10-Q 1 0001.txt FORM 10-Q FOR PERIOD ENDED 6/30/2000 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, 2000 ------------- 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) -------------------------------------------------------------------------------- (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 9,997,252 shares as of August 4, 2000 ------------------------------------------- 1 Index Matthews Studio Equipment Group and Subsidiaries
Part I. Financial Information Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets - June 30, 2000 and September 30, 1999 Condensed consolidated statements of operations - Three months ended June 30, 2000 and 1999 - Nine months ended June 30, 2000 and 1999 Condensed consolidated statements of cash flows - Nine months ended June 30, 2000 and 1999 Notes to condensed consolidated financial statements - June 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. Other Information Item 3. Defaults Upon Senior Securities 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 (Debtors-In-Possession) Condensed Consolidated Balance Sheets ($ in thousands, except share amounts)
June 30, September 30, 2000 1999 -------------- --------------- (Unaudited) (Note) ASSETS: Current Assets: Cash and cash equivalents $ 1,390 $ 390 Accounts receivable, less allowance for doubtful accounts of $2,091 at June 30, 2000 and $1,420 at September 30, 1999 4,602 9,893 Current portion of net investment in finance and sales-type leases 257 264 Inventories 1,591 3,312 Prepaid expenses and other current assets 390 489 Income tax refund receivable - 36 ----------------- ------------------- Total current assets 8,230 14,384 Property and equipment, net 37,910 54,168 Net investment in finance and sales-type leases, less current portion 35 150 Goodwill less accumulated amortization of $19,758 at June 30, 2000 and $6,344 at September 30, 1999 3,944 17,358 Other assets 1,525 5,167 ----------------- ------------------- Total assets $ 51,644 $ 91,227 ================= =================== LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 115 $ 11,673 Accrued liabilities 334 7,610 Current portion of long-term debt and capital lease obligations 83 5,404 Prepetition liabilities subject to compromise 93,166 - ----------------- ------------------- Total current liabilities 93,698 24,687 Long-term debt and capital lease obligations less current portion 193 83,111 Shareholders' equity (accumulated deficit): Preferred stock - - Common stock 9,210 8,132 Accumulated deficit (51,457) (24,703) ----------------- ------------------- Total shareholders' equity (accumulated deficit) (42,247) (16,571) ----------------- ------------------- Total liabilities and shareholders' equity $ 51,644 $ 91,227 ================= ===================
Note: The balance sheet at September 30, 1999 has 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 (Debtors-In-Possession) Condensed Consolidated Statements of Operations (Unaudited) ($ in thousands, except per share data)
Three Months Ended Nine Months Ended June 30, June 30, 2000 1999 2000 1999 ------------------------------- ------------------------------- Revenue from rental operations $ 6,221 $ 9,491 $ 24,494 $ 28,826 Net product sales 703 4,242 8,451 14,554 -------------- -------------- -------------- -------------- 6,924 13,733 32,945 43,380 Costs and expenses: Cost of rental operations 3,581 6,078 15,517 18,125 Cost of sales 1,135 3,369 7,520 11,063 Selling, general and administrative 3,486 5,280 12,874 15,154 Goodwill and long-lived assets impairment 16,474 - 16,474 423 Interest, net 812 1,851 5,582 5,564 Reorganization items: Professional fees 1,455 - 1,455 - Interest income on short-term investments (10) - (10) - -------------- -------------- -------------- -------------- 26,933 16,578 59,412 50,329 Loss before income taxes (20,009) (2,845) (26,467) (6,949) Benefit for income taxes - - - (600) -------------- -------------- -------------- -------------- Loss before extraordinary item (20,009) (2,845) (26,467) (6,349) Extraordinary loss on early extinguishment of debt - - (287) - -------------- -------------- -------------- -------------- Net loss $ (20,009) $ (2,845) $ (26,754) $ (6,349) ============== ============== ============== ============== Loss per common share, basic and diluted: Loss before extraordinary item ($2.00) ($0.31) ($2.65) ($0.69) Extraordinary loss 0.00 0.00 (0.03) 0.00 -------------- -------------- -------------- -------------- Loss per common share, basic and diluted: ($2.00) ($0.31) ($2.68) ($0.69) ============== ============== ============== ============== Weighted average number of common shares Outstanding 9,997 9,321 9,996 9,230
The accompanying notes are an integral part of these consolidated financial statements. 4 Matthews Studio Equipment Group and Subsidiaries (Debtors-In-Possession) Condensed Consolidated Statements of Cash Flows (Unaudited) ($ in thousands)
Nine Months Ended June 30, 2000 1999 ----------------- -------------- Operating activities: Net loss $ (26,754) $ (6,349) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Provision for doubtful accounts 833 53 Depreciation & amortization 8,183 8,862 Goodwill and long-lived asset impairment 16,474 - Deferred income taxes - (887) Gain on sale of assets (444) (656) Extraordinary loss on early extinguishment of debt 287 - Changes in operating assets and liabilities net of effects from acquisitions and disposition: Accounts receivable (5,350) (260) Inventories 1,721 13 Net investment in leases 122 134 Prepaids and other assets 1,411 (2,251) Income tax refund receivable 73 291 Accounts payable and accrued liabilities (2,985) 2,559 ----------------- -------------- Net cash provided by (used in) operating activities (6,429) 1,509 Investing activities: Purchase of property and equipment (2,992) (6,743) Proceeds from sale of property and equipment 11,229 192 ----------------- -------------- Net cash provided by (used in) investing activities 8,237 (6,551) Financing activities: Proceeds from exercise of stock options and warrants 35 587 Proceeds from borrowings 3,554 5,100 Repayment of borrowings (4,397) (976) ----------------- -------------- Net cash (used in) provided by financing activities (808) 4,711 Net decrease in cash and cash equivalents 1,000 (331) Cash and cash equivalents at beginning of period 390 331 ----------------- -------------- Cash and cash equivalents at end of period $ 1,390 $ - ================= ==============
The accompanying notes are an integral part of these consolidated financial statements. 5 Matthews Studio Equipment Group and Subsidiaries (Debtors-In-Possession) Condensed Consolidated Statements of Cash Flows (continued) (Unaudited) ($ in thousands)
Nine Months Ended June 30, 2000 1999 ---------------- --------------- Schedule of noncash investing and financing transactions: Common stock issued for lawsuit settlement $ 1,175 $ - Capital lease obligations incurred - 1,699 Note received for sale of assets - 1,289 Additional disclosures: Cash paid during period for: Interest 4,474 4,792 Income taxes 51 165
The accompanying notes are an integral part of these consolidated financial statements. 6 Matthews Studio Equipment Group and Subsidiaries (Debtors-In-Possession) 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 considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending September 30, 2000. For further information refer to the consolidated financial statements and footnotes thereto included in the Matthews Studio Equipment Group annual report on Form 10-K for the year ended September 30, 1999. Petition For Relief Under Chapter 11 On April 6, 2000, the Company and its subsidiaries filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The filing was made in the U.S. Bankruptcy Court in the San Fernando Valley division of the Central District of California. The case number assigned to the Company is SV 00-13471 KL. In Chapter 11, the Company will continue to manage its affairs and operate its businesses as a debtor-in-possession while it attempts to develop a reorganization plan that will restructure the Company and allow its emergence from Chapter 11. The Chapter 11 proceedings are being jointly administered, with the Company managing the business in the ordinary course as debtor-in- possession subject to the control and supervision of the Bankruptcy Court. As of the petition date, payment of pre-petition liabilities of the Company and pending litigation against the Company are stayed while the Company continues its business operation as debtors-in-possession. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Chapter 11 filing, such realization of assets and liquidation of liabilities is subject to uncertainty. While under the protection of Chapter 11, the Company, in the normal course of business, may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in the consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets or amount of liabilities that might be necessary as a consequence of a plan of reorganization. The propriety of using the going concern basis is dependent upon, among other things, confirmation of a plan of reorganization, which must be approved by the creditors and confirmed by the Bankruptcy Court, and the Company's ability to meet its business plan and generate sufficient cash flows from operations and financial sources. Business The Company sells, leases and rents theatrical, film and production equipment and accessories to the motion picture, television, corporate, theatrical, video and photography industries. The Company operates in one business segment and provides, as a single source, the necessary production equipment which is otherwise only available by using many different suppliers. The Company supplies equipment such as lights, grip lighting supports, camera mounts, tripods, pedestals, fluid heads, camera dollies, portable camera cranes, power generators and production trucks. On January 21, 2000, the Company sold the video equipment rental operations conducted by its Duke City Video, Inc. subsidiary ("Duke City" ) to Vitec DC Holding Corp. ("Vitec") for a total purchase price of $12.25 million in cash. The sale was structured 7 Matthews Studio Equipment Group and Subsidiaries (Debtors-In-Possession) Notes to Condensed Consolidated Financial Statements (Unaudited) as a sale of assets whereby Duke City sold its assets to Vitec pursuant to an Asset Purchase Agreement dated January 21, 2000, among the Company, Duke City Holdings, Inc. ("Holdings"), Duke City and Vitec (the "Agreement"). Vitec has purchased the name "Duke City Video" and derivations thereof as part of the sale. Excluded from the sale are Duke City's Albuquerque property, its accounts receivable and certain other assets. Also, Duke City retains responsibility for its liabilities. $2.0 million of the $12.25 million purchase price was paid to Duke City on closing. The purchase price has been adjusted downward by $856,000 due to damaged or missing rental equipment. A portion of the purchase price was held by Vitec to be applied against Duke City's trade and other accounts payable, provided Duke City obtains certain financing statement terminations pursuant to the terms of the Agreement. As of June 30, 2000, approximately $7.81 million of this holdback has been paid to Duke City and its trade and other creditors, and Duke City is working with Vitec to obtain the release of the last $280,000 of this holdback. The remaining $1.3 million of the purchase price is being held by Vitec as security for certain indemnification obligations of Duke City and will be paid to Duke City upon the expiration of certain time periods and the satisfaction of certain conditions specified in the Agreement. The Company, Holdings and Duke City are obligated to indemnify Vitec against losses arising out of any inaccuracy of representations and warranties made in the Agreement and against losses arising out of Duke City's liabilities. As noted, the Company applied part of the sale proceeds to satisfy obligations that specifically apply to the Duke City business. The Company used some of the sale proceeds to reduce bank and other debt. Financial Statement Presentation - Certain balances from the June 30, 1999 financial statements have been reclassified to conform to the June 30, 2000 presentation. 2. Prepetition Liabilities Prepetition liabilities included substantially all current and long-term liabilities of the Debtors as of April 6, 2000. These amounts may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, whether or not such claims are secured and the value of any security interest securing such claims or other events. As part of the Chapter 11 reorganization process, the Company has notified all known or potential claimants for the purpose of identifying all prebankruptcy claims against the Company. Claimants have until November 23, 2000 to file claims or to be barred from future action, except in instances of claims relating to any future rejection of executory contracts as part of the bankruptcy proceedings. 3. Reorganization Items Costs incurred by the Company with respect to the bankruptcy administrative process (principally professional fees) have been classified as Reorganization Items. The interest income earned by the Company on cash accumulated since the Chapter 11 filings, and which was invested in marketable securities, also is categorized as a component of the Reorganization Items. 4 Asset Impairment and Other Charges During the nine months ended June 30, 2000 the Company incurred a net loss of $26,754,000. This amount included approximately $16,474,000 of non-recurring and non-cash charges. The significant charges relate to the write-down of certain long-term assets (most significantly goodwill), the closing of some Company sites and sale of the asset of an operation. 8 Matthews Studio Equipment Group and Subsidiaries (Debtors-In-Possession) Notes to Condensed Consolidated Financial Statements (Unaudited) As a result of the Chapter 11 filings, Company management reviewed certain acquisitions, including the current business environment and their continued operating losses in fiscal year 2000, and performed an impairment review of its long-lived assets. Based on this review and future revenue and cash flow projections, the Company believes that certain long-lived assets have been impaired. The Company determined that the estimated fair value was below the carrying value of the long-lived assets. Accordingly, in the third quarter of fiscal year 2000, The Company recorded impairment charges of $12,867,000, for the write-down of goodwill and $3,607,000, for the write-down of software development costs and deferred charges. 5 Equity During the nine months ended June 30, 2000, the Company recorded in equity warrants issued and to be issued (pursuant to the terms of the Company's Note Purchase Agreement dated June 30, 1999) for approximately $2.7 million. These warrants relate to certain of the Company's debt agreements and have been capitalized as debt issue costs, to be amortized over the shorter of the remaining life of the warrants or the related debt instrument. As a result of the Chapter 11 petition, the unamortized balance of $2,370,000 was charged against equity. In October 1999, the Company issued 400,000 shares of common stock to settle a litigation matter which was accrued at September 30, 1999. 6 Per Share Data Basic loss per share is calculated using the net loss divided by the weighted average common shares outstanding. Shares from the assumed exercise of outstanding warrants and options are omitted from the computations of diluted loss per share because the effect would be antidilutive. The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, "Accounting for Stock- Based Compensation," the Company's net loss and loss per share would have been increased to the pro forma amounts indicated below (in thousands, except per share data):
Three Months Ended June 30, Nine Months Ended June 30, 2000 1999 2000 1999 --------- --------- --------- ---------- ($ in thousands, except per share data) Net loss As reported $ (20,009) (2,845) $ (26,754) (6,349) Pro forma (20,060) (2,902) (26,912) (6,520) Net loss per share, basic and diluted: As reported ($2.00) ($0.31) ($2.68) ($0.69) Pro forma (2.01) (0.31) (2.69) (0.71)
9 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. Petition For Relief Under Chapter 11 On April 6, 2000, the Company and its subsidiaries filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The filing was made in the U.S. Bankruptcy Court in the San Fernando Valley division of the Central District of California. The case number assigned to the Company is SV 00-13471 KL. In Chapter 11, the Company will continue to manage its affairs and operate its businesses as a debtor-in-possession while it attempts to develop a reorganization plan that will restructure the Company and allow its emergence from Chapter 11. The Chapter 11 proceedings are being jointly administered, with the Company managing the business in the ordinary course as debtor-in- possession subject to the control and supervision of the Bankruptcy Court. As of the petition date, payment of pre-petition liabilities of the Company and pending litigation against the Company are stayed while the Company continues its business operation as debtors-in-possession. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Chapter 11 filing, such realization of assets and liquidation of liabilities is subject to uncertainty. While under the protection of Chapter 11, the Company, in the normal course of business, may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in the consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets or amount of liabilities that might be necessary as a consequence of a plan of reorganization. The propriety of using the going concern basis is dependent upon, among other things, confirmation of a plan of reorganization, which must be approved by the creditors and confirmed by the Bankruptcy Court, and the Company's ability to meet its business plan and generate sufficient cash flows from operations and financial sources. In accordance with the Bankruptcy Code, the Company can seek court approval for the rejection of pre-petition executory contracts, including real property leases. Any such rejection may give rise to a pre-petition claim for damages pursuant to the Bankruptcy Code. In connection with the Chapter 11 proceedings, the Company received approval to reject 8 real property leases. Subject to Bankruptcy Court's approval, other real property leases and certain executory contracts may be rejected in the future. On the first day of the Chapter 11 filing, the Company sought and received authorization from the Bankruptcy Court to continue certain employee policies which the Company deemed necessary for its survival. These include its policies related to employee wages, benefits and out-of-pocket business expenses. Since the filing, most of the Company's vendors have continued to ship merchandise to the Company. However, many of the Company's vendors have requested changes in trade credit terms offered to the Company. Where previously the Company 10 was paying for most vendor shipment on an average of 75 days, the Company now is being required in a majority of its shipments to make payment on a cash-in- advance basis. The Company's Board of Directors has authorized Imperial Capital, LLC, the Company's financial advisor, to develop and implement a process to solicit interest relating to the potential sale of all or part of the Company's assets or stock by merger, tender offer, exchange offer, plan of reorganization, other acquisition of debt or securities, or otherwise. Results of Operations Overview On April 6, 2000, the Company and its subsidiaries filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The filing was made in the U.S. Bankruptcy Court in the San Fernando Valley division of the Central District of California. The case number assigned to the Company is SV 00-13471 KL. In Chapter 11, the Company will continue to manage its affairs and operate its businesses as a debtor-in-possession while it attempts to develop a reorganization plan that will restructure and allow its emergence from Chapter 11. The Chapter 11 proceedings are being jointly administered, with the Company managing the business in the ordinary course as debtor-in-possession subject to the control and supervision of the Bankruptcy Court. Since the petition date, the Company has continued to be in possession of its properties and, as debtor-in-possession, is authorized to operate and manage its business and enter into all transactions (including obtaining services, inventories, and supplies) that it could have entered into in the ordinary course of business without approval of the Bankruptcy Court. A statutory Creditors' Committee has been appointed. In a Chapter 11 filing, substantially all liabilities as of the petition date are subject to compromise or other treatment under a plan of reorganization. Generally, actions to enforce or otherwise effect payment of all pre-petition liabilities as well as all pending litigation against the Company are stayed while the Company continues its business operations as debtor-in-possession. The ultimate amount of and settlement terms for such liabilities are subject to a plan of reorganization and accordingly are not presently determinable. Under the Bankruptcy Code, the Company may elect to assume or reject real estate leases, employment contracts, personal property leases, service contracts and other pre-petition executory contracts, subject to Bankruptcy Court approval. The Company will continue to analyze its executory contracts and may assume or reject additional contracts. The Company's revenues for the first nine months of fiscal 2000 decreased to $32,945,000, a decrease of $10,435,000 or 24% over the first nine months of fiscal 1999. In addition, EBITDA (earnings before interest expense, income taxes, depreciation and amortization) decreased to $5,217,000 in the first nine months of fiscal 2000 as compared to $7,477,000 in fiscal 1999. The EBITDA excludes $16,474,000 of non-recurring charges and $1,455,000 of Chapter 11 reorganization costs. Net loss for the first nine months of fiscal 2000 was $26,754,000 or $2.68 per share, compared to net loss of $6,349,000 or $0.69 per share for the same period last year. Components of the Company's operating results are discussed below. This loss resulted from a combination of factors, the most significant of which were the Chapter 11 bankruptcy filing, "runaway productions" (fewer feature films whose principal photography was conducted in the United States), shrinking margins due to competition pressures and going concern uncertainty. 11 Three-Month Period ended June 30, 2000 and June 30, 1999 -------------------------------------------------------- Revenues From Rental Operations ------------------------------- Revenues from rental operations were $6,221,000 for the third quarter of fiscal 2000, compared to $9,491,000 for the same period last year, a decrease of $3,270,000 or 35%. The decrease is primarily due to the going concern uncertainty from the Chapter 11 filing and sale of assets and operations of Duke City during January 2000. Excluding Duke City's rental revenues from the prior year, revenues from rental operations decreased by $181,000 or 3% in the third quarter of fiscal 2000. Duke City generated approximately 33% or $3,089,000 of rental revenues in the same period of fiscal 1999. Aggregate theatrical rental operations accounted for approximately $2,953,00 or 47% of revenues from rental operations, an increase of $178,000 or 6% from approximately $2,775,000 for the same period last year. Production equipment rentals, primarily of lighting, grip, power generators and trucks, consisted of approximately $3,248,000 or 52% of revenues from rental operations, a decrease of $326,000 or 9% from approximately $3,574,000 for the same period last year. Other operations accounted for approximately 1% of the revenues from rental operations in the third quarter of fiscal 2000. Net Product Sales ----------------- Net equipment and supply sales were $703,000 for the third quarter of fiscal 2000, a decrease of $3,539,000 or 83% from $4,242,000 for the third quarter of fiscal 1999. The decrease is primarily due to the going concern uncertainty from the Chapter 11 filing, and the closures of the Las Vegas, Nevada operation on April 28, 2000 and of the Southeast expendable supply operation during the fourth quarter of fiscal 1999. Gross Profit - Rental --------------------- Gross profit on rental revenues was $2,640,000 or 42% of revenues for the third quarter of fiscal 2000 compared to $3,413,000 or 36% in fiscal 1999. Aggregate theatrical rental operations accounted for approximately $1,431,000 of gross profit on rental revenues. Production equipment rentals, primarily of lighting, grip, power generators and trucks, accounted for approximately $1,198,000 of such gross profit. Gross Profit - Sales -------------------- Gross profit on sales decreased from $873,000 in the third quarter of 1999 to a loss of $432,000 in the third quarter of 2000. The lower gross profit was primarily attributable to expendable supply and equipment sale shortfall as a result of the going concern uncertainty from the Chapter 11 filing, and the closures of the Las Vegas, Nevada operation on April 28, 2000 and of the Southeast expendable supply operation during the fourth quarter of fiscal 1999. Some margin erosion has also resulted due to competition within the industry. Selling, General and Administrative ----------------------------------- Selling, general and administrative expenses were $3,486,000 for the third quarter of fiscal 2000 compared to $5,280,000 for the same period in fiscal 1999, a decrease of $1,794,000. As a percentage of sales, selling, general and administrative expenses were 50% for the third quarter of fiscal 2000 compared to 38% for the same period in fiscal 1999. The percentage increase is due primarily to a decrease in revenues, and costs and expenses incurred to dispose of, close or relocate operations, which more than offset the cost cutting measures began in the fourth quarter of fiscal 1999. 12 Interest -------- Interest decreased to $812,000 in the third quarter of fiscal 2000 from $1,851,000 in the third quarter of fiscal 1999. As a result of the Chapter 11 filing, the accrual of interest on the Company's bank line and senior subordinated notes issued to ING Equity Partners, L.P. I ("ING") was suspended on April 5, 2000. Nine-Month Period ended June 30, 2000 and June 30, 1999 ------------------------------------------------------- Revenues From Rental Operations ------------------------------- Revenues from rental operations were $24,494,000 for the nine months of fiscal 2000, compared to $28,826,000 for the same period last year, a decrease of $4,332,000 or 15%. The decrease is primarily due to the sale of Duke City during January 2000. Excluding Duke City's rental revenues from the nine months of fiscal 2000 and 1999, revenues from rental operations actually increased by $805,000 or 4%. Aggregate theatrical rental operations accounted for approximately $9,473,000 or 39% of revenues from rental operations, an increase of $541,000 or 6% from approximately $8,932,000 for the same period last year. Production equipment rentals, primarily of lighting, grip, power generators and trucks, increased to approximately $11,350,000 or 46% of revenues from rental operations, an increase of $175,000 or 2% from approximately $11,175,000 for the same period last year. Approximately 14% or $3,428,000 of rental revenues was generated from the video rental operation (i.e. Duke City) and other operations accounted for approximately 1%. Net Product Sales ----------------- Net equipment and supply sales were $8,451,000 for the first nine months of fiscal 2000, a decrease of $6,103,000 or 42% from $14,554,000 for the same period of fiscal 1999. The decrease is primarily due to the going concern uncertainty as a result of the Chapter 11 filing, and the closure of the Las Vegas, Nevada operation and expendable supply sale operation located in the southeastern part of the U.S. during the fourth quarter of fiscal 1999. Excluding the equipment and expendable supply sales from these locations (which accounted for $2,639,000 or 31% and $6,682,000 or 46% of the net equipment and expendable supply sales for the nine months of fiscal 2000 and 1999 respectively), sales decreased by $2,060,000 or 26% over the first nine months of fiscal 1999. Gross Profit - Rental --------------------- Gross profit on rental revenues was $8,977,000 or 37% as a percentage of revenues for the first nine months of fiscal 2000 compared to $10,701,000 or 37% in fiscal 1999. Aggregate theatrical rental operations accounted for approximately $4,880,000 of gross profit on rental revenues. Production equipment rentals, primarily of lighting, grip, power generators and trucks accounted for approximately $4,142,000 of gross profit on rental revenues in fiscal 2000. Video equipment rental operation's "cost of rental revenues" exceeded revenues by approximately $168,000 in fiscal 2000. The assets and operation of the video rental operation were sold on January 21, 2000. Gross Profit - Sales -------------------- Gross profit on sales decreased from $3,491,000 in the first nine months of fiscal 1999 to $931,000 in the first nine months of fiscal 2000. The lower gross profit was primarily attributable to expendable supply and equipment sale shortfall as a result of the going concern uncertainty from the Chapter 11 filing, and the closures of the Las Vegas, Nevada operation on April 28, 2000 and Southeast expendable supply operation during the fourth quarter of fiscal 1999. Some margin erosion has also resulted due to competition within the industry. 13 Selling, General and Administrative ----------------------------------- Selling, general and administrative expenses were $12,874,000 for the first nine months of fiscal 2000 compared to $15,154,000 for the same period in fiscal 1999, a decrease of $2,280,000 or 15%. As a percentage of sales, selling, general and administrative expenses were 39% for the first nine months of fiscal 2000 compared to 35% for the same period in fiscal 1999. The percentage increase is due primarily to decrease in revenues, and costs and expenses incurred to dispose of, close or relocate operations, which more than offset the cost cutting measures began in the fourth quarter of fiscal 1999. Interest -------- Interest increased to $5,582,000 in the first nine months of fiscal 2000 from $5,564,000 in the same period of fiscal 1999. As a result of the Chapter 11 filing, the accrual of interest on the Company's bank line and senior subordinated notes issued to ING Equity Partners, L.P. I ("ING") was suspended on April 5, 2000. Liquidity and Capital Resources ------------------------------- As indicated above, on April 6, 2000, the Company and its subsidiaries filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The Company primarily applied cash from investing activities and additional borrowings from the Company's bank line of approximately $8,000,000 and $3,500,000 respectively to pay down capital lease obligations and other debt. The major component of the net capital equipment additions was equipment for the Company's theatrical rental operations of approximately $2,288,000. The Company's bank debt of $13,250,000 and $56,222,000 due June 1, 2000 and January 31, 2001, respectively, were reclassified as prepetition liabilities subject to compromise. The Company's liquidity, capital resources and result of operations may be affected from time to time by a number of factors and risks, including the ability to arrange debtor in possession financing, operating successfully under a Chapter 11 proceeding, obtain shipments and negotiate terms with vendors and service providers for current orders, fund and execute a new operating plan for the Company, attract and retain key executive and associates and meet competitive pressures, which may affect the nature and viability of the Company's business strategy, generate cash flow, attract and retain customers and manage its business notwithstanding the potential adverse publicity. NASDAQ Listing -------------- Effective April 24, 2000, NASDAQ delisted the Company's security which had been suspended from trading since March 30, 2000, from the NASDAQ SmallCap market. 14 PART II. Other Information Items 1,2, 4 and 5 are not applicable. Item 3. Defaults Upon Senior Securities. On April 6, 2000, the Company and its subsidiaries filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. This constituted an event of default under both the Purchase Agreement dated July 27, 1995, as amended to date, between the Company and ING Equity Partners, L.P. I ("ING"), pursuant to which ING holds a $100,000 Senior Subordinated Note, and the Note Purchase Agreement dated June 30, 1999 between the Company and ING, pursuant to which ING holds a $10 million Convertible Senior Subordinated Note. The same event constituted a default under the Amended and Restated Credit Agreement dated as of April 1, 1998, as amended to date, among the Company and its subsidiaries, The Chase Manhattan Bank , as agent for the lenders, and the lenders named therein. In a Chapter 11 filing, substantially all liabilities as of the petition date are subject to compromise or other treatment under a plan of reorganization. See Part I, Item 2, Management's Discussion and Analysis of Financial Condition and results of operations. 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) Not applicable 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report on Form 10-Q for the period ended June 30, 2000, to be signed on its behalf by the undersigned hereunto duly authorized. MATTHEWS STUDIO EQUIPMENT GROUP (Registrant) Date: August 14, 2000 By: /s/ Carlos D. De Mattos ---------------------------------------- Carlos D. De Mattos Chairman of the Board, and Chief Executive Officer By: /s/ Miles R. Stover ---------------------------------------- Miles R. Stover Chief Operating Officer and Chief Financial Officer 16