fiscal 1996, an increase of $1,328,000 or 10% from $12,797,000 in fiscal 1995. Rental revenues at HRC increased by $1,616,000 to $13,723,000, as compared to $12,107,000 in fiscal 1995. This increase is primarily due to availability of additional rental equipment acquired during fiscal 1996, and industry-wide favorable conditions. Net Product Sales Net equipment and supply sales for fiscal 1996 were $16,079,000, an increase of $1,525,000 or 11% from $14,554,000 in fiscal 1995. Equipment sales increased by $978,000 or 8% from fiscal 1995, primarily due to continued concentrated marketing efforts on certain higher margin products introduced in fiscal 1996. Partially offsetting the equipment sales increase was an $87,000 decline in sales of used equipment in fiscal 1996 compared to fiscal 1995. Gross Profit - Rental Gross profit on rental revenues, as a percentage of revenues, was 43% in fiscal 1996 as compared to 41% in fiscal 1995. HRC's gross profit increased to 43%, compared to 41% in fiscal 1995. The increase in gross profit percentage was primarily due to increased rental activities, made possible partly from an increase of the Company's rental equipment inventory coupled with a decrease in subrental costs, and partly from industry-wide favorable conditions. As discussed above, the Company made capital asset acquisitions (of rental equipment) in fiscal 1996 which expanded the Company's equipment rental inventory and permitted the Company to decrease subrental costs. The increase in gross profit percentage was partially offset by $365,000 of increased depreciation expenses incurred in connection with additions to the rental equipment inventory. Gross Profit - Sales Gross profit, as a percentage of sales, was 36% in fiscal 1996 as compared to 31% in fiscal 1995. Gross profit on equipment sales, as a percentage of sales, increased to 39% in fiscal 1996 from 35% in fiscal 1995. The increase was primarily due to a 8% increase in equipment sales in fiscal 1996, and to increased sales of the Company's higher margin products, which were introduced in fiscal 1995. Selling, General and Administrative Selling, General and Administrative expenses including provision for doubtful accounts receivable were 29% as percentage of sales in fiscal 1996, as compared to 28% in fiscal 1995. The dollar increase is primarily due to higher payroll, allowance for doubtful accounts receivable, sales commission and bonus expenses, a significant portion of which resulted from the Company's generally increased business. 9 Interest Interest expense for fiscal 1996 was $2,151,000, an increase of $23,000 or 1% from $2,128,000 in fiscal 1995. The increase is attributable to increased indebtedness in fiscal 1996 incurred to fund the Company's increased business and for capital asset acquisitions to increase the Company's rental equipment inventory. This increase, however, was partially offset by lower interest rates. Also, loan fee amortization costs were $275,000 in fiscal 1996 as compared to $403,000 in fiscal 1995. Interest income in fiscal 1996 was $107,000, a decrease of $31,000 from $138,000 in fiscal 1995. Income Taxes The Company recognized a provision for income taxes in fiscal 1996 of $35,000 as compared to a provision for income taxes on income before extraordinary item in fiscal 1995 of $59,000. The Company's effective tax rate for fiscal 1996 was 3% compared to 22% in fiscal 1995, on income before extraordinary item. The difference between the effective tax rates is primarily attributable to the recognition of net operating loss carryforwards. Extraordinary Loss on the Extinguishment of Debt The Company incurred an extraordinary loss on the extinguishment of debt during fiscal 1995 of $2,228,000, net of income tax benefit of $221,000. These costs were incurred in fiscal 1994 and fiscal 1995 for financing fees to establish the General Electric Capital Corporation credit facility, and fees to the Company's investment banker, as well as legal and accounting fees and prepayment penalties. LIQUIDITY AND CAPITAL RESOURCES During the fiscal year ended September 30, 1997, the Company financed its operations primarily through bank borrowings and internally generated funds. The Chase Bank Facility On July 27, 1995, the Company and its then principal subsidiaries (the "Borrowers") entered into an agreement for a senior secured revolving credit facility with The Chase Manhattan Bank (the "Chase Facility"), in an aggregate principal amount of up to $17 million. Borrowings under the Chase Facility by any of the Borrowers are cross- collateralized pursuant to a security agreement in which the Borrowers have granted Chase Bank a first priority lien and security interest in substantially all of their respective assets. On August 14, 1997, the Borrowers (including Duke City, which became a Borrower, as of that date) amended and restated its senior secured revolving credit facility with The Chase Manhattan Bank (the "Amended Chase Facility"), as agent for a syndicate of lenders ("Bank"). The Amended Chase Facility provides for revolving credit loans in an aggregate principal amount not in excess of $50 million at any time outstanding. The proceeds of the Amended Chase Facility may be used, 1) for general working capital purposes, 2) to finance the repayment of certain capitalized lease obligations, 3) to repay in full certain subordinated debt, 4) for the financing of future acquisitions with $10 million designated for such activities, and 5) to repurchase securities of the Company, with $5 million designated for such activities, all within the limits specified in the agreement. Interest on outstanding borrowings under the Amended Chase Facility at the Company's choice is at LIBOR plus a maximum of 2.75% or the greater of (i) Chase Manhattan Bank's Prime Rate plus a maximum of .75%, (ii) the Base CD Rate (as determined by the Bank) plus a maximum of 1.75% or (iii) the Federal Funds Effective Rate plus a maximum of 1.25%. In each case, the interest margin charged on outstanding loans may be reduced if specified ratios are achieved by the Company. In addition, the Company pays interest at a rate from three- eight's of one percent to one-half of one percent on the unused credit commitment. 10 The Amended Chase Facility matures August 14, 2002. The Amended Chase Facility requires the Company to maintain certain levels of net worth and on a quarterly basis certain levels of EBITDA (earnings before interest, taxes, depreciation and amortization), and to meet several financial ratios including interest coverage and debt-to-EBITDA. The Amended Chase Facility provides for annual capital expenditure limits of $9.0 million in fiscal 1997 and from $7.8 million to $8.6 million, for the fiscal years thereafter. Amounts (up to $2.0 million) permitted to be expended in a given fiscal year may be carried over (if not spent) and expended in the succeeding fiscal year. In addition, the annual limits will be increased by 25% in years when specified ratios have been achieved. At September 30, 1997, the Company had an outstanding principal balance of $28,622,000 and had $10,229,000 available under the Chase Facility, and was in full compliance with all covenants of the Chase Facility agreements and the ING agreements more specifically described in the several paragraphs which follow. The Company is also contingently liable to Chase Bank for an open Letter of Credit of $535,000. The ING Equity Partners, L.P. I Senior Subordinated Promissory Notes In connection with the refinancing of the GECC Facility in July 1995, the Company entered into a purchase agreement (as amended in April 1996, the "Purchase Agreement") with ING Equity Partners, L.P. I ("ING"), pursuant to which the Company sold to ING for a total purchase price of $5 million (i) its senior subordinated promissory notes in the aggregate principal amount of $5 million, bearing interest at an initial rate of 10% per annum, (ii) a common stock purchase warrant (the "ING Warrant") entitling ING to purchase 2,322,464 of the Company's outstanding shares of common stock at an initial purchase price per share of $2.50 and having certain antidilutive rights and (iii) one share of preferred stock of the Company entitling ING to voting rights, with respect to the number of shares underlying the ING Warrant. The ING Warrant required an adjustment of the exercise price to $2.00 per share if the Company does not complete a public offering of its common stock at a price of at least $2.50 per share with net proceeds to the Company of at least $10 million by July 27, 1998 (a "Qualifying Offering"). The Company amended these agreements in April 1996 primarily to effect the following: (i) certain limits are placed on ING's anti-dilution rights under the ING Warrant; (ii) except for voting rights accorded by law, the share of preferred stock issued to ING will not have the right to vote until there has been a default under the Purchase Agreement; and (iii) the shareholders of the Company must approve the stock options granted to Carlos D. De Mattos under his employment agreement with the Company and to Edward Phillips under his employment agreement with the Company and Studio Equipment. In the absence of shareholder approval, those options would have been reduced from options to purchase 200,000 shares of the Company's common stock to 12,500 shares, in each individual's case. (See Item 12, Security Ownership of Certain Beneficial Owners and Management.) As amended the Purchase Agreement provided for a $100,000 subordinated note maturing July 27, 2005, and a $4,900,000 subordinated note maturing July 27, 2000. The $100,000 and $4,900,000 subordinated notes described above (the "Subordinated Notes") require the Company to maintain certain financial covenants similar to the covenants required by Chase Bank and provide similar annual capital expenditure and acquisition limits. Interest on the $4,900,000 Subordinated Note is at the rate of 10.00% for the first three years of the Purchase Agreement, and increases to 12.50% for the fourth year and 15.00% for the fifth year. Interest on the $100,000 Subordinated Note is at the rate of 10.00% for the first three years of the Purchase Agreement, and, in the event the Company does not repay the $4,900,000 Subordinated Note, increases to 12.50% for the fourth year and 15% for the fifth through tenth years. If the $4,900,000 Subordinated Note is repaid prior to the fourth year, interest on the $100,000 Subordinated Note remains at 10% through the tenth year; or, if the $4,900,000 Subordinated Note is repaid during the fourth year, interest on the $100,000 Subordinated Note remains at 12.50% for the fourth through tenth years. In accordance with the Purchase Agreement on June 11, 1996, the Company amended its Articles of Incorporation to provide for the indemnification of its directors and officers to the fullest extent permitted under California law. This amendment was approved by the Company's shareholders at the annual shareholder meeting held on May 30, 1996. As part of the transaction with ING, the Company also entered into a registration rights agreement (the "Registration Rights Agreement") with ING and Sutro & Co., Incorporated ("Sutro"), which acted as the Company's investment bankers in connection with the transaction, entitling the holders of the ING Warrant and the common stock purchase warrant issued to Sutro (for the purchase of up to 100,000 shares of common stock of the Company), to certain piggy back registration rights with respect to the shares of common stock issuable upon 11 exercise of these warrants, as well as any shares of common stock subsequently acquired by ING. The Registration Rights Agreement also grants ING the right to require the Company to file a shelf registration statement with respect to the sale from time to time of 1.4 million shares of common stock of the Company acquired by ING from a former employee of the Company. In addition, as part of the transaction with ING, the Company, Carlos D. De Mattos and Edward Phillips and their affiliates ("Management Shareholders") entered into a Stockholders' Agreement with ING (the "Stockholders Agreement") pursuant to which the Company and the Management Shareholders agreed to nominate and vote for the election of two representatives of ING to the Board of Directors of the Company, the number of members of which would be set at nine. The Stockholders Agreement also contains certain restrictions on the transfer of shares held by ING and the Management Shareholders. In addition, the Stockholders Agreement was amended in April 1996 to provide that the obligations of the Management Shareholders to vote for ING nominees for the Company's Board of Directors, and the obligation of the Company to nominate such ING nominees, shall extend to July 27, 2005, unless a change in control or certain public offering of the Company's common stock, as described in the Stockholders Agreement occurs, in which case those obligations will terminate. On September 29, 1997, the Company prepaid the $4,900,000 Subordinated Note with the anticipated maturity date of July 27, 2000. In connection with this prepayment, the Company and ING extended the date for the Qualifying Offering to December 31, 1999. The amendment of the ING related documents (but not the prepayment of the $4,900,000 Subordinated Note) become effective upon approval by the Bank, which approval the Company expects to receive. Working Capital - Cash Flows At September 30, 1997, the Company's working capital was $9,662,000 which was an increase of $1,709,000 from its working capital at September 30, 1996. In fiscal 1997, the Company generated cash from operating activities of $2,216,000. The major contributor to cash from operating activities was earnings before depreciation and amortization of $6,215,000. Partially offsetting the major contributor to cash from operating activities was an increase in trade accounts receivable of $2,037,000 and inventory of $2,365,000, as a result of a general increase in business activity and expansion of companies acquired during fiscal year 1997. In fiscal 1997, the Company primarily utilized cash from operating activities of $2,216,000, augmented by additional borrowings from the Company's bank line of $14,065,000, to finance the acquisition of capital equipment and to pay down subordinated debt of $4,900,000 and other debt assumed in acquisitions made in fiscal year 1997. The major components of the net capital equipment additions were equipment for the Company's video equipment rental operations of approximately $3,754,000 and equipment additions to other rental operations of approximately $4,051,000. During the next twelve months, the Company expects to purchase new capital equipment to allow its operations to be more efficient, support growth and to minimize the sub-rental of equipment necessary to meet customer orders. The Company expects to finance its capital acquisition program through a combination of cash generated from operations and additional borrowings under the Amended Chase Facility. The Company believes it will have sufficient funds from operations and bank borrowings to meet its anticipated requirements for working capital during the next twelve months. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS The Company is including the following cautionary statement in this Form 10-K to make applicable and take advantage of safe harbor provisions of the Private Security Reform Act of 1995 for any forward looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral, and whether made by or on behalf of the Company, are also expressly qualified by these cautionary statements. Certain statements contained herein are forward-looking statements and accordingly involve risk and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. 12 ITEM 8. FINANCIAL STATEMENTS The required financial statements commence at page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 13 PART III ITEM 10. DIRECTORS; EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Name Age Position - ---- --- -------- Carlos D. De Mattos/(5)/ 45 Chairman of the Board, Chief Executive Officer, President, Chief Financial Officer Edward Phillips/(5)/ 51 Director, President of Studio Equipment Ernst F. Nettmann 58 Director, President of Electronics Jack Brehm/(1)(2)(3)(4)/ 69 Director John H. Donlon/(1)(2)(3)(4)/ 52 Director Jerome E. Farley/(1)(2)(3)(4)/ 56 Director Benjamin P. Giess/(1)(2)(3)(4)(5)/ 35 Director John F. Jastrem/(1)(2)(3)(4)/ 42 Director John Alonzo 63 Director Gary S. Borman 40 Vice President, Corporate Controller (Principal Accounting Officer) Kenneth W. Kramer 39 Vice President, Development and Operations Carly Barber 42 President of HRC Robert M. Johnston 37 President, Expendable Supply Store Division of Studio Equipment Jay Lefkovitz 45 President of Duke City - --------------------------------------------------------------------------------------------- /(1)/ Member of 1994 Stock Option Plan for Directors Committee. /(2)/ Member of 1994 Stock Option Plan Committee. /(3)/ Member of Audit Committee /(4)/ Member of Compensation Committee /(5)/ Member of Executive Committee
The term of office of all directors is until the next annual meeting, which is scheduled for March 18, 1998, and the term of office of all officers is for one year and until their successors are chosen and qualify. CARLOS D. DE MATTOS was co-founder of the Company and has served as a director and the Company's Chairman, President and Chief Executive Officer since January 1995, and prior thereto as the Company's co-chairman and Chief Executive Officer from February 1989 to January 1995. Mr. De Mattos also serves as the Company's Chief Financial Officer. He is a co-recipient of two Technical Achievement Awards from the Academy of Motion Picture Arts and Sciences in March 1983 and March 1985, respectively for the Tulip Crane and for the development of the Cam- Remote(R) System. He is also a co- 14 recipient of a Technical Achievement Award from the Academy of Television Arts and Sciences in September 1989 for the development of the Cam-Remote(R) System. Mr. De Mattos is an active member of the principal trade associations pertaining to the industry serviced by the Company. In June 1991, the government of Portugal inducted him into the select membership of the prestigious Order of Henry the Navigator as a Knight Commander. He is a member of the Academy of Motion Picture Arts and Sciences, the American Society of Cinematographers and the Portuguese-American Leadership Council of the United States based in Washington, D.C. EDWARD PHILLIPS was co-founder of the Company and has served as a director of the Company since February 1989. Until December 31, 1994 he was the co-chairman of the Company's Board and Chief Operating Officer from February 1989 to January 1995. Continuously since 1976, Mr. Phillips has been Co-chairman of the Board and President of Matthews Studio Equipment, Inc. Mr. Phillips has continuously been responsible for the design and engineering of most of the equipment manufactured by Matthews Studio Equipment, Inc., since 1972. In the latter 1970s Mr. Phillips authored the first ANSI standard covering mounting equipment interface for the motion picture industry. Mr. Phillips is a co-recipient of two Technical Achievement Awards from the Academy of Motion Picture Arts and Sciences in March 1983 and March 1985, respectively for the Tulip Crane and for the development of the Cam-Remote(R) System. He is also a co-recipient of a Technical Achievement Award from the Academy of Television Arts and Sciences for the Cam-Remote(R) System in September 1989. Mr. Phillips is a past President of the Professional Motion Picture Equipment Association and has served on many subcommittees of the Society of Motion Picture and Television Engineers. He is a member of the American Society of Cinematographers. ERNST F. NETTMANN has served as a director of the Company since February 1989. Mr. Nettmann is president of Matthews Studio Electronics, Inc. Mr. Nettmann is President of E. F. Nettmann & Associates, Inc., a privately held corporation, which has been managing the business of Matthews Studio Electronics, Inc., since October 1, 1994 pursuant to a management and license agreement. Prior to 1981, Mr. Nettmann was principal owner of Continental Camera Rental, which made and rented his Technical Achievement Award winning camera mounts and aerial photography optical systems. He is a co-recipient of a life award from the Academy of Motion Picture Arts and Sciences in March 1985 and the Academy of Television Arts and Sciences in September 1989 for the development of the Cam- Remote(R) System. JACK BREHM has served as a director since February 1989, and served as chief financial officer of the Company from that date through December 1991. Mr. Brehm was with Ernst & Young LLP from 1951 until his retirement as a partner in 1988. Since his retirement in September 1988, Mr. Brehm has acted as a financial consultant. Mr. Brehm is a director of Zegarelli Group International, Inc., a Nasdaq listed corporation, which manufactures and distributes professional hair care products. JEROME E. FARLEY has served as a director of the Company since April, 1994. He is President and Chief Executive Officer of Western Security Bancorp a bank holding company. Continuously since December 1992 he has also been President, Chief Executive Officer and a director of Western Security Bank, a National Banking Corporation. From 1981 through most of 1992, Mr. Farley was a director and an executive officer of First Regional Bank. From 1979 to 1997 Mr. Farley has been a director of Regional Properties, Inc., a real estate development company, principally active in Riverside County, California. Mr. Farley has been a member of the State Bar of California since 1973. From 1973 through 1985 he was general counsel to a number of subsidiaries of City Investing Company, which was listed on the New York Stock Exchange. Mr. Farley has been a professor at the Pepperdine University School of Business and Management since 1984. JOHN H. DONLON has served as a director of the Company since February 1995. He is president and director of Four Media Company ("4MC"), a Nasdaq listed corporation with revenues in excess of $100 million. 4MC employs over 700 people worldwide, principally at its facilities in Universal City, Burbank and Santa Monica, California, and Singapore. 4MC provides post-production services to the Hollywood television and motion picture industry along with playback and satellite transmission services for eighteen channels of cable programming to the USA. The Singapore subsidiary provides similar services to American companies in Asia From 1984 to 1993, Mr. Donlon was president and chief executive officer of Compact Video Group, Inc. ("CVG"). During his tenure, CVG expanded its editing and sound services, consolidated its duplication and satellite transmission, developed syndication capability and established a successful network origination business. From 1981 to 1984 he was president of Technicolor Videocassette where he launched a videocassette duplication facility from the ground up. From 1977 to 1981 he was Vice President of Operations for Technicolor, the largest motion picture and television film laboratory in the world. 15 BENJAMIN P. GIESS was elected a director of the Company in September 1995. Mr. Giess is a partner and executive officer of ING Equity Partners, L.P.I ("ING Equity Partners"). Mr. Giess has been employed by ING Equity Partners or its predecessors and affiliates since 1992. From 1991 to 1992, Mr. Giess worked in the Corporate Finance Group of ING Capital. From 1990 to 1991, Mr. Giess was employed by the Corporate Finance Group of General Electric Capital Corporation where he worked in the media and entertainment group. From 1986 to 1988, Mr. Giess was the credit department manager of the Boston Branch of ABN Amro North America, Inc. From 1984 to 1986 Mr. Giess was employed by Shawmut Bank of Boston, N.A. Mr. Giess also serves on the board of directors of American Communication Services, Inc., a Nasdaq company, which is a competitive local access telecommunications provider. He is also a director of CMI Holding Corp., a privately held book retailer and specialty importer, as well as TransCare Corporation, a privately held ambulance operator. JOHN F. JASTREM was elected a director of the Company in September 1995. He serves as a management consultant to major business enterprises. From 1996 to 1997, he served as Chairman and Chief Executive Officer of Hooven Direct Marketing, a privately held corporation founded in 1922 with more than 250 employees. From 1995 to 1996 Mr. Jastrem served as President and Chief Executive Officer of Colt's Manufacturing Company, Inc. From 1993 to 1995 Mr. Jastrem was President and Chief Operating Officer of Acme Holdings, Inc. and Acme Acquisition Corp. (currently Rental Services Corp.), the fifth largest equipment rental business in the United States. From 1990 to 1993 Mr. Jastrem was Senior Vice President and Chief Financial Officer of Knapp Communications Corp., the publisher of Architectural Digest and Bon Appetit magazines which was acquired by Conde Nast. From 1989 through 1990 Mr. Jastrem was Chief Financial Officer of Reliance Steel & Aluminum Company, a metals distributing company. From 1985 to 1989 Mr. Jastrem was part of the management team of Wickes Companies, Inc., a $6 billion manufacturer and retailer, during its successful reorganization. From 1977 to 1985 Mr. Jastrem was a senior manager for Arthur Andersen LLP. JOHN A. ALONZO was elected a director of the Company in July 1996. Mr. Alonzo is the first cinematographer to be recognized by the U.S. Library of Congress, for his cinematography work on the feature film "Chinatown", and is a member of the American Society of Cinematographers. Other feature films on which Mr. Alonzo was the principal cinematographer include "Harold and Maude," "Scarface," "Steel Magnolias," and "Star Trek, Generations." Mr. Alonzo holds an honorary Doctorate Degree in Humane Letters from Columbia College, Hollywood, and an honorary Bachelors Degree from The Brooks Institute. Mr. Alonzo has given seminars and lectures at the University of Southern California and is currently on the faculty of The American Film Institute. GARY S. BORMAN joined the Company as Corporate Controller and Chief Accounting Officer in March 1996, and as Vice President since March 1997. From 1991 to 1996 Mr. Borman was the Controller of HR Textron, Inc., an aerospace component manufacturer and a division of Textron, Inc. From 1982 to 1991 Mr. Borman was a senior manager for Ernst & Young LLP. KENNETH W. KRAMER joined the Company in December 1996 as Vice President, Developments and Operations. Prior to joining the Company, Mr. Kramer was employed by Technicolor Video Services, Inc., from February 1995 to December 1996, where he served as Senior Vice President and Chief Financial Officer. From June 1981 to February 1995 Mr. Kramer was a senior manager for Ernst & Young, LLP, serving in their Chicago, National/Cleveland and Los Angeles offices. CARLY BARBER, President, HRC. Ms Barber joined the Company in March of 1986. From 1984 to 1986, Ms Barber was the manager of Cinepro, a Panavision expendables, camera, lighting and grip company. From 1981 to 1984, Ms. Barber worked for Samuelsons Film Services, an international supplier of rental cameras and lighting equipment as a representative of the company on production. ROBERT M. JOHNSTON, President, Expendable Supply Store. Mr. Johnston joined the Company in October 1996. Prior to joining the Company, he was a consultant, with responsibility for the marketing and sales of production supplies and products, to William F. White, LTD, Canada's largest supplier of television, motion picture and theatrical equipment. JAY LEFKOVITZ, President, Duke City. Mr. Lefkovitz joined the Company in May 1997. Mr. Lefkovitz co-founded Duke City in 1979 and was President and Chief Executive Officer of Duke City, with responsibility for all day-to-day operations of Duke City. 16 Remuneration of Directors During fiscal 1997 each independent director of the Company was paid a fee of $1,000 per month for services rendered to the Board of Directors or Committee(s) of the Board of Directors and attendance at the meetings. In addition, the Chairman of the Audit Committee and Compensation Committee receives an additional fee of $500 per month. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of shares of the Company's equity securities, to file by specific dates with the SEC initial reports of ownership and reports of changes in ownership of equity securities of the Company. Officers, directors and greater than 10 percent stockholders are required by security regulations to furnish the Company with copies of all Section 16(a) forms that they may file. The Company is required to report in this Form 10-K annual report any failure of its directors and executive officers and greater than ten percent stockholders to file by the relevant due date any of these reports during the preceding fiscal year. To the best of the Company's knowledge, based solely on review of copies of such reports furnished to the Company during the fiscal year ended September 30, 1997, all Section 16(a) filing requirements applicable to the Company's officers, directors and greater than ten percent stockholders were complied with, except: due to administrative errors: (i) the Form 3 filed by Mr. Gary Borman with respect to 60,000 options to purchase the Company's common stock granted in March, 1997, was filed after its due date, (ii) the Form 3 filed by Mr. Ken Kramer with respect to 60,000 options to purchase the Company's common stock granted in March, 1997, was filed after its due date, (iii) the Form 4 filed by Mr. Kramer with respect to 5,000 shares of the Company's common stock acquired in September, 1997, was filed after its due date, and (iv) no Form 3 has been filed by Ms. Carly Barber. ITEM 11. EXECUTIVE COMPENSATION The table which follows sets forth all cash compensation paid and/or accrued for services rendered in all capacities with respect to the fiscal year ended September 30, 1997, to the Chief Executive Officer and each of the Company's five highest paid executive officers whose total salary and bonus equals or exceeds $100,000: 17
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS PAYOUTS Other Name and Principal Year Salary Bonus Annual Restricted Securities LTIP All Other Position ($) ($) Compen- Stock Underlying Pay- Compen- sation Awards Options/ outs ($) sation ($) ($) SARs (#) ($) - --------------------------------------------------------------------------------------------------------------------- Carlos D. De Mattos, 1997 351,421 140,568 - - - - 1,230 Chairman; Chief 1996 263,425 50,000 - - - - 1,462 Executive Officer; 1995 225,866 - - - 200,000 - 1,828 President; Chief Financial Officer Edward Phillips, 1997 295,747 118,299 - - - - 1,512 Director; 1996 263,425 100,000 - - - - 1,799 President of Studio 1995 225,866 - - - 200,000 - 2,249 Equipment Carly Barber, 1997 111,291 23,000 - - - - 1,094 President of HRC 1996 88,002 7,000 - - 15,000 - 1,219 1995 83,189 - - - - - - Gary S. Borman, 1997 100,769 30,203 - - 30,000 - 900 Vice President, 1996 48,462 6,000 - - 30,000 - 21 Corporate Controller 1995 - - - - - - -
ALL OTHER COMPENSATION - This represents Company contributions to the 401(k) plan. 18
OPTION/SAR GRANTS FOR THE YEAR ENDED SEPTEMBER 30, 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Individual Grants - ----------------------------------------------------------------------------------------------------------------------------------- Name Number of Percentage Exercise Expir- Potential Securities of Total or Base ration Value at Assumed Underlying Options/ Price Date Rates of Stock Price Options/ SARs $/Share Appreciation For SARs Granted to Option Term Granted Employees --------------------- 5% 10% - ----------------------------------------------------------------------------------------------------------------------------------- Gary S. Borman 30,000 8% $ 2.50 March, $ 33,000 $ 83,000 2004 - ----------------------------------------------------------------------------------------------------------------------------------- OPTION/SAR EXERCISES AND FY-END VALUE TABLE - ----------------------------------------------------------------------------------------------------------------------------------- Name Shares ($) Value (# of Shares) Under- Value of Acquired Realized lying Unexercised Unexercised On Options and SARs In-the-Money Exercise Exercisable/ Options and SARs Unexercisable at FY-End ($) Exercisable/ Unexercisable - ----------------------------------------------------------------------------------------------------------------------------------- Carlos D. De Mattos - - 207,000/67,000 $ 309,000 /$ 92,000 Edward Phillips - - 207,000/67,000 $ 309,000 /$ 92,000 Carly Barber - - 27,000/9,000 $ 51,000 /$ 21,000 Gary S. Borman - - 6,000/54,000 $ 14,000 /$ 113,000 - -----------------------------------------------------------------------------------------------------------------------------------
The Company has an employee benefit plan intended to qualify under Section 401(k) of the Internal Revenue Code. Employees may contribute as deferred compensation up to 6% of compensation (not to exceed $9,500 annually). The Company matches from 20% to 50% of employee contributions based on individual salary levels. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a)The table below shows as of December 17, 1997 the amount and class of the Company's voting stock owned beneficially (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) by each holder of more than 5% of the Company's shares, each director of the Company and all directors and officers of the Company as a group: 19
Number of Name and Address of Shares Beneficially Percentage of Beneficial Owners/1/ Owned Common Stock/8/ -------------------- ------------------- --------------- Carlos D. De Mattos 2,123,784/9/ 19.3% Edward Phillips 2,123,784/10/ 19.3% Ernst F. Nettmann 105,000/11/ 1 % Jack Brehm/(2)/ 17,000/12/ * John H. Donlon/(4)/ 15,000/13/ * Jerome E. Farley/(3)/ 15,000/14/ * Benjamin P. Giess/(5)/ 4,137,464/15/ 37.7% ING Equity Partners, 4,137,464/16/ 37.7% L.P.I /(6)/ John F. Jastrem/(7)/ 15,000/17/ * John A. Alonzo 10,000/18/ * Gary S. Borman 6,000/19/ * Kenneth W. Kramer 7,000 * Carly Barber 27,000/20/ * - ------------------------------------------------------------------------------- All officers and directors as a group (12 persons) 8,602,032 78.3%
* Less than 1% - ------------------------------------------------------------------------------- 1 Unless otherwise noted, all shares are beneficially owned and the sole voting power is held by the person indicated, and the address of each of these individuals is: c/o Matthews Studio Equipment Group, 3111 North Kenwood Street, Burbank, California 91505. 2 This individual's address is: 19501 Greenbriar Drive, Tarzana, California 91356. 3 This individual's address is: 4100 West Alameda Avenue, Burbank, California 91505. 4 This individual's address is: 2813 West Alameda Avenue, Burbank, California 91506. 5 This individual's address is: 135 East 57/th/ Street, 16/th/ Floor, New York, New York 10022. 6 This company's address is: 135 East 57/th/ Street, 16/th/ Floor, New York, New York 10022. 7 This individual's address is: 1913 Ripley Avenue, Redondo Beach, California 90278. 8 Based on 10,988,806 shares outstanding. 9 Includes 2,016,450 shares owned by a family trust with trust management vested in the named director as the trustee, and 100,000 shares owned by a limited liability company owned by such family trust. Includes options to purchase 207,333 20 shares of the Company's common stock. 10 Includes 2,047,450 shares owned by a family trust with trust management vested in the named director as the trustee and 69,000 shares held outside of the family trust. Also includes options to purchase 207,333 shares of the Company's common stock. 11 Includes options to purchase 100,000 shares of the Company's common stock. 12 Includes options to purchase 15,000 shares of the Company's common stock. 13 Represents options to purchase 15,000 shares of the Company's common stock. 14 Represents options to purchase 15,000 shares of the Company's common stock. 15 Mr. Giess disclaims beneficial ownership of these shares. Mr. Giess is an executive officer of Lexington Partners, Inc., which is the sole general partner of Lexington Partners, L.P., the sole general partner of ING, however, the Company has been advised by Mr. Giess that he does not exercise sole or shared voting or dispositive power with respect to the shares held by ING described in footnote (/16/). 16 Includes a warrant to purchase 2,322,464 shares of the Company's common stock. Upon occurrence of an event of default under the Purchase Agreement, ING Equity Partners, L.P.I is entitled to exercise voting rights for the 2,322,464 shares underlying the warrant pursuant to a share of the Company's preferred stock issued to said company. Also includes an option issued to ING Equity Partners, L.P.I, to purchase 15,000 shares of the Company's common stock, as consideration for services of its appointee, Benjamin P. Giess. 17 Includes options to purchase 15,000 shares of the Company's common stock. 18 Represents options to purchase 10,000 shares of the Company's common stock. 19 Represents options to purchase 6,000 shares of the Company's common stock. 20 Includes options to purchase 27,000 shares of the Company's common stock. (b) There are no arrangements, known to the Company, the operation of which may at a subsequent date result in a change in control of the Company, except as described in Item 7 hereof. 21 EMPLOYMENT AGREEMENTS The Company entered into a written Employment Agreement ("De Mattos Agreement") with Carlos D. De Mattos on July 1, 1995 for such individual to serve as the Company's Chief Executive Officer, President and Chairman of the Board for a three-year term commencing July 1, 1995, at an annual base salary of $257,000. On December 19, 1996, the Compensation Committee approved an increase in the base salary of Mr. De Mattos to $332,700 per year starting October 1, 1996. Mr. De Mattos was also granted an option to purchase 200,000 shares of the Company's common stock at an exercise price of $3.00 per share. The right to purchase up to 66,667 shares under this option vests in like installments commencing on July 1, 1996 and the next two successive anniversaries of that date, and the option is exercisable until July 2005. As discussed above, shareholder approval of these options was required. At the Company's annual shareholder meeting held on May 30, 1996, the shareholders approved these options. Effective as of October 1, 1997, the Employment Agreement with Mr. De Mattos was amended (as amended, the "De Mattos Agreement") by the Compensation Committee. The term of the employment under the De Mattos Agreement will expire September 30, 2000 but, similar to the July 1, 1995 Employment Agreement, Mr. De Mattos has agreed to provide consulting services to the Company for a period of five years following the termination date, at 50% of the base salary. The base salary under the De Mattos Agreement was increased to $400,000 and will increase 10% at each anniversary date. Mr. De Mattos will receive an incentive bonus for fiscal year 1998 ranging from 20% to 100% of his base salary, based upon attainment by the Company of specific earnings per share levels (described in more detail in the De Mattos Agreement). The annual incentive bonus for fiscal years 1999 and 2000 will be based on performance levels to be established by the Company's Compensation Committee. As part of the amendment, options to purchase an additional 100,000 shares of the Company's common stock at an exercise price of $4.74 per share were granted to Mr. De Mattos. These options are in addition to the options to purchase 200,000 shares of the Company's common stock granted under the July 1, 1995 Employment Agreement. These additional options will vest at one-third increments on October 1, 1998 and on the next two successive anniversaries of that date, and were granted under and are subject to the terms of the Company's 1994 Stock Option Plan. The De Mattos Agreement has been approved by unanimous vote of the independent directors on the Compensation Committee of the Company's Board of Directors. Further, the agreement is to be submitted to the full Board for approval and is expected to be approved. On July 1, 1995, the Company and Studio Equipment entered into a written Employment Agreement ("Phillips Agreement") with Edward Phillips, for him to serve as president of Studio Equipment for a three-year term commencing July 1, 1995, at an annual base salary of $257,000. The base salary increases 10% at each anniversary date during the term of the Phillips Agreement. The Phillips Agreement also provides for an annual incentive bonus from 20% to 40% of the base salary based upon attainment by the Company of specified Earnings (as defined in the Phillips Agreement). Mr. Phillips was also granted an option to purchase 200,000 shares of the Company's common stock at an exercise price of $3.00 per share. The right to purchase up to 66,667 shares under this option vests in like installments commencing on July 1, 1996, and the next two successive anniversaries of that date, and the option is exercisable until July 2005. As discussed above, shareholder approval of these options was required. At the Company's annual shareholder meeting held on May 30, 1996, the shareholders approved these options. In addition, Mr. Phillips agreed, upon termination of the Phillips Agreement, to render consulting services to the Company for a period of five years from the termination date, at 50% of the base salary. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS None. REPORT ON EXECUTIVE COMPENSATION The compensation for the five highest paid executive officers of the Company in fiscal 1997 is set forth in the Summary Compensation Table which preceded this section. Total compensation for executive officers consists of a combination of salaries, bonuses and contributions to the Company's 401(k) plan. 22 Other than the Chairman of the Board of the Company and the President of Matthews Studio Equipment Inc., incentive bonuses are determined by senior management based on the financial performance of the individual subsidiaries, responsibilities of the executive and other factors. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As discussed above in Item 2, Properties, certain facilities of the Company are leased from PDM, a general partnership whose sole general partners are Carlos D. De Mattos, the Chairman of the Board, President and Chief Financial Officer of the Company, and Edward Phillips, a director of the Company and President of Studio Equipment. Until May 30, 1997, the executive office, showroom and warehouse of HRC in Sun Valley, California, was leased from a former director and former officers of the Company. Nettmann, a corporation owned by a director of the Company, manages the Cam- Remote(R) and Mini-Mote(R) C.A.T.(R) business of Studio Electronics. The Company and Nettmann share costs under the Management Agreement. See Item 1. Business - Cam-Remote and Mini-Mote Systems. Under the Management Agreement Nettmann is entitled to compensation based on revenues. For discussion of the issuance of the Subordinated Notes to ING pursuant to the Purchase Agreement between the Company and ING, which is an affiliate of Benjamin P. Giess, a director of the Company, as well as other agreements made by the Company and Carlos D. De Mattos and Edward Phillips, such as the Registration Rights Agreement and the Stockholders Agreement, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation. 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) & (2) The response to this portion of Item 14 is submitted as a separate section of this report and appears on page F-1. (a)(3) & (C) The Exhibit Index appears at page E-1 which follows the Financial Statements. (b) Reports on Form 8-K - Form 8-K dated August 14, 1997 was filed during the last quarter of the period covered by this report. (d) Financial Statement Schedules - the response to this portion of Item 14 is submitted as a separate section of this report and appears on page F-1. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report on Form 10K for the fiscal year ended September 30, 1997, to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: December 26, 1997 MATTHEWS STUDIO EQUIPMENT GROUP /s/ Carlos D. De Mattos ---------------------------- Carlos D. De Mattos Chairman of the Board, Chief Executive Officer, President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Carlos D. De Mattos Chairman of the Board, Chief Executive Officer, December 26, 1997 - ----------------------------- Carlos D. De Mattos President, Chief Financial Officer /s/ Edward Phillips Director, President of Matthews Studio December 26, 1997 - ----------------------------- Edward Phillips Equipment, Inc. /s/ Jack Brehm Director December 26, 1997 - ----------------------------- Jack Brehm /s/ John H. Donlon Director December 26, 1997 - ----------------------------- John H. Donlon /s/ Jerome E. Farley Director December 26, 1997 - ----------------------------- Jerome E. Farley /s/ Benjamin P. Giess Director December 26, 1997 - ----------------------------- Benjamin P. Giess /s/ John F. Jastrem Director December 26, 1997 - ----------------------------- John F. Jastrem /s/ John A. Alonzo Director December 26, 1997 - ----------------------------- John A. Alonzo /s/ Gary S. Borman Vice President, Corporate Controller December 26, 1997 - ----------------------------- Gary S. Borman (Principal Accounting Officer)
25 Matthews Studio Equipment Group Index to Consolidated Financial Statements and Financial Statement Schedule
Page No. Report of Independent Auditors F-2 Consolidated Balance Sheets at September 30, 1997 and 1996 F-3 Consolidated Statements of Operations for the years ended September 30, 1997, 1996 and 1995 F-5 Consolidated Statements of Shareholders' Equity for the years ended September 30, 1997, 1996 and 1995 F-6 Consolidated Statements of Cash Flows for the years ended September 30, 1997, 1996 and 1995 F-7 Notes to Consolidated Financial Statements F-9
The following Consolidated Financial Statement Schedule of Matthews Studio Equipment Group is included in Item 14 (d) Schedule II Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. F-1 REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Matthews Studio Equipment Group We have audited the accompanying consolidated balance sheets of Matthews Studio Equipment Group and subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended September 30, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Matthews Studio Equipment Group and subsidiaries at September 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. S/Ernst & Young LLP Los Angeles, California December 12, 1997 F-2
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES Consolidated Balance Sheets ($ in thousands) September 30 1997 1996 ---------- ---------- ASSETS : Current Assets: Cash and cash equivalents $ 393 $ 462 Accounts receivable less allowance for doubtful accounts of $745 in 1997 and $480 in 1996 9,144 5,145 Current portion of net investment in finance and sales-type leases (Note 3) 829 794 Inventories (Note 2) 7,844 4,961 Prepaid expenses and other current assets 923 481 Income tax refund receivable 645 - Deferred income taxes (Note 5) 894 464 ---------- ---------- Total current assets 20,672 12,307 Property and Equipment (Notes 1 & 7): Rental equipment 47,169 32,280 Manufacturing equipment and tooling 1,952 1,872 Office furniture and equipment 3,627 2,438 Land and building 2,131 - Leasehold improvements 1,112 963 ---------- ---------- 55,991 37,553 Less accumulated depreciation and amortization 20,804 17,214 ---------- ---------- Property and equipment, net 35,187 20,339 Net investment in finance and sales-type leases, less current portion 455 865 Goodwill (Note 10) 4,052 - Other assets 1,505 973 ---------- ---------- Total assets $ 61,871 $ 34,484 ========== ==========
See accompanying notes. F-3 MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES Consolidated Balance Sheets (continued) ($ in thousands)
September 30 1997 1996 -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 5,241 $ 2,603 Accrued liabilities 2,950 1,626 Current portion of long-term debt (Notes 4 & 7) 693 - Current portion of capital lease obligations (Note 7) 2,126 125 ------- ------- Total current liabilities 11,010 4,354 Long-term debt, less current portion (Note 4) 31,859 18,619 Notes payable to related parties (Notes 4 & 10) 956 - Capital lease obligations, less current portion (Notes 4 & 7) 3,900 295 Deferred income taxes (Note 5) 2,976 2,142 Commitments and contingencies (Note 8) Shareholders' equity (Note 6): Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding one share in 1997 and 1996 - - Common stock, no par value, authorized 20,000,000 shares; issued and outstanding shares 10,632,000 in 1997 and 10,331,000 in 1996 6,168 5,584 Retained earnings 5,002 3,490 ------- ------- Total shareholders' equity 11,170 9,074 ------- ------- Total liabilities and shareholders' equity $61,871 $34,484 ======= =======
See accompanying notes. F-4 MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES Consolidated Statements of Operations ($ in thousands, except per share data)
Year ended September 30 1997 1996 1995 ----------- ----------- ----------- Revenues from rental operations $ 25,589 $ 14,125 $ 12,797 Net product sales 20,769 16,079 14,554 ----------- ----------- ----------- 46,358 30,204 27,351 Costs and expenses: Cost of rental operations 14,519 8,016 7,496 Cost of sales 14,081 10,257 9,992 Selling, general and administrative 12,360 8,554 7,449 Provision for doubtful accounts receivable 269 295 157 Interest 2,675 2,044 1,990 ----------- ----------- ----------- 43,904 29,166 27,084 ----------- ----------- ----------- Income before income taxes and extraordinary item 2,454 1,038 267 Provision for income taxes (Note 5) 748 35 59 ----------- ----------- ----------- Income before extraordinary item 1,706 1,003 208 Extraordinary loss on early extinguishment of debt - net of income tax benefit of $130 in 1997 and $221 in 1995 (194) - (2,228) ----------- ----------- ----------- Net income (loss) $ 1,512 $ 1,003 $ (2,020) ----------- ----------- ----------- Income (loss) per common share and common equivalent share (Note 1): Income before extraordinary item $ 0.16 $ 0.10 $ 0.02 Extraordinary loss on early extinguishment of debt (0.02) - (0.22) ----------- ----------- ----------- Net Income (loss) per share $ 0.14 $ 0.10 $ (0.20) =========== =========== =========== Income (loss) per common share assuming full dilution (Note 1): Income before extraordinary item $ 0.15 $ 0.10 $ 0.02 Extraordinary loss on early extinguishment of debt (0.02) - (0.22) ----------- ----------- ----------- Net income (loss) per share $ 0.13 $ 0.10 $ (0.20) =========== =========== =========== Weighted average number of shares 12,526,000 10,328,000 10,314,000 =========== =========== ===========
See accompanying notes. F-5 MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (in thousands)
Common Stock ------------------------ Number of Retained Shares Amount Earnings Total ------- ------- -------- ------- Balance at September 30, 1994 10,313 $5,386 $ 4,507 $ 9,893 Exercise of stock options and warrants 1 2 - 2 Repurchase of warrants - (30) - (30) Issuance of warrants in connection with subordinated debt financing - 209 - 209 Net loss - - (2,020) (2,020) ------- ------- -------- ------- Balance at September 30, 1995 10,314 5,567 2,487 8,054 Exercise of stock options and warrants 17 17 - 17 Net income - - 1,003 1,003 ------- ------- -------- ------- Balance at September 30, 1996 10,331 5,584 3,490 9,074 Exercise of stock options 15 24 - 24 Issuance of common stock in connection with the acquisition of Duke City Video, Inc. 286 560 - 560 Net income - - 1,512 1,512 ------- ------- -------- ------- Balance at September 30, 1997 10,632 $6,168 $ 5,002 $11,170 ======= ======= ======== =======
See accompanying notes. F-6 MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES Consolidated Statements of Cash Flows ($ in thousands)
Year ended September 30 1997 1996 1995 ------------- ------------ ------------ Operating activities: Net income (loss) $ 1,512 $ 1,003 $ (2,020) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for doubtful accounts 269 295 157 Depreciation and amortization 4,703 2,896 2,829 Deferred income taxes 404 - (127) Gain on sale of assets (330) (298) (349) Extraordinary loss on early extinguishment of debt 194 - 1,613 Changes in operating assets and liabilities net of effects from acquisitions (Note 10): Accounts receivable (2,037) (1,402) (809) Inventories (2,365) (406) 565 Net investment in leases 397 697 360 Prepaids and other assets (633) 73 (802) Income tax refund receivable (645) 252 8 Accounts payable and accrued liabilities 747 1,588 (2,593) ------------- ------------ ------------ Net cash provided by (used in) operating activities 2,216 4,698 (1,168) Investing activities: Payment for acquisitions (Note 10) (437) - - Purchase of property and equipment (9,660) (6,905) (4,107) Proceeds from sale of property and equipment 621 1,116 930 ------------- ------------ ------------ Net cash used in investing activities (9,476) (5,789) (3,177) Financing activities: Proceeds from exercise of stock options 24 17 2 Proceeds from borrowings 14,065 1,098 4,046 Repayment of borrowings (6,898) ------------- ------------ ------------ Net cash provided by financing activities 7,191 1,115 4,048 Net increase (decrease) in cash and cash equivalents (69) 24 (297) Cash and cash equivalents at beginning of period 462 438 735 ------------- ------------ ------------ Cash and cash equivalents at end of period $ 393 $ 462 $ 438 ============= ============ ============
See accompanying notes. F-7 MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) ($ in thousands)
Year ended September 30 1997 1996 1995 ------------- ------------- ------------- Schedule of noncash investing and financing transactions: Long-term loans incurred to acquire equipment $ 160 $ 143 $ 439 Issuance of warrants in connection with secured debt financing - - 209 Common stock issued for acquired company 560 - - Dissolution of Electronics partnership - - 780 Additional disclosures: Cash paid during year for: Interest 2,495 1,878 1,635 Income taxes 853 47 19
See accompanying notes. F-8 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements 1. ACCOUNTING POLICIES Business Matthews Studio Equipment Group (the Company) designs, manufactures, sells, leases and rents audio, video, film and production equipment and accessories to the motion picture, television, corporate, video and photography industries. The Company operates in one business segment and provides, as a single source, the necessary production equipment which is otherwise only available by using many different suppliers. The Company supplies equipment such as lights, grip lighting supports, professional video equipment, camera mounts, tripods, pedestals, fluid heads, camera dollies, portable camera cranes, power generators and production trucks. The Company's manufactured products are distributed worldwide by its sales force and by independent dealers and distributors located in North America, Europe, Asia and South America. In addition, the Company has fully operational and equipment supplied sound stages and studios. Principles of Consolidation The financial statements include the accounts of the Company and its subsidiaries. Material intercompany balances and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Concentration of Credit Risk The Company's customers are located around the world and are principally engaged in motion picture and television production, theatrical production, corporate video, commercial photography, or in providing rental equipment to companies in these industries. The Company generally sells on credit terms of 30 days and does not require collateral, except for items sold under capital leases in which it retains a security interest. The Company rents equipment under short-term operating leases on credit terms of generally 30 days and retains a security interest. Inventories Inventories are principally stated at the lower of first-in, first-out cost or market. Goodwill The goodwill, which arose from acquisitions made during fiscal year 1997, is amortized over a period of twenty five years. F-9 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) Marketing and Advertising Expenses Marketing expenses (including trade show and catalogue costs) are capitalized as prepaid expenses and amortized over six to twenty four month periods. The marketing expenses, including amortization of capitalized costs, for the years ended September 30, 1997, 1996 and 1995 were $409,000, $234,000 and $413,000, respectively. The advertising expenses (including media advertising and promotions) for the years ended September 30, 1997, 1996 and 1995 were $175,000, $139,000 and $146,000, respectively. Property and Equipment Property and equipment, including capital leases, are stated at cost. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets as follows: Rental equipment 5 - 10 years Buildings and improvements 10 - 40 years Other fixed assets 5 - 10 years Capital leases and leasehold improvements are amortized over the estimated useful lives, or the term of the related leases, for improvements, whichever is shorter, using the straight-line method. Amortization of capital leases is included in depreciation expense. Costs incurred for major renewals and betterments that extend the useful life of the assets are capitalized, whereas repair and maintenance costs are charged to expense as incurred. When property is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income. Revenue Recognition The Company recognizes revenue from rentals under operating leases in the week in which they are earned and recognizes product sales upon shipment. Revenues from certain qualifying non-cancelable lease contracts are accounted for as sales-type leases wherein the present value of all payments, net of executory costs, are recorded currently as revenues, and the related cost of the asset is charged to cost of sales. Associated interest, using the interest method, is recorded over the term of the related lease agreement. Interest income from non-cancelable lease contracts accounted for as direct finance leases is recognized using the interest method over the term of the related lease agreement. Per Share Data The computation of earnings per common and common equivalent shares is based upon the weighted average number of common shares outstanding during the period plus (in periods in which they have a dilutive effect) the effect of common shares contingently issuable, primarily from the assumed exercise of stock options and warrants to purchase common stock. Prior to the year ended September 30, 1997, per share data had been computed based on the weighted average number of shares of common stock outstanding as dilutive options and warrants accounted for less than 3% of the outstanding common shares, as a result of exercise prices of options and warrants in excess of the existing market prices. For the year ended September 30, 1997, earnings per share is computed under the modified treasury stock method which assumes the exercise of all outstanding stock options and warrants to purchase common stock, and the use of the assumed proceeds thereof to purchase up to a maximum of 20% of the then outstanding common stock of the Company. Excess F-10 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) proceeds derived from the assumed purchase of such shares are assumed to be utilized to reduce the outstanding balances of notes payable. As a result, for purposes of determining primary earnings per share, net income is adjusted for the hypothetical reduction in interest expense of $236,000, and $79,000 for fully diluted earnings per share, for the year ended September 30, 1997, such adjustments being made net of income taxes. Income Taxes The Company utilizes the liability method to determine the provision for income taxes. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. For the years ended September 30, 1997 and 1996 income tax expense was reduced as a result of recognition of net operating loss carryforwards which were reserved in prior years due to uncertainty of realization. Long-Lived Assets Long-lived assets used in operations are reviewed periodically to determine that the carrying values are not impaired and if indicators of impairment are present or if long-lived assets are expected to be disposed of, impairment losses are recorded. Financial Statement Presentation Certain balances from the September 30, 1996, financial statements have been reclassified to conform to the September 30, 1997 presentation. New Accounting Principles Earnings per share: In February 1997, the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 128, "Accounting for Earnings Per Share" ("FAS 128") This statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This Statement simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, Earnings Per Share, and makes them comparable to international EPS standards. It is effective for financial statements issued for periods ending after December 15, 1997. The Company will adopt this new standard in fiscal year 1998, and has not yet determined the potential impact on the financial statements. Comprehensive Income: In June 1997, the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for reporting and displaying comprehensive income and its components (revenue, expenses, gains and losses) in financial statements. FAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statements that is displayed with same prominence as other financial statements. It is effective for fiscal years beginning after December 15, 1997. The Company intends to disclose the information required by FAS 130 beginning with its 1998 fiscal year. F-11 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) Segment Reporting: In June 1997, the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information " ("FAS 131") This statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. It is effective for fiscal years beginning after December 15, 1997. The Company intends to adopt this new standard in fiscal year 1998, and does not believe that this statement will have significant impact on it financial statements. 2. INVENTORY Inventory consists of the following:
September 30 1997 1996 -------------------- (in thousands) Raw materials and work in process $2,388 $2,747 Finished Goods 5,456 2,214 ------ ------ $7,844 $4,961 ====== ======
F-12 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. NET INVESTMENT IN LEASES Finance and Sales Type Leases The Company's net investment in finance and sales-type leases consists of the following:
September 30 1997 1996 --------------------------- (in thousands) Minimum lease payments receivable $1,398 $1,880 Unearned income (114) (221) ------ ------ Net investment in leases, including current portion of $829 in 1997 and $794 in 1996 $1,284 $1,659 ====== ======
Future annual minimum lease payments receivable under finance and sales-type leases are as follows at September 30, 1997 (in thousands): 1998 $ 853 1999 239 2000 122 2001 56 2002 and thereafter 128 ------ $1,398 ======
Any unguaranteed residual value of leased property at the end of the lease term under finance leases accrues to the benefit of the Company. Operating Leases The Company is the lessor of equipment and accessories used in the film, video, television, commercial photography and theatrical production industries. Such leases generally range from one day to several weeks, with certain rentals of several months. Substantially all of the leases are non-cancelable. The original cost and accumulated depreciation of rental equipment held for operating leases was $47,169,000 and $16,530,000, respectively, at September 30, 1997, and $32,280,000 and $13,772,000, respectively at September 30, 1996. F-13 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. LONG-TERM DEBT Long-term debt consists of the following:
September 30 ------------------------- (in thousands) 1997 1996 -------- -------- Revolving Credit Loan $28,622 $13,779 Senior subordinated notes 100 5,000 ------- ------- 28,722 18,779 Less unamortized discount - 160 ------- ------- 28,722 18,619 Bank and vendor notes payable, partially collateralized by land, building, vehicles and equipment, payable in monthly installments, with interest at approximately 6.4% to 10.4% due through 2016 3,830 - Capital lease obligations, with interest at approximately 6.5% to 22.6% due through 2002. 6,026 420 Notes payable to related parties, interest at 8% to 8.75% 956 - ------- ------- 39,534 19,039 Less current portion 2,819 125 ------- ------- $36,715 $18,914 ======= =======
The General Electric Capital Corporation Senior Secured Credit Facility On September 6, 1994, the Company entered into a Credit Agreement with General Electric Capital Corporation ("GECC") for a senior secured credit facility in the aggregate principal amount of up to $22 million (the "GECC Facility"), secured by substantially all of the Company's assets. The GECC Facility included a Revolving Credit Facility in the aggregate principal amount of up to $7 million (including $500,000 in letters of credit), a Term Loan in the principal amount of $10 million and an Equipment Acquisition Term Loan to be drawn down from time to time in connection with rental equipment acquisitions in an aggregate principal amount of up to $5 million. On July 27, 1995, the Company entered into a Release Agreement with GECC and repaid all amounts outstanding under the GECC Facility from borrowings under the Chase Facility and the proceeds from the Senior Subordinated Promissory Note with ING described in the paragraphs which follow. As a result of the refinancing, in fiscal year 1995, the Company incurred an extraordinary loss of $2,228,000 net of tax benefits, on the extinguishment of the debt to GECC. F-14 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. LONG-TERM DEBT (CONTINUED) The Chase Bank Revolving Credit Facility On July 27, 1995, the Company and its principal subsidiaries as the Borrowers entered into an agreement for a senior secured revolving credit facility with The Chase Manhattan Bank as agent for a syndicate of lenders, in an aggregate principal amount of up to $17,000,000. On August 14, 1997, the Company amended and restated its senior secured revolving credit facility with The Chase Manhattan Bank (the "Amended Chase Facility"), as agent for a syndicate of lenders ("Bank"). The Amended Chase Facility provides for revolving credit loans in an aggregate principal amount not in excess of $50 million at any time outstanding. The proceeds of the Amended Chase Facility may be used, 1) for general working capital purposes, 2) to finance the repayment of certain capitalized lease obligations, 3) to repay in full certain subordinated debt, 4) for the financing of future acquisitions with $10 million designated for such activities, and 5) to repurchase securities of the Company with $5 million designated for such activities, all within the limits specified in the agreement. Interest on outstanding borrowings under the Amended Chase Facility at the Company's choice is at LIBOR plus a maximum of 2.75% or the greater of (i) Chase Manhattan Bank's Prime Rate plus a maximum of .75%, (ii) the Base CD Rate (as determined by the Bank) plus a maximum of 1.75% or (iii) the Federal Funds Effective Rate plus a maximum of 1.25%. In each case, the interest margin charged on outstanding loans may be reduced if specified ratios are achieved by the Company. In addition, the Company pays from three-eights of one percent to one-half of one percent on the unused credit commitment. The Amended Chase Facility matures August 14, 2002. The Amended Chase Facility requires the Company to maintain certain levels of net worth and on a quarterly basis certain levels of EBITDA (earnings before interest, taxes, depreciation and amortization), and to meet several financial ratios including interest coverage and debt-to-EBITDA. The Amended Chase Facility provides for annual capital expenditure limits of $9.0 million in fiscal 1997, and from $7.8 million to $8.6 million for the fiscal years thereafter. Amounts (up to $2.0 million) permitted to be expended in a given fiscal year may be carried over (if not spent) and expended in the succeeding fiscal year. In addition, the annual limits will be increased by 25% in years when specified ratios have been achieved. At September 30, 1997, the Company had an outstanding principal balance of $28,622,000 and had $10,229,000 available for borrowing under the facility, and was in compliance with all covenants. Borrowings under the Amended Chase Facility by the Company and its subsidiaries are cross collateralized pursuant to a security agreement in which the Company and its subsidiaries has granted the Bank a first priority lien in all of their respective assets. In connection with the amendment and restatement of the Chase Facility, the Company incurred $562,000 of legal, bank fees and other related costs, which are being amortized over the term of the facility. F-15 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. LONG TERM DEBT (CONTINUED) The ING Equity Partners, L.P.I, Senior Subordinated Promissory Note In connection with the refinancing of the GECC Facility in July 1995, the Company entered into a purchase agreement (as amended in April 1996, the "Purchase Agreement") with ING Equity Partners, L.P. I ("ING"), pursuant to which the Company sold to ING for a total purchase price of $5 million (i) its senior subordinated promissory notes in the aggregate principal amount of $5 million, bearing interest at an initial rate of 10% per annum, (ii) a common stock purchase warrant (the "ING Warrant") entitling ING to purchase 2,322,464 of the Company's outstanding shares of common stock at an initial purchase price per share of $2.50 and having certain antidilutive rights and (iii) one share of preferred stock of the Company entitling ING to voting rights, with respect to the number of shares underlying the ING Warrant. The ING Warrant required an adjustment of the exercise price to $2.00 per share if the Company does not complete a public offering of its common stock at a price of at least $2.50 per share with net proceeds to the Company of at least $10 million by July 27, 1998 (a "Qualifying Offering"). The Company amended these agreements in April 1996 primarily to effect the following: (i) certain limits are placed on ING's anti-dilution rights under the ING Warrant; (ii) except for voting rights accorded by law, the share of preferred stock issued to ING will not have the right to vote until there has been a default under the Purchase Agreement; and (iii) the shareholders of the Company must approve the stock options granted to Carlos D. De Mattos under his employment agreement with the Company and to Edward Phillips under his employment agreement with the Company and Studio Equipment. In the absence of shareholder approval, those options would have been reduced from options to purchase 200,000 shares of the Company's common stock to 12,500 shares, in each individual's case. (See Item 12, Security Ownership of Certain Beneficial Owners and Management.) As amended the Purchase Agreement provided for a $100,000 subordinated note maturing July 27, 2005, and a $4,900,000 subordinated note maturing July 27, 2000. The $100,000 and $4,900,000 subordinated notes described above (the "Subordinated Notes") require the Company to maintain certain financial covenants similar to the covenants required by Chase Bank and provide similar annual capital expenditure and acquisition limits. Interest on the $4,900,000 Subordinated Note is at the rate of 10.00% for the first three years of the Purchase Agreement, and increases to 12.50% for the fourth year and 15.00% for the fifth year. Interest on the $100,000 Subordinated Note is at the rate of 10.00% for the first three years of the Purchase Agreement, and, in the event the Company does not repay the $4,900,000 Subordinated Note, increases to 12.50% for the fourth year and 15% for the fifth through tenth years. If the $4,900,000 Subordinated Note is repaid prior to the fourth year, interest on the $100,000 Subordinated Note remains at 10% through the tenth year; or, if the $4,900,000 Subordinated Note is repaid during the fourth year, interest on the $100,000 Subordinated Note remains at 12.50% for the fourth through tenth years. On September 29, 1997, the Company prepaid the $4,900,000 Subordinated Note with the anticipated maturity date of July 27, 2000. In connection with this prepayment, the Company and ING extended the date for the Qualifying Offering to December 31, 1999. The amendment of the ING related documents (but not the prepayment of the $4,900,000 Subordinated Note) become effective upon approval by the Bank, which approval the Company expects to receive. F-16 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. LONG-TERM DEBT (CONTINUED) In connection with the early extinguishment of debt, the Company recognized a loss of $194,000, net of tax benefits of $130,000. Also on September 29, 1997, the Purchase Agreement was amended to conform with financial covenants and capital expenditure and acquisition limits under the Purchase Agreement to those of the Amended Chase Facility. Following prepayment of the $4,900,000 subordinated note, the $100,000 subordinated note accrues interest at the rate of 10% until maturity. Under the above arrangements the Company is restricted from paying dividends on its common stock. The aggregate annual maturities of long-term debt, consist of the following at September 30, 1997 (in thousands):
1998 $ 693 1999 598 2000 101 2001 74 2002 28,695 thereafter 3,347 -------- $ 33,508 ========
5. INCOME TAXES Significant components of the Company's deferred tax liabilities and assets are as follows:
September 30 1997 1996 ---------- ---------- (in thousands) Deferred tax liabilities: Tax depreciation in excess of book depreciation $ 3,773 $ 3,167 Leasing income 551 563 Other 98 43 --------- --------- Total deferred tax liabilities 4,422 3,773 Deferred tax assets: Net operating loss carryforwards 560 1,173 Alternative minimum tax credit carryforwards 862 654 ITC credit carryforwards 148 148 Allowance for doubtful accounts receivable 237 207 Excess of tax basis over financial statement basis of inventory 347 263 Other accruals 258 - Valuation allowance (72) (350) --------- --------- Total deferred tax assets 2,340 2,095 --------- --------- Net deferred tax liabilities $ 2,082 $ 1,678 ========= =========
F-17 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. INCOME TAXES (CONTINUED) The provision (benefit) for income taxes on income (loss) before extraordinary item is as follows:
September 30, 1997 1996 1995 -------- -------- -------- (in thousands) Current : Federal $ 209 $ 25 $ 143 State 135 10 16 ------- ----- ------ 344 35 159 Deferred: Federal 335 - (171) State 69 - 71 ------- ----- ------ 404 - (100) ------- ----- ------ $ 748 $ 35 $ 59 ====== ===== ======
The reconciliation of income tax computed at the U.S. federal statutory tax rates to income tax expense for income (loss) before extraordinary item, is:
SEPTEMBER 30, 1997 September 30, 1996 September 30, 1995 AMOUNT PERCENT Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (in thousands) Tax at U.S. statutory rates $ 834 34 % $ 353 34 % $ 91 34 % State income taxes, net of federal tax benefit 147 6 - - 11 4 Permanent differences 37 1 41 4 21 8 Reduction in valuation allowance on NOL carryforwards (264) (11) (458) (44) - - AMT rate differences (carry- forwards) - - 35 3 (66) (25) Provision to return items: Additional depreciation - - 20 2 Tax effect of Electronics dissolution - - 31 3 Other - - 13 1 Other - net (6) - - - 2 1 ------- ------ ------- ------ ------- ----- $ 748 30 % $ 35 3 % $ 59 22 % ======= ====== ====== ====== ======= =====
F-18 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. INCOME TAXES (CONTINUED) At September 30, 1997, the Company has alternative minimum tax credit carryforwards, with no expiration date, of $862,000, and federal net operating loss carryforwards of approximately $1,645,000, that expire principally in the year 2010. F-19 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. SHAREHOLDERS' EQUITY At September 30, 1997, the Company had the following warrants and stock options outstanding for the purchase of its common stock:
NUMBER OF DESCRIPTION EXPIRATION DATE SHARES EXERCISE PRICE ISSUABLE - ----------------------------- ----------------- ------------ --------------- ING Warrants September 2005 2,322,464 $ 2.50 Sutro Warrants September 2005 100,000 $ 2.50 Other Warrants September 1998 115,000 $2.75-$4.13 to May 2002 1989 Plan February 1999 300,750 $1.00-$3.75 1994 Plan March 2004 828,300 $1.63-$4.38 1994 Directors' Plan March 2004 80,000 $1.75-$3.00 Options outside of Plans June 2005 415,000 $ 3.00 ---------- Total number of common shares issuable 4,161,514 ==========
Warrant In connection with the ING transaction (see Note 4), the Company issued the ING Warrant to ING for the purchase of 2,322,464 shares of common stock (subject to certain antidilution rights) at an initial purchase price of $2.50 per share, which expires July 27, 2005. As amended, the ING Warrant requires an adjustment of the warrant exercise price to $2.00 per share if the Company does not complete a public offering of its common stock at a price of at least $2.50 per share with net proceeds to the Company of at least $10 million by December 31, 1999. And, as part of the same July 27, 1995 transaction, the Company issued a warrant to Sutro & Co. for the purchase of 100,000 shares of common stock at $2.50 per share (the "Sutro Warrant") subject to certain antidilutive provisions similar to those granted to ING. During fiscal 1991 the Company issued a warrant to Princeton Securities for the purchase of 50,000 shares of common stock at $3.44 per share. The Company has also issued warrants to the owner of an entity with whom the Company has established a marketing arrangement. Stock Options At September 30, 1997, the Company has three stock-based compensation plans, which are described below. The Company applies APB Opinion 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. In accordance with the statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, pro forma information regarding net income and earnings per share has not been presented because the effect of the employee stock option grants is immaterial in fiscal years 1997 and 1996. F-20 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. SHAREHOLDERS' EQUITY (CONTINUED) The 1989 Stock Option Plan (the 1989 Plan) provides for the grant of incentive and non-qualified options to purchase up to 1,000,000 shares of common stock. The Stock Option Committee of the Board of Directors determines the number of shares, date of grant, exercise price, when the options become exercisable and expiration date of each grant. The exercise price of incentive stock options cannot be less than the fair market value of the shares at the grant date. The outstanding options are generally exercisable 20% a year commencing one year after date of grant. In 1994, the Board of Directors adopted, and the shareholders approved, the 1994 Stock Option Plan (the 1994 Plan) and the 1994 Stock Option Plan for Directors (the 1994 Directors Plan). Both plans are administered by a committee of the Board of Directors and terminate in March 2004. The 1994 Plan provides for the granting of options to purchase up to 1,200,000 shares of common stock. Incentive and nonqualified stock options may be granted to any full-time salaried employees, and nonqualified options to any consultant. The Stock Option Committee of the Board of Directors determines the number of shares, date of grant, exercise price, when the options become exercisable and expiration date of each grant. The exercise price of incentive stock options cannot be less than the fair market value of the shares at the grant date. The outstanding options are generally exercisable 20% a year commencing one year after date of grant. The 1994 Directors Plan provides for the granting of options to purchase up to 300,000 shares of common stock. As of the date of each Annual Meeting of Shareholders, non-employee directors who have not previously received a grant under the 1994 Directors Plan, will receive an option to purchase 15,000 shares of common stock. Such shares are exercisable ratably 6, 24 and 36 months after the grant date, and at the fair market value of the shares at the grant date. During 1997 and 1996, no options were exercised under the 1994 Directors Plan. The following summarizes the option activity related to the plans:
1997 1996 --------------------- ----------------- WEIGHTED WEIGHTED AVERAGE AVERAGE SHARES EXERCISE SHARES EXERCISE DESCRIPTION (000'S) PRICE (000'S) PRICE -------------------------------------- ----------------------- --------------------- Fixed Options: Outstanding, at beginning of year 870 $2.37 675 $2.40 Granted 388 $2.65 304 $2.00 Exercised (15) $1.64 (17) $1.00 Forfeited (34) $3.02 (92) $1.80 ----- ---- Outstanding at end of year 1,209 $2.44 870 $2.37 ===== ==== Options exercisable at year-end 622 $2.47 533 $2.50 Weighted average fair value of exercisable options at year-end $ .90 $ .69
The weighted average remaining contract life of the plan options was 5.5 years as of September 30, 1997. At September 30, 1997, the range of prices of exercisable options under the plans were $1.00 to $3.75. F-21 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. SHAREHOLDERS' EQUITY (CONTINUED) In addition to options under the Plans, the Company also issued options outside of these Plans to Carlos D. De Mattos, Edward Phillips and ING during fiscal 1995 (see Note 8). During 1997 and 1996, none of these options were exercised. At September 30, 1997, the Company has adequately reserved common shares to cover all outstanding options and warrants. 7. LEASES The Company leases certain of its manufacturing facilities under non-cancelable operating leases with a company owned by certain officers/shareholders; such leases expire in December 1999. The Company also leases its primary facilities, equipment, vehicles and other premises under capital leases and non-cancelable operating leases. Certain leases contain escalation clauses based on inflation or fixed amounts and generally require the Company to pay utilities, insurance, taxes and other operating expenses. Property and equipment includes the following assets recorded under capital leases:
September 30, 1997 1996 ------------------------ (in thousands) Property and equipment $ 5,933 $ 775 Less accumulated amortization 742 242 --------- --------- $ 5,191 $ 533 ========= =========
Future minimum payments under capital leases and non-cancelable operating leases with initial terms of one year or more consisted of the following at September 30, 1997 (in thousands): F-22 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statments (continued) 7. LEASES (CONTINUED)
Capital Operating Leases Leases --------------------------- 1998 $2,379 $1,588 1999 2,159 1,202 2000 1,451 1,087 2001 639 701 2002 175 319 ------ ------ 6,803 $4,897 ====== Amounts representing interest 777 ------ Present value of net minimum lease payments (including current portion of $2,126) $6,026 ======
Rent expense under operating leases approximated $1,687,000 for 1997, $1,661,000 for 1996, and $1,530,000 in 1995. Included in rent expense is rent for property leased from certain officers/shareholders of $479,000, $479,000 and $769,000, for the years ended September 30, 1997, 1996 and 1995, respectively. F-23 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. COMMITMENTS AND CONTINGENCIES The Company entered into a written Employment Agreement ("De Mattos Agreement") with Carlos D. De Mattos on July 1, 1995 for such individual to serve as the Company's President and Chairman of the Board for a three-year term commencing July 1, 1995, at an annual base salary of $257,000. On December 19, 1996, the Compensation Committee approved an increase in the base salary of Mr. De Mattos to $332,700 per year starting October 1, 1996. Mr. De Mattos was also granted an option to purchase 200,000 shares of the Company's common stock at an exercise price of $3.00 per share. The right to purchase up to 66,667 shares under this option vests in like installments commencing on July 1, 1996 and the next two successive anniversaries of that date, and the option is exercisable until July 2005. As discussed above, shareholder approval of these options was required. At the Company's annual shareholder meeting held on May 30, 1996, the shareholders approved these options. Effective as of October 1, 1997, the Employment Agreement with Mr. De Mattos was amended (as amended, the "De Mattos Agreement") by the Compensation Committee. The term of the employment under the De Mattos Agreement will expire September 30, 2000 but, similar to the July 1, 1995 Employment Agreement, Mr. De Mattos has agreed to provide consulting services to the Company for a period of five years following the termination date, at 50% of the base salary. The base salary under the De Mattos Agreement was increased to $400,000 and will increase 10% at each anniversary date. Mr. De Mattos will receive an incentive bonus for fiscal year 1998 ranging from 20% to 100% of his base salary, based upon attainment by the Company of specific earnings per share levels (described in more detail in the De Mattos Agreement). The annual incentive bonus for fiscal years 1999 and 2000 will be based on performance levels to be established by the Company's Compensation Committee. As part of the amendment, options to purchase an additional 100,000 shares of the Company's common stock at an exercise price of $4.74 per share were granted to Mr. De Mattos. These options are in addition to the options to purchase 200,000 shares of the Company's common stock granted under the July 1, 1995 Employment Agreement. These additional options will vest in one-third increments on October 1, 1998 and on the next two successive anniversaries of that date, and were granted under and are subject to the terms of the Company's 1994 Stock Option Plan. The De Mattos Agreement has been approved by unanimous vote of the independent directors on the Compensation Committee of the Company's Board of Directors. Further, the agreement is to be submitted to the full Board for approval and is expected to be approved. On July 1, 1995, the Company and Studio Equipment entered into a written Employment Agreement ("Phillips Agreement") with Edward Phillips, for him to serve as president of Studio Equipment for a three-year term commencing July 1, 1995, at an annual base salary of $257,000. The base salary increases 10% at each anniversary date during the term of the Phillips Agreement. The Phillips Agreement also provides for an annual incentive bonus from 20% to 40% of the base salary based upon attainment by the Company of specified Earnings (as defined in the Phillips Agreement). Mr. Phillips was also granted an option to purchase 200,000 shares of the Company's common stock at an exercise price of $3.00 per share. The right to purchase up to 66,667 shares under this option vests in like installments commencing on July 1, 1996, and the next two successive anniversaries of that date, and the option is exercisable until July 2005. As discussed above, shareholder approval of these options was required. At the Company's annual shareholder meeting held on May 30, 1996, the shareholders approved these options. In addition, Mr. Phillips agreed, upon termination of the Phillips Agreement, to render consulting services to the Company for a period of five years from the termination date, at 50% of the base salary. In addition to the Purchase Agreement which the Company entered into with ING (see Note 4), as part of the transaction, the Company and certain of its management shareholders (the "Management Shareholders") entered into a Shareholders Agreement with ING (the "Shareholders Agreement") pursuant to which the Company and the shareholders agreed to nominate and vote for the election of two representatives of ING to the Board of Directors of the Company, the number of members of which would be set at nine. The Shareholders Agreement also contains certain restrictions on the transfer of shares held by ING and the Management Shareholders. F-24 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company also entered into a registration rights agreement (the "Registration Rights Agreement") with ING and Sutro & Co., Incorporated, which acted as the Company's investment bankers in connection with the transaction ("Sutro"), entitling the holders of the ING Warrant and the common stock purchase warrant issued to Sutro with respect to the purchase of up to 100,000 shares of common stock of the Company, to certain demand and piggy back registration rights with respect to the shares of common stock issuable upon exercise of the ING Warrant as well as any shares of common stock subsequently acquired by ING. The Registration Rights Agreement also grants ING the right to require the Company to file a shelf registration statement with respect to the sale from time to time of the 1.4 million shares of common stock of the Company acquired by ING from a former employee of the Company. The Company is from time to time named as a defendant in legal proceedings, in the ordinary course of its business. In the opinion of management, after consultation with outside counsel, there are no outstanding suits or claims that may reasonably result in a material adverse effect on the business, financial condition or results of operations of the Company. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of the Company's outstanding balances under its revolving credit facility and senior subordinated notes approximate the fair value because the interest rates on outstanding borrowings vary according to current market rates or are set at approximate market rates. 10. ACQUISITIONS The following acquisitions are included in the results of operations of the Company beginning as of the effective date of the transactions. Effective May 1, 1997, the Company acquired Duke City Video, Inc. ("Duke City"), pursuant to stock exchange agreements dated as of May 2, 1997, among the shareholders of Duke City and Duke City Holdings Inc., a wholly-owned subsidiary of the Company. The acquisition was accounted for under the purchase method of accounting for business combinations. Pursuant to the stock exchange agreements the Duke City shareholders received 285,715 restricted and unregistered shares of the Company's common stock in exchange for all of the common stock of Duke City, in a transaction exempt from registration under the Securities Act of 1933. In connection with the transaction, the Company reissued a note payable to an officer of Duke City in the amount of $580,000. Effective January 1, 1997, the Company purchased the assets and business of Media Lighting Supply, Inc., a lighting supply company in Miami, Florida. The acquisition was accounted for under the purchase method of accounting for business combinations. The acquisition was made for cash of $425,000. In addition, the Company incurred debt of $1,505,000 related to the transaction. Cash of $200,000 was paid on closing, with the remaining portion of the purchase price becoming due in installments of $100,000, $100,000 and $25,000 on the first, second and third anniversaries of the closing. Effective June 1, 1997, the Company purchased the assets and business of Centerline Stage & Studio Lighting, Inc. of Tempe Arizona. The acquisition was accounted for under the purchase method of accounting for business combinations. The acquisition was made for cash of $382,000 of which $237,000 was paid on closing, with the remaining portion of the purchase price becoming due on January 1, 1999. In addition, the Company assumed debt of $164,000 related to the transaction. In respect of the above acquisitions, the excess of purchase price over the fair market value of net assets acquired ("goodwill") amounted to $4,074,000, and the fair market value of assets acquired was $13,091,000. In connection with the acquisitions the fair value of liabilities assumed was $16,168,000. F-25 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. ACQUISITIONS (CONTINUED) The pro forma results of operations for the years ended September 30, 1997 and 1996, assuming consummation of the purchases as of October 1, 1995, are as follows:
For the Year Ended September 30 1997 1996 ------------------ ------------------ ($ in thousands, except per share data) Net revenue $52,958 $43,617 Net income before extraordinary item 1,003 903 Net income 809 903 Net income per common share primary 0.08 0.09 Net income per common share fully diluted 0.07 0.09
11. OTHER ITEMS The Company maintains a defined contribution retirement plan ("the Plan"), which qualifies under Section 401(k) of the Internal Revenue Code. The Plan covers substantially all employees with over one year of service. The Company makes matching contributions between 20% and 50% of the participant's deferral depending on the participant's annual salary up to a maximum of 6% of compensation. The Company recognized expense under the plan of $77,000 in 1997, $52,000 in 1996 and $29,000 in 1995. In the fourth quarter of 1997, the Company incurred an extraordinary loss on the extinguishment of the ING debt, of $324,000 before the related tax benefit of $130,000. In the fourth quarter of 1995, the Company incurred an extraordinary loss on the extinguishment of the GECC debt, of $2,449,000. The Company also recorded a fiscal 1995 fourth quarter adjustment to reduce the carrying amount of used equipment inventories by $276,000. The aggregate impact of these adjustments increased the fourth quarter's pretax loss by $2,725,000. For the fiscal year ended September 30, 1997, a single rental customer accounted for approximately 10.9% of total revenues. F-26 Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. SUBSEQUENT EVENTS On October 17, 1997, the Company purchased the assets and business of Haehnle Dwertman, Inc. (HDI), a grip, lighting and video camera rental company in Covington, Kentucky and Cincinnati, Ohio. The acquisition was made for cash of $800,000 and 350,000 restricted and unregistered shares of the Company's common stock in exchange for all of the common stock of HDI, in a transaction exempt from registration under the Securities Act of 1933. In addition, the Company incurred debt of $1,511,000, and recorded $300,000 of goodwill relating to the transaction. As part of the acquisition, the Company entered into real estate leases with an affiliate of HDI, for Cincinnati, Ohio and Covington, Kentucky facilities from which HDI's business was conducted. The Company is continuing to operate the business acquired from HDI at those facilities. On October 31, 1997, the Company purchased the assets and business of Olesen, a theatrical supply company in Hollywood, California. The acquisition was made for cash of $1,450,000 of which $1,000,000 of cash was paid on closing, with the remaining portion of the purchase price becoming due in two equal installments on October 31, 1999 and October 31, 2000. In addition, the Company incurred debt of $605,000 and recorded goodwill of $690,000, relating to the transaction. As part of the acquisition, the Company entered into real estate leases with affiliates of Olesen, for facilities located in Hollywood, California from which Olesen's business was conducted. The Company is continuing to operate the business acquired from Olesen from those facilities. The acquisition of both HDI and Olesen have been accounted for under the purchase method of accounting for business combinations. F-27 Matthews Studio Equipment Group
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (amounts in thousands) Year Charged Ended Balance at to Costs Charged Balance September Beginning and to Other Deductions at End 30 Description of Year Expenses Accounts - Describe of Year - ------------ ----------------------- ------------ ------------ ------------ ------------- ----------- 1997 ALLOWANCE FOR DOUBTFUL ACCOUNTS $480 $269 $150 (B) $154 (A) $745 1996 Allowance for doubtful accounts 297 295 - 112 (A) 480 1995 Allowance for doubtful accounts 225 157 - 85 (A) 297
(A) Uncollectible accounts written off. (B) Amount assumed in connection with acquisitions. F-28 INDEX TO EXHIBITS Exhibit No. Description - ------- --------------------------------------------------------------------- 3 (a) Articles of Incorporation and amendments incorporated by reference to the Company's Registration Statement on Form S-18 No. 33-30963 LA. 3 (b) Bylaws and amendments incorporated by reference to the Company's Registration Statement on Form S-18 No. 33-30963 LA. 3 (c) Amendment to Articles of Incorporation changing the number of members of Board of Directors, incorporated by reference to the Company's definitive Proxy Statement dated March 1, 1990. 3 (d) Amendment to Articles of Incorporation limiting directors' and officers' liability, incorporated by reference to the Company's definitive Proxy Statement dated March 1, 1990. 3 (e) Certificate of Determination regarding Preferred Stock, incorporated by reference to the Company's Form 8-K dated August 14, 1994. 3 (f) Amendment to Bylaws, incorporated by referenced to the Company's Form 10-K for fiscal year ended September 30, 1995. 3 (g) Amended and Restated Articles of Incorporation, incorporated by reference to the Company's 8-K dated August 14, 1997. 4 (a) Subordinated Note dated as of July 27, 1995, made by the Company in favor of ING Equity Partners, L.P. I, incorporated by reference to the Company's Form 8-K dated August 14, 1994. 4 (b) Warrant dated as of July 27, 1995 issued by the Company to ING Equity Partners, L.P. I, incorporated by reference to the Company's Form 8-K dated August 14, 1994. 4 (c) Registration Rights Agreement dated as of July 27, 1995, between the Company and ING Equity Partners, L.P. I, incorporated by reference to the Company's Form 8-K dated August 14, 1994. 4 (d) Stockholders Agreement dated as of July 27, 1995, among the Company, ING Equity Partners, L.P. I, Carlos D. De Mattos, Edward Phillips, C&E DM Limited Partnership, CE& DM LLC, The Carlos and Elena De Mattos Family Trust dated February 12, 1991 and the Edward and Norman Phillips Family Trust dated June 5, 1991, incorporated by reference to the Company's Form 8-K dated August 14, 1994. 4(e) $4,900,000 Senior Subordinated Note dated July 27, 1995, and $100,000 Senior Subordinated Note dated July 27, 1995, made by the Company in favor of ING Equity Partners, L.P. I, incorporated by reference to the Company's Form 10-Q for fiscal quarter ended March 31, 1996. 4(f) Amendment No. 1 to Common Stock Purchase Warrant, dated as of April 5, 1996, between the Company and ING Equity Partners, L.P. I, incorporated by reference to the Company's Form 10-Q for fiscal quarter ended March 31, 1996. 4(g) Amendment No. 1 to Stockholders Agreement dated as of April 5, 1996, among the Company, ING Equity Partners, L.P. I, Carlos D. De Mattos, Edward Phillips, C&E DM Limited Partnership, CE& DM LLC, The Carlos and Elena De Mattos Family Trust dated February 12, 1991 and the Edward and Norman Phillips Family Trust dated June 5, 1991, incorporated by reference to the Company's Form 10-Q for fiscal quarter ended March 31, 1996. 10 (a) 1989 Stock Option Plan, incorporated by reference to the Company's Registration Statement on Form S-18 No. 33-30963 LA. 10 (b) Amendment to 1989 Stock Option Plan incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30, 1991. 10 (c) 1994 Stock Option Plan incorporated by reference to the Company's Proxy Statement dated March 29, 1994. 10 (d) 1994 Stock Option Plan for Directors incorporated by reference to the Company's Proxy Statement dated March 29, 1994. 10 (e) Lease Agreement between PDM and the Company, incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30, 1995. 10 (f) Lease Agreement between Hollywood Rental Co., Inc. and Douglas J. Pentek and Frieda M. Pentek, incorporated by reference to the Company's Registration Statement on Form S-18 No. 33-30963 LA. 10 (g) Lease Agreement between Perimeter Woods Associates and Hollywood Rental Co., Inc., incorporated by reference to the Company's Form 10-K dated for the fiscal year ended September 30, 1991. 10 (h) First Amendment to Lease Agreement between Perimeter Woods Associates and Hollywood Rental Co., Inc., incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30, 1995. 10 (i) Employment Agreement between the Company and Carlos D. De Mattos dated July 1, 1995, incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30, 1995. 10 (j) Employment Agreement between the Company, Matthews Studio Equipment, Inc. and Edward Phillips dated July 1, 1995, incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30, 1995. 10 (k) Agreement of Dissolution of General Partnership between Matthews Studio Electronics, Inc., and E.F. Nettmann & Associates, Inc., dated as of September 30, 1994, less attachments, incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30, 1995. 10 (l) Equipment Management Services Agreement between Matthews Studio Electronics, Inc., and E.F. Nettmann & Associates, Inc., dated as of October 1, 1994, less attachments, incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30, 1995. 10 (m) Assignment of License Agreement With Option of First Refusal between Matthews Studio Electronics, a general partnership and the Company, dated as of June 1, 1989, incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30, 1995. 10 (n) Release dated as of July 27, 1995, made by the Company, Matthews Studio Equipment, Inc., Matthews Acceptance Corporation, Matthews Studio Electronics, Inc., Matthews Studio Electronics, E.F. Nettmann & Associates, Inc. in favor of General Electric Capital Corporation, incorporated by reference to the Company's Form 8-K dated August 14, 1994. 10 (o) Revolving Credit Agreement dated as of July 27, 1995 among the Company, Matthews Studio Equipment, Inc., Hollywood Rental Co., Inc., Matthews Studio Electronics, Inc., Matthews Acceptance Corporation, and Chemical Bank, incorporated by reference to the Company's Form 8-K dated August 14, 1994, less the exhibits or schedules, but including items 10(p) and 10(q). 10 (p) Revolving Credit Note, dated as of July 27, 1995, made by the Company, Matthews Studio Equipment, Inc., Hollywood Rental Co., Inc., Matthews Studio Electronics, Inc., Matthews Acceptance Corporation, to Chemical Bank, incorporated by reference to the Company's Form 8-K dated August 14, 1994. 10 (q) Security Agreement, dated as of July 27, 1995, among the Company, Matthews Studio Equipment, Inc., Hollywood Rental Co., Inc., Matthews Studio Electronics, Inc., Matthews Acceptance Corporation, Matthews Medical Equipment, Inc., Keylite Holdings, Inc., Keylite Production Services, Inc., Reel Wheels, Inc., and Chemical Bank, incorporated by reference to the Company's Form 8-K dated August 14, 1994. 10 (r) Purchase Agreement dated as of July 27, 1995 between the Company and ING Equity Partners, L.P. I, incorporated by reference to the Company's Form 8-K dated August 14, 1994, less the exhibits or schedules, but including items 4(a), 4(b), 4(c), 4(d), 4(e), 4(f) and 4(g) above and 10(s) below. 10 (s) Amendment No. 1 to Purchase Agreement dated as of April 5, 1996, between the Company and ING Equity Partners, L.P. I, incorporated by reference to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996. 10 (t) First Amendment to Employment Agreement, dated as April 5, 1996, between the Company and Carlos D. De Mattos, incorporated by reference to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996. 10 (u) First Amendment to Employment Agreement, dated as April 5, 1996, between the Company and Edward Phillips, incorporated by reference to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996. 10 (v) Stock Exchange Agreement and Plan of Reorganization dated as of May 2, 1997, among Patricia M. Brusati, Harold Jay Lefkovitz, Louise K. Lefkovitz, Stephen F. Ward, Duke City Video, Inc.and Duke City Holdings, Inc., incorporated by reference from the Company's Form 8-K filed May 2, 1997. 10 (w) Subordination Agreement made by Harold Jay Lefkovitz in favor of Chase Manhattan Bank, as agent, incorporated by reference from the Company's Form 8-K filed May 2, 1997. 10 (x) Stock Exchange Agreement dated as of May 2, 1997, between Duke City Holdings, Inc. and John E. Hensch, incorporated by reference from the Company's Form 8-K filed May 2, 1997. 10 (y) Amended and Restated Credit Agreement, incorporated by reference from the Company's Form 8-K filed August 14, 1997. 11 Statements Re: Computation of Per Share Earnings 21 List of the Company's subsidiaries, incorporated by reference to the Company's Form 10-K for the fiscal year ended September 30, 1995. 23 Consent of Independent Auditors covering the consolidated financial statements for the fiscal year ended September 30, 1997. 27 Financial Data Schedule EX-11 2 STATEMENT RE EARNINGS PER SHARE EXHIBIT 11 Exhibit (11)-Statement Re: Computation of Earnings Per Share MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES Computation of Primary and Fully Diluted Per Share Earnings ($ in thousands, except per share data)
Year Ended September 30, 1997 --------------- PRIMARY PER SHARE EARNINGS: Weighted average shares outstanding 10,456 Net effect of dilutive stock options and warrants 2,070 -------- Total 12,526 Net income $ 1,512 Reduction in interest expense resulting from the assumed exercise of stock options and warrants to purchase common stock and the assumed reduction of outstanding notes payable, net of income taxes 236 -------- Net income, as adjusted $ 1,748 Per share amount $ 0.14 ======= FULLY DILUTED PER SHARE EARNINGS: Weighted average shares outstanding 10,456 Net effect of dilutive stock options and warrants 2,070 -------- Total 12,526 Net income $ 1,512 Reduction in interest expense resulting from the assumed exercise of stock options and warrants to purchase common stock and the assumed reduction of outstanding notes payable, net of income taxes 79 -------- Net income, as adjusted $ 1,591 ======== Per share amount $ $0.13 ========
Note: the above computation is after the extraordinary loss on early extinguishment of debt, which amounted to $0.02 per share. EX-23 3 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 December 12, 1997, with respect to the consolidated financial statements and schedule of Matthews Studio Equipment Group included in its Annual Report (Form 10-K) for the year ended September 30, 1997, filed with the Securities and Exchange Commission. S/Ernst & Young LLP Los Angeles, California December 24, 1997 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10 K FOR PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-30-1996 OCT-01-1996 SEP-30-1997 393 0 9,889 745 7,844 20,672 55,991 20,804 61,871 11,010 0 0 0 6,168 5,002 61,871 20,769 46,358 14,081 28,600 0 0 2,675 2,454 748 1,706 0 (194) 0 1,512 0.14 0.13
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