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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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 0-16323
LASER-PACIFIC MEDIA CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-3824617
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
809 N. Cahuenga Blvd., Hollywood, California 90038
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (323) 462-6266
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock ($.0001 par value per share)
Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [__]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes ___ No _X_
The aggregate market value of the voting stock held by non-affiliates of the
registrant on June 28, 2002 (based upon the closing price per share of $2.51 on
the NASDAQ National Market on that date) was $15,156,000.
Number of shares of Common Stock, $.0001 par value per share, outstanding as of
February 28, 2003: 7,101,295.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for the 2003 Annual Meeting
of Stockholders, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A not later than April 30, 2003, are incorporated by
reference into Part III hereof.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Table of Contents
Part I Page
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 20
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20
Part III
Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 45
Item 13. Certain Relationships and Related Transactions 45
Item 14. Controls and Procedures 45
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 46
Signatures 48
Certifications 49
PART I
ITEM 1. BUSINESS
Statements included within this document, other than statements of
historical facts, that address activities, events or developments that
Laser-Pacific Media Corporation, ("Laser-Pacific" or the "Company") expects or
anticipates will or may occur in the future, including such things as business
strategy and measures to implement strategy, competitive strengths, goals,
expansion and growth of the Company's business and operations, plans, references
to future success and other such matters, are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and fall under the safe harbor. These
forward-looking statements are usually preceded by one or a combination of the
following words: "believes," "anticipates," "plans," "may," "hopes," "can,"
"will," "expects," "estimates," "continues," "with the intent," and "potential."
However, if a forward-looking statement is not preceded by one of these words
that does not mean that it is not a forward-looking statement. Specific
instances of forward-looking statements that exist in the below section of this
document include the following: the unionization of some of the Company's
employees at its Pacific Film Laboratories under Item 1 of this Form 10-K; plans
to purchase/lease additional property in 2003 under Item 2 of this Form 10-K;
and the Company's lack of knowledge concerning any potential lawsuits that could
be filed against the Company under Item 3 of this Form 10-K. In all cases where
a forward-looking statement is identified, the actual results of operations and
financial position could differ materially in scope and nature from those
anticipated in the forward-looking statements as a result of a number of
factors. Examples of risk factors include: the terms of the contract that the
Company negotiates with the new union; terms of contracts and availability of
property for lease/purchase; the amount and nature of any lawsuit that could be
filed against the Company; the Company's ability to successfully expand
capacity; general economic, market, or business conditions; the opportunities
(or lack thereof) that may be presented to and pursued by the Company;
competitive actions by other companies; changes in laws or regulations;
investments in new technologies; continuation of sales levels; the risks related
to the cost and availability of capital; and other factors, including those
disclosed in this report and the Company's other reports filed with the
Securities and Exchange Commission ("SEC"), many of which are beyond the control
of the Company. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publish revised forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
General
Laser-Pacific Media Corporation, a Delaware corporation, was formed by the
merger of Spectra Image, Inc. and Pacific Video, Inc. in September 1990. Both of
the predecessor companies were organized in 1983. Additional information about
the Company, its code of ethics, and access to its other SEC filings are
available at the Company's website, www.laserpacific.com. This website address
is not an active hyperlink for readers accessing this Form 10-K electronically
and none of the information contained on the Company's website is part of, or
incorporated into, this Form 10-K.
Laser-Pacific is a provider of a broad range of post-production services to
the motion picture and television industries from its facilities in Hollywood,
California. These post-production services include technical and creative
services provided to the producers of primetime network television series,
television movies, and theatrical motion pictures. The Company's primary
services include telecine, editing, color timing, digital graphics and visual
effects, duplication, and digital compression, which are described in further
detail below. Additionally, the Company provides sound editing and mixing,
digital preview services, motion picture film processing, DVD authoring and
mastering, and numerous additional services as required by our customers. At the
end of the process, the Company provides our customers with a completed master
in high definition, standard definition, or data format for television, home
video, DVD, or film release.
The Company is recognized as an industry leader in the development and
introduction of new methods and technology in service of television, motion
pictures and digital multimedia. The Company led the television industry in the
move from film to electronic and digital based techniques in post-production
through the introduction of its proprietary Electronic Laboratory(TM) and has
received five Emmy Awards for Outstanding Achievement in Engineering for its
developments. A few of the awards the Company has received are detailed below:
- 2001 Emmy Award for Engineering Excellence
- This award was given in recognition for significant contributions to the
creation of the 24P High Definition technology that has become standard
throughout the industry;
- 1996 Emmy Award for Engineering Excellence - This award was given in
recognition of Laser-Pacific's development of the SuperComputer Assembly
System(TM);
- 1989 Emmy Award for Engineering Excellence - This award was given in
recognition of Laser-Pacific's development of the Electronic Laboratory(TM);
- 1999 Winner of the International Teleproduction Society Award for Best
Electronic Visual Effects for "The Journey of Allen Strange";
- 2001 Video Excellence Award granted by the DVD Association for Added
Value and Special Features on "The Cell" (New Line Home Video); and - 1998 DIVI
Gold Medal for Best DVD/Web Interactivity in conjunction with InterActual
Technologies for work performed on the movie "Lost in Space" (New Line Home
Video).
Services
The principal categories of services offered by the Company are:
Motion Picture Film Processing - The Company operates five negative
processing machines at its Pacific Film Laboratories facility, located in
Hollywood, California. Pacific Film Laboratories develops customers' film
negatives after photography, with the capacity to develop approximately 2
million feet of film per week.
Telecine Transfer - Laser-Pacific operates nine telecine suites that are
used to transfer images from customers' original film negatives to digital video
suitable for subsequent post-production processes. These telecine suites are
also used for transferring from completed motion pictures to video masters for
electronic distribution, digital cinema, videocassette and DVD, and other uses
after initial film release. Currently, three telecine suites are used for
digital standard definition, four are used for both digital standard definition
as well as digital high definition, and two are used for only digital high
definition. Revenues from telecine transfer accounted for approximately 24%,
23%, and 24% of the Company's total revenue in 2002, 2001, and 2000,
respectively.
Editing - The Company operates eight editing suites, for preparing
broadcast quality videotape masters or conformed digital motion picture masters
for its customers. These editing suites engage in conforming or assembly of
television programs and motion pictures, including creation of visual effects,
titles, and graphics. These editing suites are used for assembly of television
programs and motion pictures, including creation of visual effects, titles, and
graphics. Three of the suites are equipped for standard definition editing only,
three for high definition editing only, and two are used for both standard
definition and high definition. Additionally, the Company's SuperComputer
Assembly system provides high definition and standard definition assembly
capability equivalent to four or five additional conventional editing rooms.
Revenues from editing accounted for approximately 28%, 25%, and 23% of the
Company's total revenues in 2002, 2001, and 2000 respectively.
Color Timing - The Company operates five timing suites that are used for
the final color balancing and image enhancement of customers' programs. Three of
these suites are equipped for digital high definition and two for standard
definition. In January 2003, the Company completed construction of its new
digital timing theatre designed specifically to perform final color timing of
theatrical motion pictures.
Digital Graphics and Visual Effects - The Company's Visual Effects
Department is equipped with a variety of digital video effects systems used to
create graphical elements, special effects, and other specialized work for
television and motion pictures.
Sound Editing and Mixing - The Company's post-production sound department,
Pacific Sound Services, includes ten digital sound editing systems, a sound
effects and dialogue recording studio, and a re-recording studio for
accomplishing the final sound mix of customers' programs.
Digital Compression Services - Using an IBM SuperComputer and other
specialized computer systems, the Company provides digital compression and
related services, which result in the creation of data recordings for use in
CD-ROM, digital file servers and video-on-demand applications. The Company also
provides digital compression and "authoring" services for the creation of DVDs.
"Authoring" is the industry term that describes the creation of disc navigation
and interactivity capability in a DVD replication master, including DVD menu
design and formatting.
Digital Preview - This category of service was added in 2002. The Company
creates a digital master to be used in previewing new theatrical motion pictures
and providing, on a rental basis, the equipment and personnel needed to preview
motion pictures in theatres throughout the country.
Duplication and Other Services - The Company provides duplication,
restoration, digital file conversion, screening, and a variety of other services
to fulfill the production and delivery needs of its customers.
The Company's primary customers are the major motion picture and television
studios and production companies. The Company's ten largest customers accounted
for approximately 76% of total revenues in 2002. During 2002, 20th Century Fox,
CBS Productions, Walt Disney and their affiliated companies, accounted for 12%,
11% and 11%, respectively, of the Company's total revenues.
Revenues from Foreign Sources
The Company had no material revenues from foreign sources.
Seasonality and Variation of Quarterly Results
The Company's business is subject to substantial quarterly variations as a
result of seasonality, which the Company believes is typical of the television
post-production industry. Since the majority of the Company's business is
derived from programs aired on primetime television, revenues and net income
have been highest during the first and fourth quarters, when the production of
television programs and, consequently, the demand for the Company's services are
at their highest. Revenues have historically been substantially lower during the
second and third quarters.
Employees
At December 31, 2002, the Company had approximately 226 employees.
Approximately, twenty-five of those employees are represented by the
International Alliance of Theatrical and Stage Employees (I.A.T.S.E.) pursuant
to a collective bargaining agreement put into place on July 15, 2002 that will
expire on July 15, 2005. On January 23, 2003, eleven of the Company's Pacific
Film Laboratory employees voted to be represented by I.A.T.S.E. Local 683. The
Company is currently in contract negotiations with Local 683. The Company
believes that the unionization of the employees at Pacific Film Laboratories
will not materially adversely affect the Company's results of operations or
financial condition. The Company has never experienced a work stoppage and
considers its relations with its employees to be good.
Competition
The Company experiences competition in all phases of its business from a
number of companies. Some competitors are also clients of the Company. Some of
the Company's competitors specialize in specific service areas, such as sound,
film laboratory or editing, and some are fully integrated and offer a complete
range of post-production services. Some of the Company's competitors have
financial resources that are materially greater than the Company's. The
Company's services are, for the most part, standard throughout the industry,
therefore, customer service, price and relationships between the Company's
employees and its clients are key to the Company's ability to retain clients and
obtain new business. Additionally, due to the nature of the Company's core
business, post-production, the majority of the Company's competitors are located
in the Southern California area. If a large amount of production were to leave
the Southern California area, the Company would face competition from
competitors in other parts of the country and the world.
Environmental Control Expenditures
The Company made no material expenditures in connection with environmental
regulations in 2002.
ITEM 2. PROPERTIES
The Company owns two buildings with a total of 22,000 square feet located
on lots totaling 39,000 square feet in Hollywood, California, where it provides
film processing, sound editing and mixing services. In addition, the Company
leases approximately 47,000 square feet in five buildings in Hollywood,
California, which contain executive offices and its post-production facilities.
Three of the larger facilities are on five-year leases that extend through the
year 2006. Two of the leases are on a month-to-month basis. The Company plans to
lease additional space in 2003 to support the demand for its services.
The Company believes that its facilities, some of which include the use of
chemical products, substantially comply with all applicable environmental and
other laws and regulations.
ITEM 3. LEGAL PROCEEDINGS
The Company may have certain contingent liabilities and claims incident to
the ordinary course of business. At this time, management believes that these
ordinary course proceedings will not have a material adverse effect on the
Company's results of operations or financial position and is not aware of any
material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
PART II
Statements included within this document, other than statements of
historical facts, that address activities, events or developments that
Laser-Pacific expects or anticipates will or may occur in the future,
specifically, the Company's plans to not pay dividends in the foreseeable
future, are forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act and fall under the safe
harbor. The decision to pay a dividend could be impacted by large increases or
decreases in the Company's cash balances; market conditions; lawsuits that could
be filed against the Company; and other factors, many of which are beyond the
control of the Company.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the NASDAQ National Market under
the symbol "LPAC." The following table reflects, for the quarters indicated, the
range of high and low intra-day selling prices of the Company's Common Stock.
This information is based on intra-day selling prices as reported by the NASDAQ
National Market.
High Low
2002
First Quarter $3.03 $2.22
Second Quarter $2.80 $2.24
Third Quarter $2.55 $1.70
Fourth Quarter $2.10 $1.42
2001
First Quarter $3.31 $1.38
Second Quarter $3.90 $1.25
Third Quarter $5.50 $2.63
Fourth Quarter $5.55 $2.20
The Company had approximately 3,000 stockholders on March 15, 2003.
The Company has never paid a cash dividend on its shares of Common Stock
and currently intends to retain its earnings, if any, for use in its operations
and the expansion of its business. Consequently, it does not anticipate paying
any cash dividends in the foreseeable future.
The Company's equity compensation plan information is detailed below.
Equity Compensation Plan Information
--------------------------- ---------------------------- ----------------------------- ------------------------------
Number of securities
remaining available for
Number of securities to be future issuance under equity
issued upon exercise of Weighted-average exercise compensation plans
outstanding options, price of outstanding (excluding securities
warrants and rights options, warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
--------------------------- ---------------------------- ----------------------------- ------------------------------
Equity Compensation plans 528,400 $3.23 34,600
approved by security
holders
--------------------------- ---------------------------- ----------------------------- ------------------------------
Equity Compensation plans
not approved by security
holders -- -- --
--------------------------- ---------------------------- ----------------------------- ------------------------------
Total 528,400 $3.23 34,600
--------------------------- ---------------------------- ----------------------------- ------------------------------
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected financial data of the Company and
its consolidated subsidiaries for each of the last five fiscal years:
(In thousands except for per share data.)
Fiscal Year Ended December 31,
2002 2001 2000 1999 1998
Statement of Operations Data:
Revenues....................................... $31,752 $33,647 $33,058 $30,991 $30,699
Operating expenses:
Direct....................................... 19,306 20,513 19,721 19,753 19,183
Depreciation................................. 4,699 4,305 4,161 3,258 3,572
--------------- ------------ ------------- -------------- --------------
24,005 24,818 23,882 23,012 22,755
--------------- ------------ ------------- -------------- --------------
Gross profit..................................... 7,747 8,829 9,176 7,980 7,944
Selling, general and administrative expenses..... 5,076 5,039 4,648 4,570 4,616
--------------- ------------ ------------- -------------- --------------
Income from operations........................... 2,671 3,790 4,528 3,410 3,328
Interest expense................................. (784) (1,164) (1,241) (1,241) (1,288)
Gain on sale of subsidiary....................... --- --- --- --- 875
Other income..................................... 112 543 253 2,382 114
Income tax expense(benefit)...................... 820 588 30 (285) 109
--------------- ------------ ------------- -------------- --------------
Net income....................................... $1,179 $2,581 $3,510 $4,836 $2,920
=============== ============ ============= ============== ==============
Net income per share (basic)..................... $0.17 $0.35 $0.45 $0.65 $0.41
--------------- ------------ ------------- -------------- --------------
Net income per share (diluted)................... $0.17 $0.35 $0.44 $0.62 $0.39
--------------- ------------ ------------- -------------- --------------
Weighted average shares outstanding (basic)...... 7,102 7,384 7,726 7,491 7,163
=============== ============ ============= ============== ==============
Weighted average shares outstanding (diluted).... 7,121 7,419 8,003 7,838 7,510
=============== ============ ============= ============== ==============
At December 31,
2002 2001 2000 1999 1998
Balance Sheet Data:
Working capital................................ $6,676 $6,478 $5,547 $2,923 $2,461
Total assets................................... 34,300 31,897 30,594 29,668 20,397
Current installments of notes payable bank
and long-term debt.......................... 3,528 3,739 3,490 3,718 2,462
Notes payable to bank and long-term debt,
less current installments................... 8,415 7,878 7,934 10,303 7,629
Net stockholders' equity....................... $18,808 $17,636 $16,894 $13,368 $8,405
Quarterly Financial Information
The following table summarizes unaudited selected financial data of the
Company and its consolidated subsidiaries for each quarter during the last two
fiscal years:
2002
-----------------------------------------------------------------------------------
December 31 September 30 June 30 March 31
------------------ ------------------- ------------------ -------------------
Revenues $ 10,337,000 $ 7,619,000 $ 5,806,000 $ 7,989,000
------------------ ------------------- ------------------ -------------------
Income (loss) from operations 2,148,000 507,000 (834,000) 850,000
------------------ ------------------- ------------------ -------------------
Net income (loss) 1,189,000 200,000 (602,000) 393,000
================== =================== ================== ===================
Net income (loss) per share basic $ $0.17 $ 0.03 $ (0.08) $ 0.06
================== =================== ================== ===================
Net income (loss) per share diluted $ $0.17 $ 0.03 $ (0.08) $ 0.06
================== =================== ================== ===================
2001
-----------------------------------------------------------------------------------
December 31 September 30 June 30 March 31
------------------ ------------------- ------------------ -------------------
Revenues $ 9,283,000 $ 6,857,000 $ 7,581,000 $ 9,927,000
------------------ ------------------- ------------------ -------------------
Income (loss) from operations 1,534,000 (125,000) 457,000 1,924,000
------------------ ------------------- ------------------ -------------------
Net income 734,000 375,000 101,000 1,371,000
================== =================== ================== ===================
Net income per share basic $ 0.10 $ 0.05 $ 0.01 $ 0.18
================== =================== ================== ===================
Net income per share diluted $ 0.10 $ 0.05 $ 0.01 $ 0.17
================== =================== ================== ===================
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements included within this document, other than statements of
historical facts, that address activities, events or developments that
Laser-Pacific expects or anticipates will or may occur in the future,
specifically, the Company's plans to not pay dividends in the foreseeable
future, are forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act, and fall under the safe
harbor. Specifically, the reduction in film processing revenues could be
affected by a change in the type of clients the Company is servicing, changes in
labor agreements relating to the Company's film lab, discussed above, and
numerous other factors, including industry and technological advances, many of
which are out of the control of the Company. Also, the anticipation that the
Company will be able to satisfy its cash requirements over the next twelve
months could be impacted by large swings in its cash balances, failure to remain
in compliance with debt covenants, an industry wide slowdown, or one of many
other factors, many of which are out of the control of the Company.
Additionally, please reference prior filings of the Company at its website for
risk factor discussions within those documents, and the other italicized
discussions on pages 3 and 7 contained herein, which contain information
pertinent to the entire filing.
Results of Operations
2002 Compared to 2001
Revenues for the year ended December 31, 2002 decreased to $31.8 million
from $33.6 million for the year ended December 31, 2001, a decrease of $1.8
million or 5.6%. The decrease in revenues is principally due to a decrease in
demand for the Company's services in the first six months of 2002, which was
partially offset by an increase in demand for the Company's services during the
last six months of 2002. The following factors impacted the decrease in
revenues: the overall economic downturn in the entertainment and advertising
sectors and the associated corporate cost cutting; the continuing trend of
reality programming which uses little of the Company's services; a reduction in
the number of movies for television and certain clients utilizing formats that
require a lower volume of film processing. These factors were partially offset
by the Company's revenues from services related to motion pictures, which
increased during the third and fourth quarters.
Film processing revenues decreased to $1,561,000 in 2002 from $2,545,000 in
2001, a decrease of $1.0 million or 38.7%. This significant decrease has
primarily been due to the Company's clients utilizing formats that require a
lower volume of film processing. Specifically, for the 2002-2003 television
broadcast season, the majority of the situation comedies for which the Company
performs services have been and are being produced on videotape. In the five
year period from 1998 to 2002, film processing revenues have dropped from $3.3
million in 1998 to $1.6 million in 2002, a decrease of $1.7 million or 51.5%.
Film processing was 10.9% of total revenues in 1998, as compared to 4.9% of
total revenues in 2002. The Company believes that revenues from film processing
associated with television production will continue to decline in the next
fiscal year.
Operating expenses, excluding depreciation, for the year ended December 31,
2002, were $19.3 million versus $20.5 million for the comparable year-ago
period, a decrease of $1.2 million or 5.9%. The decrease in operating expenses
is primarily the result of a decrease in wages and salaries of $680,000 and a
decrease in bad debt expense of $482,000. Decreases in wages and salaries were
primarily the result of the overall decrease in demand for the Company's
services that occurred in the first half of 2002. The decrease in bad debt
expense is primarily the result of improved collection activities on the part of
the Company's management. Operating expenses, excluding depreciation, as a
percentage of revenues, were 60.8% in 2002 compared to 61.0% in 2001.
Depreciation expense for the year ended December 31, 2002 was $4.7 million
compared to $4.3 million for the same year-ago period, an increase of $394,000
or 9.1%. The increase in depreciation expense is primarily due to acquisitions
of new equipment and investment in new technology. Total operating costs,
including depreciation, as a percentage of revenues for the year ended December
31, 2002, were 75.6% compared with 73.8% for the same year-ago period.
For the year ended December 31, 2002, the Company recorded a gross profit
of $7.7 million compared to $8.8 million for the same year-ago period, a
decrease of $1.1 million or 12.3%. The decrease in gross profit is primarily the
result of reduced revenues partially offset by decreased operating expenses
discussed above. Gross profit, as a percentage of revenues, was 24.4% in 2002
compared to 26.2% in 2001.
Selling, general and administrative expenses ("SG&A expenses") for the year
ended December 31, 2002 were $5.0 million as compared to $5.0 million during the
same year-ago period. Increases in insurance expense of $29,000, bank charges of
$32,000, wages and salaries of $57,000, and tax and license fees of $100,000
were offset by decreases in advertising and promotion of $78,000 and
professional services fees of $129,000. Total SG&A expenses as a percentage of
revenues were 16.0% in 2002 compared to 15.0% in 2001.
Income from operations for the year ended December 31, 2002 was $2.7
million compared to $3.8 million for the same year-ago period, a decrease of
$1.1 million or 29.0%. The decrease in income from operations is primarily the
result of the overall decrease in demand for the Company's services resulting in
reduced revenues as discussed above partially offset by the decrease in
operating expenses also discussed above.
Interest expense for the year ended December 31, 2002 was $784,000 compared
to $1.2 million for the same year-ago period, a decrease of $379,000 or 32.6%.
The decrease in interest expense is primarily due to lower interest rates on
outstanding borrowings resulting mostly from a refinancing of debt in 2002.
Other income for the year ended December 31, 2002 was $112,000 compared to
$543,000 for the same year-ago period, a decrease of $431,000 or 79.3%. In 2002,
other income was primarily interest income. In 2001, other income included
income recognized from a research and development collaboration agreement of
$193,000, a gain on the sale of the Company's interest in Composite Image
Systems LLC ("CIS") of $83,000, which is discussed further in "Matters Affecting
Operations," and interest income resulting from higher interest rates paid on
cash balances.
Income tax expense for the year ended December 31, 2002 was $820,000
compared to $588,000 for the same year-ago period, an increase of $232,000 or
39.5%. The effective tax rate was approximately 41.0% in 2002 and 18.6% in 2001.
The 2002 income tax expense is comprised of federal income taxes of $710,000 and
state income taxes of $110,000. The rate exceeded the statutory tax rate
principally due to the expiration of tax credits. In 2001, the Company's
effective tax rate for federal income taxes differed from the statutory U.S.
Federal and state tax rate of approximately 40% principally due to the
elimination of a valuation allowance for deferred tax assets of $879,000. The
Company anticipates that the combined Federal and state effective tax rate for
2003 will be approximately 40%.
Based on the above factors, the Company reported net income of $1.2 million
or $0.17 per diluted share in 2002 versus reported net income of $2.6 million or
$0.35 per diluted share in 2001.
Fourth Quarter 2002
The following table summarizes selected financial data of the Company and
its consolidated subsidiaries for the fourth quarters ended December 31, 2002
and December 31, 2001.
Three Months ended December 31, Increase (Decrease)
2002 2001 Dollars Percent
Revenues $ 10,337,000 $ 9,283,000 $ 1,054,000 11.4%
Operating expenses 6,682,000 6,253,000 429,000 6.9%
Gross profit 3,655,000 3,030,000 625,000 20.6%
SG&A expenses 1,507,000 1,496,000 11,000 0.7%
----------------- ------------------
Income from operations 2,148,000 1,534,000 615,000 40.0%
Interest expense 152,000 389,000 (237,000) (60.9%)
Other income 17,000 32,000 (15,000) (46.7%)
----------------- ------------------
Income before taxes 2,013,000 1,177,000 836,000 71.1%
Income tax expense 824,000 443,000 381,000 86.0%
----------------- ------------------
Net income $ 1,189,000 $ 734,000 $ 455,000 62.1%
================= ==================
Revenues for the three months ended December 31, 2002 increased $1.1
million or 11.4% from the same period in 2001. The increase in revenues is
primarily the result of increases in revenues of $582,000, $550,000 and $112,000
from editing, duplication and telecine, respectively. The increase in revenues
is primarily the result of an increase in the number of theatrical releases for
which the Company provides services, which was partially offset by a decrease in
film processing services of $298,000 due to certain clients utilizing formats or
processes that require a lower volume or no film processing.
For the three months ended December 31, 2002, the Company's gross profit
increased $625,000 or 20.6% from the same period in 2001. The increase in gross
profit is primarily due to the increase in revenues discussed above, partially
offset by an increase in operating expenses of $429,000. The increase in
operating expenses is primarily the result of an increase in labor costs of
$301,000, an increase in videotape stock expense of $162,000, and an increase in
equipment rental of $107,000, all of which were the result of increased demand
for the Company's services. These increased expenses were partially offset by a
decrease in bad debt expense of $243,000, which was brought about by improved
collection activities. Total operating expenses, including depreciation, as a
percentage of revenues for the three months ended December 31, 2002 were 64.6%
compared with 67.4% for the same year-ago period.
For the three months ended December 31, 2002, the Company's income from
operations increased $615,000 or 40.0% from the same period in 2001. The
increase in income from operations is primarily the result of the revenue
increase discussed above partially offset by an increase in operating expenses
of $429,000.
Other income for the fourth quarter of 2002 decreased $15,000 or 46.7% from
the fourth quarter of 2001. Other income is primarily interest income earned on
cash balances and the decrease is principally the result of a decline in
interest rates.
Income tax expense for the fourth quarter of 2002 increased $381,000, or
86.0% from the fourth quarter of 2001. The Company's effective tax rate for both
the fourth quarter of 2002 and 2001 of 41% and 38%, respectively, was consistent
with the combined statutory federal and state income tax rate of 40%.
Based on the above factors, the Company reported net income of $1,189,000,
or $0.17 per diluted share for the fourth quarter of 2002 versus reported net
income of $734,000, or $0.10 per diluted share for the same period in 2001.
2001 Compared to 2000
Revenues for the year ended December 31, 2001 increased to $33.6 million
from $33.1 million for the year ended December 31, 2000, an increase of $0.5
million or 1.8%. The minimal increase in sales was the result of an increase in
demand for the Company's services in the first six months of 2001, which was
offset by a decline in demand for the Company's services during the last six
months of 2001. The following factors impacted the decrease in revenues during
the third and fourth quarters of 2001: 1) a slowing of movie production in the
second and third quarters because studios and networks stockpiled shows to ride
out a threatened strike by the writers and actors that did not materialize,
which impacted the services the Company provides on feature movies such as movie
mastering, preview services and digital compression; 2) the impact of the
September 11, 2001 terrorist attacks that resulted in the cancellation and
rescheduling of certain production and delayed the beginning of the fall
broadcast season; 3) a significant decline in the number of movies made for
television with much of the remaining television movie production business being
moved outside of the United States; and 4) the overall slowdown in the economy
and general weakness of the entertainment industry, which has impacted
advertising revenues and the programs supported by those revenues such that
there are fewer non-broadcast and off-network shows and the shows that are being
produced have lower post-production budgets.
For the year ended December 31, 2001, the Company recorded a gross profit
of $8.8 million compared to $9.2 million for the same year-ago period, a
decrease of $0.4 million or 3.8%. The decrease in gross profit was primarily the
result of relatively flat sales and increased operating costs, as discussed
below.
Operating costs, excluding depreciation for the year ended December 31,
2001, were $20.5 million versus $19.7 million for the same year-ago period, an
increase of 4.0%. The increase in operating costs was primarily the result of
increased labor cost of $365,000, increased equipment maintenance and rental
expense of $239,000 and increased transmission cost of $116,000. Depreciation
expense for the year ended December 31, 2001 was $4.3 million compared to $4.2
million for the same year-ago period, an increase of $144,000 or 3.5%. Total
operating costs, including depreciation, as a percentage of revenues for the
year ended December 31, 2001, were 73.8% compared with 72.2% for the same
year-ago period.
SG&A expenses for the year ended December 31, 2001 were $5.0 million as
compared to $4.6 during the same year-ago period, an increase of 8.4%. The
increase in SG&A expenses was primarily attributable to increased wages for
non-operations staff of $175,000 and increased legal, financial advisory and
consulting fees of $238,000, partially offset by minor reductions in other
costs.
Income from operations for the year ended December 31, 2001 was $3.8
million compared to $4.5 million for the same year-ago period, a decrease of
$0.7 million or 16.3%. The decrease in income from operations was primarily the
result of decreased sales volume and increased operating and SG&A expenses, as
discussed above.
Interest expense for the year ended December 31, 2001 was $1,163,000
compared to $1,241,000 for the same year-ago period, a decrease of $78,000. The
decrease in interest expense was primarily due to lower interest rates on
borrowings offset by the additional interest expense related to the sales tax
assessment described under "Item 7--Liquidity and Capital Resources" of the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Other income for the year ended December 31, 2001 was $543,000 compared to
other income of $253,000 for the same year-ago period in 2000. The increase of
$290,000 was primarily attributable to income of $193,000 recognized in
connection with a collaboration agreement and the gain on the sale of the
Company's interest in CIS of $83,000 (see Notes 8 and 10 to the consolidated
financial statements hereto).
Income tax expense amounted to $588,000 in 2001 as compared to $30,000 in
2000. The effective tax rate was 18.6% in 2001 and 8.5% in 2000. The Company's
effective tax rate differed from the statutory U.S. Federal tax rate of 34% in
2001 principally from the elimination of a valuation allowance for deferred tax
assets of $879,000. When a threatened strike by the writers and actors did not
materialize, the Company determined that it was more likely than not that all
deferred tax assets would be realized and eliminated the valuation allowance
established in prior years. The 2000 income tax expense is comprised of U.S.
Federal income tax of $57,000 and state income tax benefit in the amount of
$27,000. In fiscal 2000, the U.S. Federal income tax was primarily composed of
alternative minimum tax. The state income tax benefit was the result of
utilization of state tax credits.
Based on the above factors, the Company reported net income of $2.6 million
or $0.35 per diluted share in 2001 versus reported net income of $3.5 million or
$0.44 per diluted share in 2000.
Matters Affecting Operations
Some producers of television programs are increasingly choosing to shoot
their programs on videotape. The dollar amount of the decreases in this line of
service since 1998 are discussed in more detail above in "Results of
Operations--2002 Compared to 2001." There has been an increase in the number of
television programs choosing to shoot on videotape in the past two television
seasons. The primary reason for this change is the producers desire for cost
savings as compared to shooting on film. The majority of situation comedies are
now shot on videotape and the company expects this to continue for the
foreseeable future. The majority of dramatic programs continue to be shot on
film. Management believes that producers find the qualities of film preferable
to videotape for dramatic programs. A continuation and expansion of the trend of
shooting television programs on videotape rather than film would result in a
further decrease in demand for services offered by Pacific Film Laboratories and
would likely reduce revenues from telecine for television programs.
On July 9, 2001, the Company entered into an agreement with its joint
venture partner in CIS, to sell its interest in CIS to its joint venture
partner. Under the terms of the agreement, the Company transferred to its joint
venture partner the Company's 50% interest in CIS and certain equipment
previously leased to CIS in exchange for a cash payment of $575,000. The Company
has given corporate guarantees regarding a lease obligation of the joint
venture. CIS and the joint venture partner have agreed to indemnify the Company
for up to the amount of the principal obligation for any claims that might arise
under the guarantee should CIS default on the lease obligation. The lease
obligation is also secured by the equipment purchased under the lease. The
Company estimates that, as of December 31, 2002, the current principal balance
outstanding on the lease obligation was approximately $195,000.
Treasury Stock
In March 2002, the Company retired 900,200 shares of its Common Stock held
in treasury.
In April 2002, the Company purchased 3,300 shares of its Common Stock for
$7,788 and subsequently retired the shares.
Stock Repurchases
In June 2001, the Company purchased 825,200 shares of its Common Stock in a
private transaction for $2,063,000.
In November 2001, the Company announced that it would commence a stock
repurchase program. The Board of Directors authorized the Company to allocate up
to $2,000,000 to purchase its Common Stock at suitable market prices through
November 1, 2002. In November 2001, the Company purchased 75,000 shares of its
Common Stock on the open market for $204,140 and in March 2002 the Company
purchased 3,300 shares of its Common Stock on the open market for $7,788 under
the Stock Repurchase program. All of the shares purchased were subsequently
retired.
Liquidity and Capital Resources
The Company's principal source of funds is cash generated by operations.
The Company anticipates that existing cash balances, availability under existing
loan agreements and cash generated from operations will be sufficient to service
existing debt and to meet the Company's projected operating and capital
requirements for the next twelve months. However, should sales decrease due to;
changes in market conditions, changes in the industry's acceptance of the
Company, changes in laws, or other potential industry-wide problems, the
potential consequences could materially affect the Company's cash flows and
liquidity. Additionally, should the Company not comply with the debt covenants
related to its' equipment leases or other lending agreements, the Company could
be forced to reduce its debt obligations or re-negotiate the lending agreements.
The Company and its subsidiaries are operating under a credit facility with
Merrill Lynch Business Financial Services Inc. The maximum credit available
under the facility is $13.5 million. The facility provides for borrowings of up
to $6.0 million under a revolving loan and $7.5 million in equipment term loans.
The term note credit agreements contain covenants, including financial covenants
related to leverage and fixed charge ratios. The Company was in compliance with
these covenants at December 31, 2002. As of December 31, 2002, the outstanding
borrowing under the facility was $6,258,000. The revolving loan expires on May
31, 2003 and may be renewed annually. The equipment term loans expire during the
period of June 2006 through December 2007. The revolving loan and equipment term
loans are payable monthly.
In October 2002, the Company entered into an agreement with Wells Fargo
Equipment Finance to refinance all of the Company's equipment term loans with
The Terminal Marketing Company in the amount of $2,422,000 at an interest rate
of 5.25%. Prior to the refinance, the equipment term loans had interest rates
ranging from 7.50% to 11.88%. As of December 31, 2002, the outstanding borrowing
under the capital lease obligations with Wells Fargo Equipment Finance and all
other financing companies are presented below in tabular format.
The Company also has obligations under operating leases, relating to its
facilities, of $2,489,000 at December 31, 2002 (see Note 8 to the accompanying
consolidated financial statements). Below is a listing of the contractual
obligations the Company currently has and the current balance due on those
obligations.
Schedule of Contractual Obligations
- ---------------------------------------- ----------------------- ----------------------------------------------------
Balance At
Contractual Obligations December 31, 2002 Interest Rate
- ---------------------------------------- ----------------------- ----------------------------------------------------
Long-Term Debt
- ---------------------------------------- ----------------------- ----------------------------------------------------
Revolving Loan $ 0.00 "30-day dealer commercial paper" rate plus 2.20%
- ---------------------------------------- ----------------------- ----------------------------------------------------
Variable Rate Equipment Loan $ 683,000 "30-day dealer commercial paper" rate plus 2.65%
- ---------------------------------------- ----------------------- ----------------------------------------------------
Variable Rate Equipment Loan $ 3,200,000 "30-day dealer commercial paper" rate plus 2.20%
- ---------------------------------------- ----------------------- ----------------------------------------------------
Fixed Rate Equipment Loan $ 475,000 4.64%
- ---------------------------------------- ----------------------- ----------------------------------------------------
Fixed Rate Equipment Loan $ 900,000 6.04%
- ---------------------------------------- ----------------------- ----------------------------------------------------
Fixed Rate Equipment Loan $ 1,000,000 4.86%
- ---------------------------------------- ----------------------- ----------------------------------------------------
Capital Lease Obligations
- ---------------------------------------- ----------------------- ----------------------------------------------------
Wells Fargo - Fixed Rate Re-financing
of Terminal Marketing Equipment Term
Loans $ 2,224,000 5.25%
- ---------------------------------------- ----------------------- ----------------------------------------------------
All Others $ 3,461,000 5.98% to 12.75%
- ---------------------------------------- ----------------------- ----------------------------------------------------
Operating Leases
- ---------------------------------------- ----------------------- ----------------------------------------------------
809 N. Cahuenga Avenue $ 921,000 N/A
- ---------------------------------------- ----------------------- ----------------------------------------------------
800 N. Cole Street $ 386,000 N/A
- ---------------------------------------- ----------------------- ----------------------------------------------------
861 N. Seward Street $ 1,182,000 N/A
- ---------------------------------------- ----------------------- ----------------------------------------------------
Discussion of Cash Flows
2002 compared to 2001
Net cash provided by operating activities in 2002 was $6.0 million compared
to $9.3 million in 2001, a decrease of $3.3 million or 35.4%. The decrease in
cash provided by operating activities in 2002 is primarily due to a decrease in
net income of $1.4 million discussed above, and an increase in net accounts
receivable of $0.8 million due in part to a decrease in the allowance for
doubtful accounts and the increase in fourth quarter revenues discussed above.
Net cash used in investing activities in 2002 was $2.6 million compared to
$1.6 million in 2001, an increase of $1.0 million. The increase in cash used in
investing activities is primarily due to an increase in purchases of property
and equipment of $836,000.
Net cash used in financing activities in 2002 was $3.7 million compared to
$5.3 million in 2001, a decrease of $1.6 million. The decrease in cash used in
financing activities was principally due to a decrease in the amount of treasury
stock purchased by the Company to $7,788 in 2002 from $2,267,140 in 2001, which
was partially offset by increased debt repayments in 2002.
As a result of the above factors, the Company recorded a net decrease in
cash and cash equivalents of $307,000 in 2002, as compared to a net increase in
2001 of $2.5 million.
2001 compared to 2000
Net cash provided by operating activities in 2001 was $9.3 million compared
to $7.4 million in 2000, an increase of $1.9 million. The increase in cash
provided by operating activities was primarily due to a decrease in net accounts
receivable of $1.1 million due primarily to a decrease in demand for the
Company's services in the fourth quarter of 2001; a decrease in other assets of
$624,000 due to a decrease in the Company's inventories; a decrease of deferred
tax expense of $309,000 due to the elimination of valuation allowances; and a
decrease in the investment in CIS of $346,000, which were partially offset by a
decrease in net income of $929,000.
Cash flows used in investing activities were $1.6 million in 2001 and $1.6
million in 2000. Although there was no material change in net cash used in
investing activities, the disposal of equipment of $820,000 and the contribution
of $346,000 to a joint venture in 2000 were offset by an increase in net
property and equipment purchases of $1.2 million in 2001.
Net cash used in financing activities in 2001 was $5.3 million compared to
$3.7 million in 2000, an increase of $1.6 million. The increase in cash used for
financing activities was the result of purchases of treasury stock for $2.3
million in 2001 partially offset by decreased debt repayments of $460,000 and
proceeds of $251,000 from stock options and warrants exercised.
As a result of the above factors, the Company recorded a net increase in
cash and cash equivalents of $2.5 million in 2001, as compared to a net increase
of 2000 of $2.1 million.
Related Party Transactions
James R. Parks, Chairman of the Board and Chief Executive Officer of the
Company, is an executive director of CBIZ Southern California, Inc. ("CBIZ").
CBIZ provides tax, accounting, and management consulting services to the
Company. CBIZ charges for services were approximately $81,000, $83,000, and
$77,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
James R. Parks, Chairman of the Board and Chief Executive Officer of the
Company, is a member of Local Boys, LLC and an executive producer. The Company
has been providing services for a movie produced by Local Boys, LLC since
September 2001. Fees for services were billed at the Company's standard rates
and the total amount billed for services through December 31, 2002 was $271,000.
As of December 31, 2002, $54,000 of the total amount billed was outstanding. As
of March 27, 2003, no invoices were outstanding relating to the activities of
Local Boys, LLC.
In July 2001, 35 Lake Avenue L.P., a California limited partnership in
which James R. Parks, the Company's Chief Executive Officer, is a partner,
exercised warrants to purchase 250,000 shares of the Company's Common Stock at
an exercise price of $1.00 per share. The warrants originally were issued during
1997 in connection with a short-term debt financing arrangement.
David Merritt, a director of the Company and chairman of the audit
committee is a member of Gerard Klauer Mattison & Co., Inc. In April 2001, the
Company engaged Gerard Klauer Mattison & Co., Inc. as a financial advisor.
Gerard Klauer Mattison & Co., Inc billed fees of $21,000 in 2002 and $75,000 in
2001 for services provided to the Company.
Off Balance Sheet Transactions
The Company does not currently maintain any material off balance sheet
transactions.
Critical Accounting Policies
Laser-Pacific's critical accounting policies are as follows:
Depreciation of property and equipment,
Valuation of long-lived assets,
Valuation of deferred tax assets, and
Valuation of accounts receivable.
Depreciation of Property and Equipment
The Company depreciates property and equipment on a straight-line basis
over the estimated useful lives of the related assets. Significant management
judgment is required to determine the useful lives of the assets. The useful
lives designated by management to the various types of assets specified below
are as follows:
- -------------------------------- -----------------------------------------------
Type of Asset Useful Life
- -------------------------------- -----------------------------------------------
Automobiles 4 years
- -------------------------------- -----------------------------------------------
Furniture and fixtures 5 years
- -------------------------------- -----------------------------------------------
Technical equipment 7 years
- -------------------------------- -----------------------------------------------
Building improvements 10 years
- -------------------------------- -----------------------------------------------
Buildings 30 years
- -------------------------------- -----------------------------------------------
Leasehold improvements Remaining life of the lease plus options to
renew, or 10 years, whichever is shorter.
- -------------------------------- -----------------------------------------------
In addition, repairs costing in excess of $5,000 related to technical
equipment are amortized over 18 months. Should the useful lives of assets be
revised, the impact on the Company's results of operations could be material.
Valuation of Long-Lived Assets
The Company periodically assesses the impairment of its long-lived assets,
which requires management to make assumptions and judgments regarding the
carrying value of these assets. The assets are considered to be impaired if the
Company determines that the carrying value of identifiable assets may not be
recoverable based upon its assessment of the following events or changes in
circumstances:
The asset's ability to continue to generate income from operations and
positive cash flow in future periods;
Significant changes in strategic business objectives and utilization of the
assets; and
The impact of significant negative industry, technological or economic
trends.
If the assets are considered to be impaired, the impairment that is
recognized is the amount by which the carrying value of the assets exceeds the
fair value of the assets. If a change were to occur in any of the
above-mentioned factors or estimates a material change in the reported results
could occur.
Valuation of Deferred Tax Assets
Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount management believes is more likely than not to be
realized. The likelihood of a material change in the Company's expected
realization of these assets depends on future taxable income, the ability to
deduct tax loss carry forwards against future taxable income, the effectiveness
of the tax planning and strategies among the various tax jurisdictions in which
the Company operates, and any significant changes in the tax laws. For the years
ended December 31, 2002, 2001 and 2000, the Company eliminated valuation
allowances of $0, $879,000, and $1,315,000, respectively, because management
determined that it was more likely than not that the related deferred tax assets
would be realized. As of December 31, 2002, the Company had no valuation
allowance related to deferred tax assets of $556,000.
Valuation of Accounts Receivable
The Company periodically assesses its accounts receivable balance and
records an allowance for bad debts for the amount the Company considers
uncollectable. The purpose of this allowance is to reduce the accounts
receivable balance to the estimated net realizable balance. Management's
judgment is required to determine an appropriate estimate for the bad debts
allowance and reflects management's best estimate of the amount of uncollectable
trade receivables. The bad debts allowance is determined considering the
following criteria: delinquency of individual accounts, collection history of
specific customers, and the ability of clients to make payments. In 2002, the
Company improved its collections and as a result reduced its allowance for bad
debts by $221,000 as compared to bad debt expense of $261,000 in 2001, and
$274,000 in 2000. The effect of this reduction to the bad debt allowance was to
increase net income by $0.03 per diluted share and bring the allowance to a
level consistent with the above criteria. As of December 31, 2002, the allowance
for bad debts was $770,000 and trade receivables totaled $5,520,393. Changes in
the financial condition of the customers, the Company or other business
conditions could affect the adequacy of the Company's allowance.
Recent Accounting Pronouncements
Accounting for Business Combinations and Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and
Other Intangible Assets. Statement No. 141 requires that the purchase method be
used for all business combinations initiated after June 30, 2001. Statement No.
142 requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment on an annual basis. The Company adopted Statement Nos.
141 and 142 effective January 1, 2002. The adoption of these pronouncements did
not have any impact on the Company's financial statements.
Accounting for the Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (Opinion No. 30), for the disposal of a segment of a
business (as previously defined in that Opinion). Statement No. 144 retains the
fundamental provisions in Statement No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving certain implementation issues
associated with Statement No. 121. The Company adopted Statement No. 144
effective January 1, 2002. Statement No. 144 retains the basic provisions of
Opinion 30 on how to present discontinued operations in the income statement but
broadens that presentation to include a component of an entity (rather than a
segment of a business). The adoption of Statement No. 144 did not have any
impact on the Company's financial statements.
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 amends existing guidance on reporting gains and losses on the
extinguishments of debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to
require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
Statement related to the rescission of Statement No. 4 is applied in fiscal
years beginning after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of the Statement related to Statement No. 13 were
effective for transactions occurring after May 15, 2002, with early application
encouraged. The Company adopted Statement No. 145 effective January 1, 2002. The
adoption of Statement No. 145 did not have any impact on the Company's financial
statements.
Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. Statement No. 146 nullifies
Emerging Issues Task Force ("EITF") issue 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). Under EITF issue 94-3, a
liability for an exit cost is recognized at the date of an entity's commitment
to an exit plan. Under Statement No. 146, the liabilities associated with an
exit or disposal activity will be measured at fair value and recognized when the
liability is incurred and meets the definition of a liability in the FASB's
conceptual framework. This Statement is effective prospectively for exit or
disposal activities initiated after December 31, 2002. Management believes the
adoption of Statement No. 146 will not have a material impact on the Company's
consolidated financial statements.
Accounting for Stock-Based Compensation
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure ("SFAS 148"), which amends
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 148
amends the disclosure requirements in SFAS 123 for stock-based compensation for
annual periods ending after December 15, 2002 and for interim periods beginning
after December 15, 2002. The disclosure requirements apply to all companies,
including those that continue to recognize stock-based compensation under APB
Opinion No. 25, Accounting for Stock Issued to Employees. Effective for
financial statements for fiscal years ending after December 15, 2002, SFAS 148
also provides three alternative transition methods for companies that choose to
adopt the fair value measurement provisions of SFAS 123. Management has chosen
not to adopt the fair value measurement provisions of SFAS 123. The Company has
included the disclosure requirements in Note 7 to the consolidated financial
statements.
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"), which addresses the disclosure
to be made by a guarantor in its interim and annual financial statements about
its obligations under guarantees. The disclosure requirements are effective for
interim and annual financial statements ending after December 15, 2002. The
Company does not have any guarantees that require disclosure under FIN 45 except
for the Company's guarantee associated with CIS.
FIN 45 also requires the recognition of a liability by a guarantor at the
inception of certain guarantees. FIN 45 requires the guarantor to recognize a
liability for the non-contingent component of a guarantee, which is the
obligation to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability is the
fair value of the guarantee at inception. The recognition of the liability is
required even if it is not probable that payments will be required under the
guarantee or if the guarantee was issued with a premium payment or as part of a
transaction with multiple elements. The initial recognition and measurement
provisions are effective for all guarantees within the scope of FIN 45 issued or
modified after December 31, 2002.
As noted above we have adopted the disclosure requirements of FIN 45 and
will apply the recognition and measurement provisions for all guarantees entered
into or modified after December 31, 2002. To date we have not entered into or
modified any guarantees requiring the recognition of a liability pursuant to the
provisions of FIN 45.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), which addresses the consolidation by
business enterprises of variable interest entities, which have one or both of
the following characteristics: (1) the equity investment at risk is not
sufficient to permit the entity to finance its activities without additional
financial support from other parties, or (2) the equity investors lack one or
more of the following essential characteristics of a controlling financial
interest: (a) the direct or indirect ability to make decisions about the
entity's activities through voting or similar rights, (b) the obligation to
absorb the expected losses of the entity if they occur, or (c) the right to
receive the expected residual returns of the entity if they occur. FIN 46 will
have a significant effect on existing practice because it requires existing
variable interest entities to be consolidated if those entities do not
effectively disburse risks among parties involved. In addition, FIN 46 contains
detailed disclosure requirements. FIN 46 applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. Management expects that the application of
this interpretation will not have a material effect on the Company's
consolidated financial statements.
Revenue Arrangements with Multiple Deliverables
In November 2002, the EITF issued EITF 00-21 Revenue Arrangements with
Multiple Deliverables ("EITF 00-21). EITF 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. Specifically, EITF 00-21 addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting. In applying EITF 00-21, separate contracts with the
same entity or related parties that are entered into at or near the same time
are presumed to have been negotiated as a package and should, therefore, be
evaluated as a single arrangement in considering whether there are one or more
units of accounting. That presumption may be overcome if there is sufficient
evidence to the contrary. EITF 00-21 also addresses how consideration should be
measured and allocated to the separate units of accounting in the arrangement.
The guidance in EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Alternatively, companies may elect
to report the change in accounting as a cumulative-effect adjustment. Management
expects that the application of EITF 00-21 will not have a material effect on
the Company's consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Instruments. The Company invests any funds in excess of its
operational requirements in a Money Market Fund. The cash invested in this fund
at December 31, 2002 and December 31, 2001 was $6.4 million and $6.5 million,
respectively. The average monthly ending balance in 2002 was $6.6 million. In
2002, the Company earned $103,000 from its investment in the fund. The average
monthly yield for 2002 was 1.55%.
If the average monthly yield were to change by 1%, the income earned would
change by approximately $66,000 over a twelve month period.
Market Risk. The Company's market risk exposure with respect to financial
instruments is subject to changes in the "30-day dealer commercial paper" rate
in the United States of America. The Company had borrowings of $3.8 million at
December 31, 2002 under the variable rate equipment term loans (discussed above)
and may borrow up to $6.0 million under a revolving loan. Amounts outstanding
under the variable rate equipment term loans bear interest at the "30-day dealer
commercial paper" rate plus 2.20% to 2.65%. There were no borrowings under the
variable rate revolving credit facility as of December 31, 2002.
If, under the existing credit facility, the "30-day dealer commercial
paper" rate were to change by 1%, interest expense would change by approximately
$34,000 over a twelve month period.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements for the Company, including the
financial statement schedule and the independent auditors' report relating
thereto are set forth on pages 22 through 43 of this report and are incorporated
herein by this reference. See page 21 for an index to all of the consolidated
financial statements and supplementary financial information that are attached
hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Index to Consolidated Financial Statements and
Financial Statement Schedule
Consolidated Financial Statements: Page
Independent Auditors' Report 22
Consolidated Balance Sheets - At December 31, 2002 and 2001 23
Consolidated Statements of Income - Years Ended December 31, 2002, 2001 and 2000 25
Consolidated Statements of Stockholders' Equity - Years Ended December 31, 2002, 2001 and 2000 26
Consolidated Statements of Cash Flows - Years Ended December 31, 2002, 2001 and 2000 27
Notes to Consolidated Financial Statements 29
Consolidated Financial Statement Schedule - Valuation and Qualifying Accounts - Years Ended December 31,
2002, 2001 and 2000 44
All other schedules are omitted because they are not applicable or the
required information is shown in the Company's consolidated financial statements
or the related notes thereto.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Laser-Pacific Media Corporation:
We have audited the accompanying consolidated financial statements of
Laser-Pacific Media Corporation and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Laser-Pacific Media
Corporation and subsidiaries as of December 31, 2002 and 2001 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/KPMG LLP
Los Angeles, California
February 21, 2003
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
Assets (note 4) 2002 2001
----------------- ----------------
Current assets:
Cash and cash equivalents $ 6,682,395 $ 6,989,781
Receivables:
Trade 5,520,393 4,693,891
Other 85,122 206,935
----------------- ----------------
5,605,515 4,900,826
Less allowance for doubtful receivables 770,155 1,097,174
----------------- ----------------
4,835,360 3,803,652
----------------- ----------------
Inventory 264,680 268,493
Prepaid expenses and other current assets 585,092 699,310
Deferred tax assets (note 5) 556,000 730,778
----------------- ----------------
Total current assets 12,923,527 12,492,014
----------------- ----------------
Net property and equipment, at cost (note 3) 21,187,713 19,204,407
Other assets, net 188,579 200,531
----------------- ----------------
$ 34,299,819 $ 31,896,952
================= ================
(Continued)
See accompanying notes to consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
December 31, 2002 and 2001
Liabilities and Stockholders' Equity 2002 2001
----------------- -----------------
Current liabilities:
Current installments of notes payable to bank and
long-term debt (notes 3 and 4) $ 3,528,407 $ 3,738,680
Accounts payable 568,077 487,451
Accrued compensation expense 968,684 917,776
Accrued expenses 1,182,053 869,933
----------------- -----------------
Total current liabilities 6,247,221 6,013,840
----------------- -----------------
Deferred tax liabilities (note 5)
829,058 368,764
Notes payable to bank and long-term debt, less current
installments (notes 3 and 4) 8,415,453 7,878,227
Commitments and contingencies (note 8)
Stockholders' equity (notes 6 and 7):
Preferred stock, $.0001 par value. Authorized
3,500,000 shares; none issued -- --
Common stock, $.0001 par value. Authorized 25,000,000
shares; issued 7,101,295 and 8,004,795 shares at
December 31, 2002 and 2001, respectively 710 800
Additional paid-in capital 18,089,063 20,363,901
Retained earnings (accumulated deficit) 718,314 (461,440)
Treasury stock, at cost: 900,200 at December 31, 2001 -- (2,267,140)
----------------- -----------------
Net stockholders' equity 18,808,087 17,636,121
----------------- -----------------
$ 34,299,819 $ 31,896,952
================= =================
See accompanying notes to consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------------ ------------------ ------------------
Revenues $ 31,751,872 $ 33,647,167 $ 33,058,293
------------------ ------------------ ------------------
Direct operating costs and expenses:
Direct 19,305,514 20,512,506 19,721,320
Depreciation 4,699,089 4,305,201 4,160,784
------------------ ------------------ ------------------
Total operating expenses 24,004,603 24,817,707 23,882,104
------------------ ------------------ ------------------
Gross profit 7,747,269 8,829,460 9,176,189
Selling, general and administrative expenses 5,075,964 5,039,203 4,648,189
------------------ ------------------ ------------------
Income from operations 2,671,305 3,790,257 4,528,000
Other income (expense):
Interest expense (784,016) (1,163,445) (1,240,562)
Other income (note 10) 112,243 542,500 252,532
------------------ ------------------ ------------------
Income before income taxes 1,999,532 3,169,312 3,539,970
Income taxes (note 5) 819,778 588,146 29,923
------------------ ------------------ ------------------
Net income $ 1,179,754 $ 2,581,166 $ 3,510,047
================== ================== ==================
Net income per share (basic) $ .17 $ .35 $ .45
================== ================== ==================
Net income per share (diluted) $ .17 $ .35 $ .44
================== ================== ==================
Weighted average shares outstanding (basic) 7,102,120 7,384,095 7,725,693
================== ================== ==================
Weighted average shares outstanding (diluted) 7,121,038 7,419,484 8,003,353
================== ================== ==================
See accompanying notes to consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2002, 2001 and 2000
Common Stock Treasury Stock
------------------------- Retained --------------------------
Additional earnings Net
Number paid-in (accumulated Number stockholders'
of shares Amount capital deficit) of shares Amount equity
------------ ----------- ------------- --------------- ------------ ------------- ---------------
Balance at
December 31, 1999 7,654,646 $ 765 19,919,956 (6,552,653) -- -- 13,368,068
Stock issuances 96,649 10 16,200 -- -- -- 16,210
Net income -- -- -- 3,510,047 -- -- 3,510,047
------------ ----------- ------------- --------------- ------------ ------------- ---------------
Balance at
December 31, 2000 7,751,295 $ 775 19,936,156 (3,042,606) -- -- 16,894,325
------------ ----------- ------------- --------------- ------------ ------------- ---------------
Stock issuances 253,500 25 250,745 -- -- -- 250,770
Purchase of treasury stock -- -- -- -- (900,200) (2,267,140) (2,267,140)
Tax deduction for
non-qualified stock
options and warrants -- -- 177,000 -- -- -- 177,000
Net income -- -- -- 2,581,166 -- -- 2,581,166
------------ ----------- ------------- --------------- ------------ ------------- ---------------
Balance at
December 31, 2001 8,004,795 $ 800 20,363,901 (461,440) (900,200) (2,267,140) 17,636,121
------------ ----------- ------------- --------------- ------------ ------------- ---------------
Purchase of treasury stock -- -- -- -- (3,300) (7,788) (7,788)
Retire treasury stock (903,500) (90) (2,274,838) -- 903,500 2,274,928 --
Net income -- -- -- 1,179,754 -- -- 1,179,754
------------ ----------- ------------- --------------- ------------ ------------- ---------------
Balance at
December 31, 2002 7,101,295 $ 710 18,089,063 718,314 -- -- 18,808,087
============ =========== ============= =============== ============ ============= ===============
See accompanying notes to consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
--------------- --------------- -----------------
Cash flows from operating activities:
Net income $ 1,179,754 $ 2,581,166 $ 3,510,047
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property and equipment 4,699,089 4,305,201 4,160,784
Provision (recovery) for doubtful accounts receivable (220,885) 260,667 274,392
Deferred income tax expense 635,074 309,072 --
Write-off of property and equipment -- -- 99,764
Gain on sale of plant, property and equipment (6,623) (32,290) (79,784)
Other -- 177,743 --
Change in assets and liabilities:
Receivables (810,824) 1,275,512 (474,559)
Inventory 3,813 6,142 (47,823)
Prepaid expenses and other current assets 114,218 (199,399) (15,444)
Other assets 11,952 623,551 (64,055)
Accounts payable 80,626 171,002 19,115
Accrued expenses 291,816 (169,914) 1,039
Income taxes payable 71,212 -- (22,820)
--------------- --------------- -----------------
Net cash provided by operating activities $ 6,049,222 $ 9,306,453 $ 7,360,656
--------------- --------------- -----------------
Cash flows from investing activities:
Cash purchases of property and equipment (2,640,801) (1,805,072) (601,648)
Financed purchases of property and equipment (4,041,595) (3,429,440) (2,060,079)
--------------- --------------- -----------------
Total property and equipment acquired (6,682,396) (5,234,512) (2,661,727)
Less proceeds borrowed under financing agreements 4,041,595 3,429,440 2,060,079
--------------- --------------- -----------------
Net cash purchases of property and equipment (2,640,801) (1,805,072) (601,648)
Proceeds from disposal of property and equipment 6,623 214,266 (605,084)
Contribution to Composite Image Systems, LLC -- -- (345,912)
--------------- --------------- -----------------
Net cash used in investing activities $ (2,634,178) $ (1,590,806) $ (1,552,644)
--------------- --------------- -----------------
See accompanying notes to consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---------------- -------------- --------------
Cash flows from financing activities:
Repayments of notes payable to bank and
long-term debt $ (3,714,642) $ (3,236,538) $ (3,695,587)
Net proceeds from stock issuance -- 250,770 16,210
Purchase of treasury stock (7,788) (2,267,140) --
---------------- -------------- --------------
Net cash used in financing activities $ (3,722,430) $ (5,252,908) $ (3,679,377)
---------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents (307,386) 2,462,739 2,128,635
Cash and cash equivalents at beginning of year 6,989,781 4,527,042 2,398,407
---------------- -------------- --------------
Cash and cash equivalents at end of year $ 6,682,395 $ 6,989,781 $ 4,527,042
================ ============== ==============
Supplementary disclosure of cash flow information:
Cash paid during the year for:
Interest $ 723,000 $ 1,086,000 $ 1,198,000
Income taxes 30,000 214,000 71,000
================ ============== ==============
Supplemental disclosure of non-cash investing and financing activities:
The Company purchased property and equipment, financed through capital
lease obligations, of $4,041,595, $3,429,440 and $2,060,079 during each of the
years ended December 31, 2002, 2001 and 2000, respectively.
See accompanying notes to consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(1) Nature of Business and Basis of Presentation
Laser-Pacific Media Corporation provides a broad range of post-production
services to the motion picture and television industries.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Laser-Pacific Media Corporation and its subsidiaries ("Laser-Pacific" or the
"Company"). Accordingly, all significant intercompany accounts and transactions
have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments, primarily money market
funds, purchased with original maturities of three months or less to be cash
equivalents.
Depreciation
Depreciation of property and equipment is computed by use of the straight-line
method over the estimated useful lives of the related assets as follows:
Buildings 30 years
Building improvements 10 years
Technical equipment 7 years
Furniture and fixtures 5 years
Automobiles 4 years
Leasehold improvements Remaining life of the lease plus
options to renew, or 10 years,
whichever is shorter.
Replacements of equipment components are amortized over 18 months.
Inventory
Inventory consists primarily of tape stock and is valued at the lower of cost
(determined on the first-in, first-out basis) or market (net realizable value).
Other Assets
Other assets at December 31, 2002 and 2001consist primarily of security and
utility deposits.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2002, 2001 and 2000
Revenue Recognition and Credit Risk
The Company performs post-production services under short-term arrangements.
Revenues are recognized, generally on a daily basis, based on the number of
hours of work performed and amount of film and tape processed at the agreed upon
billing rate. The Company sells services to customers in the entertainment
industry, principally located in Southern California. Management performs
regular evaluations of customers' ability to satisfy their obligations. A
provision for doubtful accounts is recorded based upon these evaluations.
The Company's primary customers are the major motion picture and television
studios and production companies. The Company's ten largest customers accounted
for approximately 76%, 70% and 66% of total revenues in 2002, 2001 and 2000,
respectively. During 2002, three customers each accounted for more than 10% of
the Company's total revenues; two customers accounted for 11% each and one other
customer accounted for 12% of the Company's total revenues. During 2001, three
customers each accounted for more than 10% of the Company's total revenues. One
customer accounted for 10%, another customer for 11%, and another customer was
responsible for 12% of the Company's total revenues for the year ended December
31, 2001. During 2000, three customers each accounted for more than 10% of the
Company's total revenues for the year. Two customers accounted for 10% each and
another customer was responsible for 12% of the Company's total revenues for the
year ended December 31, 2000.
The Company's ten largest customers accounted for approximately 81% and 76% of
total accounts receivable in 2002 and 2001, respectively. During 2002, two
customers each accounted for more than 10% of the Company's total accounts
receivable; one customer accounted for 11% and another accounted for 14% of the
Company's total accounts receivable. During 2001, three customers each accounted
for more than 10% of the Company's total revenues. One customer accounted for
13%, another customer for 15%, and another customer was responsible for 16% of
the Company's total accounts receivable balance for the year ended December 31,
2001.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment and Disposal of Long-Lived Assets, provides a single accounting model
for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria
for classifying an asset as held for sale, broadens the scope of businesses to
be disposed of that qualify for reporting as discontinued operations, and
changes the timing of recognizing losses on such operations. The Company adopted
SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not affect the
Company's financial statements.
In accordance with SFAS No. 144, long-lived assets, such as property, plant, and
equipment, and purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimate undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the assets. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet.
Goodwill and intangible assets not subject to amortization are tested annually
for impairment, and are tested for impairment more frequently if events and
circumstances indicate that the asset might be impaired. An impairment loss is
recognized to the extent that the carrying amount exceeds the asset's fair
value.
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived
assets in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2002, 2001 and 2000
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant items subject to such
estimates and assumptions include the carrying amount of property and equipment
and valuation allowances for receivables and deferred income tax assets. Actual
results could differ materially from those estimates.
Stock-Based Compensation
The Company accounts for stock based compensation in accordance with SFAS No.
123, "Accounting for Stock Based Compensation." Under the provisions of SFAS No.
123, the Company has elected to continue to apply the intrinsic value-based
method of accounting prescribed by Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations, in
accounting for stock options issued to employees and directors of the Company
and provide the pro forma disclosure provision of SFAS No. 123 and 148. As such,
compensation expense would be recorded on the date of grant only if the current
market price of underlying stock exceeded the exercise price.
Comprehensive Income
Comprehensive income is the total of net income and all other non-owner changes
in equity. The Company does not have any transactions or other economic events
that qualify as comprehensive income. As such, net income represented
comprehensive income for each of the years in the three-year period ended
December 31, 2002.
Disclosures about Segments of an Enterprise
Pursuant to disclosure requirements of SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, the Company has determined that it has
one business segment - post-production services.
Advertising and Promotional Expenses
The Company charges advertising and promotional costs to expense as incurred.
Advertising and promotional expenses amounted to $462,000, $540,000, and
$506,000 for the years ended December 31, 2002, 2001, and 2000, respectively.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2002, 2001 and 2000
Fair Value of Financial Instruments
The carrying amounts of the following financial instruments approximate fair
value because of the short term maturity of those instruments: cash and cash
equivalents, receivables, prepaid expenses and other current assets, other
assets, accounts payable, accrued compensation expense, and accrued expenses.
Notes payable to bank and long-term debt approximate fair value based on current
rates offered to the Company for debt with similar terms.
Earnings per Share
Basic earnings per share ("EPS") is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution from securities that
could share in the earnings of the Company.
The reconciliation of basic and diluted weighted average shares is as follows:
Years ended December 31,
2002 2001 2000
------------------ ------------------- -----------------
Net income $ 1,179,754 $ 2,581,166 $ 3,510,047
------------------ ------------------- -----------------
Weighted average shares used in basic computation 7,102,120 7,384,095 7,725,693
Dilutive stock options and warrants 18,918 35,389 277,660
------------------ ------------------- -----------------
Weighted average shares used in diluted computation 7,121,038 7,419,484 8,003,353
================== =================== =================
Options and warrants to purchase shares of common stock at prices ranging from
$2.50 to $5.25 were outstanding at December 31, 2002, 2001, and 2000 in the
amounts of 427,000, 212,000, and 0, respectively, but were not included in the
computation of diluted earnings per share because the option exercise prices
were greater that the average market price of a common share.
Reclassifications
Certain amounts in the prior years consolidated have been reclassified to
conform with the current year presentation.
Impact of Recently Issued Accounting Pronouncements
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("FIN 45"), which addresses the disclosure to be made by
a guarantor in its interim and annual financial statements about its obligations
under guarantees. The disclosure requirements are effective for interim and
annual financial statements ending after December 15, 2002. The Company does not
have any guarantees that require disclosure under FIN 45 except for the
Company's guarantee associated with CIS.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2002, 2001 and 2000
FIN 45 also requires the recognition of a liability by a guarantor at the
inception of certain guarantees. FIN 45 requires the guarantor to recognize a
liability for the non-contingent component of a guarantee, which is the
obligation to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability is the
fair value of the guarantee at inception. The recognition of the liability is
required even if it is not probable that payments will be required under the
guarantee or if the guarantee was issued with a premium payment or as part of a
transaction with multiple elements. The initial recognition and measurement
provisions are effective for all guarantees within the scope of FIN 45 issued or
modified after December 31, 2002.
As noted above we have adopted the disclosure requirements of FIN 45 and will
apply the recognition and measurement provisions for all guarantees entered into
or modified after December 31, 2002. To date we have not entered into or
modified any guarantees requiring the recognition of a liability pursuant to the
provisions of FIN 45.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), which addresses the consolidation by
business enterprises of variable interest entities, which have one or both of
the following characteristics: (1) the equity investment at risk is not
sufficient to permit the entity to finance its activities without additional
financial support from other parties, or (2) the equity investors lack one or
more of the following essential characteristics of a controlling financial
interest: (a) the direct or indirect ability to make decisions about the
entity's activities through voting or similar rights, (b) the obligation to
absorb the expected losses of the entity if they occur, or (c) the right to
receive the expected residual returns of the entity if they occur. FIN 46 will
have a significant effect on existing practice because it requires existing
variable interest entities to be consolidated if those entities do not
effectively disburse risks among parties involved. In addition, FIN 46 contains
detailed disclosure requirements. FIN 46 applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. Management expects that the application of
this interpretation will not have a material effect on the Company's
consolidated financial statements.
Revenue Arrangements with Multiple Deliverables
In November 2002, the EITF issued EITF 00-21 Revenue Arrangements with Multiple
Deliverables ("EITF 00-21). EITF 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. Specifically, EITF 00-21 addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting. In applying EITF 00-21, separate contracts with the
same entity or related parties that are entered into at or near the same time
are presumed to have been negotiated as a package and should, therefore, be
evaluated as a single arrangement in considering whether there are one or more
units of accounting. That presumption may be overcome if there is sufficient
evidence to the contrary. EITF 00-21 also addresses how consideration should be
measured and allocated to the separate units of accounting in the arrangement.
The guidance in EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Alternatively, companies may elect
to report the change in accounting as a cumulative-effect adjustment. Management
expects that the application of EITF 00-21 will not have a material effect on
the Company's consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2002, 2001 and 2000
(3) Property and Equipment
Property and equipment is comprised of the following:
2002 2001
------------------ --------------------
Land $ 400,000 $ 400,000
Buildings and improvements 3,363,088 3,346,014
Technical equipment 42,936,173 37,801,344
Furniture and fixtures 1,313,726 1,164,331
Automobiles 118,209 91,602
Leasehold improvements 494,099 485,051
Construction in Progress 1,246,167 --
------------------ --------------------
49,871,462 43,288,342
Less: accumulated depreciation
28,683,749 24,083,935
------------------ --------------------
$ 21,187,713 $ 19,204,407
================== ====================
The Company leases technical equipment under capital leases expiring through
2007. Equipment under capital leases aggregated $15,273,286 and $13,603,399 and
related accumulated depreciation aggregated $7,526,662 and $5,453,449 at
December 31, 2002 and 2001, respectively. Interest cost capitalized during 2002
amounted to approximately $16,000.
The Company's notes payable to a bank are secured by substantially all of the
Company's assets (see note 4). Equipment securing the notes payable aggregated
$34,598,176 and $29,684,943 and related accumulated depreciation aggregated
$21,157,087 and $18,630,486 at December 31, 2002 and 2001, respectively.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2002, 2001 and 2000
(4) Notes Payable to Bank and Long-Term Debt
Notes payable to bank and long-term debt are summarized as follows:
2002 2001
---------------- ------------------
Term notes payable to bank were under $1,000,000, $500,000 and $1,000,000
credit agreements, each dated in 2002, secured by eligible property and
equipment, as defined, payable in twelve monthly installments per year at
$41,667 plus interest at fixed interest rates ranging from 4.64% to 6.04%,
through 2007. $ 2,375,000 $ --
Term notes payable to bank were pursuant to $4,000,000 and $1,000,000
credit agreements, secured by eligible property and equipment, as defined,
payable in twelve monthly installments per year at $83,333 plus interest at
the 30-day dealer commercial paper rate (1.30% at December 31, 2002) plus
2.20% and 2.65%, respectively, through 2006. 3,883,333 4,883,333
Capital lease obligations (note 8) 5,685,527 6,733,574
---------------- ------------------
11,943,860 11,616,907
Less current installments 3,528,407 3,738,680
---------------- ------------------
$ 8,415,453 $ 7,878,227
================ ==================
The Company has access to $6.0 million under a revolving credit line, which
expires in May 2003, subject to annual renewal. The Company has no borrowings
under this credit facility at December 31, 2002. The borrowings under the
revolving credit line incur interest at a rate equal to the 30-day dealer
commercial paper rate plus 2.20%.
The Company's term note and revolving loan credit agreements contain covenants,
including financial covenants related to leverage and fixed charge ratios. The
Company was in compliance with these covenants at December 31, 2002. The
aggregate future maturities of notes payable to bank and long-term debt,
exclusive of capital lease obligations, are summarized as follows:
December 31:
2003 $ 1,500,000
2004 1,500,000
2005 1,500,000
2006 1,383,333
2007 375,000
------------------
$ 6,258,333
==================
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2002, 2001 and 2000
(5) Income Taxes
A summary of income tax expense is as follows:
2002 2001 2000
----------------- ----------------- ----------------
Current:
Federal $ 103,000 $ 21,000 $ 57,000
State 82,000 126,000 (27,000)
----------------- ----------------- ----------------
Total Income Tax 185,000 147,000 30,000
----------------- ----------------- ----------------
Deferred:
Federal 607,000 356,000 --
State 28,000 85,000 --
----------------- ----------------- ----------------
Total Income Tax 635,000 441,000 --
----------------- ----------------- ----------------
Total expense $ 820,000 $ 588,000 $ 30,000
================= ================= ================
The provision for income taxes at the Company's effective tax rate differed from
the U.S. Federal tax rate as follows:
2002 2001 2000
----------------- ----------------- -----------------
Federal income tax expense at "expected
rate" $ 680,000 $ 1,078,000 $ 1,203,000
State taxes, net of Federal income tax
benefit 117,000 196,000 216,000
Nondeductible expenses -- (7,000) 12,000
Expiration of income tax credits 35,000 212,000 (72,000)
Change in valuation allowance for deferred
tax assets -- (879,000) (1,315,000)
Other (12,000) (12,000) (14,000)
----------------- ----------------- -----------------
Income tax expense $ 820,000 $ 588,000 $ 30,000
================= ================= =================
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2002, 2001 and 2000
(5) Income Taxes (continued)
The tax effect of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31, 2002 and 2001 is
presented below:
2002 2001
------------------ -----------------
Deferred tax assets and liabilities:
Net operating loss carryforwards $ 2,231,000 $ 2,333,000
Income tax credit carryforwards 194,000 268,000
Vacation pay 206,000 160,000
Reserve for bad debts 307,000 437,000
Other 296,000 86,000
------------------ -----------------
Total gross deferred tax assets 3,234,000 3,284,000
Deferred tax liabilities - property and
equipment (3,507,000) (2,922,000)
------------------ -----------------
Net deferred tax assets (liabilities) $ (273,000) $ 362,000
================== =================
At December 31, 2002, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $6,562,000 that expire principally
from 2008 through 2012. The Company also has approximately $194,000 of federal
alternative minimum tax credit carryforwards, which have no expiration period.
The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences
become deductible. Management considers the projected future taxable income and
tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management currently
believes it is more likely than not the Company will realize all of the benefits
of these deductible differences, accordingly, as of December 31, 2002, no
valuation allowance has been recorded for deferred tax liabilities.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2002, 2001 and 2000
(6) Stockholders' Equity
Warrants
In July 2001, 35 Lake Avenue, a California limited partnership in which James R.
Parks, the Company's Chief Executive Officer is a partner, exercised warrants to
purchase 250,000 shares of the Company's Common Stock at an exercise price of
$1.00 per share. The warrants originally were issued during 1997 in connection
with a short-term debt financing arrangement.
Preferred Stock Purchase Rights
On January 9, 2001, the Board of Directors of the Company authorized and
declared a dividend of one preferred stock purchase right for each share of
Common Stock, par value $.0001 per share, of the Company. The dividend was
payable on January 24, 2001 the "Record Date" to the holders of record of Common
Stock as of the close of business on such date.
These Rights only become exercisable on the Distribution Date. The Distribution
Date would follow the announcement that any person or entity (with certain
exceptions) had acquired 20% or more of the voting shares of the Company. Any
outstanding Rights shall expire on January 9, 2011, unless earlier redeemed or
exchanged. The Rights may be exercised through the purchase of Preferred Shares,
purchase of Common Shares or the right to purchase common stock of a successor
Company, all as defined in the underlying agreement.
Treasury Stock
In March 2002, the Company retired 900,200 shares of its Common Stock held in
treasury.
In April 2002, the Company purchased 3,300 shares of its Common Stock for $7,788
and subsequently retired the shares.
Stock Repurchases
In June 2001, the Company purchased 825,200 shares of its Common Stock in a
private transaction for $2,063,000.
In November 2001, the Company announced that it would commence a stock
repurchase program. The Board of Directors authorized the Company to allocate up
to $2,000,000 to purchase its Common Stock at suitable market prices through
November 1, 2002. In November 2001, the Company purchased 75,000 shares of its
Common Stock on the open market for $204,140 and in March 2002 the Company
purchased 3,300 shares of its Common Stock on the open market for $7,788 under
the Stock Repurchase program. All of the shares purchased were subsequently
retired.
(7) Stock-based Compensation and Other Option Grants
The Company's 1997 incentive stock option plan, as amended, originally provided
for grants of 1,000,000 of incentive or nonqualified stock options to officers,
directors and key employees at exercise prices equal to or greater than the fair
value of the Company's Common Stock at the date of grant. Options expire 10
years from the grant date and are generally vested at the date of grant. As of
December 31, 2002, 473,400 options were outstanding under the plan were vested
and 55,000 options outstanding under the plan were not vested.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2002, 2001 and 2000
(7) Stock-based Compensation and Other Option Grants (continued)
Activity under the plan for the years ended December 31, 2002, 2001 and 2000
follows:
Number of shares Weighted average Options exercisable
exercise price
-------------------- --------------------- --------------------
Shares under option at December 31, 1999 488,181 7.02 488,181
Granted 237,000 4.01
Exercised (96,649) 1.90
Expired and cancelled (313,982) 9.81
-------------------- --------------------- --------------------
Shares under option at December 31, 2000 314,550 3.41 264,550
Granted 45,000 3.50
Exercised (3,500) 0.22
Expired and cancelled -- --
-------------------- --------------------- --------------------
Shares under option at December 31, 2001 356,050 3.43 296,050
Granted 210,000 2.50
Exercised -- --
Expired and cancelled (37,650) 2.50
-------------------- --------------------- --------------------
Shares under option at December 31, 2002 528,400 $ 3.12 473,400
==================== ===================== ====================
The following table summarizes information about options outstanding under the
plan at December 31, 2002:
Outstanding Options
----------------------------------------------------------------------------------------------------
Remaining
Weighted average weighted
Options Weighted average exercise price for average
outstanding exercise price Options options that are contractual
for options that outstanding outstanding and life
are outstanding and exercisable exerciseable (in years)
----------------- ------------------ ---------------- -------------------------------------
16,400 $ 0.22 16,400 $ 0.22 5.00
20,000 1.78 20,000 1.78 4.80
10,000 2.13 10,000 2.13 8.30
210,000 2.50 210,000 2.50 9.10
20,000 3.26 20,000 3.26 8.50
217,000 4.13 167,000 4.13 7.30
20,000 4.13 20,000 4.13 4.30
15,000 5.25 10,000 5.25 8.70
----------------- ------------------ ---------------- -------------------------------------
Total 528,400 $ 3.23 473,400 $ 3.12 7.90
================= ================== ================ =====================================
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2002, 2001 and 2000
(7) Stock-based Compensation and Other Option Grants (continued)
Pro Forma Information
The Company has adopted the disclosure-only provisions of SFAS No. 123 and 148.
Accordingly, for the stock options granted to employees no compensation cost has
been recognized in the accompanying consolidated statements of income because
the exercise price equaled or exceeded the fair value of the underlying Common
Stock at the date of grant. Had compensation cost for the Company's stock
options granted to employees been determined based upon the fair value at the
grant date for awards consistent with SFAS No. 123, the Company's recorded and
pro forma net income and earnings per share for the years ended December 31,
2002, 2001 and 2000 would have been as follows:
Year ended December 31,
----------------------------------------------------------------
2002 2001 2000
-------------------- ------------------ ------------------
Net income:
As reported $ 1,179,754 $ 2,581,166 $ 3,510,047
Less: compensation expense assuming fair
value methodology of options for all
awards granted since January 1, 1995, net
of related income taxes (428,400) (103,850) (689,050)
-------------------- ------------------ ------------------
Pro forma $ 751,354 $ 2,477,316 $ 2,820,997
==================== ================== ==================
Basic net income per share:
As reported $ 0.17 $ 0.35 $ 0.45
Pro forma 0.11 0.34 0.37
Diluted net income per share:
As reported $ 0.17 $ 0.35 $ 0.44
Pro forma 0.11 0.34 0.35
==================== ================== ==================
Fair value of Common Stock options is estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted average
assumptions:
2002 2001 2000
----------------- ----------------- -----------------
Expected life (in years) 10.00 10.00 10.00
Risk-free interest rate 1.57 3.33-4.19 4.50
Volatility 0.81 1.06 0.78-1.22
Dividend yield -- -- --
Fair value - grant date 2.04 1.97-4.83 1.47-3.95
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the fair
value of its options.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2002, 2001 and 2000
(8) Commitments and Contingencies
Leases
The Company leases certain technical equipment under capital leases that expire
through 2007. These capital leases have interest rates ranging from 4.64% to
12.75% and are secured by the underlying equipment.
The Company also leases corporate offices, certain operating facilities and
equipment under non-cancelable operating leases that expire through 2006.
The present value of future minimum capital lease payments and future minimum
lease payments under non-cancelable operating leases, principally facility
leases, as of December 31, 2002, are summarized as follows:
Capital leases Operating leases
Year ending December 31:
2003 $ 2,347,856 $ 754,550
2004 1,947,598 770,948
2005 1,324,408 789,621
2006 355,692 173,409
2007 326,053 --
------------------ ----------------------
Total minimum lease payments 6,301,607 $ 2,488,528
======================
Less amount representing interest 616,080
------------------
Present value of minimum lease payments $ 5,685,527
==================
Rent expense amounted to $927,844, $954,686 and $834,759 for the years ended
December 31, 2002, 2001 and 2000, respectively.
Legal Matters
The Company may have certain contingent liabilities resulting from litigation
and claims incident to the ordinary course of business. At this time, management
believes that these ordinary course proceedings will not have a material adverse
effect on the Company's results of operations or financial position and is not
aware of any material pending legal proceedings.
Employment Agreements
The Company has employment agreements with certain officers for periods of one
and five years. These agreements require written notices of termination ranging
from ninety days to five years.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2002, 2001 and 2000
(8) Commitments and Contingencies (continued)
Contingencies
On July 9, 2001, the Company entered into an agreement with its joint venture
partner in CIS, to sell its interest in CIS to its joint venture partner. Under
the terms of the agreement, the Company transferred to its joint venture partner
all of the Company's interest in CIS and certain equipment previously leased to
CIS in exchange for a cash payment of $575,000. The Company gave a corporate
guarantee in connection with a lease obligation of the joint venture, and CIS
and the joint venture partner have agreed to indemnify the Company for up to the
amount of the principal obligation for any claims that might arise under the
guarantee should CIS default on the lease obligation. The lease obligation is
also secured by the equipment purchased under the lease. The Company estimates
that, as of December 31, 2002, the current principle balance outstanding on the
lease obligation was approximately $195,000.
(9) Benefit Plan
The Company has a defined contribution Profit Sharing 401(k) Savings Plan that
covers substantially all of its employees. Under the terms of the plan,
employees can elect to defer up to 15% of their wages, subject to certain
Internal Revenue Service (IRS) limitations, by making voluntary contributions to
the plan. Also, employees over age fifty may make additional elective
contributions if they meet certain IRS requirements. Additionally, the Company,
at the discretion of management, can elect to match up to 100% of the voluntary
contributions made by its employees, but may not exceed 4% of an employee's
compensation. For the years ended December 31, 2002, 2001 and 2000 the Company
did not contribute to the plan on behalf of its employees.
(10) Other Income
Other income in 2002 consists primarily of interest earned from cash balances.
Other income in 2001 consists of income recognized in connection with a research
and development collaboration agreement of $193,000, income from a gain on the
sale of the Company's interest in CIS of $83,000 discussed in Note 8 above, and
interest income earned from cash balances. Other income in 2000 consists
primarily of interest earned from cash balances.
(11) Related Party Transactions
James R. Parks, Chairman of the Board and Chief Executive Officer of the
Company, is an executive director of CBIZ Southern California, Inc. ("CBIZ").
CBIZ provides tax, accounting, and management consulting services to the
Company. CBIZ charges for services were approximately $81,000, $83,000, and
$77,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
James R. Parks, Chairman of the Board and Chief Executive Officer of the
Company, is an executive producer for Local Boys, LLC a producer of films. The
Company has been providing services for a film produced by Local Boys, LLC since
September 2001. Fees for services were billed at the Company's standard rates
and the total amount billed for services through December 31, 2002 was $271,000.
As of December 31, 2002, $54,000 of the total amount billed was outstanding. As
of March 27, 2003, no invoices were outstanding relating to the activities of
Local Boys, LLC.
In July 2001, 35 Lake Avenue L.P., a California limited partnership in which
James R. Parks, the Company's Chief Executive Officer, is a partner, exercised
warrants to purchase 250,000 shares of the Company's Common Stock at an exercise
price of $1.00 per share. The warrants originally were issued during 1997 in
connection with a short-term debt financing arrangement.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
December 31, 2002, 2001 and 2000
(11) Related Party Transactions (continued)
David Merritt, a director of the Company and chairman of the audit committee is
a member of Gerard Klauer Mattison & Co., Inc. In April 2001, the Company
engaged Gerard Klauer Mattison & Co., Inc. as a financial advisor. Gerard Klauer
Mattison & Co., Inc billed fees of $21,000 in 2002 and $75,000 in 2001 for
services provided to the Company.
Schedule II
Valuation and Qualifying Accounts
Years ended December 31, 2002, 2001 and 2000
Column A Column B Column C Column D Column E
- ------------------------------- -------------------- -------------------- ------------------- ---------------------
Charged
Balance at (recovery) to Deductions
Description beginning of costs and write-offs (1) Balance at end
period expenses of period
- ------------------------------- -------------------- -------------------- ------------------- ---------------------
Allowance for bad debts:
2000 $ 1,372,000 274,000 (359,000) 1,287,000
==================== ==================== =================== =====================
2001 $ 1,287,000 261,000 (451,000) 1,097,000
==================== ==================== =================== =====================
2002 $ 1,097,000 (221,000) (106,000) 770,000
==================== ==================== =================== =====================
(1) Uncollectable accounts written off, net of recoveries.
PART III
All references in this Part III to the Company's definitive proxy statement
for its 2003 Annual Meeting of Stockholders are exclusive of the information set
forth under the captions "Report of the Board of Directors on Executive
Compensation," "Audit Committee Report" and "Stock Performance Graph and Table"
therein.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this Item is incorporated by reference to the registrant's
definitive proxy statement for its 2003 Annual Meeting of Stockholders, to be
filed on or before April 30, 2003, for the limited purpose of providing the
information necessary to comply with this Item.
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item is incorporated by reference to the registrant's
definitive proxy statement for its 2003 Annual Meeting of Stockholders, to be
filed on or before April 30, 2003, for the limited purpose of providing the
information necessary to comply with this Item.
Item 12. Security Ownership of Certain Beneficial Owners AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The response to this Item is incorporated by reference to the registrant's
definitive proxy statement for its 2003 Annual Meeting of Stockholders, to be
filed on or before April 30, 2003, for the limited purpose of providing the
information necessary to comply with this Item. With respect to the information
required herein by Item 201(d) of Regulation S-K, such information is contained
under Item 5 of this Form 10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item is incorporated by reference to the registrant's
definitive proxy statement for its 2003 Annual Meeting of Stockholders, to be
filed on or before April 30, 2003, for the limited purpose of providing the
information necessary to comply with this Item.
Item 14. Controls and Procedures
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision of and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rules 13a-14 and 13a-15
promulgated under the Exchange Act. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
There were no significant changes in the Company's internal controls or in
other factors that would significantly affect those internal controls subsequent
to the date of the most recent evaluation. Since there were no significant
deficiencies or material weaknesses in the Company's internal controls, the
Company did not take any corrective actions.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1 and 2. Financial Statements and Financial Statement Schedule: The
financial statements and financial statement schedule are
listed in the accompanying index to the Consolidated Financial
Statements on page 21 of this Form 10-K. The financial
statements indicated on the index appearing on page 21 hereof
are incorporated herein by reference.
3. Exhibits: The exhibits required by Item 601 of Regulation S-K
are listed on the accompanying exhibit index and are
incorporated herein by reference or are filed as part of this
Form 10-K.
EXHIBIT INDEX
3.1 Certificate of Incorporation of the Company.(1)
3.2 Certificate of Amendment to Certificate of Incorporation of
the Company, filed August 29, 1990.(2)
3.3 Certificate of Amendment to Certificate of Incorporation of
the Company, filed August 14, 1991.(3)
3.4 Amended and Restated ByLaws of the Company.(15)
4.1 Form of Common Stock Certificate.(2)
4.2 Rights Agreement, dated as of January 12, 2001, between the
Company and U.S. Stock Transfer Corporation, as Rights
Agent.(11)
4.3 Certificate of Designations of Series B Junior Participating
Cumulative Preferred Stock.(11)
10.2 Laser-Pacific Media Corporation Incentive and Non-Qualified
Stock Option Plan (1997).*(7)
10.3 Amendment No. 1 to Laser-Pacific Media Corporation Incentive
and Non-Qualified Stock Option Plan (1997).*(9)
10.5 Employment Agreement, dated as of May 15, 1990, between the
Company and Emory Cohen.(1)
10.8 CIT Group/Credit Finance, Inc. Credit Agreement, entered into
as of August 3, 1992.(4)
10.8A Amended Loan Agreement, between CIT Group/Credit Finance, Inc.
and the Company, dated as of April 12, 1995.(5)
10.8B Amended Loan Agreement, between CIT Group/Credit Finance, Inc.
and the Company, dated as of April 10, 1997.(6)
10.8C Amended Loan Agreement, between CIT Group/Credit Finance, Inc.
and the Company, dated as of June 15, 1998.(8)
10.8D Amended Loan Agreement, between CIT Group/Credit Finance, Inc.
and the Company, dated as of June 7, 1999.(10)
10.15 Employment Agreement, dated as of July 24, 1995, between the
Company and Randolph Blim.(5)
10.19 Employment Agreement, dated as of August 1, 1999, between the
Company and Robert McClain.(10)
10.20 Lease Agreement, dated as of February 7, 2001, between the
Company and Morton La Kretz, Trustee of the Crossroads Trust
UTD 4/28/82.(12)
10.21 Lease Agreement, dated as of March 1, 2001, between the
Company and NTA Partners.(12)
10.22 Term Loan and Security Agreement (including all other related
loan documents), as amended, dated as of June 5, 2001,
between the Company and Merrill Lynch Business Financial
Services Inc.(13)
10.23 Lease Agreement, dated May 18, 2001, between the Company and
Melba Investments, LLC.(14)
21.1 Amended and Restated List of Subsidiaries. (15)
23.1 Consent of KPMG LLP, Independent Public Accountants.(15)
99.1 Certification of James R. Parks, Chief Executive Officer
of the Company, Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.(15)
99.2 Certification of Robert McClain, Chief Financial Officer
of the Company, Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.(15)
___________________________
* Management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-K pursuant to the
applicable rules and regulations of the SEC.
(1) Previously filed as an exhibit to the Company's Registration
Statement on Form S-1, as filed with the SEC on June 7, 1991,
incorporated herein by reference (File No. 33-41085).
(2) Previously filed as an exhibit to the Company's Registration
Statement on Form S-1/A, as filed with the SEC on July 23,
1991, incorporated herein by reference (File No. 33-41085).
(3) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K, as filed with the SEC on April 10, 1992,
incorporated herein by reference (File No. 1-16323).
(4) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K, as filed with the SEC on August 12, 1992,
incorporated herein by reference (File No. 1-16323).
(5) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K, as filed with the SEC on April 14, 1996,
incorporated herein by reference (File No. 1-16323).
(6) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K, as filed with the SEC on April 14, 1997,
incorporated herein by reference (File No. 1-16323).
(7) Previously filed as Exhibit A to the Company's definitive Proxy
Statement on Schedule 14A, as filed with the SEC on May 7,
1997, incorporated herein by reference (File No. 333-42359).
(8) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K, as filed with the SEC on March 29, 1999,
incorporated herein by reference (File No. 1-16323).
(9) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q, as filed with the SEC on August 12, 1999,
incorporated herein by reference (File No. 1-16323).
(10) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K, as filed with the SEC on March 30, 2000,
incorporated herein by reference(File No. 1-16323).
(11) Previously filed as an exhibit to the Company's Form 8-K, as filed
with the SEC on January 19, 2001, incorporated herein by
reference(File No. 1-16323).
(12) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K, as filed with the SEC on March 29, 2001,
incorporated herein by reference (File No. 1-16323).
(13) Previously filed as an exhibit to the Company's Quarterly Report
on Form 10-Q, as filed with the SEC on August 8, 2001,
incorporated herein by reference (File No. 1-16323).
(14) Previously filed as an exhibit to the Company's Annual Report on
Form 10-K, as filed with the SEC on March 27, 2002,
incorporated herein by reference (File No. 1-16323).
(15) Filed herewith.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on March 27, 2003.
LASER-PACIFIC MEDIA CORPORATION
By: /s/ James R. Parks
James R. Parks
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ James R. Parks
James R. Parks Chairman of the Board and March 26, 2003
Chief Executive Officer (Principal Executive Officer)
/s/ Emory M. Cohen
Emory M. Cohen President, Chief Operating Officer and Director March 27, 2003
/s/ Robert McClain
Robert McClain Vice President, Chief Financial Officer and March 26, 2003
Corporate Secretary (Principal Financial and Accounting Officer)
/s/ Thomas D. Gordon
Thomas D. Gordon Director March 26, 2003
/s/ Craig A. Jacobson
Craig A. Jacobson Director March 20, 2003
/s/ David C. Merritt
David C. Merritt Director March 26, 2003
Certifications
Each of the undersigned, in his capacity as the Chief Executive Officer and
Chief Financial Officer of Laser-Pacific Media Corporation, as the case may be,
provides the following certifications required by 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, and 17 C.F.R.
Section 240.13a-14.
Certification of Chief Executive Officer
I, James R. Parks, certify that:
1. I have reviewed this annual report on Form 10-K of Laser-Pacific Media
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ James R. Parks
James R. Parks
Chief Executive Officer
Certification of Chief Financial Officer
I, Robert McClain, certify that:
1. I have reviewed this annual report on Form 10-K of Laser-Pacific Media
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Robert McClain
Robert McClain
Chief Financial Officer