<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 December 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
--------------------------
9,994,252 shares as of January 31, 2000
- ---------------------------------------
<PAGE>
Index
Matthews Studio Equipment Group and Subsidiaries
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - December 31, 1999 and
September 30, 1999
Condensed consolidated statements of operations - Three months ended
December 31, 1999 and 1998
Condensed consolidated statements of cash flows - Three months ended
December 31, 1999 and 1998
Notes to condensed consolidated financial statements - December 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
<PAGE>
Part I. Financial Information
Item I. Financial Statements
Mathews Studio Equipment Group and Subsidiaries
Condensed Consolidated Balance Sheets
($ in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
(Unaudited) (Note)
ASSETS:
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 442 $ 390
Accounts receivable, less allowance for
doubtful accounts of $1,408 at December 31,
1999 and $1,420 at September 30, 1999 8,157 9,893
Current portion of net investment in finance
and sales-type leases 255 264
Inventories 3,688 3,312
Prepaid expenses and other current assets 709 489
Income tax refund receivable 36 36
-------- --------
Total current assets 13,287 14,384
Property and equipment, net 52,680 54,168
Net investment in finance and sales-type leases,
less current portion 135 150
Goodwill less accumulated amortization of $6,526 at December 31,
1999 and $6,344 at September 30, 1999 17,177 17,358
7,710 5,167
-------- --------
Total assets $ 90,989 $ 91,227
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (ACCUMULATED DEFICIT):
Current liabilities:
Accounts payable $ 10,785 $ 11,673
Accrued liabilities 4,623 7,610
Current portion of long-term debt and capital lease obligations 5,185 5,404
-------- --------
Total current liabilities 20,593 24,687
Long-term debt and capital lease obligations less current portion 84,997 83,111
Shareholders' equity (accumulated deficit):
Preferred stock - -
Common stock 12,036 8,132
Accumulated deficit (26,637) (24,703)
-------- --------
Total shareholders' equity (accumulated deficit) (14,601) (16,571)
-------- --------
Total liabilities and shareholders' equity
(accumulated deficit $ 90,989 $ 91,227
======== ========
</TABLE>
Note: The balance sheet at September 30, 1999 has been derived from the audited
financial statements at that date.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
($ in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
---------- ----------
<S> <C> <C>
Revenues from rental operations $ 11,054 $ 10,064
Net product sales 4,595 4,882
--------- ---------
15,649 14,946
Costs and expenses:
Cost of rental operations 7,023 5,950
Cost of product sales 3,873 3,753
Selling, general and administrative 4,296 5,041
Interest, net 2,391 1,893
--------- ---------
17,583 16,637
Loss before income taxes (1,934) (1,691)
Income taxes provision(benefit) 0 (339)
--------- ---------
Net loss $ (1,934) $ (1,352)
========= =========
Loss per common share, basic and
diluted ($0.19) ($0.15)
========= =========
Weighted Average number of Common Share,
outstanding 9,994 9,117
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
-------- --------
<S> <C> <C>
Net loss $(1,934) $(1,352)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for doubtful accounts receivable 25 14
Depreciation and amortization 3,507 2,836
Deferred income taxes - (339)
Gain on sale of assets (253) (65)
Changes in operating assets and liabilities
net of effects from acquisitions:
Accounts receivable 1,590 (956)
Inventories (376) (173)
Net investment in leases 24 45
Prepaids and other assets 822 (224)
Accounts payable and accrued liabilities (4,175) 2,145
Income tax refund receivable - 80
------- -------
Net cash (used in) provided by operating activities (770) 2,011
Investing activities:
Purchase of property and equipment (1,543) (3,635)
Proceeds from sale of property and equipment 453 141
------- -------
Net cash used in investing activities (1,090) (3,494)
Financing activities:
Proceeds from exercise of stock options 29 9
Proceeds from borrowings 2,429 1,843
Repayment of borrowings (546) (700)
------- -------
Net cash provided by financing activities 1,912 1,152
Net increase (decrease) in cash and cash equivalents 52 (331)
Cash and cash equivalents at beginning of period 390 331
------- -------
Cash and cash equivalents at end of period $ 442 -
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Condensed Consolidated Statements of Cash Flows (continued)
(Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
-------- ---------
<S> <C> <C>
Schedule of noncash investing and financing
transactions:
Common stock issued for lawsuit settlement $1,175 $ -
Capital lease obligations incurred - 377
Accounting for Warrant in connection with
debt issue cost 2,700 -
Additional disclosures:
Cash paid during period for:
Interest 2,674 1,794
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<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 months ended December 31, 1999
are not necessarily indicative of the results that may be expected for the year
ending September 30, 2000. For further information refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended September 30, 1999.
Business
The Company sells, leases and rents audio, video, theatrical, film and
production equipment and accessories, to the motion picture, television,
corporate, theatrical, video and photography industries. The Company operates
in one business segment and provides, as a single source, the necessary
production equipment which is otherwise only available by using many different
suppliers. The Company supplies equipment such as lights, grip lighting
supports, professional video equipment, camera mounts, tripods, pedestals,
fluid heads, camera dollies, portable camera cranes, power generators and
production trucks.
On January 21, 2000, the Company sold the video equipment rental operations
conducted by its Duke City Video, Inc. ("Seller") subsidiary to Vitec DC Holding
Corp. ("Vitec") for a total purchase price of $12.25 million in cash. The sale
was structured as a sale of assets whereby Duke City sold its assets to Vitec
pursuant to an Asset Purchase Agreement dated January 21, 2000, among the
Company, Duke City Holdings, Inc. ("Holdings"), Duke City and Vitec (the
"Agreement"). Vitec has purchased the name "Duke City Video" and derivations
thereof as part of the sale. Excluded from the sale are Duke City's Albuquerque
property, its accounts receivable and certain other assets. Also, Duke City
retains responsibility for its liabilities.
$2.0 million dollars of the $12.25 million purchase price was paid to Duke City
on closing. up to $557,000 of the purchase price to be paid to Seller following
a post closing inventory of rental equipment sold in the transaction. $8.93
million of the purchase price will be paid to Seller and Seller's trade and
other Creditors, provided it obtains terminations pursuant to the terms of the
Agreement. The remaining $1.3 million of the purchase price is being held by
Vitec as security for certain indemnification obligations of Seller and will be
paid to Seller upon the expiration of certain time periods specified in the
Agreement. The Company, Holdings and Seller are obligated to indemnify Vitec
against losses arising out of any inaccuracy of representations and warranties
made in the Agreement and against losses arising out of Seller's liabilities.
As noted, the Company will use part of the proceeds from the sale of the Seller
assets to satisfy obligations that specifically apply to the business. The
Company will also use such sales proceeds to reduce bank and other debt.
On January 13, 2000, the Company entered into a letter of intent for the sale of
its New York-based theatrical lighting rental operations, Four Star Lighting,
Inc. ("Four Star"), to Four Star's current management and a group of investors
for a purchase price of $30 million cash. The transaction will be structured as
a sale of Four Star's assets. In addition to cash consideration, the purchaser
will enter into certain strategic agreements with the Company in connection with
the sale. The Company will have $1 million of equipment rental credits from the
purchaser and the right to offer the purchaser's theatrical lighting equipment
for rental over the Company's Showbizmart.com internet site.
The Company will retain its Hollywood theatrical lighting rental operations.
The Company intends to consolidate those operations with its Hollywood Rental
Co. grip and lighting equipment
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
rental operations based in Burbank, California. The sale of Four Star
is subject to the parties' agreement on the terms of a definitive acquisition
agreement, as well as board and regulatory approval. The sale is also subject
to consent of the Company's lenders. The Company intends to use proceeds from
the sale of Four Star to reduce bank and other debt.
2. Equity
During the quarter ended December 31, 1999, the Company recorded in equity
Warrants issued and to be issued for approximately $2.7 million. These warrants
relate to certain of the Company's debt agreements and have been capitalized as
debt issue costs, to be amortized over the shorter of the remaining life of the
warrants or the related debt instrument.
In October 1999, the Company issued 400,000 shares of common stock to settle a
litigation matter which was accrued at September 30, 1999.
<PAGE>
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
3. Per Share Data
Basic loss per share is calculated using the net loss divided by the weighted
average common shares outstanding. Shares from the assumed exercise of
outstanding warrants and options are omitted from the computations of diluted
loss per share because the effect would be antidilutive.
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 loss per share would have been
increased to the pro forma amounts indicated below (in thousands, except per
share data):
<TABLE>
<CAPTION>
Three Months Ended December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Net loss
As reported $(1,934) $(1,352)
Pro forma (1,990) (1,387)
Net loss per share, basic and diluted
As reported (0.20) (0.15)
As Pro forma (0.20) (0.15)
</TABLE>
<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
Securities Litigation Reform Act of 1995 for any forward looking statements made
by, or on behalf of, the Company. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. From time to time, the Company may publish or otherwise
make available forward-looking statements of this nature. All such subsequent
forward-looking statements, whether written or oral, and whether made by or on
behalf of the Company, are also expressly qualified by these cautionary
statements. Certain statements contained herein are forward-looking statements
and accordingly involve risks and uncertainties which could cause actual results
or outcomes to differ materially from those expressed in the forward-looking
statements.
Results of Operations
Overview
Company revenues for the first three months of fiscal 2000 increased to
$15,649,000, an increase of $703,000 or 5% over the first three months of
fiscal 1999. In addition, EBITDA (earnings before interest expense, income
taxes, depreciation and amortization) increased to $3,963,000 in the first
quarter of fiscal 2000 as compared to $3,035,000 in fiscal 1999. Net loss for
the quarter ended December 31, 1999 was $1,934,000 or $0.19 per share compared
to net loss of $1,352,000 or $0.15 per share for the same period last year.
Components of the Company's operating results are discussed below. The net loss
included approximately $850,000 or $0.09 per share of the Company's video
rental of Duke City operation which was sold in January 2000. Excluding the
loss from the disposed video rental operation and the $498,000 increase in
interest costs over same period last year, the net loss would have been $622,000
or $0.06 for the first quarter of fiscal 2000. This loss resulted from a
combination of factors, the most significant of which were "runaway productions"
(fewer feature films whose principal photography was conducted in the United
States), shrinking margins and increased interest costs.
The combination of the shrinking marketplace, increased competition and
operating loss has caused the Company to re-examine its allocation of resources.
Among other actions, the Company is continuing to reallocate its resources
during the first quarter of fiscal 2000 to improve cash flow. The Company has
closed or consolidated certain facilities. In addition, the Company has decided
to dispose of certain assets which are not core to the Company's overall
strategy, or which can generate significant cash upon disposition. The Company
intends to use proceeds from these sales to reduce bank and other debt. This
reallocation of resources will continue at least into the second quarter of
fiscal 2000.
Three-Month Period ended December 31, 1999 and December 31, 1998
- ----------------------------------------------------------------
<PAGE>
Revenues From Rental Operations
- -------------------------------
Revenues from rental operations were $11,054,00 for the first three months of
fiscal 2000, compared to $10,064,000 for the same period last year, an increase
of $990,000 or 10%. Rental revenues from production equipment rentals,
primarily of lighting, grip, power generators and trucks, increased by
approximately $221,000 or 5% to $4,474,000 in the first quarter of fiscal 2000,
compared to $4,253,000 for the same period last year. The theatrical rental
operations revenues increased to $3,283,000 or 2% in the first quarter of fiscal
2000, compared to $3,221,000 for the same quarter of last year. In addition,
revenues from video equipment rentals increased to $3,152,000 or 25% in the
first three months of fiscal 2000, compared to $2,524,000 for the first quarter
of fiscal 1999.
Net Product Sales
- -----------------
Net equipment and supply sales were $4,595,000 for the first three months of
fiscal 2000, a decrease of $287,000 or 6%, from $4,882,000 for the first three
months of fiscal 1999. The decrease is primarily due to the Company's closure
of an unprofitable expendable supply operation during the fourth quarter of
fiscal 1999.
Gross Profit - Rental
- ---------------------
Gross profit on rental revenues was $4,031,000 or 37% of revenues for the first
three months of fiscal 2000 compared to $4,111,000 or 41% in fiscal 1999. The
theatrical rental operations accounted for approximately $1,788,000 or 44% of
gross profit on rental revenues in fiscal 2000 compared to $1,969,000 or 48% in
same period last year. Production equipment rentals, primarily of lighting,
grip, power generators and trucks accounted for approximately $1,672,000 or 41%
of gross profit on rental revenue compared to $1,676,000 or 41% in the same
period last year. The video equipment rentals accounted for approximately
$474,000 or 12% of gross profit on rental revenue compared to $423,000 or 10% in
the same period last year.
Gross Profit - Sales
- --------------------
Gross profit on sales decreased from $1,129,000 in the first quarter of 1999 to
$722,000 in the first quarter of 2000. As a percentage of sales, gross profit
was approximately 16% for the first three months of fiscal 2000, compared to
approximately 23% for the same period in fiscal 1999. The dollar decrease in
gross profit on sales is primarily due to the closure of an unprofitable
expendable supply operation. In addition, 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.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses were $4,296,000 in the first three
months of fiscal 2000 compared to $5,041,000 for the same period in fiscal 1999,
a decrease of $745,000 or 15%. As a percent of sales, selling, general and
administrative expenses were 28% for the first three months of fiscal 2000
compared to 34% for the same period in fiscal 1999. The dollar decrease is due
to primarily costs cutting and consolidation of facilities and streamlining
of operations that was begun during the fourth quarter of fiscal 1999.
<PAGE>
Interest
- --------
Interest costs increased to $2,391,000 in the first three months of fiscal 2000
from $1,893,000 in the first three months of fiscal 1999. The increase in
interest costs is mainly due to additional debt incurred and to additional
capital investment made.
Liquidity and Capital Resources
- -------------------------------
As the Company has little cash or cash equivalents, it is heavily dependent on
its lenders to fund working capital and investing activities needs.
The Company primarily applied cash from additional borrowings from the Company's
bank line of $2,429,000 to pay down capital lease obligations and other debt
incurred in prior years acquisitions. The major component of the net
capital equipment additions was equipment for the Company's theatrical rental
operations of approximately $1,067,000.
During the next twelve months, the Company intends to improve its financial
condition principally through disposition of certain assets of the video and
theatrical operations and the raising of equity capital. In January 2000, the
Company completed the sale of substantially all of the assets of its video
equipment rental division, Duke City Video, Inc., for $12.25 million. The
Company will use proceeds from this sale to satisfy obligations that
specifically apply to this business and then to reduce bank and other debt.
Company management and personnel are devoting significant time and effort toward
these goals. The Company will also seek to refinance its senior credit facility
and is aggressively pursuing a number of alternative revenue generating and/or
cost saving measures. There can be no assurances that the Company can achieve
these alternatives over a quick enough period of time in order to allow it to
continue as a going concern.
Year 2000 Readiness - Update
- ----------------------------
The Company has substantially completed its Year 2000 compliance program.
(Readers should refer to the Company's Annual Report on Form 10-K for a more
complete discussion of the Company's Year 2000 Readiness program.) The Company
is on schedule with completion of the remaining open items of its Year 2000
readiness plan.
The failure to identify and correct a Y2K problem could result in an
interruption in, or failure of, certain normal business activities or
operations. However, the Company does not expect such failures to have a
materially adverse effect on its results of operations or financial condition.
It is not presently possible to describe a reasonably likely "worst case Year
2000 scenario" without making numerous assumptions. The Company presently
believes that a most likely worst case scenario would make it necessary for the
Company to replace some suppliers or contractors, rearrange some plans, or
interrupt some office and field activities. Assuming this scenario is correct,
the Company does not believe that such circumstances would have a materially
adverse effect on its financial condition or the results of operations, even if
additional costs to correct unanticipated compliance failures are incurred. No
such failures have been experienced to date.
Subsequent Events
- ------------------
Effective January 21, 2000, the Company sold substantially all of the assets of
Duke City Video, Inc. for approximately $12.25 million in cash, which
approximated the net book value of the assets sold. At the date of sale, the net
assets sold consisted of approximately $11 million of property and equipment.
The net proceeds will be used to satisfy obligations that specifically apply to
this business and then to reduce the Company's bank and other debt.
<PAGE>
PART II. Other Information
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 December 31, 1999.
<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
ended December 31, 1999, to be signed on its behalf by the undersigned hereunto
duly authorized.
MATTHEWS STUDIO EQUIPMENT GROUP
(Registrant)
Date: February 14, 2000 By: S/Carlos D. DeMattos
----------------------------------------------
Carlos D. DeMattos
Chairman of the Board and
Chief Executive Officer
By: S/Anil Sharma
----------------------------------------------
Anil Sharma
President and Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q
PERIOD ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 442
<SECURITIES> 0
<RECEIVABLES> 9,565
<ALLOWANCES> 1,408
<INVENTORY> 3,688
<CURRENT-ASSETS> 13,287
<PP&E> 89,267
<DEPRECIATION> 36,587
<TOTAL-ASSETS> 90,989
<CURRENT-LIABILITIES> 20,593
<BONDS> 0
0
0
<COMMON> 12,036
<OTHER-SE> (26,637)
<TOTAL-LIABILITY-AND-EQUITY> 90,989
<SALES> 4,595
<TOTAL-REVENUES> 15,649
<CGS> 3,873
<TOTAL-COSTS> 10,896
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 25
<INTEREST-EXPENSE> 2,391
<INCOME-PRETAX> (1,934)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,934)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,934)
<EPS-BASIC> ($0.19)
<EPS-DILUTED> ($0.19)
</TABLE>
