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, 1997
-----------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ____________
Commission file number 0-18102
-------
MATTHEWS STUDIO EQUIPMENT GROUP
-------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-1447751
-----------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3111 NORTH KENWOOD STREET, BURBANK, CA 91505
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(818) 525-5200
--------------
(Registrant's telephone number, including area code)
2405 EMPIRE AVENUE, BURBANK, CA 91504-3399
------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. COMMON STOCK, NO PAR VALUE
--------------------------
10,988,806 SHARES AS OF JANUARY 31, 1998.
- -----------------------------------------
INDEX
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - December 31, 1997 and
September 30, 1997
Condensed consolidated statements of income - Three months ended
December 31, 1997 and 1996
Condensed consolidated statements of cash flows - Three months ended
December 31, 1997 and 1996
Notes to condensed consolidated financial statements - December
31, 1997
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
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS (UNAUDITED)
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
($ in thousands)
December 31, September 30,
1997 1997
------------ -------------
(Unaudited) (Note)
ASSETS :
Current Assets:
Cash and cash equivalents $ 567 $ 393
Accounts receivable, less allowance for
doubtful accounts of $808 at December 31,
1997 and $745 at September 30, 1997 8,715 9,144
Current portion of net investment in finance
and sales-type leases 796 829
Inventories 9,242 7,844
Prepaid expenses and other current assets 774 923
Income tax refund receivable 645 645
Deferred income taxes 894 894
-------- --------
Total current assets 21,633 20,672
Property and Equipment:
Rental equipment 51,893 47,169
Manufacturing equipment and tooling 1,851 1,952
Office furniture and equipment 3,874 3,627
Land and building 2,131 2,131
Leasehold improvements 1,292 1,112
-------- --------
61,041 55,991
Less accumulated depreciation and amortization 22,544 20,804
-------- --------
Property and equipment, net 38,497 35,187
Net investment in finance and sales-type leases,
less current portion 405 455
Goodwill (Notes 2 & 4) 5,543 4,052
Other assets 1,575 1,505
-------- --------
Total assets $ 67,653 $ 61,871
======== ========
Note: The balance sheet at September 30, 1997 has been derived from the audited
financial statements at that date.
See accompanying notes.
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
($ in thousands)
December 31, September 30,
1997 1997
------------- -------------
(Unaudited) (Note)
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 3,799 $ 5,241
Accrued liabilities 2,393 2,950
Current portion of long-term debt 555 693
Current portion of capital lease obligations 2,203 2,126
------------- -------------
Total current liabilities 8,950 11,010
Long-term debt, less current portion 39,346 31,859
Notes payable to related parties 956 956
Capital lease obligations, less current portion 3,356 3,900
Deferred income taxes 2,976 2,976
Shareholders' equity:
Preferred stock - -
Common stock 7,064 6,168
Retained earnings 5,005 5,002
------------- -------------
Total shareholders' equity 12,069 11,170
------------- -------------
Total liabilities and shareholders' equity $ 67,653 $ 61,871
============= =============
Note: The balance sheet at September 30, 1997 has been derived from the audited
financial statements at that date.
See accompanying notes.
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
($ in thousands, except per share data)
Three Months Ended
December 31,
1997 1996
-------------- -------------
Revenues from rental operations $ 7,771 $ 5,768
Net product sales 5,686 3,554
-------------- -------------
13,457 9,322
Costs and expenses:
Cost of rental operations 4,062 3,398
Cost of sales 3,860 2,332
Selling, general and administrative 4,379 2,339
Provision for doubtful accounts receivable 41 67
Interest 1,110 567
-------------- -------------
13,452 8,703
Income before income taxes 5 619
Provision for income taxes 2 248
-------------- -------------
Net income $ 3 $ 371
============== =============
Earnings per common share, basic and
diluted (Note 3) $0.00 $0.04
============== =============
See accompanying notes.
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
($ in thousands)
Three Months Ended
December 31,
1997 1996
--------- ---------
Operating activities:
Net income $ 3 $ 371
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for doubtful accounts receivable 41 67
Depreciation and amortization 1,867 799
Gain on sale of assets (105) (53)
Changes in operating assets and liabilities
net of effects from acquisitions (Note 4):
Accounts receivable 832 137
Inventories (585) (403)
Net investment in leases 83 99
Prepaids and other assets 12 (29)
Accounts payable and accrued liabilities (1,692) (290)
Income tax refund receivable - 206
--------- ---------
Net cash provided by operating activities 456 904
Investing activities:
Payment for acquisitions (1,800) -
Purchase of property and equipment (4,227) (1,376)
Proceeds from sale of property and equipment 209 150
--------- ---------
Net cash used in investing activities (5,818) (1,226)
Financing activities:
Proceeds from exercise of stock options 12 -
Proceeds from borrowings 7,019 153
Repayment of borrowings (1,495) -
--------- ---------
Net cash provided by financing activities 5,536 153
Net increase (decrease) in cash and cash equivalents 174 (169)
Cash and cash equivalents at beginning of period 393 462
--------- ---------
Cash and cash equivalents at end of period $ 567 $ 293
========= =========
See accompanying notes.
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (continued)
(Unaudited)
($ in thousands)
Three Months Ended
December 31,
1997 1996
------- -------
Schedule of noncash investing and financing
transactions:
Common stock issued for acquired company $ 884 $ -
Additional disclosures:
Cash paid during period for:
Interest 1,069 597
Income taxes - -
See accompanying notes.
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, 1997
are not necessarily indicative of the results that may be expected for the year
ending September 30, 1998, 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, 1997.
Business
The Company designs, manufactures, sells, leases and rents audio, video, film
and production equipment and accessories, to the motion picture, television,
corporate, video, photography and live theatrical industries. The Company
operates in one business segment and provides, as a single source, the necessary
production equipment which is otherwise only available by using many different
suppliers. The Company supplies equipment such as lights, grip lighting
supports, professional video equipment, camera mounts, tripods, pedestals,
fluid heads, camera dollies, portable camera cranes, power generation,
production trucks, and theatrical equipment. The Company's manufactured
products are distributed worldwide by its sales force and by independent dealers
and distributors located in North America, Europe, Asia and South America. In
addition, the Company has fully operational soundstages and studios which are
supplied with equipment.
2. Accounting Policies
Principles of Consolidation
The financial statements include the accounts of the Company and its
subsidiaries. Material intercompany balances and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Concentration of Credit Risk
The Company's customers are located around the world and are principally engaged
in motion picture and television production, theatrical production, corporate
video, commercial photography, or in providing rental equipment to companies in
these industries. The Company generally sells on credit terms of 30 days and
does not require collateral, except for items sold under capital leases in which
it retains a security interest. The Company rents equipment to customers under
short-term leases on credit terms of generally 30 days and retains a security
interest.
Inventories
Inventories are principally stated at the lower of first-in, first-out cost or
market.
Goodwill
The goodwill, which arose from acquisitions, is amortized over a period of
twenty five years.
Property and Equipment
Property and equipment, including capital leases, are stated at cost.
Depreciation and amortization is calculated using the straight-line method over
the estimated useful lives of the assets as follows:
Rental equipment 5 - 10 years
Buildings and improvements 10 - 40 years
Other equipment 5 - 10 years
Capital leases are amortized over the estimated useful lives using the straight-
line method and the amortization is included in depreciation expense. Leasehold
improvements are amortized over the estimated useful life of the improvement, or
the related lease term, whichever is shorter.
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.
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
2. Accounting Policies (continued)
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.
Interest income from non-cancelable lease contracts accounted for as direct
finance leases is recognized using the interest method over the term of the
related lease agreement.
Per Share Data
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Accounting for Earnings Per Share"
("FAS 128"). This statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common stock
or potential common stock. This statement simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15, Earnings
Per Share, and makes them comparable to international EPS standards.
Accordingly, the Company implemented FAS 128 in the quarter ended December 31,
1997. The retroactive application of the statement had no impact on the EPS for
the quarter ended December 31, 1996.
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 three months ended December 31,
1997 and 1996, an effective income tax rate of approximately 40% was utilized.
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 December 31, 1996, financial statements have been
reclassified to conform to the December 31, 1997 presentation.
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
3. Earnings Per Share
The following is a reconciliation of the computations for basic and diluted EPS:
For the Quarter Ended December 31,
-------------------------------------------------------------------------
1997 1996
----------------------------------- -----------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic EPS:
Income available
to common stockholders $ 3 10,987 $ 0.00 $ 371 10,332 $ 0.04
========= ========
Effect of Dilutive
Options and warrants 1,593 76
----------- ------------- ----------- -------------
Diluted EPS:
Income available to common
Stockholders and assumed
conversions $ 3 12,580 $ 0.00 $ 371 10,408 $ 0.04
=========== ============= ========= =========== ============= =========
Options to purchase 119,000 shares of common stock at a range of $4.13 to $4.74
per share, and options to purchase 3,314,000 shares of common stock at a range
of $2.50 to $4.13 per share, were outstanding during the quarter ended December
31, 1997 and 1996 respectively, but were not included in the computation of
diluted EPS because the options' exercise prices were greater than the average
market price of the common shares.
During the three months ended December 31, 1997, 7,100 shares of common stock
were issued upon exercise of stock options.
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for its stock-based compensation
plans. Accordingly, no compensation cost has been recognized for its fixed
stock option plans. Had compensation cost for the Company's option plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, "Accounting for Stock-
Based Compensation," the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below (in thousands, except per
share data):
Three Months Ended December 31,
1997
----
Net income
As reported $ 3
Pro forma (16)
Earnings per share, basic and diluted
As reported -
As Pro forma -
MATTHEWS STUDIO EQUIPMENT GROUP AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
4. Acquisitions
The following acquisitions are included in the results of operations of the
Company beginning as of the effective date of the transactions.
Effective October 1, 1997, the Company purchased the assets and business of
Haehnle Dwertman, Inc. (HDI), a grip, lighting and video camera rental company
in Covington, Kentucky and Cincinnati, Ohio. The acquisition was made for cash
of $800,000 and 350,000 restricted and unregistered shares of the Company's
common stock in exchange for all of the common stock of HDI, in a transaction
exempt from registration under the Securities Act of 1933. In addition, the
Company incurred debt of $1,511,000 and recorded $842,000 of goodwill relating
to the transaction.
As part of the acquisition, the Company entered into real estate leases with an
affiliate of HDI, for Cincinnati, Ohio and Covington, Kentucky facilities from
which HDI's business was conducted. The Company is continuing to operate the
business acquired from HDI at those facilities.
Effective November 1, 1997, the Company purchased the assets and business of
Olesen, a theatrical supply company in Hollywood, California. The acquisition
was made for cash of $1,450,000 of which $1,000,000 of cash was paid on closing,
with the remaining portion of the purchase price becoming due in two equal
installments on October 31, 1999 and October 31, 2000. In addition, the Company
incurred debt of $605,000 and recorded goodwill of $690,000 relating to the
transaction. As part of the acquisition, the Company entered into real estate
leases with an affiliate of Olesen, for facilities located in Hollywood,
California, from which Olesen's business was conducted. The Company is
continuing to operate the business acquired from Olesen from those facilities.
The fair market value of the assets acquired relating to the above acquisitions
was $1,153,000.
The acquisitions of both HDI and Olesen have been accounted for under the
purchase method of accounting for business combinations.
The pro forma results of operations for the three months ended December 31, 1997
and 1996, assuming consummation of the purchases as of October 1, 1996, are as
follows:
Three Months Ended
December 31,
1997 1996
---- ----
($ in thousands, except per share data)
Net revenue $13,708 $13,701
Net income (loss) (4) (15)
Net income (loss) per common share, basic and diluted - -
The above pro forma information includes the operations of HDI and Olesen for
both periods and, for the 1996 period, other acquisitions completed subsequent
to December 31, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Overview
The expansion of the Company and its marketing and distribution network into
various select geographic marketplaces continued in the first three months of
fiscal 1998 with the completion of the acquisitions of two companies. In
addition, the Company continued to invest in the expansion of its core
businesses, as well as operations acquired in fiscal 1997. Revenues increased
$4,135,000 or 44% to $13,457,000 for the first three months of fiscal 1998, from
$9,322,000 for the first three months of fiscal 1997. Net income decreased
$368,000 compared to the first three months of fiscal 1997. Several factors
contributed to the decrease in net income for the first quarter of fiscal 1998.
These factors included higher expenses associated with the expansion of the
operations and the costs to improve systems and absorb new operations. In
addition, in the first quarter of fiscal 1997 a large-budget film project
bolstered the results by providing additional revenues without requiring a
significant amount of incremental costs and expenses.
Three-Month Period ended December 31, 1997 and December 31, 1996
- ----------------------------------------------------------------
Revenues From Rental Operations
- -------------------------------
Revenues from rental operations were $7,771,000 for the first three months of
fiscal 1998, compared to $5,768,000 for the same period last year, an increase
of $2,003,000 or 35%. Revenues generated by operations acquired subsequent to
the first quarter of fiscal 1997 accounted for $3,543,000 of total revenues for
the first three months of fiscal 1998. Production equipment rentals, primarily
of lighting, grip, power generators and trucks, decreased by approximately
$1,538,000 to $4,105,000 in the first quarter of fiscal 1998 from $5,643,000,
for the same period last year. The decrease is primarily attributable to a
large-budget film project included in the results of the first quarter of last
fiscal year.
Net Product Sales
- -----------------
Net equipment and supply sales were $5,686,000 for the first three months of
fiscal 1998, an increase of $2,132,000 or 60%, from $3,554,000 for the first
three months of fiscal 1997. Sales generated by expendable supply sales
operations acquired subsequent to the first quarter of fiscal 1997 accounted for
approximately $2,052,000 of total sales for the first three months of fiscal
1998. Sales from existing operations changed only slightly from the three
months ended December 31, 1997 as compared to the same period last year.
Gross Profit - Rental
- ---------------------
Gross profit on rental revenues, as a percentage of revenues, was 48% for the
first three months of fiscal 1998 compared to 41% in fiscal 1997. Production
equipment rentals, primarily of lighting, grip, power generators and trucks
accounted for approximately 5% of the increase in the gross profit percentage.
The increase resulted primarily from lower equipment sub-rental costs in the
current quarter compared to the first quarter of fiscal 1997, during which
period higher costs were incurred to support the high level of rental activity.
In addition, higher margins from recently acquired rental operations
contributed to the increased gross profit percentage when comparing the first
quarter of fiscal 1998 with the same period last year.
Gross Profit - Sales
- --------------------
Gross profit as a percentage of sales was approximately 32% for the first three
months of fiscal 1998, compared to approximately 34% for the same period in
fiscal 1997. The lower gross profit percentage realized by the Company on
higher revenues was primarily attributable to the increase in expendable supply
product sales, which carry lower gross profit margins than the Company's other
products.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses were $4,379,000 in the first three
months of fiscal 1998 compared to $2,339,000 for the same period in fiscal 1997.
As a percent of sales, selling, general and administrative expenses were 33% for
the first three months of fiscal 1998 compared to 25% for the same period in
fiscal 1997. The 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. The dollar increase is primarily due to the acquisitions
completed subsequent to the first quarter of fiscal 1997, as well as a general
increase in the overall operations resulting in higher payroll, employee
benefits, depreciation and rent expenses.
Interest
- --------
Interest increased to $1,110,000 in the first three months of fiscal 1998 from
$567,000 in the first three months of fiscal 1997. The increase in interest
costs is mainly due to additional debt incurred and assumed in the acquisitions
the Company completed since the first quarter of fiscal 1997, and to the
substantial amount of capital investment made in certain of the acquired, as
well as the existing, operations.
Liquidity and Capital Resources
- -------------------------------
During the three months ended December 31, 1997, the Company financed its
operations from internally generated cash flow and bank borrowings.
At December 31, 1997 the Company's working capital was $12,683,000 which was an
increase of $3,021,000 from its working capital at September 30, 1997.
The Company primarily applied cash from additional borrowings from the Company's
bank line of $7,019,000 to finance the acquisition of rental equipment of
approximately $3,611,000, to consummate the acquisitions of Haehnle Dwertman,
Inc., ("HDI"), and the business of Olesen, for $1,800,000 cash, to retire
certain debt assumed in the acquisition of HDI and to pay down capital lease
obligations incurred in a fiscal year 1997 acquisition. The major components of
the net capital equipment
additions were equipment for the Company's video equipment rental operations of
approximately $1,922,000 and equipment additions to other rental operations of
approximately $1,689,000.
The Company has signed a letter of intent to acquire the business of Four Star
Stage Lighting, Inc. ("Four Star"). This transaction is structured as a stock
purchase for $26,500,000, payable in cash. The Company is obtaining an increase
to its bank line to finance this acquisition and provide for future working
capital requirements. Closing of this acquisition is conditioned on the
execution of a mutually satisfactory definitive purchase agreement. Four Star
is engaged in the rental of theatrical equipment and is headquartered in New
York, New York.
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 additional
borrowings under its bank line. The Company believes it will have sufficient
funds from operations and bank borrowings to meet its anticipated requirements
for working capital during the next twelve months.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
10(i) Amended and Restated Employment Agreement between
the Company and Carlos D. DeMattos, dated as of
October 1, 1997 (in Edgar filing only).
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, 1997.
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 December 31, 1997, to be signed on its behalf by the undersigned hereunto
duly authorized.
MATTHEWS STUDIO EQUIPMENT GROUP
(Registrant)
Date: February 12, 1998 By: /s/ Carlos D. DeMattos
------------------------------
Carlos D. DeMattos
Chairman of the Board, President,
Chief Executive Officer and
Chief Financial Officer
By: /s/ Gary S. Borman
------------------------------
Gary S. Borman
Vice President,
Corporate Controller