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, 1996
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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
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(Exact name of registrant as specified in its charter)
CALIFORNIA 95-1447751
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2405 EMPIRE AVENUE, BURBANK, CA 91504-3399
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(Address of principal executive offices) (Zip Code)
(818) 843-6715
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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
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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 -
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10,326,591 SHARES AS OF APRIL 30, 1996.
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INDEX
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (UNAUDITED)
Condensed consolidated balance sheets - March 31, 1996
and September 30, 1995
Condensed consolidated statements of income - Three months ended
March 31, 1996 and 1995; Six months ended March 31, 1996 and 1995
Condensed consolidated statements of cash flows - Six months ended
March 31, 1996 and 1995
Notes to condensed consolidated financial statements -
March 31, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Change in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
MATTHEWS STUDIO EQUIPMENT GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
($ in thousands)
March 31, September 30,
1996 1995
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ASSETS:
Current Assets:
Cash and cash equivalents................. $ 386 $ 438
Accounts receivable less allowances of
March 31, 1996: $333 and
September, 30, 1995: $297............ 3,669 4,039
Current portion of net investment in leases 880 979
Inventories............................... 4,639 4,556
Prepaid expenses and other current assets. 811 922
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Total current assets................... 10,385 10,934
Property and equipment less accumulated
depreciation and amortization of
March 31, 1996: $16,047 and
September 30, 1995: $14,785........... 19,347 17,226
Investment in leases, less current portion..... 1,173 1,376
Other assets................................... 1,081 1,167
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Total assets........................... $31,986 $30,703
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 1,369 $ 1,569
Accrued liabilities....................... 1,050 1,080
Current portion of long-term debt and
capital lease obligations.............. 310 413
Income taxes payable...................... 54
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Total current liabilities............. 2,783 3,062
Long-term debt and capital leases.............. 18,929 17,664
Deferred income taxes.......................... 1,923 1,923
Common stock................................... 5,579 5,567
Retained earnings.............................. 2,772 2,487
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Total shareholders' equity............ 8,351 8,054
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Total liabilities and shareholders'
equity.............................. $31,986 $30,703
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See accompanying notes.
MATTHEWS STUDIO EQUIPMENT GROUP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
($ in thousands, except per share data)
Three Months Ended Six Months Ended
March 31, March 31,
1996 1995 1996 1995
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Net product sales........................ $ 3,517 $ 4,062 $ 6,697 $ 7,586
Revenues from rental operations.......... 3,249 3,010 6,434 6,148
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6,766 7,072 13,131 13,734
Costs and expenses:
Cost of sales.......................... 2,285 2,397 4,285 4,538
Cost of rental operations.............. 1,841 1,842 3,638 3,601
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4,126 4,239 7,923 8,139
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Gross profit......................... 2,640 2,833 5,208 5,595
Selling, general and administrative...... 2,018 2,031 3,854 3,822
Minority interest........................ 37 63
Interest................................. 476 499 999 958
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Total expenses....................... 2,494 2,567 4,853 4,843
Income before income taxes............... 146 266 355 752
Provision for taxes...................... 29 92 70 286
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Net income........................... $ 117 $ 174 $ 285 $ 466
======= ======= ======= =======
Earnings per common share................ $0.01 $0.02 $0.03 $0.05
======= ======= ======= =======
Weighted average number of common
shares outstanding...................... 10,321 10,313 10,324 10,313
See accompanying notes.
MATTHEWS STUDIO EQUIPMENT GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in thousands)
Six Months Ended March 31,
1996 1995
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Operating activities:
Net income $ 285 $ 466
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Provision for doubtful accounts 80 123
Depreciation and amortization 1,667 1,342
Minority interest 63
Gain on sale of assets (65) (152)
Changes in operating assets and liabilities:
Accounts receivable 290 (471)
Inventory (84) (499)
Net investment in leases 302 113
Unguaranteed residual value of leases 1 32
Prepaids and other assets (57) (286)
Income tax refund receivable 252
Accounts payable and accrued liabilities (229) (1,916)
Income taxes payable 54 267
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Net cash provided by (used in)
operating activities 2,496 (918)
Investing activities:
Purchase of property and equipment (3,847) (2,394)
Proceeds from sale of property
and equipment 218 187
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Net cash used in investing activities (3,629) (2,207)
Financing activities:
Proceeds from exercise of stock options 12
Proceeds from borrowings 15,874 3,288
Repayment of borrowings (14,805) (750)
Payments to minority interest (138)
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Net cash provided by financing activities 1,081 2,400
Net decrease in cash and cash equivalents (52) (725)
Cash and cash equivalents at beginning
of period 438 735
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Cash and cash equivalents at end of
period $ 386 $ 10
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See accompanying notes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Matthews Studio Equipment Group (the "Company") and Subsidiaries 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, 1996 are not necessarily indicative of the results that may be
expected for the year ending September 30, 1996, due to fluctuations in film
production activities. For further information refer to the consolidated
financial statements and footnotes thereto included in the Matthews Studio
Equipment Group's annual report on Form 10-K for the year ended September 30,
1995.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. PER SHARE DATA
Net income per share is based on the weighted average number of shares
outstanding. The dilution from common stock equivalents is less than three
percent and is therefore excluded from the calculation of earnings per common
share.
3. INVENTORIES
Inventories are principally stated at the lower of first-in, first-out cost or
market.
4. LONG-LIVED ASSETS
Long-lived assets used in operations are reviewed periodically to determine that
the carrying values are not impaired and if indicators of impairment are present
or if long-lived assets are expected to be disposed of, impairment losses are
recorded.
5. DEBT
The Chemical Bank Revolving Credit Facility
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On July 27, 1995, the Company and its principal subsidiaries entered into an
agreement for a senior secured revolving credit facility with Chemical Bank (the
"Facility"), in an aggregate principal amount of up to $17 million. The
Facility matures July 27, 1999 and provides the following declining commitment
schedule: $17 million at July 27, 1995; $16 million on October 1, 1996; $15
million on October 1, 1997; $14 million on October 1, 1998. The Facility
requires the Company to maintain on a quarterly basis certain levels of earnings
and to meet several financial ratios.
At March 31, 1996, the Company had an outstanding balance of $13,812,000 and had
$2,874,000 available under the Facility. The Company obtained a waiver from
Chemical Bank relating to a covenant stating a maximum ratio of debt-to-EBITDA
(earnings before interest, taxes, depreciation and amortization) which was
exceeded at an interim period in fiscal 1996, however, the Company was in
compliance with the covenant at the period ended March 31, 1996. The Company
was in full compliance with all other covenants of the credit agreement with
Chemical Bank and the several ING agreements more specifically described in the
paragraphs which follow.
The ING Equity Partners, L.P.I Senior Subordinated Promissory Note
- - - -------------------------------------------------------------------
Concurrently, and in connection with the refinancing, the Company entered into a
purchase agreement (the "Purchase Agreement") with ING Equity Partners, L.P.I
("ING"), pursuant to which the Company sold to ING for a total purchase price of
$5 million (i) its senior subordinated promissory note in the principal amount
of $5 million, bearing interest at an initial rate of 10% per annum (the
"Subordinated Note"), (ii) a common stock purchase warrant (the "ING Warrant")
entitling ING to purchase 2,322,464 of the Company's outstanding shares of
common stock at an initial purchase price per share of $2.50 and having certain
antidilutive rights and (iii) a share of preferred stock of the Company
entitling ING to voting rights with respect to the number of shares underlying
the ING Warrant. The ING Warrant requires an adjustment of the exercise price
to $2.00 per share if the Company does not complete a public offering of its
common stock at a price of at least $2.50 per share with net proceeds to the
Company of at least $10 million by July 27, 1998. The proceeds from the
offering are to be used for general corporate purposes, working capital,
retirement of bank debt and the Subordinated Note.
Subsequent to the quarter ended March 31, 1996, the Subordinated Note with ING
was amended, and replaced with two subordinated notes, a $100,000 subordinated
note with a due date of July 27, 2005, and a $4,900,000 subordinated note with a
due date of July 27, 2000, which may also be extended to July 27, 2005 at the
discretion of ING. The other terms and conditions of the new subordinated notes
are unchanged from the terms and conditions of the original Subordinated Note.
6. TAXES
Deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The effective income tax rate is 20% for the current
quarter of this fiscal year versus 40% for the same period of the prior year.
The lower rate for this year is attributable to the utilization of net operating
loss carryforwards.
7. STOCK OPTIONS
During the six months ended March 31, 1996, 12,000 shares of common stock were
issued upon the exercise of stock options.
8. OTHER INFORMATION
During October, 1995, the Company launched its strategic expansion program in
the Northwest market when it entered into the acquisition of the assets of Jonas
Jensen Studios, Inc., a privately held rental and post-production company in
Seattle, Washington. Concurrently, the Company entered into an equipment
management, marketing and revenue sharing agreement with Jonas Jensen Studios,
Inc., which thereby became the only studio in the Seattle region capable of
servicing the major post-production work necessary for TV commercials or full-
length feature movie productions.
9. SUBSEQUENT EVENT
Subsequent to the quarter ended March 31, 1996, the Purchase Agreement with ING
and the ING Warrant were amended along with the employment agreements with the
Company's two principal officers, Mr. Carlos D. De Mattos and Edward Phillips.
The basic effect of the amendments were: to place certain limits on the number
of shares of the Company's Common Stock which may be purchased under the ING
Warrant, to amend the voting rights of the preferred stock issued by the Company
to ING so as not to have the right to vote until there has been a default under
the Purchase Agreement, and to amend the above mentioned employment agreements
to require shareholder approval of the grants of 200,000 shares to each of Mr.
De Mattos and Mr. Phillips and absent such approval, Mr. De Mattos' and Mr.
Phillips' options are automatically reduced to options to purchase up to 12,500
shares of Company Common Stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
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Three-Month Period ended March 31, 1996 and March 31, 1995
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Net Product Sales
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Net equipment and supply sales were $3,517,000 for the second quarter of fiscal
1996, a decrease of $545,000 or 13.4% from $4,062,000 for the second quarter of
fiscal 1995. Equipment sales declined to $2,489,000, a decline of approximately
$113,000 or 4.3% from $2,602,000 in fiscal 1995. Also, approximately $163,000
of the decrease is due to the decline in broker sales and other revenues by the
Company's leasing entity and expendable supply sales declined approximately
$250,000.
Revenues From Rental Operations
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Revenues from rental operations were $3,249,000 for the second quarter of fiscal
1996 compared to $3,010,000 for the same period last year, an increase of
$239,000 or 7.9%. Equipment rentals at Hollywood Rental Co., Inc., increased to
approximately $3,038,000 or an increase of approximately $328,000 or 12.0% from
approximately $2,710,000 in the same period last year. Offsetting the increase
in rental revenues was a decline of approximately $114,000 in disposal of rental
assets and other services from approximately $185,000 in fiscal 1995 to
approximately $71,000 in fiscal 1996. In addition, revenues from Matthews
Studio Electronics, Inc., declined from approximately $128,000 in fiscal 1995 to
approximately $96,000 in fiscal 1996 primarily due to the termination of the
minority partnership agreement in effect in previous years. Since the fourth
quarter of fiscal 1995, approximately 30% of Electronics rental revenues have
been recorded by the Company's previous partner.
Gross Profit - Sales
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Gross profit as a percentage of sales was approximately 35.0% for the second
quarter of fiscal 1996 compared to approximately 41.0% for the same period in
fiscal 1995. The decline is partially attributable to the decline of broker
sales by the leasing entity which carried a 100% margin. Gross profit excluding
broker sales was approximately 38.5% for the second quarter of fiscal 1995. In
addition, increases in certain overhead expenditures and depreciation expense
contributed to lower margins.
Gross Profit - Rental
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Gross profit as a percentage of rental revenues was approximately 43.3% for the
second quarter of fiscal 1996 compared to 38.8% in fiscal 1995. The increase in
gross profit is mainly due to an increase in the equipment rental revenue base
resulting in lower fixed operating costs as a percent of sales and decreased
labor costs of approximately $89,000 due to efficiencies in handling customer
orders, offset by an increase of $94,000 in depreciation expense from new
equipment purchases.
Selling, General and Administrative
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Selling, general and administrative expenses were $2,018,000 in the second
quarter of fiscal 1996 compared to $2,031,000 for the same period in fiscal
1995. As a percent of sales, selling, general and administrative expenses were
29.8% for the second quarter of fiscal 1996 compared to 28.7% for the same
period in fiscal 1995, an increase of 1.1%.
Minority Interest
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There was no minority interest expense in fiscal 1996 as the partnership was
terminated in fiscal 1995.
Interest
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Interest decreased to $476,000 in the second quarter of fiscal 1996 compared to
$499,000 in the second quarter of fiscal 1995. The decrease in interest costs
is primarily due to $50,000 of lower loan fee amortization costs and higher
interest income somewhat offset by higher interest charges on increased debt of
approximately $3,223,000.
Six-Month Period ended March 31, 1996 and March 31, 1995
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Net Product Sales
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Net equipment and supply sales were $6,697,000 for the first six months of
fiscal 1996, a decrease of $889,000 or 11.7% from $7,586,000 for the first six
months of fiscal 1995. Approximately $291,000 of the decrease is due to the
decline in broker sales by the Company's leasing entity. In addition, equipment
sales declined to $4,856,000, a decline of approximately $162,000 or 3.2% from
$5,019,000 for the first six months of 1995, and sales of expendable supplies
were down approximately $385,000 from the same period last year.
Revenues From Rental Operations
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Revenues from rental operations were $6,434,000 for the first six months of
fiscal 1996 compared to $6,148,000 for the same period last year, an increase of
$286,000 or 4.7%. Equipment rentals at Hollywood Rental Co., Inc., increased to
approximately $6,006,000 or an increase of approximately $558,000 or 10.2% from
approximately $5,448,000 in the same period last year. In addition, rental
revenues from Matthews Studio Electronics, Inc., declined from approximately
$455,000 in fiscal 1995 to approximately $230,000 in fiscal 1996 primarily due
to the termination of the minority partnership agreement in effect in previous
years. Since the fourth quarter of fiscal 1995, approximately 30% of Electronics
rental revenues have been recorded by the Company's previous partner.
Gross Profit - Sales
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Gross profit as a percentage of sales was approximately 36.0% for the first six
months of fiscal 1996 compared to approximately 39.9% for the same period in
fiscal 1995. The decline is attributable to the decline of broker sales by the
leasing entity which carried a 100% margin. Gross profit excluding broker sales
was approximately 36.3% for the first six months of fiscal 1995.
Gross Profit - Rental
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Gross profit as a percentage of rental revenues was approximately 43.5% compared
to 41.4% in fiscal 1995. The increase in gross profit is mainly due to the
benefit of spreading fixed operating costs over a higher revenue base, in
addition to decreased labor costs of approximately $150,000 due to efficiencies
in handling customer orders, yet offset by an increase of $220,000 in
depreciation expense from new equipment purchases during the past fiscal year.
Selling, General and Administrative
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Selling, general and administrative expenses were $3,854,000 in the first six
months of fiscal 1996 compared to $3,822,000 for the same period in fiscal 1995.
As a percent of sales, selling, general and administrative expenses were 29.4%
for the first six months of fiscal 1996 compared to 27.8% for the same period in
fiscal 1995, an increase of 1.6%.
Interest
- - - --------
Interest increased to $999,000 in the first six months of fiscal 1996 compared
to $955,000 in the first six months of fiscal 1995. The increase in interest
costs is primarily due to increased debt of approximately $3,223,000 partially
offset by $98,000 of lower loan fee amortization costs.
Liquidity and Capital Resources
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During the six months ended March 31, 1996, the Company financed its operations
from internally generated cash flow and bank borrowings.
Working capital was $7,602,000 at March 31, 1996 compared to $7,872,000 at
September 30, 1995.
During the first six months of fiscal 1996, the Company generated cash from
operating activities of $2,496,000. The major contributors to cash from
operating activities were earnings before depreciation and amortization,
reduction (collection) of accounts receivable of $290,000 and income tax refunds
of $295,000. Partially offsetting the major contributors to cash from
operating activities was a decrease in trade accounts payable of $200,000.
The Company primarily utilized cash from operating activities of $2,496,000,
augmented by additional borrowings from the Company's bank line of $1,068,000,
to finance the acquisition of capital equipment. The major components of the
asset additions were equipment for the Company's rental operations of
approximately $2,106,000, and equipment acquisition cost for the Seattle
marketing center (See Note 8) of approximately $768,000.
PART II. OTHER INFORMATION
Items 1 through 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
11.1 Amendment No. 1 to Purchase Agreement
11.2 Amendment No. 1 to Stockholders' Agreement
11.3 Amendment No. 1 to Common Stock Purchase Warrant
11.4 $4,900,000 Senior Subordinated Note
11.5 $100,000 Senior Subordinated Note
11.6 First Amendment to Employment Agreement with Carlos
D. DeMattos
11.7 First Amendment to Employment Agreement with Edward
Phillips
11.8 Letter issued by NASDAQ
27 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the
three months ended March 31, 1996.
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, 1996, to be signed on its behalf by the undersigned hereunto
duly authorized.
MATTHEWS STUDIO EQUIPMENT GROUP
(Registrant)
Date: April 14, 1996 By: John D. Murray
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John D. Murray
Executive Vice President
and Chief Financial Officer