United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended June 30, 1999
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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.)
3111 North Kenwood Street, Burbank, CA 91505
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(Address of principal executive offices) (Zip Code)
(818) 525-5200
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(Registrant's telephone number, including area code)
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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
----- -----
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
--------------------
9,423,952 shares as of August 3, 1999
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1
Index
Matthews Studio Equipment Group and Subsidiaries
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - June 30, 1999 and September 30, 1998
Condensed consolidated statements of operations - Three months ended June 30, 1999 and 1998
- Nine months ended June 30, 1999 and 1998
Condensed consolidated statements of cash flows - Nine months ended June 30, 1999 and 1998
Notes to condensed consolidated financial statements - June 30, 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
2
Part I. Financial Information
Item I. Financial Statements (Unaudited)
Matthews Studio Equipment Group and Subsidiaries
Condensed Consolidated Balance Sheets
($ in thousands, except share amounts)
June 30, September 30,
1999 1999
--------- ---------
(Unaudited) (Note)
ASSETS:
Current Assets:
Cash and cash equivalents $ - $ 331
Accounts receivable, less allowance for
doubtful accounts of $1,243 at June 30,
1999 and $1,259 at September 30, 1998 9,188 8,981
Current portion of net investment in finance
and sales-type leases 302 353
Inventories 3,770 3,783
Prepaid expenses and other current assets 828 536
Income tax refund receivable 754 1,045
Deferred income taxes 1,797 753
--------- ---------
Total current assets 16,639 15,782
Property and equipment, net 50,997 51,650
Net investment in financed sales-type leases,
less current portion 165 248
Goodwill less accumulated amortization of $1,384 at June 30,
1999 and $681 at September 30, 1998 22,290 23,168
Other assets 5,746 3,538
--------- ---------
Total assets $ 95,837 $ 94,386
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 6,767 $ 4,634
Accrued liabilities 4,372 3,946
Current portion of long-term debt and capital lease obligations 4,482 4,687
--------- ---------
Total current liabilities 15,621 13,267
Long-term debt and capital lease obligations less current portion 79,550 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 June 30, 1999 and September 30, 1998 - -
Common stock, no par value, authorized
20,000,000 shares; issued and outstanding 9,350,000 shares at
June 30, 1999 and 9,110,000 shares at September 30, 1998 7,731 7,144
Retained earnings (1,298) 5,051
--------- ---------
6,433 12,195
Less retired common stock (1,916,450 shares at
June 30, 1999 and September 30, 1998) 9,582 9,582
--------- ---------
Total shareholders' equity (deficit) (3,149) 2,613
--------- ---------
Total liabilities and shareholders' equity $ 95,837 $ 94,386
========= =========
Note: The balance sheet at September 30, 1998 had been derived from the audited
financial statements as of that date.
The accompanying notes are an integral part of these consolidated
financial statements.
3
Matthews Studio Equipment Group and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
($ in thousands, except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
Revenue from rental operations $ 9,491 $ 9,412 $ 28,826 $ 23,448
Net product sales 4,242 7,699 14,554 20,064
-------- -------- -------- --------
13,733 17,111 43,380 43,512
Costs and expenses:
Cost of rental operations 6,078 5,747 18,125 13,949
Cost of sales 3,369 5,215 11,063 13,678
Selling, general and administrative 5,280 5,525 15,154 14,484
Restructuring charge - - 423 -
Interest, net 1,851 1,883 5,564 4,128
-------- -------- -------- --------
16,578 18,370 50,329 46,239
Loss before income taxes (2,845) (1,259) (6,949) (2,727)
Benefit for income taxes - (351) (600) (946)
-------- -------- -------- --------
Net loss $ (2,845) $ (908) $ (6,349) $ (1,781)
======== ======== ======== ========
Loss per common share, basic and
diluted $ (0.31) $ (0.08) $ (0.69) $ (0.16)
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
Matthews Studio Equipment Group and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
($ in thousands)
Nine Months Ended June 30,
1999 1998
-------- ---------
Operating activities:
Net loss $ (6,349) $ (1,781)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for doubtful accounts 53 354
Depreciation & amortization 8,862 6,148
Deferred income taxes (887) -
Gain on sale of assets (656) (387)
Changes in operating assets and liabilities net of
effects from acquisitions:
Accounts receivable (260) (1,447)
Inventories 13 (573)
Net investment in leases 134 543
Prepaids and other assets (2,251) (536)
Income tax refund receivable 291 (1,000)
Accounts payable and accrued liabilities 2,559 (2,692)
-------- --------
Net cash provided by (used in) operating activities 1,509 (1,371)
Investing activities:
Payments for acquisitions (30,770)
Purchase of property and equipment (6,743) (8,971)
Proceeds from sale of property and equipment 192 566
-------- --------
Net cash used in investing activities (6,551) (39,175)
Financing activities:
Proceeds from exercise of stock options and warrants 587 91
Proceeds from borrowings 5,100 42,021
Repayment of borrowings (976) (1,818)
-------- --------
Net cash provided by financing activities 4,711 40,294
Net decrease in cash and cash equivalents (331) (252)
Cash and cash equivalents at beginning of period 331 393
-------- --------
Cash and cash equivalents at end of period $ 0 $ 141
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
Matthews Studio Equipment Group and Subsidiaries
Condensed Consolidated Statements of Cash Flows (continued)
(Unaudited)
($ in thousands)
Nine Months Ended
June 30,
1999 1998
-------- --------
Schedule of noncash investing and financing
transactions:
Common stock issued for acquired company $ - $ 884
Capital lease obligations incurred 1,699 -
Note received for sale of assets 1,289 -
Additional disclosures:
Cash paid during period for:
Interest 4,792 3,983
Income taxes 165 50
The accompanying notes are an integral part of these consolidated financial
statements.
Matthews Studio Equipment Group and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. General
Presentation
The accompanying unaudited condensed consolidated financial statements of
Matthews Studio Equipment Group and Subsidiaries (the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the year ending September 30, 1999. 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. In addition, the
Company is developing an Internet business which is being designed as the
entertainment industry's true "one-stop shop" online resource for production
information, equipment and merchandise. 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
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 develop 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 when they are earned and recognizes product sales upon
shipment.
8
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 - During the first nine months of fiscal 1999, the Company
recorded a restructuring charge of $423,000 ($385,000 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 nine months
ended June 30, 1999 and 1998, effective income tax rates of 9% and 35% 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 June 30, 1998,
financial statements have been reclassified to conform to the June 30, 1999
presentation.
9
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:
For the Three Months Ended June 30,
------------------------------------------------------------------------------------------------
1999 1998
-------------------------------------------- --------------------------------------------
Loss Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ----------- ----------- ------------- -----------
Basic and diluted EPS:
Loss available
to common stockholders $ (2,845) 9,321 $ (0.31) $ (908) 11,020 $ (0.08)
======== ========
For the Nine Months Ended June 30,
------------------------------------------------------------------------------------------------
1999 1998
-------------------------------------------- --------------------------------------------
Loss Shares Per-Share Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ----------- ----------- ------------- -----------
Basic and diluted EPS:
Loss available
to common stockholders $ (6,349) 9,230 $ (0.69) $ (1,781) 11,001 $ (0.16)
======== ========
Options and warrants to purchase 4,182,830 shares of common stock at a range of
$2.00 to $4.74 per share, for the three months and nine months ended June 30,
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 and warrants to purchase 4,616,864 shares of common stock at a range of
$1.00 to $4.74 per share, for the three months and nine months ended June 30,
1998, were outstanding during the periods yet excluded from the computation of
diluted EPS because as a result of the net loss the options were antidilutive.
During the nine months ended June 30, 1999, 240,634 shares of common stock were
issued upon exercise of stock options and warrants.
10
Matthews Studio Equipment Group and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for its stock-based compensation
plans. Accordingly, no compensation cost has been recognized for its fixed
stock option plans. Had compensation cost for the Company's option plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, "Accounting for Stock-
Based Compensation," the Company's net loss per share on a pro forma basis would
have been as indicated below (in thousands, except per share data):
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
--------------------------------------------------------------
($ in thousands, except per share data)
Net loss
As reported $ (2,845) $ (908) $ (6,349) $ (1,781)
Pro forma (2,902) (933) (6,520) (1,856)
Net loss per share,
basic and diluted
As reported $ (0.31) $ (0.08) $ (0.69) $ (0.16)
Pro forma (0.31) (0.08) (0.71) (0.17)
4. Acquisitions
The pro forma results of operations for the nine months ended June 30, 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):
Nine Months Ended
June 30,
1998
-------------------
Net revenue $ 39,762
Net loss (2,294)
Net loss per common share,
basic and diluted (0.25)
The above pro forma information includes the operations of acquisitions and
disposal completed subsequent to September 30, 1997.
11
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 of expanding and strengthening its
equipment rental operations during the first nine months of fiscal 1999, and of
developing its Internet business that was launched late in the third quarter 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.
On June 21, 1999, the Company launched ShowbizMart.com, an online resource for
finding entertainment production suppliers, crew members, equipment,
expendables, memorabilia and online auction. ShowbizMart.com is being designed
as new network of Web sites built for industry and consumers.
Company revenues for the first nine months of fiscal 1999 decreased to
$43,380,000, a decrease of $132,000 or 0.3% over the first nine months of fiscal
1998. In addition, EBITDA (earnings before interest expense, income taxes,
depreciation and amortization) decreased to $7,477,000 in the first nine months
of fiscal 1999 as compared to $7,549,000 in fiscal 1998. The Company's revenues
and EBITDA for the first nine months of fiscal 1998 included $9,831,000 and
$1,163,000 respectively from manufacturing operation which was sold during the
fourth quarter of fiscal 1998. Net loss for the first nine months of fiscal year
1999 was $6,349,000 of $0.69 per share compared to net loss of $1,781,000 or
$0.16 per share for the same period last year. The increase in net loss for the
nine months ended June 30, 1999 versus 1998 was caused primarily by an increase
of $1,400,000 and $2,700,000 in interest expense and depreciation and
amortization respectively, and a $177,000 contribution to net income for the
nine months ended June 30, 1998 by the manufacturing operations. Components of
the Company's operating results are discussed below.
Three-Month Period ended June 30, 1999 and June 30, 1998
- --------------------------------------------------------
Revenues From Rental Operations
- -------------------------------
Revenues from rental operations were $9,491,000 for the third quarter of fiscal
1999, compared to $9,412,000 for the same period last year, an increase of
$79,000 or 0.8%. Approximately 35% or $3,295,000 of rental revenues were
generated by operations acquired in fiscal 1998. In addition, revenues from
video equipment rentals increased $567,000 or 23% in the third quarter of fiscal
1999, to $3,089,000, up from $2,522,000 for the same period of fiscal 1998.
Net Product Sales
- -----------------
Net equipment and supply sales were $4,241,000 for the third quarter of fiscal
1999, a decrease of $3,458,000 or 45%, from $7,699,000 for the third quarter of
fiscal 1998. The decrease is primarily due to the disposal of the manufacturing
operation during the fourth quarter of last year. Excluding the manufacturing
operation (which accounted for $3,711,000 of the net equipment and supply sales
of the third quarter of fiscal 1998), sales increased $253,000 or 6% over the
third 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
Gross Profit - Rental
- ---------------------
Gross profit on rental revenues was $3,413,000 or 36% of revenues for the third
quarter of fiscal 1999 compared to $3,665,000 or 39% in fiscal 1998. Aggregate
theatrical rental operations accounted for approximately $1,657,000 of gross
profit on rental revenues. Production equipment rentals, primarily of lighting,
grip, power generators and trucks accounted for approximately $1,155,000 and
video equipment rentals accounted for approximately $601,000.
Gross Profit - Sales
- --------------------
Gross profit on sales decreased from $2,484,000 in the third quarter of 1998 to
$873,000 in the third quarter of 1999. Included in the 1998 results is gross
profit of $1,380,000 from the manufacturing subsidiary. As a percentage of
sales, gross profit was approximately 20% for the third quarter of fiscal 1999,
compared to approximately 32% for the same period in fiscal 1998. The lower
gross profit percentage 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 softening in the feature film business.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses were $5,280,000 for the third
quarter of fiscal 1999 compared to $5,525,000 for the same period in fiscal
1998, an decrease of $245,000. As a percentage of sales, selling, general and
administrative expenses were 38% for the third quarter of fiscal 1999 compared
to 32% for the same period in fiscal 1998. The percentage 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 softening in the feature film business.
Interest
- --------
Interest decreased to $1,851,000 in the third quarter of fiscal 1999 from
$1,883,000 in the third quarter of fiscal 1998. The interest cost approximates
prior year's interest cost.
Nine-Month Period ended June 30, 1999 and June 30,, 1998
- --------------------------------------------------------
Revenues From Rental Operations
- -------------------------------
Revenues from rental operations were $28,826,000 for the nine months of fiscal
1999, compared to $23,448,000 for the same period last year, an increase of
$5,378,000 or 23%. Approximately 36% or $10,432,000 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 $11,175,000, a decrease of $1,312,000 or 17% from approximately
$12,487,000, for the same period last year. The decrease is primarily due to the
softening in the feature film business.
13
Net Product Sales
- -----------------
Net equipment and supply sales were $14,554,000 for the first nine months of
fiscal 1999, a decrease of $5,510,000 or --%, from $20,064,000 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 $9,831,000 of the net equipment
and supply sales of the first nine months of last year), sales increased
$4,320,000 or 42% over the first nine 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 $10,701,000 or 37% as a percentage of
revenues for the first nine months of fiscal 1999 compared to $9,499,000 or 41%
in fiscal 1998. Aggregate theatrical rental operations accounted for
approximately $5,444,000 of gross profit on rental revenues. Production
equipment rentals, primarily of lighting, grip, power generators and trucks
accounted for approximately $4,009,000 and video equipment rentals accounted for
approximately $1,248,000 in fiscal 1999. The decrease in gross profit percentage
resulted primarily from general softening in the feature film business 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 in the feature
film business. Depreciation expense for rental operations was $7,044,000 in the
first nine months of fiscal 1999 compared to $5,061,000 in 1998.
Gross Profit - Sales
- --------------------
Gross profit on sales decreased from $6,386,000 in the first nine months of
fiscal 1998 to $3,491,000 in the first nine months of fiscal 1999. Included in
the 1998 results is gross profit of $3,656,000 from the manufacturing
subsidiary. As a percentage of sales, gross profit was approximately 24% for the
first nine 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
softening in the feature film business.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses were $15,154,000 for the first nine
months of fiscal 1999 compared to $14,130,000 for the same period in fiscal
1998, an increase of $670,000. As a percentage of sales, selling, general and
administrative expenses were 35% for the first nine months of fiscal 1999
compared to 33% 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 Company 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 nine 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 $5,564,000 in the first nine months of fiscal 1999 from
$4,128,000 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
Liquidity and Capital Resources
- -------------------------------
During the nine months ended June 30, 1999, the Company financed its operations
from internally generated cash flow and bank borrowings.
At June 30, 1999, the Company's working capital was $1,018,000 which was a
decrease of $1,497,000 from its working capital at September 30, 1998.
The Company primarily applied cash from additional borrowings from the Company's
bank line of $5,100,000 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 $4,356,000 and equipment additions to other rental operations
(primarily video rental operations) of approximately $2,067,000.
On June 30, 1999, the Company sold $10,000,000 of convertible senior
subordinated notes ("Notes") to ING Equity Partners, L.P. I ("ING"), including
funding of capital expenditures and further development of the Company's
Internet business. In connection with the issuance of the Notes, the Company and
its subsidiaries also entered into an amendment agreement for the Company's bank
line of credit facility. This amendment agreement modified certain covenants
under the bank line of credit and permitted the release of the $3,000,000 letter
of credit issued by ING (U.S.) Capital LLC on January 12, 1999, as additional
collateral for the Company's bank line of credit.
The Notes, which are secured by a junior and subordinated security interest in
the Company's consolidated assets, will mature on June 30, 2005, and bear
interest at twelve percent for the first year and eighteen percent thereafter.
At the Company's option, interest on the Notes may be paid in cash or in kind
(i.e., by the issuance of additional notes similar to the Notes). However, upon
consummation of an equity offering by the Company which results in gross
proceeds of $25,000,000 or more on or prior to June 30, 2000 (a "Qualified
Equity Offering"), the principal amount of the Notes then outstanding plus
accrued and unpaid interest thereon will automatically convert into shares of
the Company's common stock ("Common Stock") at the subscription price to
investors in such Qualified Equity Offering. If a Qualified Equity Offering has
not been consummated on or prior to June 30, 2000, the Company will issue to the
holders of the Notes 500,000 warrants to purchase Common Stock at $0.01 per
share for each $10,000,000 of principal outstanding under the Notes.
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
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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.
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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 completing the implementation phase for all significant
systems.
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 therefore 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.
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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.
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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) Form 8-K dated June 30, 1999 relating to additional financing
and debt waiver.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report on Form 10-Q for the period
ending June 30, 1999, to be signed on its behalf by the undersigned
hereunto duly authorized.
MATTHEWS STUDIO EQUIPMENT GROUP
(Registrant)
Date: August 12, 1999 By: /s/ Carlos D. De Mattos
-----------------------------------------------
Carlos D. De Mattos
Chairman of the Board, Chief Executive Officer,
& President
By: /s/ John D. Murray
-----------------------------------------------
John D. Murray
Executive Vice President, Operations
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