<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period ended JUNE 30, 1996
-------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________ to _____________
Commission file number 0-18102
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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.)
2405 EMPIRE AVENUE, BURBANK, CA 91504-3399
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(Address of principal executive offices) (Zip Code)
(818) 843-6715
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(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if changed since
last report)
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 preceding 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. COMMON STOCK, NO PAR VALUE -
----------------------------
10,331,591 SHARES AS OF JULY 31, 1996.
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<PAGE>
Part I. Financial Information
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
($ in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
-------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 406 $ 438
Accounts receivable less allowances of June 30,
1996: $373 and September 30, 1995: $297 4,567 4,039
Current portion of net investment in leases 843 979
Inventories 4,512 4,556
Prepaid expenses and other current assets 839 922
------- -------
Total current assets 11,167 10,934
Property and equipment less accumulated
depreciation and amortization of June 30, 1996:
$16,609 and September 30, 1995: $14,785 19,815 17,226
Investment in leases, less current portion 975 1,376
Other assets 1,075 1,167
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Total assets $33,032 $30,703
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 2,487 $ 1,569
Accrued liabilities 1,471 1,080
Current portion of long-term debt and capital
lease obligations 312 413
Income taxes payable 108
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Total current liabilities 4,378 3,062
Long-term debt and capital leases 18,130 17,664
Deferred income taxes 1,923 1,923
Common stock 5,585 5,567
Preferred stock - -
Retained earnings 3,016 2,487
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Total shareholders' equity 8,601 8,054
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Total liabilities and shareholders' equity $33,032 $30,703
======= =======
</TABLE>
Note: The balance sheet at September 30, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
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<PAGE>
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
($ in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net product sales $ 4,721 $3,886 $11,418 $11,572
Revenues from rental operations 3,376 3,289 9,810 9,337
------- ------ ------- -------
8,097 7,175 21,228 20,909
Costs and expenses:
Cost of sales 3,065 2,522 7,261 7,182
Cost of rental operations 1,878 1,961 5,605 5,441
------- ------ ------- -------
4,943 4,483 12,866 12,623
Gross profit 3,154 2,692 8,362 8,286
Selling, general and administrative 2,337 2,047 6,191 5,869
Minority interest 29 92
Interest 519 502 1,518 1,460
------- ------ ------- -------
Total expenses 2,856 2,578 7,709 7,421
Income before income taxes 298 114 653 865
Provision for taxes 54 60 125 346
------- ------ ------- -------
Net income $ 244 $ 54 $ 528 $ 519
======= ====== ======= =======
Earnings per common share $0.02 $0.01 $0.05 $0.05
======= ====== ======= =======
Weighted average number of
common shares outstanding 10,330 10,314 10,324 10,314
</TABLE>
See accompanying notes.
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<PAGE>
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1996 1995
-------- ---------
<S> <C> <C>
Operating activities:
Net income $ 528 $ 519
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for doubtful accounts 136 226
Depreciation and amortization 2,307 2,138
Minority interest 92
Gain on sale of assets (157) (189)
Changes in operating assets and liabilities:
Accounts receivable (664) (1,034)
Inventory 44 61
Net investment in leases 537 302
Prepaids and other assets (78) (514)
Income tax refund receivable 252
Accounts payable and accrued liabilities 1,309 (1,394)
Income taxes payable 108 327
-------- --------
Net cash provided by (used in) operating activities 4,322 534
Investing activities:
Purchase of property and equipment (5,405) (3,064)
Proceeds from sale of property and equipment 553 918
-------- --------
Net cash used in investing activities (4,852) (2,146)
Financing activities:
Proceeds from exercise of stock options 18
Proceeds from borrowings 22,906 20,311
Repayment of borrowings (22,426) (19,184)
Payments to minority interest (240)
-------- --------
Net cash provided by financing activities 498 887
Net decrease in cash and cash equivalents (32) (725)
Cash and cash equivalents at beginning of period 438 735
-------- --------
Cash and cash equivalents at end of period $ 406 $ 10
======== ========
</TABLE>
See accompanying notes.
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<PAGE>
INDEX
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - June 30, 1996 and September
30, 1995
Condensed consolidated statements of income - Three months ended June
30, 1996 and 1995: Nine months ended June 30, 1996 and 1995
Condensed consolidated statements of cash flows - Nine months ended
June 30, 1996 and 1995
Notes to condensed consolidated financial statements - June 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Change in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
5
<PAGE>
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Presentation
The accompanying unaudited condensed consolidated financial statements of
Matthews Studio Equipment Group and Subsidiaries (the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three- and nine-month periods ended
June 30, 1996 are not necessarily indicative of the results that may be expected
for the year ending September 30, 1996, due to fluctuations in film production
activities. For further information refer to the consolidated financial
statements and footnotes thereto included in the Matthews Studio Equipment
Group's annual report on Form 10-K for the year ended September 30, 1995.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. Per Share Data
Earnings per common share is based on the weighted average number of common
shares outstanding. The dilution from common stock equivalents is less than
three percent and is therefore excluded from the calculation of earnings per
common share.
3. Inventories
Inventories are principally stated at the lower of first-in, first-out cost or
market.
4. 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.
5. Long-Term Debt
The Chemical Bank Revolving Credit Facility
- -------------------------------------------
During fiscal 1995, The Company entered into an agreement for a senior secured
revolving credit facility with Chemical Bank (the "Facility.") At June 30,
1996, the Company had an outstanding balance of $13,089,000 and had
approximately $3,800,000, available under the Facility. The Company obtained a
waiver from Chemical Bank relating to a covenant, stating a maximum ratio
related to debt, which was exceeded at an interim period in fiscal 1996. The
Company however, was in compliance with all covenants in the credit agreement
during the quarter ended June 30, 1996.
6
<PAGE>
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)-Continued
5. Long-Term Debt (continued)
The ING Equity Partners, L.P.I Senior Subordinated Promissory Note
- ------------------------------------------------------------------
In July 1995, the Company entered into a purchase agreement (the "Purchase
Agreement") with ING Equity Partners, L.P.I ("ING"), pursuant to which the
Company sold to ING for a total purchase price of $5 million (i) its senior
subordinated promissory note in the principal amount of $5 million, bearing
interest at an initial rate of 10% per annum (the "Subordinated Note"), (ii) a
common stock purchase warrant (the "ING Warrant") entitling ING to purchase
2,322,464 of the Company's outstanding shares of common stock at an initial
purchase price per share of $2.50 and having certain antidilutive rights and
(iii) a share of preferred stock of the Company entitling ING to voting rights
with respect to the number of shares underlying the ING Warrant.
During the quarter ended June 30, 1996, the Subordinated Note with ING was
amended, and replaced with two subordinated notes, a $100,000 subordinated note
with a due date of July 27, 2005, and a $4,900,000 subordinated note with a due
date of July 27, 2000, which may also be extended to July 27, 2005 at the
discretion of ING. The other terms and conditions of the new subordinated notes
are unchanged from the terms and conditions of the original Subordinated Note.
In addition, during the quarter ended June 30, 1996, the Purchase Agreement with
ING and the ING Warrant were amended to place certain limits on the number of
shares of the Company's Common Stock which may be purchased under the ING
Warrant, and to amend the voting rights of the preferred stock issued by the
Company to ING so as not to have the right to vote until there has been a
default under the Purchase Agreement.
6. 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. The effective income tax rate is 20% for the current
quarter and for the first nine months of this fiscal year versus approximately
40% for the same periods of the prior year. The lower rate for this year is
primarily attributable to the utilization of net operating loss and alternative
minimum tax credit carryforwards.
7. Stock Options
During the nine months ended June 30, 1996, 17,000 shares of common stock were
issued upon the exercise of stock options.
8. Other Information
The Company continued its strategic expansion program by acquiring certain
assets of DR&A, Inc., for $270,000 on June 27, 1996. Concurrently, the Company
entered into an equipment management, marketing and revenue sharing agreement
with DR&A, Inc., which is a privately held rental and post-production company in
Nashville, Tennessee.
During the first quarter of fiscal 1996, the Company expanded its rental markets
by completing similar arrangements with Jonas Jensen Studios, Inc., located in
Seattle, Washington. Jonas Jensen Studios, Inc., thereby became the only studio
in the Seattle region capable of servicing the major post-production work
necessary for TV commercials or full-length feature movie productions.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
- ---------------------
Overview
- --------
In the last quarter of fiscal 1995, the Company successfully restructured its
long-term debt which has provided capital for expansion and to increase its
rental equipment inventory. The increase in rental equipment inventory has
resulted in a decrease in the Company's subrental costs. The Company also
experienced an increase in product sales during the third quarter of fiscal
1996, which was primarily due to concentrated marketing efforts in certain
product lines.
Three-Month Period ended June 30, 1996 and June 30, 1995
- --------------------------------------------------------
Net Product Sales
- -----------------
Net equipment and supply sales were $4,721,000 for the third quarter of fiscal
1996, an increase of $835,000 or 21.5% from $3,886,000, for the third quarter of
fiscal 1995. Sales of production equipment and accessories for lighting
support, camera support, lighting control and equipment sales to the retail
industry ("Equipment sales") increased to $3,689,000, an increase of $826,000 or
28.9% from $2,863,000, in fiscal 1995. The increase was primarily attributable
to higher sales in certain product lines resulting from concentrated marketing
efforts.
Revenues From Rental Operations
- -------------------------------
Revenues from rental operations were $3,376,000 for the third quarter of fiscal
1996, compared to $3,289,000 for the same period last year, an increase of
$87,000 or 2.6%. Production equipment rentals, primarily of lighting, grip,
power generators and trucks ("Equipment rentals"), increased to approximately
$3,289,000, an increase of $130,000 or 4.1% from approximately $3,159,000, in
the same period last year. This increase is mainly due to availability of
additional rental equipment purchased during the year.
Gross Profit - Sales
- --------------------
Gross profit as a percentage of sales held at approximately 35.1% for the third
quarter of fiscal 1996 and 1995.
Gross Profit - Rental
- ---------------------
Gross profit as a percentage of rental revenues was approximately 44.4% for the
third quarter of fiscal 1996 compared to 40.4% in fiscal 1995. The increase in
gross profit is mainly due to the addition of equipment to the Company's
Equipment rental inventory which resulted in a decrease in subrental costs in
the Equipment rental business of approximately $251,000. This increase was
somewhat offset by an increase of $59,000, in depreciation expense from new
equipment purchases.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses were $2,337,000 in the third
quarter of fiscal 1996 compared to $2,047,000 for the same period in fiscal
1995. As a percent of sales, selling, general and administrative expenses were
28.9% for the third quarter of fiscal 1996 compared to 28.5% for the same period
in fiscal 1995. The dollar increase was due mainly to higher payroll, sales
commission and bonus expenses.
8
<PAGE>
Minority Interest
- -----------------
There was no minority interest expense in fiscal 1996 due to the termination of
a partnership agreement.
Interest
- --------
Interest increased to $519,000 in the third quarter of fiscal 1996 from $502,000
in the third quarter of fiscal 1995. The increase in interest costs is
primarily due to an increase of approximately $5,045,000 in outstanding
principal amount of long-term debt. This increase however, was somewhat offset
by lower interest rates and $37,000 of lower loan fee amortization costs.
Nine-Month Period ended June 30, 1996 and June 30, 1995
- -------------------------------------------------------
Net Product Sales
- -----------------
Net equipment and supply sales decreased slightly to $11,418,000 for the first
nine months of fiscal 1996, compared to $11,572,000 for the first nine months of
fiscal 1995. Sales of expendable supplies decreased by approximately $407,000,
broker revenue decreased by $241,000 and used equipment sales also declined by
$85,000, compared to the first nine months of 1995. These decreases were
somewhat offset by Equipment sales which increased to $8,546,000 for the first
nine months of fiscal 1996, an increase of $662,000 or 8.4% from $7,884,000, for
the same period last year. The increase in Equipment sales is attributable to
concentrated marketing efforts.
Revenues From Rental Operations
- -------------------------------
Revenues from rental operations were $9,810,000 for the first nine months of
fiscal 1996, compared to $9,337,000 for the same period last year, an increase
of $473,000 or 5.1%. Equipment rentals increased to approximately $9,491,000,
an increase of $478,000 or 5.3% from approximately $9,013,000, in the same
period last year. The increase was primarily due to the addition of equipment
to the Company's rental inventory base, and new marketing center (See Note 8),
which have permitted the Company to increase its Equipment rental revenues.
Gross Profit - Sales
- --------------------
Gross profit as a percentage of sales was approximately 36.4% for the first nine
months of fiscal 1996, compared to approximately 37.9% for the same period in
fiscal 1995. The decline is attributable to the discontinuance of broker sales
by the leasing entity.
Gross Profit - Rental
- ---------------------
Gross profit as a percentage of rental revenues was approximately 42.9% for the
first nine months of fiscal 1996, compared to 41.7% in fiscal 1995. The increase
in gross profit is mainly due to the benefit of spreading fixed operating costs
over a higher revenue base, in addition to a decrease in subrental costs of
$235,000 and in labor costs of approximately $116,000 due to efficiencies in
handling customer orders. The increase in gross profit however, was partially
offset by an increase of $433,000 in depreciation expense from new equipment
purchases during the past year.
9
<PAGE>
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses were $6,191,000 for the first nine
months of fiscal 1996, compared to $5,869,000 for the same period in fiscal
1995. As a percent of sales, selling, general and administrative expenses were
29.2% for the first nine months of fiscal 1996, compared to 28.1% for the same
period in fiscal 1995. The increase was due mainly to higher professional fees,
payroll, sales commission and bonus expenses.
Interest
- --------
Interest increased to $1,518,000 for the first nine months of fiscal 1996,
compared to $1,460,000 in the first nine months of fiscal 1995. The increase in
interest costs is primarily due to an increase in the outstanding principal
amount of debt. This increase however, is partially offset by lower interest
rates and $135,000 of lower loan fee amortization costs.
Liquidity and Capital Resources
- -------------------------------
During the nine months ended June 30, 1996, the Company financed its operations
from internally generated cash flow and bank borrowings.
Working capital was $6,789,000 at June 30, 1996 compared to $7,872,000 at
September 30, 1995.
During the first nine months of fiscal 1996, the Company generated cash from
operating activities of $4,322,000. The major contributors to cash from
operating activities were earnings before depreciation and amortization of
$2,835,000, increased accounts payable and accrued liabilities of $1,309,000,
collections from investments in leases of $407,000 and income tax refunds of
$252,000. Partially offsetting the major contributors to cash from operating
activities was an increase in trade accounts receivable of $664,000.
The Company primarily utilized cash from operating activities of $4,322,000,
augmented by additional borrowings from the Company's bank line of $566,000, to
finance the acquisition of capital equipment. The major components of the asset
additions were equipment for the Company's Equipment rental operations of
approximately $2,897,000, and equipment acquisition costs for the expansion of
marketing centers in Seattle, Washington and Nashville, Tennessee (See Note 8)
of approximately $1,143,000.
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 subrental of equipment necessary to meet customer orders. The
Company expects to finance its capital program through a combination of cash
generated from operations and additional borrowings under its line of credit
with the bank. The Company believes it has sufficient funds from operations and
bank borrowings to meet its anticipated requirements for working capital during
the next twelve months.
10
<PAGE>
PART II. OTHER INFORMATION
Items 1 through 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
27 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the
three months ended June 30, 1996.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report on Form 10-Q for the period
ending June 30, 1996, to be signed on its behalf by the undersigned hereunto
duly authorized.
MATTHEWS STUDIO EQUIPMENT GROUP
(Registrant)
Date: August 12, 1996 By: /s/ Gary Borman
--------------------------------
Gary Borman
Corporate Controller
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 406
<SECURITIES> 0
<RECEIVABLES> 4,940
<ALLOWANCES> 373
<INVENTORY> 4,512
<CURRENT-ASSETS> 11,167
<PP&E> 36,424
<DEPRECIATION> 16,609
<TOTAL-ASSETS> 33,032
<CURRENT-LIABILITIES> 4,378
<BONDS> 0
0
0
<COMMON> 5,585
<OTHER-SE> 3,016
<TOTAL-LIABILITY-AND-EQUITY> 33,032
<SALES> 11,418
<TOTAL-REVENUES> 21,228
<CGS> 7,261
<TOTAL-COSTS> 12,866
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,518
<INCOME-PRETAX> 653
<INCOME-TAX> 125
<INCOME-CONTINUING> 528
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 528
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
