<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, 1998
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
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)
N/A
---
(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
--------------------------
11,025,906 shares as of August 3, 1998.
- ---------------------------------------
<PAGE>
Index
Matthews Studio Equipment Group and Subsidiaries
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - June 30, 1998 and September 30,
1997
Condensed consolidated statements of operations - Three months ended
June 30, 1998 and 1997; Nine months ended June 30, 1998 and 1997
Condensed consolidated statements of cash flows - Nine months ended
June 30, 1998 and 1997
Notes to condensed consolidated financial statements - June 30, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
Part I. Financial Information
Item I. Financial Statements (Unaudited)
Matthews Studio Equipment Group and Subsidiaries
Condensed Consolidated Balance Sheets
($ in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
-------- -------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 141 $ 393
Accounts receivable, less allowance for
doubtful accounts of $1,166 at June 30,
1998 and $745 at September 30, 1997 11,424 9,144
Current portion of net investment in finance
and sales-type leases 450 829
Inventories 9,438 7,844
Prepaid expenses and other current assets 1,086 923
Income tax refund receivable 1,645 645
Deferred income taxes 961 894
-------- --------
Total current assets 25,145 20,672
Property and Equipment:
Rental equipment 67,827 47,169
Manufacturing equipment and tooling 1,748 1,952
Office furniture and equipment 4,183 3,627
Land and building 1,554 2,131
Leasehold improvements 1,508 1,112
-------- --------
76,820 55,991
Less accumulated depreciation and amortization 25,962 20,804
-------- --------
Property and equipment, net 50,858 35,187
Net investment in finance and sales-type leases,
less current portion 291 455
Goodwill (Note 4) 23,356 4,052
Other assets 3,838 1,505
-------- --------
Total assets $103,488 $ 61,871
</TABLE>
Note: The balance sheet at September 30, 1997 has been derived from the audited
financial statements at that date.
See accompanying notes.
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
($ in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
----------- -------------
(Unaudited) (Note)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 3,498 $ 5,241
Accrued liabilities 3,219 2,950
Current portion of long-term debt 963 693
Current portion of capital lease obligations 1,936 2,126
-------- --------
Total current liabilities 9,616 11,010
Long-term debt, less current portion 75,218 31,859
Notes payable to related parties 1,306 956
Capital lease obligations, less current portion 2,602 3,900
Deferred income taxes 4,382 2,976
Shareholders' equity:
Preferred stock -- --
Common stock 7,143 6,168
Retained earnings 3,221 5,002
-------- --------
Total shareholders' equity 10,364 11,170
-------- --------
Total liabilities and shareholders' equity $103,488 $ 61,871
======== ========
</TABLE>
Note: The balance sheet at September 30, 1997 has been derived from the audited
financial statements at that date.
See accompanying notes.
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
($ in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue from rental operations $ 9,412 $ 5,901 $ 23,448 $ 17,295
Net product sales 7,699 5,479 20,064 14,182
-------- -------- -------- --------
17,111 11,380 43,512 31,477
Costs and expenses:
Cost of rental operations 5,747 3,377 13,949 9,757
Cost of sales 5,215 3,674 13,678 9,543
Selling, general and administrative 5,249 3,094 14,130 8,190
Provision for doubtful accounts receivable 276 86 354 224
Interest, net 1,883 809 4,128 1,940
-------- -------- -------- --------
18,370 11,040 46,239 29,654
Income (loss) before income taxes (1,259) 340 (2,727) 1,823
Provision (benefit) for income taxes (351) 16 (946) 609
-------- -------- -------- --------
Net income (loss) $ (908) $ 324 $ (1,781) $ 1,214
======== ======== ======== ========
Net income (loss) per common share (Note3) ($0.08) $0.03 ($0.16) $0.12
======== ======== ======== ========
Net income (loss) per common share - assuming
dilution (Note 3) ($0.08) $0.03 ($0.16) $0.11
======== ======== ======== ========
</TABLE>
See accompanying notes.
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1998 1997
--------- ---------
<S> <C> <C>
Operating activities:
Net income (loss) $ (1,781) $ 1,214
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for doubtful accounts 354 224
Depreciation & amortization 6,148 2,890
Gain on sale of assets (387) (188)
Changes in operating assets and liabilities net of
effects from acquisitions (Note 4):
Accounts receivable (1,447) (916)
Inventories (573) (1,728)
Net investment in leases 543 310
Prepaids and other assets (536) (254)
Income tax refund receivable (1,000) 0
Accounts payable and accrued liabilities (2,692) (71)
Income taxes payable 0 (245)
--------- ---------
Net cash provided by (used in) operating activities (1,371) 1,236
Investing activities:
Payments for acquisitions (30,770) (200)
Purchase of property and equipment (8,971) (5,457)
Proceeds from sale of property and equipment 566 464
--------- ---------
Net cash used in investing activities (39,175) (5,193)
Financing activities:
Proceeds from exercise of stock options 91 5
Proceeds from borrowings 42,021 4,410
Repayment of borrowings (1,818) (445)
--------- ---------
Net cash provided by financing activities 40,294 3,970
Net increase (decrese) in cash and cash equivalents (252) 13
Cash and cash equivalents at beginning of period 393 462
--------- ---------
Cash and cash equivalents at end of period $ 141 $ 475
========= =========
</TABLE>
See accompanying notes.
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Condensed Consolidated Statements of Cash Flows (continued)
(Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
1998 1997
---------- ----------
<S> <C> <C>
Schedule of noncash investing and financing transactions:
Common stock issued for acquired companies $ 884 $ 560
Additional disclosures:
Cash paid during period for:
Interest 3,983 1,975
Income taxes 50 845
</TABLE>
See accompanying notes.
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. General
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, 1998 are not necessarily indicative of the results that may be expected for
the year ending September 30, 1998, due to fluctuations in film, TV, video and
theatrical production activities. For further information refer to the
consolidated financial statements and footnotes thereto included in the Matthews
Studio Equipment Group annual report on Form 10-K for the year ended September
30, 1997.
Business
The Company designs, manufactures, sells, leases and rents audio, video, film
and production equipment and accessories, to the motion picture, television,
corporate, video, photography and live theatrical 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 generation, production
trucks, and theatrical 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. In
addition, the Company has fully operational soundstages and studios which are
supplied with equipment.
2. Accounting Policies
Principles of Consolidation
The financial statements include the accounts of Matthews Studio Equipment Group
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.
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. Accounting Policies (continued)
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. The Company rents equipment to customers under
short-term 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, is amortized over a period of
twenty five years.
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 equipment 5 - 10 years
Capital leases are amortized over the estimated useful lives using the
straight-line method and the amortization is included in depreciation expense.
Leasehold improvements are amortized over the estimated useful life of the
improvement, or the related lease term, whichever is shorter.
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. Accounting Policies (continued)
Revenue Recognition
The Company recognizes revenue from rentals under operating leases in the period
in which they are earned and recognizes product sales upon shipment.
Per Share Data
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. Accordingly, the
Company implemented FAS 128 in the quarter ended December 31, 1997. The
retroactive application of the statement had no impact on the EPS for the three
month period ended June 30, 1997.
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 nine months ended June 30, 1998 an
effective income tax rate of 35% was used which reflects expected effects of
permanent book and tax differences such as goodwill amortization. For the nine
months ended June 30, 1997, an effective income tax rate of approximately 33%
was utilized as a result of the utilization of $120,000 of valuation reserve.
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 June 30, 1997, financial statements have been
reclassified to conform to the June 30, 1998 presentation.
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
3. Earnings Per Share
The following is a reconciliation of the computations for basic and diluted EPS
(in thousands, except per share data):
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
------------------------------------------------------------------------------------------------
1998 1997
----------------------------------------------- --------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ---------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income (loss) available
to common stockholders $ (908) 11,020 $ (0.08) $ 324 10,527 $ 0.03
========== ===========
Effect of dilutive
options and warrants 817
----------- ------------- ------------ ------------
Diluted EPS:
Income (loss) available to
common stockholders and
assumed conversions $ (908) 11,020 $ (0.08) $ 324 11,344 $ 0.03
=========== ============== ========== ============ ============ ===========
For the Nine Months Ended June 30,
------------------------------------------------------------------------------------------------
1998 1997
----------------------------------------------- --------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ---------- ------------ ------------ -----------
Basic EPS:
Income (loss) available
to common stockholders $ (1,781) 11,001 $ (0.16) $ 1,214 10,398 $ 0.12
========== ===========
Effect of dilutive
options and warrants 261
----------- ------------- ------------ ------------
Diluted EPS:
Income (loss) available to
common stockholders and
assumed conversions $ (1,781) 11,001 $ (0.16) $ 1,214 10,659 $ 0.11
=========== ============= ========== ============ ============ ===========
</TABLE>
Options to purchase 4,616,864 shares of common stock at a range of $1.00 to
$4.74 per share, for the three months and nine months ended June 30, 1998, were
outstanding during the periods yet, as a result of the net loss the options were
anti-dilutive and, excluded from the computation of diluted EPS.
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Options to purchase 117,150 shares of common stock at a range of $3.44 to $4.13
per share, and 1,037,150 shares of common stock at a range of $2.63 to $4.13 per
share, for the three months and nine months ended June 30, 1997, respectively,
were outstanding during the periods yet excluded from the computation of diluted
EPS because the options' exercise prices were greater than the average market
price of the common shares.
During the nine months ended June 30, 1998, 44,200 shares of common stock were
issued upon exercise of stock options.
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for its stock-based compensation
plans. Accordingly, no compensation cost has been recognized for its fixed stock
option plans. Had compensation cost for the Company's option plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, "Accounting for Stock-
Based Compensation," the Company's net loss and earnings per share on a pro
forma basis would have been as indicated below (in thousands, except per share
data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1998
----------------------- ----------------------
($ in thousands, except per share data)
<S> <C> <C>
Net loss
As reported $ (908) $ (1,781)
Pro forma (933) (1,856)
Net loss per share,
basic and diluted
As reported $ (0.08) $ (0.16)
Pro forma (0.08) (0.17)
</TABLE>
4. Acquisitions
The following acquisitions, since October 1, 1997, have been accounted for using
the purchase method of accounting for business combinations and are included in
the results of operations of the Company beginning as of the effective date of
the transactions.
Effective October 1, 1997, the Company purchased the assets and business of
Haehnle Dwertman, Inc. (HDI), a grip, lighting and video camera rental company
in Covington, Kentucky and Cincinnati, Ohio. The acquisition was 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 $865,000 of goodwill relating
to the transaction.
As part of the acquisition, the Company entered into real estate leases with an
affiliate of HDI, for facilities in Covington, Kentucky and Cincinnati, Ohio
from which HDI's business was conducted. The Company is continuing to operate
the business acquired from HDI at those facilities.
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Effective November 1, 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 $695,000 relating to the
transaction. As part of the acquisition, the Company entered into real estate
leases with an affiliate of Olesen, for facilities located in Hollywood,
California, from which Olesen's business was conducted. The Company is
continuing to operate the business acquired from Olesen from those facilities.
Effective April 1, 1998, the Company purchased the assets and business of Four
Star Holding , Inc. ("Four Star") a holding company which owns 100% of Four Star
Lighting, Inc. Four Star provides rentals of lighting and other equipment for
use in theatrical productions. Pursuant to a stock purchase agreement, in
exchange for all of the capital stock of Four Star, the Company paid $18,421,000
in cash to the shareholders of Four Star and $9,104,000 in cash to reduce the
long-term debt of Four Star. In addition, the Company incurred debt of
$1,841,000 and recorded goodwill of $17,449,000 relating to the transaction.
Four Star has operations in New York, New York. It is continuing its business
and operations as a wholly-owned subsidiary of the Company.
The pro forma results of operations for the nine months ended June 30, 1998 and
1997, assuming consummation of the purchases as of October 1, 1996, are as
follows:
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
1998 1997
---------- ----------
($ in thousands, except per share data)
<S> <C> <C>
Net revenue $ 49,593 $ 50,667
Net income (loss) (2,312) 591
Net income (loss) per common share,
basic and diluted (0.21) 0.06
</TABLE>
The above pro forma information includes the operations of HDI, Olesen and Four
Star for both periods and, for the 1997 period, other acquisitions completed in
fiscal year 1997.
During the Company's third fiscal quarter, adjustments were recorded to goodwill
relating to an acquisition made in the third fiscal quarter of last year.
In addition to the above, the Company purchased the grip and lighting equipment
of Disney Production Services, Inc. ("DPS"), and concurrently entered into an
agreement to operate equipment rental and supply departments at certain DPS
locations. In connection with these transactions, the Company has initially
valued the right to operate the equipment rental and supply departments at DPS
locations at $1,500,000 and has capitalized this amount as a deferred asset to
be amortized over the seven year term of the agreement.
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
5. Subsequent Event
On July 31, 1998, the Company announced its plans to separate the grip
manufacturing business of the Company from what has become its core business of
renting lighting, grip, generators, professional video and film equipment. The
Company signed a letter of intent with Edward Phillips, one of the co-founders
of the Company and current President of the Company's grip manufacturing
subsidiary (Matthews Studio Equipment, Inc.), to distribute all of Matthews'
shares in such subsidiary, representing 100% of the outstanding stock, to Mr.
Phillips in exchange for his 1,916,450 shares of the Company's common stock. The
terms of the transaction also include the assumption by the subsidiary of
$5,000,000 in current indebtedness of the Company and the termination of the
Company's employment obligations to Mr. Phillips. In addition, the closing of
the transaction is subject to the parties' execution of a definitive agreement
and the obtaining of bank and other third party consents.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
- ------------------------------------------
The Company is including the following cautionary statement in this Form 10-Q 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.
Results of Operations
- ---------------------
Overview
- --------
The expansion of the Company and its marketing and distribution network into
various select geographic marketplaces continued in the first nine months of
fiscal 1998 with the completion of the acquisitions of three companies including
the acquisition of Four Star Holding, Inc. ("Four Star") in the third fiscal
quarter. The acquisition of Four Star, a holding company which owns 100% of Four
Star Lighting, Inc., a theatrical lighting company, expanded the Company's
rental operations in New York. In addition, the Company continued to invest in
the expansion of its core businesses, as well as operations it acquired in
fiscal 1997. Revenues increased by $12,035,000 or 38% to $43,512,000 for the
first nine months of fiscal 1998, from $31,477,000 for the first nine months of
fiscal 1997. In addition, EBITDA (earnings before interest expense, income
taxes, depreciation and amortization) increased to $7,549,000 for the first nine
months of fiscal 1998 as compared to $6,653,000 for the same period last year.
However, the Company reported a net loss of $1,781,000 for the first nine months
of fiscal 1998 compared to net income of $1,214,000 for the comparable period in
1997.
Several factors contributed to the net loss in the first nine months of fiscal
1998. Rental activities were impaired as a result of the threat of a Screen
Actors Guild strike and while the strike did not materialize, production delays
due to this potential strike significantly impacted the rental operations.
Additionally, in the first six months of fiscal 1997 a large-budget film project
bolstered last year's results by providing additional revenues without requiring
a significant amount of incremental cost and expenses. The Company also incurred
higher expenses associated with the expansion of the operations and costs to
improve systems and absorb new operations.
In addition, on July 31, 1998, the Company executed a letter of intent to sell
its grip manufacturing business. The closing of the transaction is subject to
the parties' execution of a definitive agreement and the obtaining of bank and
other third party consents.
Three-Month Period ended June 30, 1998 and June 30, 1997
- --------------------------------------------------------
Revenues From Rental Operations
- -------------------------------
Revenues from rental operations were $9,412,000 for the third quarter of fiscal
1998, compared to $5,901,000 for the same period last year, an increase of
$3,511,000 or 59%. Revenues generated by operations acquired subsequent to the
third quarter of fiscal year 1997 accounted for substantially all of the
increase in third quarter revenues.
<PAGE>
Net Product Sales
- -----------------
Net equipment and supply sales were $7,699,000 for the third quarter of fiscal
1998, an increase of approximately $2,220,000 or 41%, from $5,479,000 for the
third quarter of fiscal 1997. Sales of production equipment and accessories for
lighting support, camera support, lighting control and equipment sales to the
retail industry ("Equipment sales") increased to $3,785,000, an increase of
approximately $359,000, or 10%, from $3,426,000 in fiscal 1997. Sales of
expendable supply products increased in the third quarter of fiscal 1998 to
$3,914,000 from $2,053,000, an increase of approximately $1,861,000 or 91% over
the same period last year. The increase in sales of expendable supply products
was primarily attributable to operations acquired subsequent to the third
quarter of fiscal year 1997.
Gross Profit - Rental
- ---------------------
Gross profit as a percentage of rental revenues was approximately 39% for the
third quarter of fiscal 1998 compared to 43% in fiscal 1997. Gross profit from
rental revenues increased by $1,141,000 for the third quarter of fiscal 1998 as
compared to fiscal 1997, which increase is mainly due to the increase in
revenues. The decrease in gross profit percentage is primarily due to increased
fixed costs such as depreciation and the inability to maintain prices as high as
last year's prices while the industry is rebounding from a slow first half.
Gross Profit - Sales
- --------------------
Gross profit as a percentage of sales was approximately 32% for the third
quarter of fiscal 1998, compared to approximately 33% for the same period in
fiscal year 1997.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses were $5,249,000 in the third
quarter of fiscal 1998 compared to $3,094,000 for the same period in fiscal
1997. As a percent of sales, selling, general and administrative expenses were
approximately 31% for the third quarter of fiscal 1998 compared to 27% for the
same period in fiscal 1997. The increase is due primarily to higher personnel
and facility related costs and expenses incurred to expand the operations of the
Company, including costs to pursue the growth strategy, improve the foundation
for the Company's operations and improve and integrate business systems. The
dollar increase is also due to the acquisitions completed subsequent to the
third quarter of fiscal 1997.
Interest
- --------
Interest increased to $1,883,000 in the third quarter of fiscal 1998 from
$809,000 in the third quarter of fiscal 1997. The increase in interest costs is
mainly due to additional debt incurred and assumed in the acquisitions the
Company completed since the third quarter of fiscal 1997, and to the substantial
amount of capital investment made in certain of the acquired, as well as the
existing, operations.
Nine-Month Period ended June 30, 1998 and June 30, 1997
- --------------------------------------------------------
Revenues From Rental Operations
- -------------------------------
Revenues from rental operations were $23,448,000 for the first nine months of
fiscal 1998, compared to $17,295,000 for the same period last year, an increase
of $6,153,000 or 36%. The increase is mainly due to revenues generated by
operations acquired subsequent to the third quarter of fiscal year 1997.
Additionally, a substantial amount of the total revenue of the first nine months
of fiscal year 1997 was from large-budget film projects which were completed
during the second quarter of last year.
<PAGE>
Net Product Sales
- -----------------
Net equipment and supply sales increased to $20,064,000 for the first nine
months of fiscal 1998, compared to $14,182,000 for the first nine months of
fiscal 1997. Equipment sales increased to $10,574,000 for the first nine months
of fiscal 1998, an increase of $1,458,000 or 16% from $9,116,000 for the same
period last year. Sales of expendable supplies increased by approximately
$4,424,000 for the nine months ended June 30, 1998 compared to the first nine
months of 1997, primarily as a result of operations acquired during and
subsequent to the first nine months of fiscal 1997.
Gross Profit - Rental
- ---------------------
Gross profit as a percentage of rental revenues was approximately 41% for the
first nine months of fiscal 1998, compared to 44% in fiscal 1997. The decrease
in gross profit percentage on rental activities mainly resulted from lower
margins in the film and video production equipment businesses, somewhat offset
by higher margins in the Company's other rental markets from acquisitions
recently completed.
Gross Profit - Sales
- --------------------
Gross profit as a percentage of sales was approximately 32% for the first nine
months of fiscal 1998, compared to approximately 33% for the same period in
fiscal 1997.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses were $14,130,000 for the first nine
months of fiscal 1998, compared to $8,190,000 for the same period in fiscal year
1997. As a percent of sales, selling, general and administrative expenses were
32% for the first nine months of fiscal 1998, compared to 26% for the same
period in fiscal 1997. The increase is due primarily to higher personnel and
facility related costs and expenses incurred to expand the operations of the
Company, including costs to pursue the growth strategy, improve the foundation
for the Company's operations and improve and integrate business systems. The
dollar increase is also due to the acquisitions completed during and subsequent
to the first nine months of fiscal 1997.
Interest
- --------
Interest increased to $4,128,000 for the first nine months of fiscal 1998,
compared to $1,940,000 for the first nine months of fiscal 1997. The increase in
interest costs is mainly due to additional debt incurred and assumed in the
acquisitions the Company completed since the third quarter of fiscal 1997, and
to the substantial amount of capital investment made in certain of the acquired,
as well as the existing, operations.
Liquidity and Capital Resources
- -------------------------------
During the nine months ended June 30, 1998, the Company financed its operations
from bank borrowings.
At June 30, 1998, the Company's working capital was $15,529,000which was an
increase of $5,867,000 from its working capital at September 30, 1997.
In the nine months ended June 30, 1998, the Company primarily applied cash from
additional borrowings from the Company's bank line of $42,021,000 to pay for
approximately $8,971,000 of property and equipment additions, to consummate
acquisitions including Four Star, HDI, and Olesen for $30,770,000 in cash, to
retire certain debt
<PAGE>
assumed in the acquisition of HDI and to pay down capital lease obligations
incurred in a fiscal year 1997 acquisition. The major capital equipment
additions were for the Company's video equipment rental operations and
production equipment rental operations.
For the fiscal quarter ended June 30, 1998, the Company obtained waivers from
the bank relating to certain financial covenants stated in its credit agreement.
During the next twelve months, the Company expects to purchase new capital
equipment to allow its operations to become more efficient, support growth and
to control costs and is also exploring various external financing sources
including, but not limited to, existing and additional bank financing, joint
ventures, partnerships and placement of debt or equity securities of the
Company. The Company expects to finance its capital acquisition program through
external financing and cash generated from operations.
The Company believes it will have sufficient funds from operations and available
bank borrowings to meet its anticipated requirements for working capital during
the next twelve months.
<PAGE>
PART II. Other Information
Items 1,2,3, 4,and 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) Form 8-K dated April 13, 1998 and Form 8-K/A dated May
11, 1998 ( both relating to the acquisition of Four Star
Holding, Inc.)
<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, 1998, to be signed on its behalf by the undersigned hereunto
duly authorized.
MATTHEWS STUDIO EQUIPMENT GROUP
(Registrant)
Date: August 13, 1998 By: /s/ Carlos D. De Mattos
------------------------------------------
Carlos D. De Mattos
Chairman of the Board, Chief Executive Officer,
President & Chief Financial Officer
By: /s/ Gary S. Borman
-----------------------------------------------
Gary S. Borman
Vice President, Corporate Controller
& Principal Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
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