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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Quarterly Period Ended March 31, 2003
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
(323) 462-6266
(Address, including zip code and telephone number, including
area code of principal executive offices)
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
As of April 30, 2003, 7,101,295 shares of the registrant's Common Stock, $.0001
par value per share, were outstanding.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes ___ No _X_
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Table of Contents
Part I. Financial Information Page
---------
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets (Unaudited) 3
Condensed Consolidated Statements of Operations (Unaudited) 4
Condensed Consolidated Statements of Cash Flows (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Item 4. Controls and Procedures 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Certifications 16
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2003 2002
--------------- ----------------
Assets
Current Assets:
Cash and cash equivalents $ 7,690,677 $ 6,682,395
Receivables, net of allowance for doubtful accounts 4,377,274 4,835,360
Other current assets 1,418,375 1,405,772
--------------- ----------------
Total Current Assets 13,486,326 12,923,527
Net property and equipment, at cost 21,219,580 21,187,713
Other assets 185,254 188,579
--------------- ----------------
Total Assets $ 34,891,160 $ 34,299,819
=============== ================
Liabilities and Stockholders' Equity
Current Liabilities:
Current installments of notes payable to bank and long-term debt $ 3,390,215 $ 3,528,407
Other current liabilities 3,613,441 2,718,814
--------------- ----------------
Total Current Liabilities 7,003,656 6,247,221
Deferred tax liabilities 829,058 829,058
Notes payable to bank and long-term debt, less current installments 7,594,626 8,415,453
Stockholders' Equity:
Preferred stock, $.0001 par value. Authorized 3,500,000 shares; -- --
none issued
Common stock, $.0001 par value. Authorized 25,000,000 shares;
issued and outstanding 7,101,295 710 710
Additional paid-in capital 18,089,063 18,089,063
Retained earnings 1,374,047 718,314
--------------- ----------------
Net Stockholders' Equity 19,463,820 18,808,087
--------------- ----------------
Total Liabilities and Stockholders' Equity $ 34,891,160 $ 34,299,819
=============== ================
See accompanying notes to the condensed consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
-----------------------------------
2003 2002
--------------- ----------------
Revenues $ 9,794,754 $ 7,989,218
Operating costs:
Direct 5,788,401 4,797,443
Depreciation 1,293,649 1,142,255
--------------- ----------------
Total operating costs 7,082,050 5,939,698
--------------- ----------------
Gross profit 2,712,704 2,049,520
Selling, general and administrative
expenses 1,449,539 1,199,918
--------------- ----------------
Income from operations 1,263,165 849,602
Interest expense 189,866 225,530
Other income 19,899 30,988
--------------- ----------------
Income before income taxes 1,093,198 655,060
Provision for income taxes 437,465 262,210
--------------- ----------------
Net income $ 655,733 $ 392,850
=============== ================
Net income per share (basic) $ 0.09 $ 0.06
=============== ================
Net income per share (diluted) $ 0.09 $ 0.06
=============== ================
Weighted average shares outstanding (basic) 7,101,295 7,104,595
=============== ================
Weighted average shares outstanding (diluted) 7,115,653 7,127,528
=============== ================
See accompanying notes to the condensed consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
------------------------------------------
2003 2002
------------------- -------------------
Cash flows from operating activities:
Net income $ 655,733 $ 392,850
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property and equipment 1,293,649 1,142,255
Gain on sale of property and equipment (1,185) --
Provision (recovery) for doubtful accounts receivable 50,000 (70,885)
Change in assets and liabilities:
Receivables 408,085 647,649
Other current assets (12,603) 143,034
Other assets 3,325 15,185
Other current liabilities 894,627 174,756
------------------- -------------------
Net cash provided by operating activities 3,291,631 2,444,844
=================== ===================
Cash flows from investing activities:
Purchases of property and equipment (1,341,798) (707,334)
Net proceeds from disposal of property and equipment 17,468 --
------------------- -------------------
Net cash used in investing activities (1,324,330) (707,334)
=================== ===================
Cash flows from financing activities:
Net repayment of notes payable to bank and long-term debt (959,019) (937,222)
------------------- -------------------
Net cash used in financing activities (959,019) (937,222)
=================== ===================
Net increase in cash and cash equivalents 1,008,282 800,288
Cash and cash equivalents at beginning of period 6,682,395 6,989,781
------------------- -------------------
Cash and cash equivalents at end of period $ 7,690,677 $ 7,790,069
=================== ===================
See accompanying notes to the condensed consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring items) necessary to present fairly the financial position of
Laser-Pacific Media Corporation (the "Company") and its subsidiaries as of March
31, 2003 and December 31, 2002 and the results of operations and cash flows for
the three month periods ended March 31, 2003 and 2002. The Company's business is
subject to the prime time television industry's typical seasonality.
Historically, revenues and income from operations have been highest during the
first and fourth quarters, when production of television programs and demand for
the Company's services are at their highest. The net income or loss of any
interim quarter is seasonally disproportionate to revenues because selling,
general and administrative expenses and certain operating expenses remain
relatively constant during the year. Therefore, interim results are not
indicative of results to be expected for the entire fiscal year.
In accordance with the directives of the Securities and Exchange Commission
under Rule 10-01 of Regulation S-X, the accompanying consolidated financial
statements and footnotes have been condensed and do not contain certain
information included in the Company's annual consolidated financial statements
and notes thereto.
(2) Income per Common Share
The Company presents basic and diluted earnings per share ("EPS"). Basic
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 are issuable and that could
share in the earnings of the Company.
The reconciliation of basic and diluted weighted average shares is as
follows:
Three Months Ended March 31,
------------------------------------
2003 2002
---------------- ----------------
Net income $ 655,733 $ 392,850
---------------- ----------------
Shares:
Weighted average shares used in basic computation 7,101,295 7,104,595
Dilutive stock options 14,358 22,933
---------------- ----------------
Weighted average shares used in diluted computation 7,115,653 7,127,528
================ ================
Net income per common share:
Basic $ 0.09 $ 0.06
Diluted $ 0.09 $ 0.06
Options to purchase shares of common stock at prices ranging from $1.78 to
$5.25 per share were outstanding for the three month periods ended March 31,
2003 and 2002 in the amount of 457,000 and 458,150, respectively were not
included in the computation of diluted earnings per share because the exercise
price of the options was greater than the average market price of a common
share.
(3) Income Taxes
For the three months ended March 31, 2003, federal income tax expense of
$372,000 and state income tax of $65,000 was recorded. Income tax expense for
the quarter ended March 31, 2003 was computed using the estimated effective tax
rate to apply for all of 2003. The rate is subject to ongoing review and
evaluation by management.
(4) Segment Reporting
In compliance with disclosure regarding 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.
(5) Stock-based Compensation and Other Option Grants
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. No stock options were granted during the
quarter ended March 31, 2003. Stock options generally vest 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 three months ended March 31, 2003 and 2002 would have been as
follows:
Three Months Ended March 31,
--------------------------------------
2003 2002
---------------- ------------------
----------------
Net income (loss):
As reported $ 655,733 $ 392,850
Less: compensation expense assuming fair value
methodology of options for all awards granted, net
of related income taxes --- (468,300)
---------------- ------------------
Pro forma $ 655,733 $ (75,450)
================ ==================
Basic net income (loss) per share:
As reported $ 0.09 $ 0.06
Pro forma 0.09 (0.01)
================ ==================
Diluted net income (loss) per share:
As reported $ 0.09 $ 0.06
Pro forma 0.09 (0.01)
================ ==================
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:
2003 2002
----------------- ----------------
Expected life (in years) -- 10.00
Risk-free interest rate -- 1.57
Volatility -- 0.987
Dividend yield -- --
Fair value - grant date -- 2.23
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.
Item 2. 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 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 Company's expectation that sales in its Pacific Film
Laboratories will continue to decrease and the impact of labor contract
negotiations with its unions. 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:
a change in the television industry's attitude towards the use of film; a strike
that could occur if labor negotiations were to be unsuccessful; 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.
Results of Operations
Revenues for the quarter ended March 31, 2003 increased to $9,795,000 from
$7,989,000 for the same period last year, an increase of $1,806,000 or 22.6%.
The increase in revenues is primarily attributable to an increase in the number
of feature films for which the company provided services. The Company also
believes that an improvement in the economic environment in the entertainment
and advertising sectors contributed to the increase in revenues. The increase in
total revenues was partially offset by decreases in sound services revenue of
$135,000 and film processing revenue of $152,000, discussed below.
Film processing revenues for the quarter ended March 31, 2003 decreased to
$421,000 from $573,000 for the same period last year, a decrease of $152,000 or
26.6%. The decrease is primarily 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 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, and 7.2% and 4.2% of total revenues in the first quarter
of 2002 and 2003, respectively. This is discussed in greater detail below in
Matters Affecting Operations.
Operating costs for the quarter ended March 31, 2003 were $7,082,000 versus
$5,940,000 for the same period last year, an increase of $1,142,000 or 19.2%.
The increase in operating costs is consistent with the increase in revenues. The
increase in operating costs was primarily the result of increases in wages and
salaries, videotape stock expense, and depreciation expense. Increases in wages
and salaries of $430,000 and videotape stock expense of $205,000 were primarily
the result of the overall increase in demand for the Company's services
discussed above. The increase in depreciation expense of $151,000 was due to
depreciation related to equipment purchases. For the quarter ended March 31,
2003, bad debt expense was $50,000 compared to a bad debt recovery of $71,000
related to specific collections of previously written off receivables during the
same period in the prior year. Total operating costs, including depreciation, as
a percentage of revenues for the three months ended March 31, 2003 were 72.3%
compared with 74.3% for the same year-ago period.
For the quarter ended March 31, 2003, the Company recorded a gross profit
of $2,713,000 compared to a gross profit of $2,050,000 for the same period last
year, an increase of $663,000 or 32.4%. The increase in gross profit is the
result of increased sales volume partially offset by increased operating costs,
which are discussed above. Gross profit for the quarter ended March 31, 2003, as
a percentage of total revenues was 27.7% compared to 25.7% for the same year-ago
period.
Selling, general and administrative expenses ("SG&A expenses") for the
three months ended March 31, 2003 were $1,450,000 compared to $1,200,000 for the
same period last year, an increase of $250,000 or 20.8%. The increase in SG&A
expenses is primarily due to increases in professional services of $165,000,
wages and salaries of $52,000, and computer software and related services of
$20,000. The increase in professional services is primarily the result of
increased audit and attorney fees as a result of requirements and regulations
associated with the Sarbanes-Oxley Act of 2002 and increased labor attorney
fees. The increase in wages and salaries is primarily the result of an increase
in the number of employees and increases in wages. Expenses related to new
accounting and financial reporting computer software increased due to training,
maintenance, and data conversion.
Interest expense for the quarter ended March 31, 2003 was $190,000 compared
to $226,000 for the same period last year, a decrease of $36,000 or 15.8%. The
reduction in interest expense is due to lower interest rates on borrowings.
Income tax expense for the three months ended March 31, 2003 was $437,000
compared to $262,000 for the same period last year, an increase of $175,000 or
66.8%. The increase in income tax expense is due to an increase in taxable
income. The Company's effective tax rate was 40% for both periods.
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 under "Results of Operations"
above. 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. The majority of situation
comedies are now shot on videotape and the company expects this trend 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 also reduce revenues from telecine for television
programs.
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 ("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.
On July 9, 2001, the Company entered into an agreement with its joint
venture partner in Composite Image Systems, LLC ("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 March 31, 2003, the current
principal balance outstanding on the lease obligation was approximately
$155,000.
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.
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 and the services that it provides, 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 its 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 March 31, 2003. As of March 31, 2003, the outstanding
borrowing under the facility in the form of term loans was $5.9 million; there
was no borrowing under the revolving credit facility. The revolving loan expires
on May 31, 2003 and may be renewed annually. The Merrill Lynch equipment term
loans expire from June 2006 through December 2007. The equipment term loans are
payable monthly.
In addition to the above, as of March 31, 2003, the Company had outstanding
capital lease obligations relating to the acquisition of equipment of
approximately $5.1 million with various other lenders. The obligations are for
terms of up to 60 months at interest rates ranging from 5.25% to 9.75%. The
obligations are secured by the equipment financed. The Company also had
obligations under operating leases relating to its facilities of $2.3 million at
March 31, 2003.
Discussion of Cash Flows
Net cash provided by operating activities in the first quarter of 2003 was
$3,292,000 compared to $2,445,000 in the first quarter of 2002, an increase of
$847,000 or 34.6%. The increase in cash provided by operating activities during
the first quarter of 2003 was primarily due to increases in net income of
$263,000, accounts payable of $357,000, and income taxes payable of $461,000.
These increases were partially offset by a decrease in net accounts receivable
of $240,000 primarily due to the reduction in the Company's allowance for
doubtful accounts that occurred in 2002.
Net cash used in investing activities in the first quarter of 2003 was
$1,324,000 compared to $707,000 for the same year-ago period, an increase of
$617,000 or 87.2%. The increase in cash used in investing activities was
primarily due to an increase in purchases of property and equipment.
Net cash used in financing activities in the first quarter of 2003 was
$959,000 compared to $937,000 for the same year-ago period, an increase of
$22,000 or 2.3%. The increase in cash used in financing activities was primarily
due to increased principal payments made by the Company to its lenders.
As a result of the above factors, the Company recorded a net increase in
cash and cash equivalents in the first quarter of 2003 of $1,008,000 compared to
a net increase of $800,000 for the same year-ago period.
Critical Accounting Policies
The Company'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 lease (including option
periods in which the Company will incur a
penalty for non-renewal) or 10 years,
whichever is shorter.
- -------------------------------- -----------------------------------------------
In addition, replacement parts 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. As of March
31, 2003, the Company believes that the benefits of deferred tax assets of
$556,000 will be realized.
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. As of March 31,
2003, the allowance for bad debts was $808,000 and trade receivables totaled
$5.2 million. Changes in the financial condition of the Company's customers, the
Company or other business conditions could affect the adequacy of the Company's
allowance.
Recent Accounting Pronouncements
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 did not have any 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 5 to the accompanying unaudited
condensed 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 the Company has 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, the Company has not
entered into or modified any guarantees requiring the recognition of a liability
pursuant to the provisions of FIN 45.
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.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), which addressed 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Derivative Instruments. The Company invests funds in excess of its
operational requirements in a Money Market Fund. The cash invested in this fund
at March 31, 2003 and December 31, 2002 was $7.1 million and $6.4 million,
respectively. The average monthly ending balance for the last twelve months was
$6.5 million. Over the past twelve months, the Company has earned $90,000 from
its investment in the fund. The average monthly yield over that period was
1.36%.
If the average monthly yield were to change by 1%, the income earned would
change by approximately $65,000 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 $3.6 million at
March 31, 2003 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 March 31, 2003.
If, under the existing credit facility, the "30-day dealer commercial
paper" rate were to change by 1%, interest expense would change by approximately
$32,000 over a twelve-month period.
Item 4. 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 II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.4 Amended and Restated Bylaws of the Company.
Exhibit 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.
Exhibit 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.
(b) Reports on Form 8-K
None.
Signatures
Pursuant to the requirements 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.
LASER-PACIFIC MEDIA CORPORATION
Dated: May 13, 2003 /s/ James R. Parks
--------------------
James R. Parks
Chief Executive Officer
Dated: May 13, 2003 /s/ Robert McClain
------------------
Robert McClain
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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 quarterly report on Form 10-Q of Laser-Pacific
Media Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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
quarterly 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 quarterly report (the "Evaluation Date"); and
c. presented in this quarterly 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 function):
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 quarterly 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: May 13, 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 quarterly report on Form 10-Q of Laser-Pacific
Media Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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
quarterly 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 quarterly report (the "Evaluation Date"); and
c. presented in this quarterly 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 function):
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 quarterly 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: May 13, 2003
/s/ Robert McClain
------------------
Robert McClain
Chief Financial Officer