<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 March 31, 1999
--------------
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.)
3111 North Kenwood Street, Burbank, CA 91505
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(818) 525-5200
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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 9,273,756 shares as of April 30, 1999
-------------------------------------------
1
<PAGE>
Index
Matthews Studio Equipment Group and Subsidiaries
<TABLE>
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - March 31, 1999 and September 30, 1998
Condensed consolidated statements of operations - Three months ended March 31, 1999 and 1998
- Six months ended March 31, 1999 and 1998
Condensed consolidated statements of cash flows - Six months ended March 31, 1999 and 1998
Notes to condensed consolidated financial statements - March 31, 1999
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
</TABLE>
2
<PAGE>
Part I. Financial Information
Item I. Financial Statements (Unaudited)
Matthews Studio Equipment Group and Subsidiaries
Condensed Consolidated Balance Sheets
($ in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
---------------- ----------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 344 $ 331
Accounts receivable, less allowance for
doubtful accounts of $1,263 at March 31,
1999 and $1,259 at September 30, 1998 9,949 8,981
Current portion of net investment in finance
and sales-type leases 322 353
Inventories 3,982 3,783
Prepaid expenses and other current assets 876 536
Income tax refund receivable 754 1,045
Deferred income taxes 1,640 753
----------------- ----------------
Total current assets 17,867 15,782
Property and equipment, net 52,223 51,650
Net investment in finance and sales-type leases,
less current portion 188 248
Goodwill less accumulated amortization of $1,144 at March 31,
1998 and $681 at September 30, 1998 22,531 23,168
Other assets 5,411 3,538
----------------- ----------------
Total assets $ 98,220 $ 94,386
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 7,028 $ 4,634
Accrued liabilities 4,022 3,946
Current portion of long-term debt and capital lease obligations 4,526 4,687
----------------- ----------------
Total current liabilities 15,576 13,267
Long-term debt and capital lease obligations less current portion 79,390 74,691
Deferred income taxes 3,815 3,815
Shareholders' equity:
Preferred stock, no par value, authorized
1,000,000 shares; issued and outstanding
one share at March 31, 1999 and September 30, 1998 - -
Common stock, no par value, authorized
20,000,000 shares; issued and outstanding 9,268,000 shares at
March 31, 1999 and 9,110,000 shares at September 30, 1998 7,474 7,144
Retained earnings 1,547 5,051
----------------- ----------------
9,021 12,195
Less retired common stock (1,916,450 shares at
March 31, 1999 and September 30, 1998) 9,582 9,582
----------------- ----------------
Total shareholders' equity (deficit) (561) 2,613
----------------- ----------------
Total liabilities and shareholders' equity $ 98,220 $ 94,386
================= ================
</TABLE>
Note: The balance sheet at September 30, 1998 has been derived from the audited
financial statements at that date. The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
($ in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenue from rental operations $ 9,271 $ 6,265 $19,335 $14,036
Net product sales 5,430 6,679 10,312 12,365
--------------- --------------- -------------- ---------------
14,701 12,944 29,647 26,401
Costs and expenses:
Cost of rental operations 6,097 4,140 12,047 8,202
Cost of sales 3,941 4,603 7,694 8,463
Selling, general and administrative 4,833 4,539 9,874 8,959
Restructuring charge 423 - 423 -
Interest, net 1,820 1,135 3,713 2,245
--------------- --------------- -------------- ---------------
17,114 14,417 33,751 27,869
Loss before income taxes (2,413) (1,473) (4,104) (1,468)
Benefit for income taxes (261) (597) (600) (595)
--------------- --------------- -------------- ---------------
Net loss $(2,152) $ (876) $(3,504) $ (873)
=============== =============== ============== ===============
Loss per common share, basic and
diluted ($0.23) ($0.08) ($0.38) ($0.08)
=============== =============== ============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Six Months Ended March 31,
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(3,504) $ (873)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for doubtful accounts 39 78
Depreciation & amortization 5,795 3,644
Deferred income taxes (887) -
Gain on sale of assets (594) (205)
Changes in operating assets and liabilities net of
effects from acquisitions:
Accounts receivable (1,007) (548)
Inventories (199) 70
Net investment in leases 91 440
Prepaids and other assets (897) (158)
Income tax refund receivable 291 (646)
Accounts payable and accrued liabilities 2,470 (2,591)
----------- -----------
Net cash provided by (used in) operating activities 1,598 (789)
Investing activities:
Payments for acquisitions - (1,800)
Purchase of property and equipment (5,767) (7,059)
Proceeds from sale of property and equipment 185 640
----------- -----------
Net cash used in investing activities (5,582) (8,219)
Financing activities:
Proceeds from exercise of stock options 330 36
Proceeds from borrowings 4,398 11,314
Repayment of borrowings (731) (2,225)
----------- -----------
Net cash provided by financing activities 3,997 9,125
Net increase in cash and cash equivalents 13 117
Cash and cash equivalents at beginning of period 331 393
----------- -----------
Cash and cash equivalents at end of period $ 344 $ 510
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Condensed Consolidated Statements of Cash Flows (continued)
(Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1999 1998
-------------------- -------------------
<S> <C> <C>
Schedule of noncash investing and financing
transactions:
Common stock issued for acquired company $ - $ 884
Capital lease obligations incurred 1,602 -
Note received for sale of assets 1,289 -
Additional disclosures:
Cash paid during period for:
Interest 3,209 2,164
Income taxes 105 50
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<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 six month periods ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending September 30, 1999, 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 annual report on Form 10-K for the year ended September 30,
1998.
Business
The Company sells, leases and rents audio, video, theatrical, film and
production equipment and accessories, to the motion picture, television, and
corporate, theatrical, video and photography industries. The Company operates
in one business segment and provides, as a single source, the necessary
production equipment, which is otherwise only available, by using many different
suppliers. The Company supplies equipment such as lights, grip lighting
supports, professional video equipment, camera mounts, tripods, pedestals, fluid
heads, camera dollies, portable camera cranes, power generators and production
trucks. In addition, the Company has fully operational and equipment supplied
soundstages and studios.
2. Summary of Significant Accounting Policies
Principles of Consolidation - The financial statements include the accounts of
the Company and its subsidiaries as of the respective date each subsidiary was
acquired. All significant intercompany balances and transactions have been
eliminated.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents - The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents. The
carrying value of these instruments approximates market value because of their
short maturity.
Concentration of Credit Risk - The Company's customers are located around the
world and are principally engaged in motion picture and television production,
theatrical production, corporate video, commercial photography, or in providing
rental equipment to companies in these industries. The Company generally sells
on credit terms of 30 days and does not require collateral, except for items
sold under capital leases in which it retains a security interest. The Company
rents equipment under operating leases on credit terms of generally 30 days and
retains a security interest.
7
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Fair Values of Financial Instruments - The Statement of Financial Accounting
Standards No. 107 "Disclosure About Fair Value of Financial Instruments" ("SFAS
No. 107") requires disclosure of fair value information about most financial
instruments both on and off the balance sheet, if it is practicable to estimate.
SFAS No. 107 excludes certain financial instruments such as certain insurance
contracts and all non-financial instruments from its disclosure requirements. A
financial instrument is defined as a contractual obligation that ultimately ends
with the delivery of cash or an ownership interest in an entity. Disclosure
regarding the fair value of financial instruments is derived using external
market sources, estimates using present value or other valuation techniques.
Cash, accounts receivable, accounts payable, accrued and other liabilities and
short-term revolving credit agreements and variable rate long-term debt
instruments approximate their fair value.
Inventories - Inventories are principally stated at the lower of first-in,
first-out cost or market.
Other Assets - Included in other assets are loan fees that are being amortized
as interest expense over the term of the bank facility. Other assets also
include cost to purchase and development software. The Company capitalizes
certain internal software development costs. Capitalization ends when the
software is put into service and amortization of these costs is computed using
the straight-line method over five years. Other assets also include certain
five year promissory notes from the sale of equipment with interest at accruing
8.5% per annum.
Goodwill - Goodwill represents the excess of cost over the fair value of net
assets acquired and is amortized using the straight-line method, generally over
25 years. Useful lives are determined on a case by case basis for each business
acquired. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on estimated undiscounted
cash flows of the Company over the remaining amortization period, the Company's
carrying value would be reduced by the estimated shortfall of discounted cash
flows.
Property and Equipment - Property and equipment, including items purchased under
capital leases, are recorded at cost. Costs incurred for major renewals and
betterments that extend the useful life of the assets are capitalized, whereas
repair and maintenance costs are charged to expense as incurred. When property
is retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in income. Depreciation and amortization is calculated using the
straight-line method over the estimated useful lives of the assets as follows:
Rental equipment 5 - 10 years
Buildings and improvements 10 - 40 years
Other 5 - 10 years
Leasehold improvements are amortized over the estimated useful lives, or the
term of the related leases, for improvements, whichever is shorter.
Revenue Recognition - The Company recognizes revenue from rentals under
operating leases in the week in which they are earned and recognizes product
sales upon shipment.
8
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Per Share Data - During the year ended September 30, 1998, the Company adopted
the statement of Financial Accounting Standards No. 128 "Earnings Per Share"
("SFAS No. 128") which established standards for computing and presenting
earnings per share ("EPS") for publicly-held common stock or potential common
stock. SFAS No. 128 supersedes the standards for computing earnings per share
previously found in APB opinion No. 15 "Earnings per Share" and simplifies the
standards for computing earnings per share. In addition, SFAS No. 128 replaces
the presentation of primary earnings per share with a presentation of basic
earnings per share, requires dual presentation of basic and diluted earnings per
share on the face of the income statement for all entities with complex capital
structures, and requires a reconciliation of the numerator and denominator on
the basic earnings per share computation to the numerator and denominator of the
diluted earnings per share computation. All periods presented reflect the
adoption of SFAS No. 128.
Restructuring Charge - In the second quarter of fiscal 1999, the Company
recorded a restructuring charge of $423,000 ($360,000 after tax or $0.04 per
share). This charge pertains primarily to the closure of the Company's
northeastern video rental operations. Costs incurred for severance, lease
termination, and property evacuation are included in the restructuring charge.
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 six months
ended March 31, 1999 and 1998, effective income tax rates of 15% and 40% were
utilized, respectively.
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 March 31, 1998,
financial statements have been reclassified to conform to the March 31, 1999
presentation.
9
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
3. Earnings Per Share
The following is the computations for EPS. The computations for basic and
diluted EPS are the same because the effect of outstanding warrants and options
are antidilutive for all periods:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------------------------------------------------------------------
1999 1998
------------------------------------------------ ---------------------------------------------
Loss Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- -------------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic and diluted EPS:
Loss available
to common $ (2,152) 9,251 $ (0.23) $ (876) 10,997 $ (0.08)
stockholders =========== ==========
<CAPTION>
For the Six Months Ended March 31,
-----------------------------------------------------------------------------------------------
1999 1998
------------------------------------------------ ---------------------------------------------
Loss Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- -------------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic and diluted EPS:
Loss available
to common $ (3,504) 9,184 $ (0.38) $ (873) 10,992 $ (0.08)
stockholders =========== ==========
</TABLE>
Options to purchase 4,273,164 shares of common stock at a range of $1.85 to
$4.74 per share, for the three months and six months ended March 31, 1999, were
outstanding during the periods yet excluded from the computation of diluted EPS
because as a result of the net loss the options were antidilutive.
Options to purchase 4,303,164 shares of common stock at a range of $1.00 to
$4.74 per share, for the three months and six months ended March 31, 1998, were
outstanding during the periods yet excluded from the computation of diluted EPS
because as a result of the net loss the options were antidilutive.
During the six months ended March 31, 1999, 158,300 shares of common stock were
issued upon exercise of stock options.
10
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for its stock-based compensation
plans. Accordingly, no compensation cost has been recognized for its fixed
stock option plans. Had compensation cost for the Company's option plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, "Accounting for Stock-
Based Compensation," the Company's net loss per share on a pro forma basis would
have been as indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
-------------------------------------------------------------------------------------------------------
($ in thousands, except per share data)
<S> <C> <C> <C> <C>
Net loss
As reported $ (2,152) $ (876) $ (3,504) $ (873)
Pro forma (2,201) (898) (3,588) (923)
Net loss per share,
basic and diluted
As reported $ (0.23) $ (0.08) $ (0.38) $ (0.08)
Pro forma (0.24) (0.08) (0.39) (0.08)
</TABLE>
4. Acquisitions
The pro forma results of operations for the six months ended March 31, 1998
assuming consummation of the acquisition of Four Star and Olesen and disposal of
the manufacturing operations as of October 1, 1997 are as follows ($ in
thousands, except per share data):
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1998
-------------------
<S> <C>
Net revenue $ 23,362
Net loss (1,001)
Net loss per common share,
basic and diluted (0.11)
</TABLE>
The above pro forma information includes the operations of acquisitions and
disposal completed subsequent to September 30, 1997.
11
<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 Company continued its principal strategy to expand and strengthen its
equipment rental operations during the first six months of fiscal 1999. In
addition, the Company continued to focus on opportunities to provide its
products and services from outlets located in different parts of the United
States as well as expanding its product lines. The development of a marketing
and distribution network in select geographic marketplaces throughout the United
States enabled the Company to improve rental asset utilization and expand the
Company's core businesses.
Company revenues for the first six months of fiscal 1999 increased to
$29,647,000, an increase of $3,246,000 or 12% over the first six months of
fiscal 1998. In addition, EBITDA (earnings before interest expense, income
taxes, depreciation and amortization) increased to $5,404,000 in the first six
months of fiscal 1999 as compared to $4,442,000 in fiscal 1998. The EBITDA for
the first six months of fiscal 1998 included a $643,000 gain from the sale of
the manufacturing operations during the fourth quarter of fiscal 1998. Net loss
for the first six months of fiscal year 1999 was $3,504,000 or $0.38 per share
compared to net loss of $876,000 or $0.08 per share for the same period last
year. Components of the Company's operating results are discussed below.
Three-Month Period ended March 31, 1999 and March 31, 1998
- ----------------------------------------------------------
Revenues From Rental Operations
- -------------------------------
Revenues from rental operations were $9,271,000 for the second quarter of fiscal
1999, compared to $6,265,000 for the same period last year, an increase of
$3,006,000 or 48%. Approximately 31% or $2,863,000 of rental revenues were
generated by operations acquired in fiscal 1998. In addition, revenues from
video equipment rentals increased $320,000 or 12% in the second quarter of
fiscal 1999, to $2,952,000 from $2,632,000 of the same period of fiscal 1998.
Net Product Sales
- -----------------
Net equipment and supply sales were $5,430,000 for the second quarter of fiscal
1999, a decrease of $1,249,000 or 19%, from $6,679,000 for the second quarter of
fiscal 1998. The decrease is primarily due to the disposal of the manufacturing
operations during the fourth quarter of last year. Excluding the manufacturing
operations (which accounted for $3,552,000 of the net equipment and supply sales
of the second quarter of fiscal 1998), sales increased $2,303,000 or 74% over
the second quarter of fiscal 1998. The increase is primarily due to the
expansion into Las Vegas, Nevada at the end of the third quarter of fiscal 1998.
12
<PAGE>
Gross Profit - Rental
- ---------------------
Gross profit on rental revenues was $3,174,000 or 34% as a percentage of
revenues for the second quarter of fiscal 1999 compared to $2,125,000 or 34% in
fiscal 1998. Aggregate theatrical rental operations accounted for approximately
$1,781,000 of gross profit on rental revenues. Production equipment rentals,
primarily of lighting, grip, power generators and trucks accounted for
approximately $1,169,000 and video equipment rentals accounted for approximately
$224,000.
Gross Profit - Sales
- --------------------
Gross profit on sales decreased from $2,076,000 in the second quarter of 1998 to
$1,489,000 in the second quarter of 1999. Included in the 1998 results is gross
profit of $1,296,000 from the manufacturing subsidiary. As a percentage of
sales, gross profit was approximately 27% for the second quarter of fiscal 1999,
compared to approximately 31% for the same period in fiscal 1998. The lower
gross profit percentage realized by the Company was primarily attributable to
the increase in expendable supply product sales, which have lower gross profit
margins than did the equipment sales of the manufacturing operation. Some
margin erosion has also resulted from the industry-wide slow down.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses were $4,833,000 for the second
quarter of fiscal 1999 compared to $4,539,000 for the same period in fiscal
1998, an increase of $294,000. As a percentage of sales, selling, general and
administrative expenses were 33% for the second quarter of fiscal 1999 compared
to 35% for the same period in fiscal 1998. The dollar increase is due primarily
to costs and expenses incurred to expand the operations of the Company,
including costs to pursue the growth strategy, improve the foundation for the
operations, and improve and integrate business systems. These costs were
incurred in anticipation of the growth in revenues, which has been negatively
impacted by the industry-wide slow down.
Restructuring Charge
- --------------------
During the second quarter of fiscal 1999, the Company recorded a restructuring
charge of $423,000. This charge pertains primarily to the closure of the
Company's northeastern video rental operations. Costs incurred for severance,
lease termination, and property evacuation are included in the restructuring
charge.
Interest
- --------
Interest increased to $1,820,000 in the second quarter of fiscal 1999 from
$1,135,000 in the second quarter of fiscal 1998. The increase in interest costs
is mainly due to additional debt incurred and assumed in acquisitions completed,
and to the additional capital investment made.
Six-Month Period ended March 31, 1999 and March 31, 1998
- --------------------------------------------------------
Revenues From Rental Operations
- -------------------------------
Revenues from rental operations were $19,335,000 for the six months of fiscal
1999, compared to $14,036,000 for the same period last year, an increase of
$5,299,000 or 38%. Approximately 31% or $6,027,000 of rental revenues were
generated by operations acquired in fiscal 1998. Production equipment rentals,
primarily of lighting, grip, power generators and trucks, decreased to
approximately $7,601,000, a decrease of $667,000 or 20% from approximately
$8,268,000, for the same period last year. The decrease is primarily due to the
industry-wide slowdown.
13
<PAGE>
Net Product Sales
- -----------------
Net equipment and supply sales were $10,312,000 for the first six months of
fiscal 1999, a decrease of $2,053,000 or 17%, from $12,365,000 for the same
period of fiscal 1998. The decrease is primarily due to the disposal of the
manufacturing operations during the fourth quarter of last year. Excluding the
manufacturing operations (which accounted for $6,120,000 of the net equipment
and supply sales of the first six months of last year), sales increased
$4,068,000 or 65% over the first six months of fiscal 1998. The increase is
primarily due to the acquisition of Olesen in November 1997 and the expansion
into Las Vegas, Nevada at the end of the third quarter of fiscal 1998.
Gross Profit - Rental
- ---------------------
Gross profit on rental revenues was $7,288,000 or 38% as a percentage of
revenues for the first six months of fiscal 1999 compared to $5,834,000 or 42%
in fiscal 1998. Aggregate theatrical rental operations accounted for
approximately $3,788,000 of gross profit on rental revenues. Production
equipment rentals, primarily of lighting, grip, power generators and trucks
accounted for approximately $2,853,000 and video equipment rentals accounted for
approximately $647,000 in fiscal 1999. The decrease in gross profit percentage
resulted primarily from general industry-wide slow down of the production and
video equipment rental operations and the fixed nature of some costs such as
depreciation. The Company experienced some price softening and margin erosion as
a result of the slowdown. Depreciation expense for rental operations was
$4,437,000 in the first six months of fiscal 1999 compared to $2,965,000 in
1998.
Gross Profit - Sales
- --------------------
Gross profit on sales decreased from $3,902,000 in the first six months of
fiscal 1998 to $2,618,000 in the first six months of fiscal 1999. Included in
the 1998 results is gross profit of $2,276,000 from the manufacturing
subsidiary. As a percentage of sales, gross profit was approximately 25% for the
first six months of fiscal 1999, compared to approximately 32% for the same
period in fiscal 1998. The lower gross profit percentage realized by the Company
was primarily attributable to the increase in expendable supply product sales,
which have lower gross profit margins than did the equipment sales of the
manufacturing operation. Some margin erosion has also resulted from the
industry-wide slow down.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses were $9,874,000 for the first six
months of fiscal 1999 compared to $8,959,000 for the same period in fiscal 1998,
an increase of $915,000. As a percentage of sales, selling, general and
administrative expenses were 33% for the first six months of fiscal 1999
compared to 34% for the same period in fiscal 1998. The dollar increase is due
primarily to costs and expenses incurred to expand the operations of the
Company, including costs to pursue the growth strategy, improve the foundation
for the operations and improve and integrate business systems. These costs were
incurred in anticipation of the growth in revenues, which has been negatively
impacted by the industry slow down.
Restructuring Charge
- --------------------
During the first six months of fiscal 1999, the Company recorded a restructuring
charge of $423,000. This charge pertains primarily to the closure of the
Company's northeastern video rental operations. Costs incurred for severance,
lease termination, and property evacuation are included in the restructuring
charge.
Interest
- --------
Interest increased to $3,713,000 in the first six months of fiscal 1999 from
$2,245,000 in the same period of fiscal 1998. The increase in interest costs is
mainly due to additional debt incurred and assumed in acquisitions completed,
and to the additional capital investment made.
14
<PAGE>
Liquidity and Capital Resources
- -------------------------------
During the six months ended March 31, 1999, the Company financed its operations
from internally generated cash flow and bank borrowings.
At March 31, 1999, the Company's working capital was $2,291,000 which was a
decrease of $224,000 from its working capital at September 30, 1998.
The Company primarily applied cash from additional borrowings from the Company's
bank line of $4,398,000 for capital acquisitions and to pay down capital lease
obligations and other debt. The major components of the net capital equipment
additions were equipment for the Company's theatrical rental operations of
approximately $3,950,000 and equipment additions to other rental operations
(primarily video rental operations) of approximately $1,696,000.
During the second quarter of fiscal 1999, in connection with the issuance of a
$3,000,000 letter of credit by Hampshire Equity Partners (HEP), formerly ING
Equity Partners, L.P. I, in favor of the Company's lenders, the Company amended
its bank agreement. As a result, the revolving credit line was reduced to
$61,000,000, the covenants were modified for fiscal 1999 and the effects of
prior defaults were eliminated either through waiver or modification of certain
covenants. At March 31, 1999, the Company had approximately $1,400,000 available
under its revolving line of credit.
The Company obtained a waiver from its lenders relating to certain financial
covenants stated in its credit agreement that were in default as of March 31,
1999. The waiver was obtained in part on reliance that the Company will be
able to obtain $45 million of financing in the form of senior and junior
subordinated notes that the Company is in the process of raising. Approximately
$13 million of the proceeds from this financing will be used to repay a portion
of the bank debt. The remaining funds would be available for acquisitions and
other corporate purposes. To date, the Company has received proposals, subject
to various contingencies, for $35 million. While there can be no assurances
regarding the successful completion of this financing, the Company believes it
will be able to obtain the further commitments necessary, and to clear all the
contingencies prior to June 30, 1999, the next covenant measurement date.
The terms of the financing, which have not been formalized, may include the
issuance of warrants to acquire common stock of the Company. Any such warrants
would be dilutive to existing holders of the Company's common stock.
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
control cost. The Company expects to finance its capital acquisition program
through a combination of cash generated from operations and borrowings under its
bank line, and the other financings that the Company is pursuing. The Company
believes it will be able to obtain additional financing that will provide
sufficient funds to meet its anticipated requirements for working capital and
capital acquisitions during the next twelve months.
Impact of Year 2000
- -------------------
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on extensive assessments, the Company determined that it will be required
to modify some portions of its software and certain hardware so that those
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications or replacements of existing software
and certain hardware, the Year 2000 Issue can be mitigated.
15
<PAGE>
The Company's plan to resolve the Year 2000 Issue involves the following five
phases: (1) inventorying Year 2000 items; (2) assessing the Year 2000 compliance
of items determined to be material to the Company; (3) repairing or replacing
material items that are determined not to be Year 2000 compliant; (4) testing
material items; (5) implementation. To date, the Company has completed the
first four phases and is in the process of implementation. The completed
assessment indicated that most of the Company's significant information
technology systems would not be affected, particularly the general ledger,
billing and inventory systems. The non-IT systems were assessed and are not
material to the Company's operations.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
For its information technology exposures, the Company has completed the
inventorying phase, assessment phase and replacement and testing phase. The
Company is currently in the implementation phase. Completion of the
implementation phase for all significant systems is currently in process.
Nature and Level of Importance of Third Parties and their Exposure to the Year
2000
The Company does not interface directly with third party vendors with regards to
shared information systems. The Company has queried its significant suppliers
and subcontractors that do not share information systems with the Company
(external agents). To date, the Company is not aware of any external agent with
a Year 2000 issue that would materially impact the Company's results of
operations, liquidity, or capital resources. However, the Company has no means
of ensuring that external agents will be Year 2000 ready. The inability of
external agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-compliance by
external agents is not determinable.
Costs
The Company will utilize both internal and external resources to replace, test,
and implement the software and certain hardware for Year 2000 modifications.
The total cost of the Year 2000 project is estimated at $150,000 and will be
funded through operating cash flows. To date, the Company has incurred
approximately $100,000 related to all phases of the Year 2000 project. Of the
total remaining project costs, approximately $10,000 is attributable to the
purchase of new software and hardware and remaining consulting time, which will
be capitalized. The remaining $40,000 relates to internal systems development.
Risks
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. The hardware and software that
the Company is installing is known to be Year 2000 compliant. Risk of failure
should therefor be limited only to the timing or speed of the installation. As
noted above, the Company has not yet completed the final phases of the Year 2000
program. Disruptions in the economy generally resulting from Year 2000 issues
could also materially adversely affect the Company. The Company could be
subject to litigation for computer systems product failure, for example,
equipment shutdown or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
16
<PAGE>
Contingency Plan
The Company is in the implementation phase (the last phase), and does not
believes that a contingency plan is required at this time. However, contingency
plans would include outsourcing these services.
Readers are cautioned that forward-looking statements contained in this Year
2000 disclosure should be read in conjunction with the Company's disclosures
under the heading, "Special Note on Forward-looking Statements," beginning on
page 12 above. Readers should understand that the dates on which the Company
believes the Year 2000 project will be completed are based upon Management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, or that there will not be a delay in, or
increased costs associated with, the implementation of the Company's Year 2000
Compliance Project. Specific factors that might cause differences between the
estimates and actual results include, but are not limited to, the availability
and cost of personnel trained in these areas, the ability to locate and correct
all relevant computer code, timely responses to and corrections by third parties
and suppliers, the ability to implement interfaces between the new systems and
the systems not being replaced, and other similar uncertainties. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of third parties and the inter-
connection of national and international businesses, the Company cannot ensure
its ability to timely and cost-effectively resolve problems associated with the
Year 2000 issue which may affect its business operations, or expose it to third
party liability.
17
<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 (in Edgar filing only)
(b) The Company did not file any reports on Form 8-K during the
three months ended March 31, 1999.
18
<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 March 31, 1999, to be signed on its behalf by the undersigned hereunto
duly authorized.
MATTHEWS STUDIO EQUIPMENT GROUP
(Registrant)
Date: May 21, 1999 By: /s/ Carlos D. De Mattos
------------------------------------
Carlos D. De Mattos
Chairman of the Board, Chief
Executive Officer, & President
By: /s/ Alan S. Unger
------------------------------------
Alan S. Unger
Chief Financial Officer
19
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q
FOR PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
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