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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 June 30, 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 0-19407
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, with 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 July 31, 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
Page
Part I. Financial Information -------
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 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 17
Item 4. Controls and Procedures 17
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
2003 2002
--------------- ----------------
Assets
Current Assets:
Cash and cash equivalents $ 8,225,334 $ 6,682,395
Receivables, net of allowance for doubtful accounts 2,726,243 4,835,360
Other current assets 1,403,404 1,405,772
--------------- ----------------
Total Current Assets 12,354,981 12,923,527
Net property and equipment 20,587,895 21,187,713
Other assets, net 148,154 188,579
--------------- ----------------
Total Assets $ 33,091,030 $ 34,299,819
=============== ================
Liabilities and Stockholders' Equity
Current Liabilities:
Current installments of notes payable to bank and long-term debt $ 3,364,695 $ 3,528,407
Other current liabilities 2,761,695 2,718,814
--------------- ----------------
Total Current Liabilities 6,126,390 6,247,221
Deferred tax liabilities, net 829,058 829,058
Notes payable to bank and long-term debt, less current installments 6,765,983 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 1,279,826 718,314
--------------- ----------------
Net Stockholders' Equity 19,369,599 18,808,087
--------------- ----------------
Total Liabilities and Stockholders' Equity $ 33,091,030 $ 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 Six Months Ended
June 30, June 30,
---------------------------------- --------------------------------
2003 2002 2003 2002
--------------- --------------- -------------- --------------
Revenues $ 7,617,297 $ 5,806,282 $ 17,412,051 $ 13,795,500
Operating costs
Direct costs 4,963,201 4,333,980 10,751,601 9,131,423
Depreciation and amortization 1,295,689 1,153,984 2,589,339 2,296,239
--------------- --------------- -------------- --------------
Total operating costs 6,258,890 5,487,964 13,340,940 11,427,662
--------------- --------------- -------------- --------------
Gross profit 1,358,407 318,318 4,071,111 2,367,838
Selling, general and administrative expenses 1,359,464 1,152,472 2,809,004 2,352,390
--------------- --------------- -------------- --------------
Income (loss) from operations (1,057) (834,154) 1,262,107 15,448
Interest expense 173,049 206,984 362,915 432,514
Other income 17,380 38,740 37,280 69,728
--------------- --------------- -------------- --------------
Income (loss) before income tax expense (benefit) (156,726) (1,002,398) 936,472 (347,338)
Income tax expense (benefit) (62,505) (400,774) 374,960 (138,564)
--------------- --------------- -------------- --------------
Net income (loss) $ (94,221) $ (601,624) $ 561,512 $ (208,774)
=============== =============== ============== ==============
Income (loss) per share (basic) $ (0.01) $ (0.08) $ 0.08 $ (0.03)
--------------- --------------- -------------- --------------
Income (loss) per share (diluted) $ (0.01) $ (0.08) $ 0.08 $ (0.03)
--------------- --------------- -------------- --------------
Weighted average shares outstanding (basic) 7,101,295 7,101,295 7,101,295 7,102,945
=============== =============== ============== ==============
Weighted average shares outstanding (diluted) 7,101,295 7,101,295 7,118,253 7,102,945
=============== =============== ============== ==============
See accompanying notes to the condensed consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
---------------------------------
2003 2002
--------------- --------------
Cash flows from operating activities:
Net income (loss) $ 561,512 $ (208,774)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,589,339 2,296,239
Gain on sale of property and equipment (1,185) (6,623)
Recovery of doubtful accounts receivable (270,000) (70,885)
Change in assets and liabilities:
Receivables 2,379,117 2,341,886
Other current assets 2,368 171,997
Other assets 40,425 6,530
Other current liabilities 42,881 (499,853)
--------------- --------------
Net cash provided by operating activities 5,344,457 4,030,517
Cash flows from investing activities:
Purchases of property and equipment (2,005,804) (1,686,820)
Proceeds from disposal of property and equipment 17,468 6,623
--------------- --------------
Net cash used in investing activities (1,988,336) (1,680,197)
Cash flows from financing activities:
Proceeds borrowed under notes payable to bank and long-term debt -- 1,000,000
Repayment of notes payable to bank and long-term debt (1,813,182) (1,885,453)
Purchase of treasury stock -- (7,788)
--------------- --------------
Net cash used in financing activities (1,813,182) (893,241)
Net increase in cash and cash equivalents 1,542,939 1,457,079
Cash and cash equivalents at beginning of period 6,682,395 6,989,781
--------------- --------------
Cash and cash equivalents at end of period $ 8,225,334 $ 8,446,860
=============== ==============
See accompanying notes to the condensed consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(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 June
30, 2003 and December 31, 2002; the results of operations for the three and six
month periods ended June 30, 2003 and 2002; and the statements of cash flows for
the six month periods ended June 30, 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 is at its 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 Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
2003 2002 2003 2002
------------- ------------ ------------- -------------
Net income (loss) $ (94,221) $ (601,624) $ 561,512 $ (208,774)
============= ============ ============= =============
Weighted average shares used in basic computation 7,101,295 7,101,295 7,101,295 7,102,945
Dilutive stock options -- -- 16,958 --
------------- ------------ ------------- -------------
Weighted average shares used in diluted computation 7,101,295 7,101,295 7,118,253 7,101,295
============= ============ ============= =============
Net income (loss) per common share:
Basic $ (0.01) $ (0.08) $ 0.08 $ (0.03)
Diluted $ (0.01) $ (0.08) $ 0.08 $ (0.03)
Options to purchase shares of common stock at exercise prices ranging from
$2.13 to $5.25 per share were outstanding for the six month period ended June
30, 2003 in the amount of 437,000 and 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 share of common stock. For the six months
ended June 30, 2002, options to purchase shares of common stock at prices
ranging from $0.22 to $5.25 per share were outstanding in the amount of 506,050,
but were not included in the computation of diluted earnings per share because
they were anti-dilutive. Options to purchase shares of common stock at exercise
prices ranging from $0.22 to $5.25 per share were outstanding for the quarters
ended June 30, 2003 and 2002, totaling 473,400 and 506,050, respectively, but
were not included in the computation of diluted earnings per share because the
options were anti-dilutive.
(3) Income Taxes
For the three months ended June 30, 2003, federal income tax benefit of
$53,000 and state income tax benefit of $9,000 were recorded. For the six months
ended June 30, 2003, federal income tax expense of $318,000 and state income tax
expense of $57,000 were recorded. Income taxes (benefit) were 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 condensed consolidated statements
of operations 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 six month period ended June 30, 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 (loss) and income (loss) per share for the three and six months ended
June 30, 2003 and 2002 would have been as follows:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- -------------------------------
2003 2002 2003 2002
---------------- --------------- ------------- --------------
Net income (loss):
As reported $ (94,221) $ (601,624) $ 561,512 $ (208,774)
Less: compensation expense assuming
fair value methodology of options for
all awards granted, net of related income
taxes -- -- -- (468,300)
---------------- --------------- ------------- --------------
Pro forma $ (94,221) $ (601,624) $ 561,51$ (677,074)
================ =============== ============= ==============
Basic net income (loss) per share:
As reported $ (0.01) $ (0.08) $ 0.08 $ (0.03)
Pro forma (0.01) (0.08) 0.08 (0.10)
================ =============== ============= ==============
Diluted net income (loss) per share:
As reported $ (0.01) $ (0.08) $ 0.08 $ (0.03)
Pro forma (0.01) (0.08) 0.08 (0.10)
================ =============== ============= ==============
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.
(6) Subsequent Event
On July 31, 2003, the Company entered into a merger agreement (the "Merger
Agreement") with Eastman Kodak Company ("Kodak"), a New Jersey corporation, and
OS Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of
Kodak ("Sub"). Under the terms of the Merger Agreement, the Company's
stockholders are entitled to receive $4.22 per share in Kodak common stock, or
at Kodak's option, in cash. The transaction is subject to the approval of the
Company's stockholders and other customary closing conditions. The parties
expect the transaction to close in the fourth quarter of 2003.
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 outcome and risks associated with
the Company's proposed merger to Eastman Kodak Company. 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: risks relating to the proposed merger
with Kodak, as more fully set forth below under "Risks Related to the Proposed
Merger with Kodak"; a change in the television industry's attitude towards the
use of film; 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 June 30, 2003 increased to $7,617,000 from
$5,806,000 for the same year-ago period, an increase of $1,811,000 or 31.2%. 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 the continued improvement in the economic environment in the entertainment
production sector was a contributing factor. The increase in total revenues was
partially offset by a decrease in film processing revenue of $66,000, discussed
in greater detail below.
Film processing revenues for the three months ended June 30, 2003 decreased
to $127,000 from $193,000 for the same period last year, a decrease of $66,000
or 34.2%. The decrease is primarily due to the Company's clients utilizing
formats that require a lower volume of film processing. This trend is discussed
in greater detail below in "Matters Affecting Operations."
Revenues for the six months ended June 30, 2003 increased to $17,412,000
from $13,796,000 for the same year-ago period, an increase of $3,616,000 or
26.2%. 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 the continued improvement in the economic environment in the
entertainment production sector was a contributing factor. The increase in total
revenues was partially offset by a decrease in film processing revenue of
$218,000, discussed below.
Film processing revenues in the Pacific Film Laboratory for the six months
ended June 30, 2003 decreased to $547,000 from $765,000 for the same period last
year, a decrease of $218,000 or 28.5%. The decrease is primarily due to the
Company's clients utilizing formats that require a lower volume of film
processing. This trend is discussed in greater detail below in "Matters
Affecting Operations."
Operating costs for the quarter ended June 30, 2003 were $6,259,000 versus
$5,488,000 for the same year-ago period, an increase of $771,000 or 14.0%. The
increase in operating costs was primarily the result of increases in labor costs
of $552,000, tape stock expense of $167,000, depreciation and amortization
expense of $142,000, and outside services expense of $80,000. These increases
were partially offset by a decrease in bad debt expense of $320,000 resulting
from a reduction in the allowance for doubtful accounts, which is further
discussed below under "Valuation of Accounts Receivable." The increases in labor
costs, tape stock expense, and outside services were primarily the result of the
increase in demand for the Company's services. The increase in depreciation and
amortization expense is primarily due to equipment purchases in current and
prior years to maintain and increase the Company's service offerings and for
other general business expansion. Total operating costs, including depreciation,
as a percentage of revenues for the three months ended June 30, 2003 were 82.2%
compared with 94.5% for the same year-ago period.
Operating costs for the six months ended June 30, 2003 were $13,341,000
versus $11,428,000 for the same year-ago period, an increase of $1,913,000 or
16.7%. The increase in operating costs is primarily the result of increases in
labor costs of $982,000, tape stock expense of $372,000, depreciation and
amortization expense of $293,000, outside services expense (primarily
post-production services performed by outside vendors) of $154,000, and
equipment rental expense of $144,000. The increase in operating costs was
partially offset by a decrease in net bad debt expense of $199,000 resulting
from a reduction in the allowance for doubtful accounts, which is further
discussed below under "Valuation of Accounts Receivable." The increases in labor
costs, tape stock expense, outside services and equipment rental were primarily
the result of the increase in demand for the Company's services. The increase in
depreciation and amortization expense is primarily due to equipment purchases in
current and prior years to maintain and increase the Company's service offerings
and for other general business expansion. Total operating costs, including
depreciation and amortization expense, as a percentage of revenues for the six
months ended June 30, 2003, were 76.6% compared with 82.8% for the same year-ago
period.
For the quarter ended June 30, 2003 the Company recorded a gross profit of
$1,358,000 compared with $318,000 for the same year-ago period, an increase of
$1,040,000 or 327.0%. The increase in gross profit is the result of the increase
in revenues partially offset by the increase in operating costs explained above.
Revenues increased 31.2% while operating costs increased 14.0% as compared to
the same year-ago period. The Company's gross margin for the three months ended
June 30, 2003 increased to 17.8% from 5.5% in the same year-ago period.
For the six months ended June 30, 2003, the Company recorded a gross profit
of $4,071,000 compared with $2,368,000 for the same year-ago period, an increase
of $1,703,000 or 71.9%. The increase in gross profit is the result of the
increase in revenues partially offset by the increase in operating costs
discussed above. Revenues increased 26.2% while operating costs increased 16.7%
as compared to the same year-ago period. The Company's gross margin for the six
months ended June 30, 2003 increased to 23.4% from 17.2% in the same year-ago
period.
Selling, general and administrative expenses ("SG&A expenses") for the
quarter ended June 30, 2003 were $1,359,000 compared to $1,152,000 during the
same year-ago period, an increase of $207,000 or 18.0%. The increase in SG&A
expenses was primarily due to increases in professional services of $100,000,
wages and salaries of $59,000, and telephone expense of $17,000. The increase in
professional services is primarily due to consulting fees in connection with new
business, accounting and legal fees related to the Sarbanes-Oxley Act of 2002
and accounting, legal and financial advisory fees related to the Company's
proposed merger with Kodak, discussed above, and attorney fees related to the
unionization of the Pacific Film Laboratories employees. The unionization
agreement is discussed in further detail below. The increase in wages and
salaries is primarily due to the hiring of additional employees and wage
increases given to some existing employees. SG&A expenses as a percentage of
revenues for the three months ended June 30, 2003 were 17.8% compared with 19.8%
for the same year-ago period.
SG&A expenses for the six months ended June 30, 2003 were $2,809,000
compared to $2,352,000 during the same year-ago period, an increase of $457,000
or 19.4%. The increase in SG&A expenses is primarily due to increases in
professional services of $265,000 and wages and salaries of $111,000. The
increase in professional services was primarily caused by the following;
consulting fees in connection with new business, accounting and legal fees
related to the Sarbanes-Oxley Act of 2002 and accounting, legal and financial
advisory fees related to the Company's proposed merger with Kodak, discussed
above, and attorney fees related to the unionization of the Pacific Film
Laboratories employees. The unionization agreement is discussed in further
detail below. The increase in wages and salaries is primarily due to the hiring
of additional employees and wage increases for some existing employees. SG&A
expenses as a percentage of revenues for the six months ended June 30, 2003 were
16.1% compared with 17.0% for the same year-ago period.
Interest expense for the quarter ended June 30, 2003 was $173,000 compared
to $207,000 for the same year-ago period, a decrease of $34,000 or 16.4%. The
decrease in interest expense is primarily a result of lower interest rates on
borrowings.
Interest expense for the six months ended June 30, 2003 was $363,000
compared to $433,000 for the same year-ago period, a decrease of $70,000 or
16.1%. The decrease in interest expense is primarily the result of lower
interest rates on borrowings.
Other income for the quarter ended June 30, 2003 was $17,000 compared to
$39,000 for the same year-ago period, a decrease of $21,000 or 56.4%. Other
income is primarily interest income. The decrease in other income is principally
due to lower interest earned on cash balances as well as a decrease in the
Company's average cash balance.
Other income for the six months ended June 30, 2003 was $37,000 compared to
$70,000 for the same year-ago period, a decrease of $33,000 or 47.1%. Other
income is primarily interest income. The decrease in other income is principally
due to lower interest earned on cash balances as well as a decrease in the
Company's average cash balance.
Income tax benefit for the quarter ended June 30, 2003 was $63,000 compared
to a benefit of $401,000 for the same period last year, a decrease of $338,000
or 84.3%. The decrease in income tax benefit is principally due to a lower loss
before income tax benefit. The income tax rate used for the interim periods is
based on the estimated effective tax rate for the full year and is subject to
ongoing review and evaluation by management. The effective tax rate is 40% for
all periods presented.
Income tax expense for the six months ended June 30, 2003 was $375,000
compared to an income tax benefit of $139,000 for the same period last year, an
increase of $514,000 or 369.8%. The increase in income tax expense is
principally due to increased pre-tax earnings.
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 adversely
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
financing agreements, the Company could be forced to reduce its debt obligations
or re-negotiate its existing 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 June 30, 2003. As of June 30, 2003, the outstanding borrowing
under the facility in the form of equipment term loans was $5.5 million; there
was no borrowing under the revolving credit facility. The revolving loan expires
on May 31, 2004 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 June 30, 2003, the Company had outstanding
capital lease obligations relating to the acquisition of equipment of
approximately $4.6 million with various 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 $2.8 million at
June 30, 2003.
In the third and fourth quarters of 2003, the Company may assume new
obligations under debt agreements related to the purchase of new equipment to
expand service offerings. For current service offerings, the Company will
continue to make purchases as necessary.
Below is a chart detailing the Company's long-term contractual obligations
by category as of June 30, 2003.
Contractual Obligations
Payments Due by Period
(in thousands)
Less than 1 - 3 - After 5
Total 1 year 3 years 5 years years
Capital Lease and Term Loan Obligations $ 10,131 $ 3,365 $ 5,259 $ 1,507 --
Operating Leases 2,809 907 1,782 120 --
- ------------------------------------------------- --------------- --------------- -------------- ---------------- --------------
Total contractual cash obligations $ 12,940 $ 4,272 $ 7,041 $ 1,627 --
- ------------------------------------------------- --------------- --------------- -------------- ---------------- --------------
Discussion of Cash Flows
Net cash provided by operating activities in the first six months of 2003
was $5,344,000 compared to $4,031,000 for the same year-ago period, an increase
of $1,313,000 or 32.6%. The increase in cash provided by operating activities
during the first quarter of 2003 was primarily due to increases in net income of
$770,000, depreciation and amortization of $293,000, and a reduction in bad debt
expense of $199,000. The reduction in bad debt expense is the result of an
adjustment to the allowance for doubtful accounts discussed below under
"Valuation of Accounts Receivable."
Net cash used by investing activities in the first six months of 2003 was
$1,988,000 compared to $1,680,000 for the same year-ago period, an increase of
$308,000 or 18.3%. The increase in cash used in investing activities was
primarily due to an increase in purchases of property and equipment.
Net cash used by financing activities in the first six months of 2003 was
$1,813,000 compared to $893,000 for the same year-ago period, an increase of
$920,000 or 103.0%. The increase in cash used in financing activities was
primarily due to additional borrowing that occurred during the six months ended
June 30, 2002.
As a result of the above factors, the Company recorded a net increase in
cash and cash equivalents in the first six months of 2003 of $1,543,000 compared
to a net increase of $1,457,000 for the same year-ago period, an increase of
$86,000 or 5.9%.
Matters Affecting Operations
Some producers of television programs are increasingly choosing to shoot
their programs on videotape. 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. Based on
the series we so far have confirmed for the 2003-2004 television broadcast
season, we anticipate this trend will continue. The majority of dramatic
programs continue to be shot on film. Management believes that producers find
the attributes of film preferable to videotape for dramatic programs. Due to
this trend, in the five-year period from 1998 through 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 revenues were 10.9% of total
revenues in 1998, as compared to 4.9% of total revenues in 2002, and 5.5% and
3.1% of total revenues for the first six months of 2002 and 2003, respectively.
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.
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"). In May
2003, the employees at the Company's Pacific Film Laboratories agreed to a
contract that took effect on May 18, 2003, and which will expire on May 13,
2006. The contract is set to automatically renew each year thereafter. The
unionization of these employees is not expected to have a material adverse
effect on the Company's financial position or results of operations.
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 June 30, 2003, the current
principal balance outstanding on the lease obligation was approximately
$114,000.
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 operating
results 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. The increase in the
number of feature films for which the Company provides services partially offset
the seasonal fluctuation in the second quarter of 2003. In 2003, 2002 and 2001,
revenues in the second quarter were 22.2%, 27.3% and 23.6% lower than in the
first quarter, respectively. If the Company's feature film business continues to
increase, this seasonality could further decrease.
Critical Accounting Policies
The Company's critical accounting policies are as follows:
- Depreciation and amortization of property and equipment,
- Valuation of long-lived assets,
- Valuation of deferred tax assets, and
- Valuation of accounts receivable.
Depreciation and Amortization of Property and Equipment
The Company depreciates and amortizes 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 whether impairment of its long-lived
assets has occurred, which requires management to make assumptions and judgments
regarding the fair 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 June
30, 2003, the Company believes that it is more likely than not the benefits of
deferred tax assets of $556,000 will be realized. Accordingly, as of June 30,
2003, the Company has not recorded a valuation allowance.
Valuation of Accounts Receivable
The Company periodically assesses its accounts receivable balance and
records an allowance for bad debts (the "allowance") 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. The value of the
allowance 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 customers to make payments. In the second
quarter of 2003, the Company received payment on some of its delinquent
accounts, and made further improvements to its collections process, which
resulted in a $320,000 reduction to the allowance during the three months ended
June 30, 2003. As of June 30, 2003, the allowance for bad debts totaled $386,000
and trade receivables totaled $3.0 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.
Subsequent Event
On July 31, 2003, the Company entered into a Merger Agreement with Kodak
and Sub. Under the terms of the Merger Agreement, the Company's stockholders are
entitled to receive $4.22 per share in Kodak common stock, or at Kodak's option,
in cash. Additionally, all option holders at the date of closing will receive a
payment equal to the difference between the exercise price of their options and
the per share purchase price of $4.22. The transaction is subject to the
approval of the Company's stockholders and other customary closing conditions.
The parties expect the transaction to close in the fourth quarter of 2003.
Risks Related to the Proposed Merger with Kodak
The Company's expectations with respect to the proposed merger transaction
with Kodak are subject to a number of risks and uncertainties that could cause
actual results to differ. For example, the Company and Kodak may be unable to
obtain stockholder or any regulatory approvals required for the merger. Problems
may arise in successfully integrating the Company's business with Kodak's
business, which could affect, among other things, the attraction and/or
retention of the Company's new and existing customers and strategic partners.
The businesses of the Company and Kodak may suffer as a result of uncertainty
surrounding the merger, including any delays in completing the merger. The
merger also may involve unexpected costs.
Failure to complete the merger with Kodak could negatively impact the
Company's stock price and future business and operations. For example,
- if the Merger Agreement is terminated, the Company may be required, under
specific circumstances, to pay a termination fee to Kodak;
- if the Merger Agreement is terminated, the diversion of the attention of
management in the process of combining the companies could cause the
disruption of, or a loss of momentum in, the activities of its business or
could cause the impairment of relationships with its customers and
strategic partners; and
- the Company must pay its expenses related to the merger, including
substantial legal, financial advisory and accounting fees, even if the
merger is not completed. This could affect the Company's results of
operations for the period during which the fees are incurred.
Current and prospective employees may experience uncertainty about their
future role with the combined company until the combined company's strategies
are announced or executed. This may adversely affect the Company's ability to
attract and retain key management, research and development, manufacturing,
sales and marketing and other personnel. Since the Company's stockholders may
receive shares of Kodak common stock in the merger, the Company believes that
the price of its common stock may be affected by changes in the price of Kodak
common stock. The price of Kodak's common stock may be affected by factors
different from those affecting the price of the Company's common stock.
Recent Accounting Pronouncements
Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, 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. The adoption of Statement
No. 146 did not have a material impact on the Company's consolidated financial
statements.
Accounting for Stock-Based Compensation
On December 31, 2002, 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.
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
On April 30, 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. This Statement is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. Management does not believe the adoption of SFAS 149 will have a material
impact on the Company's consolidated financial statements.
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS 150"),
which addresses how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument as a liability if it embodies an obligation for the issuer such as a
mandatorily redeemable financial instrument. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise shall be
effective for the first interim period beginning after June 15, 2003. Management
expects that the application of SFAS 150 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 June 30, 2003 and December 31, 2002 was $8.0 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 $75,000 from
its investment in the fund. The average monthly yield over that period was
1.18%.
If the average monthly yield were to change by 100 basis points, 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 $3.5 million at
June 30, 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 loan as of June 30, 2003.
If, under the existing credit facility, the "30-day dealer commercial
paper" rate were to change by 100 basis points, interest expense would change by
approximately $23,000 over a twelve-month period.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. The Company's principal
executive officer (Chief Executive Officer) and principal financial officer
(Chief Financial Officer) have evaluated the Company's disclosure controls and
procedures and have concluded that, as of the end of the period covered by this
Quarterly Report on Form 10-Q, these controls and procedures are designed to
ensure that information required to be disclosed by the Company in this
Quarterly Report on Form 10-Q is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and Form 10-Q. These
disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Securities Exchange
Act of 1934 is accumulated and communicated to the Company's management,
including the principal executive officer and the principal financial officer,
as appropriate to allow timely decisions regarding required disclosure. The
principal executive officer and the principal financial officer have also
concluded, based upon their evaluation, that there are no significant
deficiencies or material weaknesses in these disclosure controls and procedures.
Internal Control Over Financial Reporting. There were no changes in the
Company's internal control over financial reporting that occurred during the
period covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on June 25, 2003, the
following individuals were elected to the Company's Board of Directors:
Votes For Votes Withheld
--------- --------------
James R. Parks 6,267,486 159,218
Emory M. Cohen 6,227,441 199,263
Thomas D. Gordon 6,416,354 10,350
Craig A. Jacobson 6,417,954 8,750
David C. Merritt 6,417,954 8,750
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 Certification of James R. Parks, Chief Executive
Officer of the Company, Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of Robert McClain, Chief Financial
Officer of the Company, Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 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 32.2 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
On May 13, 2003, the Company filed a Current Report on Form 8-K, pursuant
to which it furnished its financial results for the quarter ended March 31, 2003
in a press release furnished as Exhibit 99.1 to such report.
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: August 12, 2003 /s/James R. Parks
-----------------
James R. Parks
Chief Executive Officer
Dated: August 12, 2003 /s/Robert McClain
-----------------
Robert McClain
Chief Financial Officer
(Principal Financial
and Accounting Officer)