-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JmLlTdlizAT7QOYQHXM/2NNXqprcjwsWul56MsB4GZ2alx9/QVv4sj5xI4sbWJfQ QaXsVRXipTs4lI4H3cO8ug== 0000898430-98-003030.txt : 19980817 0000898430-98-003030.hdr.sgml : 19980817 ACCESSION NUMBER: 0000898430-98-003030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATTHEWS STUDIO EQUIPMENT GROUP CENTRAL INDEX KEY: 0000855575 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 951447751 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18102 FILM NUMBER: 98690125 BUSINESS ADDRESS: STREET 1: 3111 N KENWOOD ST CITY: BURBANK STATE: CA ZIP: 91504 BUSINESS PHONE: 8436715X32 MAIL ADDRESS: STREET 1: 2405 EMPIRE AVENUE CITY: BURBANK STATE: CA ZIP: 91504 10-Q 1 FORM 10-Q 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, 1998 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) N/A --- (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 -------------------------- 11,025,906 shares as of August 3, 1998. - --------------------------------------- Index Matthews Studio Equipment Group and Subsidiaries Part I. Financial Information Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets - June 30, 1998 and September 30, 1997 Condensed consolidated statements of operations - Three months ended June 30, 1998 and 1997; Nine months ended June 30, 1998 and 1997 Condensed consolidated statements of cash flows - Nine months ended June 30, 1998 and 1997 Notes to condensed consolidated financial statements - June 30, 1998 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)
June 30, September 30, 1998 1997 -------- ------------- (Unaudited) (Note) ASSETS: Current Assets: Cash and cash equivalents $ 141 $ 393 Accounts receivable, less allowance for doubtful accounts of $1,166 at June 30, 1998 and $745 at September 30, 1997 11,424 9,144 Current portion of net investment in finance and sales-type leases 450 829 Inventories 9,438 7,844 Prepaid expenses and other current assets 1,086 923 Income tax refund receivable 1,645 645 Deferred income taxes 961 894 -------- -------- Total current assets 25,145 20,672 Property and Equipment: Rental equipment 67,827 47,169 Manufacturing equipment and tooling 1,748 1,952 Office furniture and equipment 4,183 3,627 Land and building 1,554 2,131 Leasehold improvements 1,508 1,112 -------- -------- 76,820 55,991 Less accumulated depreciation and amortization 25,962 20,804 -------- -------- Property and equipment, net 50,858 35,187 Net investment in finance and sales-type leases, less current portion 291 455 Goodwill (Note 4) 23,356 4,052 Other assets 3,838 1,505 -------- -------- Total assets $103,488 $ 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)
June 30, September 30, 1998 1997 ----------- ------------- (Unaudited) (Note) LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 3,498 $ 5,241 Accrued liabilities 3,219 2,950 Current portion of long-term debt 963 693 Current portion of capital lease obligations 1,936 2,126 -------- -------- Total current liabilities 9,616 11,010 Long-term debt, less current portion 75,218 31,859 Notes payable to related parties 1,306 956 Capital lease obligations, less current portion 2,602 3,900 Deferred income taxes 4,382 2,976 Shareholders' equity: Preferred stock -- -- Common stock 7,143 6,168 Retained earnings 3,221 5,002 -------- -------- Total shareholders' equity 10,364 11,170 -------- -------- Total liabilities and shareholders' equity $103,488 $ 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 Operations (Unaudited) ($ in thousands, except per share data)
Three Months Ended Nine Months Ended June 30, June 30, 1998 1997 1998 1997 -------- -------- -------- -------- Revenue from rental operations $ 9,412 $ 5,901 $ 23,448 $ 17,295 Net product sales 7,699 5,479 20,064 14,182 -------- -------- -------- -------- 17,111 11,380 43,512 31,477 Costs and expenses: Cost of rental operations 5,747 3,377 13,949 9,757 Cost of sales 5,215 3,674 13,678 9,543 Selling, general and administrative 5,249 3,094 14,130 8,190 Provision for doubtful accounts receivable 276 86 354 224 Interest, net 1,883 809 4,128 1,940 -------- -------- -------- -------- 18,370 11,040 46,239 29,654 Income (loss) before income taxes (1,259) 340 (2,727) 1,823 Provision (benefit) for income taxes (351) 16 (946) 609 -------- -------- -------- -------- Net income (loss) $ (908) $ 324 $ (1,781) $ 1,214 ======== ======== ======== ======== Net income (loss) per common share (Note3) ($0.08) $0.03 ($0.16) $0.12 ======== ======== ======== ======== Net income (loss) per common share - assuming dilution (Note 3) ($0.08) $0.03 ($0.16) $0.11 ======== ======== ======== ========
See accompanying notes. Matthews Studio Equipment Group and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) ($ in thousands)
Nine Months Ended June 30, 1998 1997 --------- --------- Operating activities: Net income (loss) $ (1,781) $ 1,214 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for doubtful accounts 354 224 Depreciation & amortization 6,148 2,890 Gain on sale of assets (387) (188) Changes in operating assets and liabilities net of effects from acquisitions (Note 4): Accounts receivable (1,447) (916) Inventories (573) (1,728) Net investment in leases 543 310 Prepaids and other assets (536) (254) Income tax refund receivable (1,000) 0 Accounts payable and accrued liabilities (2,692) (71) Income taxes payable 0 (245) --------- --------- Net cash provided by (used in) operating activities (1,371) 1,236 Investing activities: Payments for acquisitions (30,770) (200) Purchase of property and equipment (8,971) (5,457) Proceeds from sale of property and equipment 566 464 --------- --------- Net cash used in investing activities (39,175) (5,193) Financing activities: Proceeds from exercise of stock options 91 5 Proceeds from borrowings 42,021 4,410 Repayment of borrowings (1,818) (445) --------- --------- Net cash provided by financing activities 40,294 3,970 Net increase (decrese) in cash and cash equivalents (252) 13 Cash and cash equivalents at beginning of period 393 462 --------- --------- Cash and cash equivalents at end of period $ 141 $ 475 ========= =========
See accompanying notes. Matthews Studio Equipment Group and Subsidiaries Condensed Consolidated Statements of Cash Flows (continued) (Unaudited) ($ in thousands)
Nine Months Ended June 30, 1998 1997 ---------- ---------- Schedule of noncash investing and financing transactions: Common stock issued for acquired companies $ 884 $ 560 Additional disclosures: Cash paid during period for: Interest 3,983 1,975 Income taxes 50 845
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 and nine month periods ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending September 30, 1998, due to fluctuations in film, TV, video and theatrical production activities. For further information refer to the consolidated financial statements and footnotes thereto included in the Matthews Studio Equipment Group annual report on Form 10-K for the year ended September 30, 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 Matthews Studio Equipment Group 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 (Unaudited) 2. Accounting Policies (continued) 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. 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. Matthews Studio Equipment Group and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 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 Condensed Consolidated Financial Statements (Unaudited) 2. Accounting Policies (continued) Revenue Recognition The Company recognizes revenue from rentals under operating leases in the period in which they are earned and recognizes product sales upon shipment. 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 three month period ended June 30, 1997. 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, 1998 an effective income tax rate of 35% was used which reflects expected effects of permanent book and tax differences such as goodwill amortization. For the nine months ended June 30, 1997, an effective income tax rate of approximately 33% was utilized as a result of the utilization of $120,000 of valuation reserve. 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, 1997, financial statements have been reclassified to conform to the June 30, 1998 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 (in thousands, except per share data):
For the Three Months Ended June 30, ------------------------------------------------------------------------------------------------ 1998 1997 ----------------------------------------------- -------------------------------------------- Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- ---------- ------------- ------------- ----------- Basic EPS: Income (loss) available to common stockholders $ (908) 11,020 $ (0.08) $ 324 10,527 $ 0.03 ========== =========== Effect of dilutive options and warrants 817 ----------- ------------- ------------ ------------ Diluted EPS: Income (loss) available to common stockholders and assumed conversions $ (908) 11,020 $ (0.08) $ 324 11,344 $ 0.03 =========== ============== ========== ============ ============ =========== For the Nine Months Ended June 30, ------------------------------------------------------------------------------------------------ 1998 1997 ----------------------------------------------- -------------------------------------------- Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- ---------- ------------ ------------ ----------- Basic EPS: Income (loss) available to common stockholders $ (1,781) 11,001 $ (0.16) $ 1,214 10,398 $ 0.12 ========== =========== Effect of dilutive options and warrants 261 ----------- ------------- ------------ ------------ Diluted EPS: Income (loss) available to common stockholders and assumed conversions $ (1,781) 11,001 $ (0.16) $ 1,214 10,659 $ 0.11 =========== ============= ========== ============ ============ ===========
Options 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, as a result of the net loss the options were anti-dilutive and, excluded from the computation of diluted EPS. Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) (Unaudited) Options to purchase 117,150 shares of common stock at a range of $3.44 to $4.13 per share, and 1,037,150 shares of common stock at a range of $2.63 to $4.13 per share, for the three months and nine months ended June 30, 1997, respectively, were outstanding during the periods yet excluded from the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. During the nine months ended June 30, 1998, 44,200 shares of common stock were issued upon exercise of stock options. The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, "Accounting for Stock- Based Compensation," the Company's net loss and earnings per share on a pro forma basis would have been as indicated below (in thousands, except per share data):
Three Months Ended Nine Months Ended June 30, June 30, 1998 1998 ----------------------- ---------------------- ($ in thousands, except per share data) Net loss As reported $ (908) $ (1,781) Pro forma (933) (1,856) Net loss per share, basic and diluted As reported $ (0.08) $ (0.16) Pro forma (0.08) (0.17)
4. Acquisitions The following acquisitions, since October 1, 1997, have been accounted for using the purchase method of accounting for business combinations and 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 $865,000 of goodwill relating to the transaction. As part of the acquisition, the Company entered into real estate leases with an affiliate of HDI, for facilities in Covington, Kentucky and Cincinnati, Ohio from which HDI's business was conducted. The Company is continuing to operate the business acquired from HDI at those facilities. Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) (Unaudited) 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 $695,000 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. Effective April 1, 1998, the Company purchased the assets and business of Four Star Holding , Inc. ("Four Star") a holding company which owns 100% of Four Star Lighting, Inc. Four Star provides rentals of lighting and other equipment for use in theatrical productions. Pursuant to a stock purchase agreement, in exchange for all of the capital stock of Four Star, the Company paid $18,421,000 in cash to the shareholders of Four Star and $9,104,000 in cash to reduce the long-term debt of Four Star. In addition, the Company incurred debt of $1,841,000 and recorded goodwill of $17,449,000 relating to the transaction. Four Star has operations in New York, New York. It is continuing its business and operations as a wholly-owned subsidiary of the Company. The pro forma results of operations for the nine months ended June 30, 1998 and 1997, assuming consummation of the purchases as of October 1, 1996, are as follows:
Nine Months Ended June 30, 1998 1997 ---------- ---------- ($ in thousands, except per share data) Net revenue $ 49,593 $ 50,667 Net income (loss) (2,312) 591 Net income (loss) per common share, basic and diluted (0.21) 0.06
The above pro forma information includes the operations of HDI, Olesen and Four Star for both periods and, for the 1997 period, other acquisitions completed in fiscal year 1997. During the Company's third fiscal quarter, adjustments were recorded to goodwill relating to an acquisition made in the third fiscal quarter of last year. In addition to the above, the Company purchased the grip and lighting equipment of Disney Production Services, Inc. ("DPS"), and concurrently entered into an agreement to operate equipment rental and supply departments at certain DPS locations. In connection with these transactions, the Company has initially valued the right to operate the equipment rental and supply departments at DPS locations at $1,500,000 and has capitalized this amount as a deferred asset to be amortized over the seven year term of the agreement. Matthews Studio Equipment Group and Subsidiaries Notes to Consolidated Financial Statements (continued) (Unaudited) 5. Subsequent Event On July 31, 1998, the Company announced its plans to separate the grip manufacturing business of the Company from what has become its core business of renting lighting, grip, generators, professional video and film equipment. The Company signed a letter of intent with Edward Phillips, one of the co-founders of the Company and current President of the Company's grip manufacturing subsidiary (Matthews Studio Equipment, Inc.), to distribute all of Matthews' shares in such subsidiary, representing 100% of the outstanding stock, to Mr. Phillips in exchange for his 1,916,450 shares of the Company's common stock. The terms of the transaction also include the assumption by the subsidiary of $5,000,000 in current indebtedness of the Company and the termination of the Company's employment obligations to Mr. Phillips. In addition, the closing of the transaction is subject to the parties' execution of a definitive agreement and the obtaining of bank and other third party consents. 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 expansion of the Company and its marketing and distribution network into various select geographic marketplaces continued in the first nine months of fiscal 1998 with the completion of the acquisitions of three companies including the acquisition of Four Star Holding, Inc. ("Four Star") in the third fiscal quarter. The acquisition of Four Star, a holding company which owns 100% of Four Star Lighting, Inc., a theatrical lighting company, expanded the Company's rental operations in New York. In addition, the Company continued to invest in the expansion of its core businesses, as well as operations it acquired in fiscal 1997. Revenues increased by $12,035,000 or 38% to $43,512,000 for the first nine months of fiscal 1998, from $31,477,000 for the first nine months of fiscal 1997. In addition, EBITDA (earnings before interest expense, income taxes, depreciation and amortization) increased to $7,549,000 for the first nine months of fiscal 1998 as compared to $6,653,000 for the same period last year. However, the Company reported a net loss of $1,781,000 for the first nine months of fiscal 1998 compared to net income of $1,214,000 for the comparable period in 1997. Several factors contributed to the net loss in the first nine months of fiscal 1998. Rental activities were impaired as a result of the threat of a Screen Actors Guild strike and while the strike did not materialize, production delays due to this potential strike significantly impacted the rental operations. Additionally, in the first six months of fiscal 1997 a large-budget film project bolstered last year's results by providing additional revenues without requiring a significant amount of incremental cost and expenses. The Company also incurred higher expenses associated with the expansion of the operations and costs to improve systems and absorb new operations. In addition, on July 31, 1998, the Company executed a letter of intent to sell its grip manufacturing business. The closing of the transaction is subject to the parties' execution of a definitive agreement and the obtaining of bank and other third party consents. Three-Month Period ended June 30, 1998 and June 30, 1997 - -------------------------------------------------------- Revenues From Rental Operations - ------------------------------- Revenues from rental operations were $9,412,000 for the third quarter of fiscal 1998, compared to $5,901,000 for the same period last year, an increase of $3,511,000 or 59%. Revenues generated by operations acquired subsequent to the third quarter of fiscal year 1997 accounted for substantially all of the increase in third quarter revenues. Net Product Sales - ----------------- Net equipment and supply sales were $7,699,000 for the third quarter of fiscal 1998, an increase of approximately $2,220,000 or 41%, from $5,479,000 for the third quarter of fiscal 1997. Sales of production equipment and accessories for lighting support, camera support, lighting control and equipment sales to the retail industry ("Equipment sales") increased to $3,785,000, an increase of approximately $359,000, or 10%, from $3,426,000 in fiscal 1997. Sales of expendable supply products increased in the third quarter of fiscal 1998 to $3,914,000 from $2,053,000, an increase of approximately $1,861,000 or 91% over the same period last year. The increase in sales of expendable supply products was primarily attributable to operations acquired subsequent to the third quarter of fiscal year 1997. Gross Profit - Rental - --------------------- Gross profit as a percentage of rental revenues was approximately 39% for the third quarter of fiscal 1998 compared to 43% in fiscal 1997. Gross profit from rental revenues increased by $1,141,000 for the third quarter of fiscal 1998 as compared to fiscal 1997, which increase is mainly due to the increase in revenues. The decrease in gross profit percentage is primarily due to increased fixed costs such as depreciation and the inability to maintain prices as high as last year's prices while the industry is rebounding from a slow first half. Gross Profit - Sales - -------------------- Gross profit as a percentage of sales was approximately 32% for the third quarter of fiscal 1998, compared to approximately 33% for the same period in fiscal year 1997. Selling, General and Administrative - ----------------------------------- Selling, general and administrative expenses were $5,249,000 in the third quarter of fiscal 1998 compared to $3,094,000 for the same period in fiscal 1997. As a percent of sales, selling, general and administrative expenses were approximately 31% for the third quarter of fiscal 1998 compared to 27% for the same period in fiscal 1997. The increase is due primarily to higher personnel and facility related costs and expenses incurred to expand the operations of the Company, including costs to pursue the growth strategy, improve the foundation for the Company's operations and improve and integrate business systems. The dollar increase is also due to the acquisitions completed subsequent to the third quarter of fiscal 1997. Interest - -------- Interest increased to $1,883,000 in the third quarter of fiscal 1998 from $809,000 in the third quarter 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 third quarter of fiscal 1997, and to the substantial amount of capital investment made in certain of the acquired, as well as the existing, operations. Nine-Month Period ended June 30, 1998 and June 30, 1997 - -------------------------------------------------------- Revenues From Rental Operations - ------------------------------- Revenues from rental operations were $23,448,000 for the first nine months of fiscal 1998, compared to $17,295,000 for the same period last year, an increase of $6,153,000 or 36%. The increase is mainly due to revenues generated by operations acquired subsequent to the third quarter of fiscal year 1997. Additionally, a substantial amount of the total revenue of the first nine months of fiscal year 1997 was from large-budget film projects which were completed during the second quarter of last year. Net Product Sales - ----------------- Net equipment and supply sales increased to $20,064,000 for the first nine months of fiscal 1998, compared to $14,182,000 for the first nine months of fiscal 1997. Equipment sales increased to $10,574,000 for the first nine months of fiscal 1998, an increase of $1,458,000 or 16% from $9,116,000 for the same period last year. Sales of expendable supplies increased by approximately $4,424,000 for the nine months ended June 30, 1998 compared to the first nine months of 1997, primarily as a result of operations acquired during and subsequent to the first nine months of fiscal 1997. Gross Profit - Rental - --------------------- Gross profit as a percentage of rental revenues was approximately 41% for the first nine months of fiscal 1998, compared to 44% in fiscal 1997. The decrease in gross profit percentage on rental activities mainly resulted from lower margins in the film and video production equipment businesses, somewhat offset by higher margins in the Company's other rental markets from acquisitions recently completed. Gross Profit - Sales - -------------------- Gross profit as a percentage of sales was approximately 32% for the first nine months of fiscal 1998, compared to approximately 33% for the same period in fiscal 1997. Selling, General and Administrative - ----------------------------------- Selling, general and administrative expenses were $14,130,000 for the first nine months of fiscal 1998, compared to $8,190,000 for the same period in fiscal year 1997. As a percent of sales, selling, general and administrative expenses were 32% for the first nine months of fiscal 1998, compared to 26% for the same period in fiscal 1997. The increase is due primarily to higher personnel and facility related costs and expenses incurred to expand the operations of the Company, including costs to pursue the growth strategy, improve the foundation for the Company's operations and improve and integrate business systems. The dollar increase is also due to the acquisitions completed during and subsequent to the first nine months of fiscal 1997. Interest - -------- Interest increased to $4,128,000 for the first nine months of fiscal 1998, compared to $1,940,000 for the first nine 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 third 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 nine months ended June 30, 1998, the Company financed its operations from bank borrowings. At June 30, 1998, the Company's working capital was $15,529,000which was an increase of $5,867,000 from its working capital at September 30, 1997. In the nine months ended June 30, 1998, the Company primarily applied cash from additional borrowings from the Company's bank line of $42,021,000 to pay for approximately $8,971,000 of property and equipment additions, to consummate acquisitions including Four Star, HDI, and Olesen for $30,770,000 in 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 capital equipment additions were for the Company's video equipment rental operations and production equipment rental operations. For the fiscal quarter ended June 30, 1998, the Company obtained waivers from the bank relating to certain financial covenants stated in its credit agreement. During the next twelve months, the Company expects to purchase new capital equipment to allow its operations to become more efficient, support growth and to control costs and is also exploring various external financing sources including, but not limited to, existing and additional bank financing, joint ventures, partnerships and placement of debt or equity securities of the Company. The Company expects to finance its capital acquisition program through external financing and cash generated from operations. The Company believes it will have sufficient funds from operations and available bank borrowings to meet its anticipated requirements for working capital during the next twelve months. 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 (b) Form 8-K dated April 13, 1998 and Form 8-K/A dated May 11, 1998 ( both relating to the acquisition of Four Star Holding, Inc.) 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, 1998, to be signed on its behalf by the undersigned hereunto duly authorized. MATTHEWS STUDIO EQUIPMENT GROUP (Registrant) Date: August 13, 1998 By: /s/ Carlos D. De Mattos ------------------------------------------ Carlos D. De Mattos Chairman of the Board, Chief Executive Officer, President & Chief Financial Officer By: /s/ Gary S. Borman ----------------------------------------------- Gary S. Borman Vice President, Corporate Controller & Principal Accounting Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS SEP-30-1998 OCT-01-1997 JUN-30-1998 141 0 12,590 1,166 9,438 25,145 76,820 25,962 103,488 9,616 0 0 0 7,143 3,221 103,488 20,064 43,512 13,678 27,627 0 354 4,128 (2,727) (946) (1,781) 0 0 0 (1,781) (0.16) (0.16)
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