UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) of the SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
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
(Address of Principal
Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (323) 462-6266
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock ($.0001 par value per share)
Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 15, 2002 (based upon the closing price on the Nasdaq
National Market on that date) was $17,335,000.
Number of shares of Common Stock, $.0001 par value per share, outstanding as of
March 15, 2002: 7,104,595.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Notice of 2002 Annual Meeting of Stockholders and definitive Proxy
Statement, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A not later than April 30, 2002.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Explanatory Note
This Amendment No. 1 to Form 10-K/A ("Form 10-K/A") amends Items 6, 7 and 8
of our Annual Report on Form 10-K for the fiscal year ended December 31, 2001,
including the consolidated financial statements therein, that was originally
filed on March 27, 2002 (the "Original Filing"). Subsequent to the Original
Filing, the Company received a sales tax assessment notice. The circumstances
pertaining to this assessment are described in greater detail under "Liquidity
and Capital Resources" in Item 7 herein and note 6 to the consolidated financial
statements. The assessment includes interest and penalties and relates to both
current and prior periods. The annual impact of the assessment on each prior
period is not material to the Company's Consolidated Statements of Income or
Consolidated Balance Sheets. The cumulative net impact of the assessment on
prior periods, extending back to fiscal 1989, has been reflected in accumulated
deficit at December 31, 1998, and in all subsequent periods. As of December 31,
1998, accumulated deficit was increased by $307,617 net of income tax benefit of
$171,000. The additional interest expense of $182,000 and related income tax
benefit of $73,000 for the three year period ended December 31, 2001,
collectively decreasing net income by $109,000 ($0.01 per share), have been
reflected in the consolidated statements of income for the quarter and year
ended December 31, 2001 and are not material to the Company's results of
operations. The net adjustment, for all periods, to accumulated deficit at
December 31, 2001 is an increase of $416,899, net of income tax benefit.
Restatement of Financial Statements
The consolidated financial statements and financial statement schedule
included in this Form 10-K/A have been restated to give effect to the assessment
discussed under "Liquidity and Capital Resources" in Item 7. Except for
financial statement information and related disclosures that are specifically
related to the restatement and except as described above under "Explanatory
Note," all information contained in this report and the Original Filing is
stated as of the date of the Original Filing.
Table of Contents
Part I Page
Item 1. Business 1
Item 2. Properties 3
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders 3
Part II
Item 5. Market for Registrant's Common Stock and Related Security Holder Matters 4
Item 6. Selected Financial Data 5
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 13
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13
Part III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners and Management 37
Item 13. Certain Relationships and Related Transactions 37
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 38
PART I
ITEM 1. BUSINESS
Statements included within this document, other than statements of
historical facts, that address activities, events or developments that Laser
Pacific Media Corporation, ("Laser-Pacific" or the "Company") expects or
anticipates will or may occur in the future, including such things as business
strategy and measures to implement strategy, competitive strengths, goals,
expansion and growth of the Company's business and operations, plans, references
to future success and other such matters, are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities and Exchange Act of 1934, as amended, and fall under the
safe harbor. The forward-looking statements are based on certain assumptions and
analyses made by the Company in light of its experience and its perception of
historical trends, current conditions and expected future developments as well
as other factors it believes are appropriate in the circumstances. However,
actual results 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, including but not limited to, 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, many of which are
beyond the control of the Company. Consequently, all of the forward-looking
statements made in this report are qualified by these cautionary statements and
there can be no assurance that the actual results or developments anticipated by
the Company will be realized or, even if substantially realized, that they will
have the expected consequences to or effects on the Company or its business
operations. Readers are urged to carefully review and consider various
disclosures made by the Company in its filings with the Securities and Exchange
Commission to advise interested parties of certain risks and other factors that
may affect the Company's business and operating results.
General
Laser-Pacific Media Corporation, a Delaware corporation, was formed by a
merger of Spectra Image, Inc. and Pacific Video, Inc. in September 1990. Both of
the predecessor companies were organized in 1983.
Laser-Pacific is a leading provider of a broad range of post-production
services to the Hollywood motion picture film and television industries. These
post-production services include technical and creative services to the
producers of prime-time network television series, television movies, and
theatrical motion pictures, services for the creation of digital masters for
high definition and standard definition television, home video, DVD as well as
other master delivery formats. In addition, the Company provides motion picture
film processing, technical and creative services for visual effects, digital
sound editing and mixing and other ancillary and related services that assist in
the preparation of film, television and digital content for a variety of
distribution methods.
The Company is recognized as an industry leader and pioneer in the
development and introduction of new methods and technology in service of
television, motion pictures and digital multimedia. The Company led the
television industry in the move from film to electronic and digital based
techniques in post-production through the introduction of its proprietary
Electronic Laboratory(TM) and has received five Emmy Awards for Outstanding
Achievement in Engineering for its developments. The Company's new high
definition television and movie mastering capabilities are reinforcing the long
standing reputation for state-of-the-art services and facilities.
The Company offers a full range of post-production services to television
and motion picture producers at its facilities in Hollywood, California. These
services, which begin immediately after completion of photography and end with
the delivery of a videotape master ready for television broadcasting or a film
master ready for feature film release printing. The services include film
processing, film to videotape transfer, electronic editing (including the
addition of special effects and titles), color correction, sound editing and
mixing, film recording and videotape duplication.
The principal categories of services offered by the Company are:
Motion Picture Film Processing - The Company operates five negative processing
machines at its Pacific Film Laboratories facility, located in Hollywood,
California. These machines are used to develop customers' negatives after
photography, with the capacity to develop approximately 2 million feet of film
per week.
Telecine Transfer - The Company operates eight telecine suites that are used to
transfer customers' film to videotape for subsequent post-production processing.
These telecine suites are used for daily transfers for electronic
post-production as well as video masters of completed motion pictures. Currently
three telecine suites are used for digital standard definition and five are used
for both digital standard definition as well as digital high definition.
Revenues from telecine transfer accounted for approximately 23%, 24% and 22% of
the Company's total revenue in 2001, 2000, and 1999 respectively.
Editing - The Company operates seven editing suites, for preparing broadcast
quality videotape masters or conformed digital motion picture masters for its
customers. These editing suites are conforming or assembly of television
programs and motion pictures, including creation of visual effects, titles, and
graphics. Four of the rooms are equipped for high definition editing, and three
are equipped for standard definition editing. Additionally, the Company's Emmy
Award winning Super-Computer Assembly system provides high definition and
standard definition assembly capability equivalent to four or five additional
conventional editing rooms. Revenues from editing accounted for approximately
25%, 23% and 22% of the Company's total revenue in 2001, 2000, and 1999
respectively.
Color Timing - The Company operates six timing suites that are used for the
final color balancing and image enhancement of customers' programs. Three of
these suites are equipped specifically for digital high definition programs.
Digital Graphics and Visual Effects - The Company's Visual Effects Department,
is equipped with several digital video effects systems specifically designed to
create graphical elements, special effects, titles and other specialized work
for television and motion pictures.
Sound Editing and Mixing - The Company's post-production sound department,
Pacific Sound Services, includes ten digital sound editing systems, a sound
effects and dialogue recording studio, and a re-recording studio for
accomplishing the final sound mix of customers' programs.
Digital Compression Services - Using an IBM SuperComputer and other specialized
computer systems, the Company provides digital compression and related services
which results in the creation of data recordings for use in CD-ROM, digital file
servers and video-on-demand applications. The Company also provides digital
compression and "authoring" services for the new DVD format. "Authoring" is the
industry term that describes the creation of disc navigation and interactivity
capability in a DVD replication master, including DVD menu design and
formatting.
Duplication and Other Services - The Company provides duplication, restoration,
digital file conversion, screening, and a variety of other services to fulfill
the production and delivery needs of its customers.
The Company's primary customers are the major motion picture and television
studios and production companies. The Company's ten largest customers accounted
for approximately 70% of total revenue in 2001. During 2001, sales to Sony
Pictures Entertainment, 20th Century Fox and Paramount Pictures and their
affiliated companies, accounted for 12%, 11% and 10% respectively of the
Company's total revenue for the year.
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. Historically, 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 been substantially lower during the second and third
quarters, when the Company historically has incurred operating losses.
Employees
At December 31, 2001, the Company had approximately 215 employees.
Approximately 30 employees are represented by the International Alliance of
Theatrical and Stage Employees pursuant to a collective bargaining agreement,
which expires on July 15, 2002. The Company has never experienced a work
stoppage and considers its relations with its employees to be excellent.
Competition
The Company experiences competition in all phases of its business from a
number of companies. Some of the Company's competitors specialize in specific
service areas, such as sound, laboratory, or editing, and some are fully
integrated and offer a complete range of post-production services. Some of the
Company's competitors have financial resources that are materially greater than
the Company's. Some of the Company's customers have post-production
capabilities. Due to the nature of the Company's core business, post-production
for television programs, the majority of the Company's competitors are located
in the Southern California area.
ITEM 2. PROPERTIES
The Company owns two buildings with a total of 22,000 square feet located
on lots totaling 39,000 square feet in Hollywood, California, where it provides
film processing and sound editing and mixing services. In addition, the Company
leases approximately 47,000 square feet in five buildings in Hollywood,
California, which contain executive offices and the balance of its
post-production facilities. Three of the larger facilities are on five-year
leases through the year 2006. Two of the leases are on a month-to-month basis.
The Company believes that its facilities are adequate for its operations as now
conducted. If operations expand, the Company will acquire additional space.
The Company believes that its facilities, some of which include the use of
chemical products, substantially comply with all applicable environmental and
other laws and regulations.
ITEM 3. LEGAL PROCEEDINGS
The Company may have certain contingent liabilities and claims incident to
the ordinary course of business. The Company is not involved in any material
litigation at this time and is not aware of any pending lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "LPAC." The following table reflects the range of high and low
intra-day selling prices of the Company's common stock by quarter for 2001 and
2000. This information is based on intra-day selling prices as reported by the
Nasdaq National Market.
High Low
2001
First Quarter $3.31 $1.38
Second Quarter $3.90 $1.25
Third Quarter $5.50 $2.63
Fourth Quarter $5.55 $2.20
2000
First Quarter $14.94 $5.00
Second Quarter $6.00 $2.63
Third Quarter $4.75 $2.25
Fourth Quarter $3.13 $1.00
The Company had approximately 2,600 stockholders on March 13, 2002.
The Company has never paid a cash dividend on its shares of Common Stock
and currently intends to retain its earnings, if any, for use in its operations
and the expansion of its business. Consequently, it does not anticipate paying
any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected financial data of the Company and
its consolidated subsidiaries for each of the last five fiscal years. Certain
selected financial data presented have been restated. See note 6 to the
consolidated financial statements for information regarding the restatement of
the consolidated financial statements.
(In thousands except for per share data.)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Restated) (Restated) (Restated) (Restated) (Restated)
Statement of Operations Data:
Revenues............................ $33,647 $33,058 $30,991 $30,699 $28,291
Operating expenses:
Direct............................. 20,513 19,721 19,753 19,183 18,343
Depreciation and amortization...... 4,305 4,161 3,258 3,572 4,207
--------------- ------------ ------------- -------------- --------------
24,818 23,882 23,012 22,755 22,550
--------------- ------------ ------------- -------------- --------------
Gross profit........................ 8,829 9,176 7,980 7,944 5,741
Selling, general and administrative
expenses............................ 5,039 4,648 4,570 4,616 4,279
--------------- ------------ ------------- -------------- --------------
Income from operations.............. 3,790 4,528 3,410 3,328 1,461
Interest expense.................... (1,163) (1,241) (1,241) (1,288) (1,563)
Gain on sale of subsidiary.......... --- --- --- 875 ---
Other income........................ 543 253 2,382 114 41
Minority interest................... --- --- --- --- (54)
Income tax expense (benefit)........ 588 30 (285) 109 232
--------------- ------------ ------------- -------------- --------------
Net income (loss)................... $2,581 $3,510 $4,836 $2,920 ($347)
=============== ============ ============= ============== ==============
Net income (loss) per share (basic)............ $0.35 $0.45 $0.65 $0.41 ($0.05)
--------------- ------------ ------------- -------------- --------------
Net income (loss) per share (diluted).......... $0.35 $0.44 $0.62 $0.39 ($0.05)
--------------- ------------ ------------- -------------- --------------
Weighted average shares outstanding (basic).... 7,384 7,726 7,491 7,163 7,128
=============== ============ ============= ============== ==============
Weighted average shares outstanding (diluted).. 7,419 8,003 7,838 7,510 7,128
=============== ============ ============= ============== ==============
Balance Sheet Data:
Working capital (deficiency)........ $6,109 $5,547 $2,923 $2,461 ($2,332)
Total assets....................... 31,528 30,594 29,668 20,397 22,488
Current installments of notes payable,
notes payable to related parties, and
long-term debt..................... 3,739 3,490 3,718 2,462 5,894
Long-term debt, excluding current
installments....................... 7,878 7,934 10,303 7,629 8,139
Net stockholders' equity............. 17,636 16,894 13,368 8,405 5,465
Quarterly Financial Information
The following table summarizes unaudited selected financial data of the
Company and its consolidated subsidiaries for each quarter of the last two
fiscal years:
2001
-----------------------------------------------------------------------------------
December 31 September 30 June 30 March 31
------------------ ------------------- ------------------ -------------------
(Restated)
Revenues $ 9,283,000 $ 6,857,000 $ 7,581,000 $ 9,927,000
Income (loss) from operations 1,534,000 (125,000) 457,000 1,924,000
Net income 734,000 375,000 101,000 1,371,000
Net income per share basic $ 0.10 $ 0.05 $ 0.01 $ 0.18
================== =================== ================== ===================
Net income per share diluted $ 0.10 $ 0.05 $ 0.01 $ 0.17
================== =================== ================== ===================
2000
-----------------------------------------------------------------------------------
December 31 September 30 June 30 March 31
------------------ ------------------- ------------------ -------------------
Revenues $ 10,721,000 $ 7,233,000 $ 5,858,000 $ 9,246,000
Income (loss) from operations 2,857,000 542,000 (677,000) 1,806,000
Net income (loss) 2,687,000 281,000 (909,000) 1,451,000
Net income (loss) per share basic $ 0.35 $ 0.04 $ (0.12) $ 0.19
================== =================== ================== ===================
Net income (loss) per share diluted $ 0.34 $ 0.04 $ (0.12) $ 0.18
================== =================== ================== ===================
The unaudited selected financial data of the Company and its consolidated
subsidiaries for the quarter ended December 31, 2001 has been restated. The
impact of the restatement is to decrease net income by $109,000. See note 6 to
the consolidated financial statements for information regarding the restatement.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company has restated its previously issued consolidated financial
statements. See note 6 to the consolidated financial statements for information
regarding the restatement. Accordingly, certain amounts included in Management's
Discussion and Analysis of Financial Condition and Results of Operations have
been adjusted.
Critical Accounting Policies
Laser Pacific Media Corporation's critical accounting policies are as
follows:
o Depreciation and amortization of property and equipment,
o Valuation of long-lived assets, and
o Accounting for income taxes.
Depreciation and Amortization of Property and Equipment
The Company, a capital-intensive enterprise, depreciates and amortizes
property and equipment on a straight-line basis over the estimated useful life
of the related assets. Significant management judgment is required to determine
the useful lives of the assets. Should the useful lives of the assets be
revised, the impact on its results of operations could be material.
Valuation of Long-Lived Assets
The Company periodically assesses the impairment of its long-lived assets,
which requires it 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 may not be recoverable based upon its
assessment of the following events or changes in circumstances:
o The asset's ability to continue to generate income from operations
and positive cash flow in future periods;
o Significant changes in strategic business objectives and
utilization of the assets; or
o The impact of significant negative industry 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, the likelihood of a material change in the
reported results would increase.
Accounting for Income Taxes
Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount 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 carryforwards against
future taxable income, the effectiveness of the tax planning and strategies
among the various tax jurisdictions in which the Company operated, and any
significant changes in the tax laws. For the years ended December 31, 2001, 2000
and 1999, valuation allowance of $879,000, $1,315,000 and $2,173,000 were
eliminated since management determined that it was more likely than not that the
related deferred tax assets would be realized. In the event that the actual
results differ from the estimates or the Company adjusts the estimates in future
periods it may need to establish an additional valuation allowance which could
materially impact the financial position and results of operations.
The Company's effective tax rate in 2001 was 18.6%, principally resulting
from the elimination of valuation allowances of $879,000. The Company's
estimated tax rate for 2002 is 40%. This rate is subject to ongoing review and
evaluation by management.
Results of Operations
2001 Compared to 2000
Revenues for the year ended December 31, 2001 increased to $33.6 million
from $33.1 million for the year ended December 31, 2000, an increase of $0.5
million or 1.8%. The minimal increase in sales is the result of an increase in
demand for the Company's services in the first six months of 2001, which was
offset by a decline in demand for the Company's services during the last six
months of 2001. The following factors impacted the decrease in revenues during
the third and fourth quarters of 2001: 1) a slowing of movie production in the
second and third quarters because studios and networks stockpiled shows to ride
out a threatened strike by the writers and actors that did not materialize,
which impacted the services the Company provides on feature movies such as movie
mastering, preview services and digital compression; 2) the impact of the
September 11, 2001 terrorist attacks that resulted in the cancellation and
rescheduling of certain production and delayed the beginning of the fall
broadcast season; 3) a significant decline in the number of movies made for
television with much of the remaining television movie production business being
moved outside of the United States; and 4) the overall slowdown in the economy
and general weakness of the entertainment industry, which has impacted
advertising revenues and the programs supported by those revenues such that
there are fewer non-broadcast and off-network shows and the shows that are being
produced have lower post-production budgets.
For the year ended December 31, 2001, the Company recorded a gross profit
of $8.8 million compared with $9.2 million for the same year-ago period, a
decrease of $0.4 million or 3.8%. The decrease in gross profit is primarily the
result of relatively flat sales and increased operating costs, as discussed
below.
Operating costs, excluding depreciation and amortization for the year ended
December 31, 2001, were $20.5 million versus $19.7 million for the year-ago
period, an increase of 4.0%. The increase in operating costs is primarily the
result of increased labor cost of $365,000, increased equipment maintenance and
rental expense of $239,000 and increased transmission cost of $116,000.
Depreciation and amortization expense for the year ended December 31, 2001 was
$4.3 million compared to $4.2 million for the same year-ago period, an increase
of $144,000 or 3.5%. Total operating costs, including depreciation and
amortization, as a percentage of revenues for the year ended December 31, 2001,
were 73.8% compared with 72.2% for the same year-ago period.
Selling, general and administrative expenses ("SG&A expenses") for the year
ended December 31, 2001 were $5.0 million as compared to $4.6 during the same
year-ago period, an increase of 8.4%. The increase in SG&A expenses is primarily
attributable to increased wages for non-operations staff of $175,000 and
increased legal, financial advisory and consulting fees of $238,000, partially
offset by minor reductions in other costs.
Income from operations for the year ended December 31, 2001 was $3.8
million compared to $4.5 million for the same year-ago period, a decrease of
$0.7 million or 16.3%. The decrease in income from operations is primarily the
result of decreased sales volume and increased operating and SG&A expenses, as
discussed above.
Interest expense for the year ended December 31, 2001 was $1,163,000
compared to $1,241,000 for the same year-ago period, a decrease of $78,000. The
decrease in interest expense is primarily due to lower interest rates on
borrowings offset by the additional interest expense related to the sales tax
assessment described under "Liquidity and Capital Resources" in Item 7 hereto.
Other income for the year ended December 31, 2001 was $543,000 compared to
other income of $253,000 in 2000. The increase of $290,000 is primarily
attributable to income of $193,000 recognized in connection with a collaboration
agreement and the gain on the sale of the Company's interest in Composite Image
Systems, LLC ("CIS") of $83,000 (see note 10 to the consolidated financial
statements hereto).
Income tax expense amounted to $588,000 in 2001 as compared to $30,000 in
2000. The effective tax rate was 18.6% in 2001 and 8.5% in 2000. The Company's
effective tax rate differed from the statutory U.S. Federal tax rate of 34% in
2001 principally from the elimination of a valuation allowance for deferred tax
assets of $879,000. When a threatened strike by the writers and actors did not
materialize, the Company determined that it was more likely than not that all
deferred tax assets would be realized and eliminated the valuation allowance
established in prior years. The 2000 income tax expense is comprised of U.S.
Federal income tax of $57,000 and state income tax benefit in the amount of
$27,000. In fiscal 2000, U.S. Federal income tax is primarily composed of
alternative minimum tax. The state income tax benefit is the result of
utilization of state tax credits. The Company anticipates that the combined
Federal and state effective tax rate for 2002 will be 40% (see note 5 to the
consolidated financial statements hereto).
As a consequence of the above factors, the Company reported net income
of $2.6 million or $0.35 per diluted share in 2001 versus reported net income of
$3.5 million or $0.44 per diluted share in 2000.
Fourth Quarter 2001
The following table summarizes selected financial data of the Company and
its consolidated subsidiaries for the fourth quarters ended December 31, 2001
and December 31, 2000.
Three Months ended December 31, Increase (Decrease)
2001 2000 Dollars Percent
(Restated)
Revenues $ 9,283,000 $ 10,721,000 $ (1,438,000) (13.4%)
Operating expenses 6,253,000 6,604,000 (351,000) (5.3%)
Gross profit 3,030,000 4,117,000 (1,087,00) (26.4%)
SG&A expenses 1,496,000 1,260,000 236,000 18.7%
--------------- ------------------
Income from operations 1,534,000 2,857,000 (1,323,000) (46.3%)
Interest expense 389,000 246,000 143,000 58.6%
Other income 32,000 62,000 (30,000) (48.4%)
--------------- ------------------
Income before taxes 1,177,000 2,673,000 (1,496,000) (56.0%)
Income tax expense (benefit) 443,000 (14,000) 457,000 3,412.9%
--------------- ------------------
Net income $ 734,000 $ 2,687,000 $ (1,953,000) (72.7%)
=============== ==================
Revenues for the three months ended December 31, 2001 decreased $1.4
million or 13.5% from the same period in 2000. The decrease in the revenues is
attributable to a decreased demand for the Company's services throughout all
areas of service that the Company provides. Factors contributing to the
decreased demand for services in the fourth quarter were: the overall economic
downturn in the entertainment and advertising sectors and the associated
corporate cost cutting; the continuing trend of reality programming which uses
little of the Company's services; and the fact that there were fewer movies for
television and fewer theatrical releases. The Company anticipates that these
trends will continue through the first six months of 2002.
For the three months ended December 31, 2001, the Company's gross profit
decreased $1.1 million or 26.4%. The decrease in gross profit is the result of
the decrease in revenues discussed above, net of a decrease in operating costs
of $351,000. The decrease in operating costs is primarily the result of a
decrease in labor cost of $203,000 and a reduction in rawstock expense of
$103,000. Total operating costs, including depreciation and amortization, as a
percentage of revenues for the three months ended December 31, 2001 were 67.4%
compared with 61.6% for the same year-ago period.
Income from operations decreased $1.3 million for the three months ended
December 31, 2001 compared to the same period in 2000. The decrease in income
from operations is the result of the sales decrease partially offset by
decreased operating costs and an increase in SG&A expenses.
Interest expense for the fourth quarter of 2001 increased $143,000 or 58.6%
from the fourth quarter of 2000. The increase in interest expense is primarily
the result of additional interest expense related to the sales tax assessment
described under "Liquidity and Capital Resources" in Item 7 hereto.
Other income for the fourth quarter of 2001 decreased $30,000 or 48.4% from
the fourth quarter of 2000. Other income is primarily interest income earned on
cash balances and the decrease is the result of a decline in interest rates.
Income tax expense for the fourth quarter of 2001 increased $457,000 from
the fourth quarter of 2000. The increase is the result of an increase in the
Company's effective tax rate in 2001.
2000 Compared to 1999
Revenues for the year ended December 31, 2000 increased to $33.1 million
from $31.0 million for the year ended December 31, 1999, an increase of $2.1
million or 6.7%. The increase is primarily attributable to an increased demand
for the Company's services. Revenues from the majority of services that the
Company provides increased significantly while revenues from some services
decreased. Revenue increases in television post-production services, which
includes high definition services, digital compression services including
digital video discs, and feature film mastering aggregated $3.1 million and were
partially offset by decreased revenue from the following services: 1) The
elimination of the Company's production rental services business in October 1999
reduced revenue by $68,000; 2) Revenues from laser disc services declined
$203,000; 3) Revenues from Graphic Services declined $605,000 as a result of a
lower demand for special effects from our customers; and 4) a decrease of
$124,000 in Film Production Revenues reflects increased use by some customers of
film formats that require a lower volume of film processing.
For the year ended December 31, 2000, the Company recorded a gross profit
of $9.2 million compared with $8.0 million for the same year-ago period, an
increase of $1.2 million or 15.0%. The increase in gross profit is primarily the
result of the increased sales volume discussed above, partially offset by an
increase in depreciation expense, as discussed below.
Operating costs, excluding depreciation and amortization for the year ended
December 31, 2000, were $19.7 million versus $19.8 million for the year-ago
period, a decrease of less than 1.0%. The decrease in operating costs is the
result of reduced bad debt expense of $519,000 and reduced equipment maintenance
and rental expense of $254,000 offset by increased labor cost of $427,000 and
increased stock cost of $304,000. Depreciation and amortization expense for the
year ended December 31, 2000 was $4.2 million compared to $3.3 million for the
same year-ago period, an increase of $902,000 or 27.7%. The increase in
depreciation and amortization expense is due to significant capital equipment
expansion in the third and fourth quarters of 1999. Total operating costs,
including depreciation and amortization, as a percentage of revenues for the
year ended December 31, 2000, were 72.2% compared with 74.2% for the same
year-ago period.
SG&A expenses for the year ended December 31, 2000 were $4,648,000 as
compared to $4,570,000 during the same year-ago period, an increase of 1.7%. The
small increase in SG&A expenses is attributable to increased wages for
non-operations staff of $86,000 and increased professional fees of $39,000,
offset by a reduction in property tax expense of $107,000.
Income from operations for the year ended December 31, 2000 was $4.5
million compared to $3.4 million for the same year-ago period, an increase of
$1.1 million or 32.8%. The increase in income from operations is primarily the
result of increased sales volume and decreased operating expenses, partially
offset by increased SG&A expenses, as discussed above.
Interest expense for the year ended December 31, 2000 was $1.2 million
compared to $1.2 million for the same year-ago period. There was no significant
change in interest expense from last year. Interest expense was higher for the
first and second quarters and lower in the third and fourth quarters of the year
ended December 31, 2000 compared to the year ended December 31, 1999.
Other income for the year ended December 31, 2000 was $253,000 compared to
other income of $2.4 million in 1999. The other income for the year ended
December 31, 2000 is primarily interest income earned on higher cash balances.
The other income in 1999 was primarily the result of a technology development
agreement that the Company entered into with a major equipment manufacturer and
supplier. Under the agreement the Company provided research, development and
engineering services related to the development of technical equipment used in
connection with high definition post-production. In consideration for services
provided, the Company received replacement equipment, discounts on the purchase
of equipment and the cancellation of rental payments under a capital lease
obligation due to the equipment supplier. The Company recognized income of $2.2
million during the fourth quarter of 1999 pursuant to this agreement. Revenue
recognition was deferred until the end of the fourth quarter as the earnings
process was not complete until December 31, 1999 when the collaboration was
complete. Costs that the Company incurred in connection with the agreement were
expensed, primarily as operating costs, as incurred throughout the year ended
December 31, 1999. The Company does not anticipate future revenue recognition
from the technology development agreement.
The 2000 income tax expense is comprised of U.S. Federal income tax of
$57,000 and state income tax benefit in the amount of $27,000. The U.S. Federal
income tax is primarily composed of alternative minimum tax. The state income
tax benefit is primarily the result of utilization of state tax credits. The
income tax benefit of $285,000 during 1999 is comprised of a deferred income tax
benefit of $500,000 resulting from a reduction in the valuation allowance to
reflect the anticipated future benefit from operating loss carryforwards which
are likely to be utilized, partially offset by income tax expense of $215,000.
The 1999 income tax expense is comprised of U.S. Federal income tax of $70,000
and state income tax in the amount of $145,000. The U.S. Federal and state
income tax is primarily composed of alternative minimum tax. This occurred
because net operating loss carryforwards were utilized to offset taxable income.
The full benefit of the net tax operating loss carryforwards is limited for
alternative minimum tax purposes. The benefit of the state net tax operating
loss was completely utilized as of December 31, 1999.
As of December 31, 2000, the Company had recorded gross deferred tax assets
of $3.9 million, a related valuation allowance of $879,000 and deferred tax
liabilities of $2.4 million (see note 5 to the consolidated financial statements
hereto). In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income
(losses) and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management can not predict at December 31,
2000 that the Company will realize all of the benefits of these deductible
differences. Based on these assessments, the valuation allowance was reduced in
2000 by $1.3 million and in 1999 by $2.2 million.
As a consequence of the above factors, the Company reported net income of
$3.5 million or $0.44 per diluted share in 2000 versus reported net income of
$4.8 million or $0.62 per diluted share in 1999.
Matters Affecting Operations
Some producers of television shows have begun to shoot their programs on
videotape instead of film. If this practice continues and becomes more
widespread the Company's revenue from film developing and film to tape transfer
will decrease.
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.
Liquidity and Capital Resources
As of December 31, 2001, the Company and its subsidiaries are operating a
credit facility with Merrill Lynch Business Financial Services. The maximum
credit available under the facility is $11.0 million. The facility provides for
borrowings of up to $6.0 million under a revolving loan and $5.0 million in
equipment term loans. There was no outstanding balance under the revolving loan
at December 31, 2001. The equipment term loans had a combined outstanding
balance of $4.9 million at December 31, 2001. The revolving loan and the
equipment term loans are payable monthly and bear interest at the 30-day dealer
commercial paper rate plus 2.20% to 2.65%. The revolving loan is for a one-year
term and can be renewed annually. The equipment term loans are for a five-year
term. As of December 31, 2001, the Company had outstanding equipment loans and
capital lease obligations of approximately $11.6 million with various lenders
(including the $4.9 million in equipment term loans discussed above) in
connection with the acquisition of equipment. The capital leases are for terms
of up to 60 months, at fixed interest rates ranging from 7.5% to 12.75% and the
equipment term loans, as discussed above, bear interest at a variable interest
rate. The Company's term note credit agreements contain covenants, including
financial covenants related to leverage and fixed charge ratios. The Company was
in compliance with these covenants at December 31, 2001. The obligations are
secured by the equipment financed. The equipment was acquired to expand the
Company's capabilities and to support the increasing demand for the Company's
services. In addition, the Company has obligations under operating leases
aggregating $2.7 million as of December 31, 2001.
In April 2002, the Great American Food Corporation, formerly known as Laser
Edit East, Inc., an insolvent subsidiary of the Company, received a collection
notice from the New York State Department of Taxation and Finance. The sales tax
liability assessed to Laser Edit East, Inc. as of December 31, 2001 is $187,565,
with the addition of statutory interest and penalties of $473,274 the total
liability is $660,839. The sales tax was assessed for the periods March 1, 1989
to August 31, 1991 and June 1, 1992 to May 31, 1994. When the sales tax was
originally assessed, Laser Edit East, Inc. appealed the assessment. The appeal
was denied and a determination was issued in June 1997. At that time, Laser Edit
East, Inc. was insolvent. Counsel advised the Company at that time that
Laser-Pacific Media Corp. would not be liable for the assessment on its
insolvent subsidiary. At December 31, 1997 the Company, did not accrue the
liability related to the assessment. In April 2002, when the notice was received
the Company again consulted with counsel. Counsel has again advised that
Laser-Pacific Media Corp. would not be held responsible for the liability of an
insolvent subsidiary. The Company believes that it will not be required to pay
the assessment. However, the Company has restated its previously issued
consolidated financial statements to record the liability net of income tax
benefit. See note 6 to the consolidated financial statements. If the Company is
ultimately required to pay the assessment the Company has sufficient liquidity
to make the payment.
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 operating and capital requirements for
fiscal 2002.
Recent Accounting Pronouncements
Accounting for Business Combinations and Goodwill and other Intangible Assets
In July 2001, the Financial Accounting Standards Board issued FASB
Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and
Other Intangible Assets. Statement No. 141 requires that the purchase method be
used for all business combinations initiated after June 30, 2001. Statement No.
142 requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment on an annual basis. The Company is required to adopt
Statement No. 142 effective January 1, 2002 and anticipates that the adoption of
this pronouncement will have no material impact on the Company's financial
position or results of operations.
Accounting for the Impairment or Disposal of Long-Lived Assets
In August 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets which supersedes FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Statement No. 144
retains the fundamental provisions in Statement No. 121 for recognizing and
measuring impairment losses on long-lived assets held for use and long-lived
assets to be disposed of by sale, while also resolving certain implementation
issues associated with Statement No. 121. The Company is required to adopt
Statement No. 144 no later than the year beginning after December 15, 2001.
Management does not expect the adoption of Statement No. 144 for long-lived
assets held for use to have a material impact on the Company's financial
statements. The provisions of the Statement for assets held for sale or other
disposal generally are required to be applied prospectively after the adoption
date to newly initiated disposal activities. Therefore, management cannot
determine the potential effects that adoption of Statement No. 144 will have on
the Company's financial statements with respect to assets held for sale or
disposals.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Instruments. The Company does not invest, and during the year
ended December 31, 2001 did not invest, in market risk sensitive instruments.
Market Risk. The Company's market risk exposure with respect to financial
instruments is to changes in the "30 day dealer commercial paper rate" in the
United States. The Company had borrowings of $4.9 million at December 31, 2001
under a term loan (discussed above) and may borrow up to $6.0 million under a
revolving loan. Amounts outstanding under the term loan and revolving credit
facility bear interest at the 30-day dealer commercial paper rate plus 2.20% to
2.65%.
If, under the existing credit facility, the "30-day dealer commercial
paper" rate were to change by 1%, the amortized interest expense would change by
approximately $45,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements for the Company and independent
auditors' report therein are set forth on pages 15 through 36 incorporated
herein. See Page 14 for an index to all the consolidated financial statements
and supplementary financial information which are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Index to Consolidated Financial Statements and
Financial Statement Schedule
Consolidated Financial Statements (Restated-Note 6): Page
Independent Auditors' Report 15
Consolidated Balance Sheets - At December 31, 2001 and 2000 16
Consolidated Statements of Income - Years Ended December 31, 2001, 2000 and 1999 18
Consolidated Statements of Stockholders' Equity - Years Ended December 31, 2001, 2000 and 1999 19
Consolidated Statements of Cash Flows - Years Ended December 31, 2001, 2000 and 1999 20
Notes to Consolidated Financial Statements 22
Consolidated Financial Statement Schedule - Valuation and Qualifying Accounts - Years Ended
December 31, 2001, 2000 and 1999 36
All other schedules are omitted because they are not applicable or the required
information is shown in the Company's consolidated financial statements or the
related notes thereto.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Laser-Pacific Media Corporation:
We have audited the accompanying consolidated financial statements of
Laser-Pacific Media Corporation and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Laser-Pacific Media
Corporation and subsidiaries as of December 31, 2001 and 2000 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in note 6 to the consolidated financial statements, the Company has
restated its financial statements to record certain sales tax liabilities and
related interest and penalties.
/s/KPMG LLP
Los Angeles, California
March 1, 2002, except for the last paragraph of note 6, which is as of May 17,
2002
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
Assets (note 4) 2001 2000
-------------------- --------------------
(Restated-Note 6) (Restated-Note 6)
Current assets:
Cash and cash equivalents $ 6,989,781 $ 4,527,042
Receivables:
Trade 4,693,891 6,440,675
Other 206,935 186,150
-------------------- -------------------
4,900,826 6,626,825
Less allowance for doubtful receivables 1,097,174 1,286,995
-------------------- --------------------
3,803,652 5,339,830
-------------------- --------------------
Inventory 268,493 274,635
Prepaid expenses and other current assets 699,310 499,911
Deferred tax asset (note 5) 362,014 671,086
-------------------- --------------------
Total current assets 12,123,250 11,312,504
-------------------- --------------------
Net property and equipment, at cost (note 3) 19,204,407 18,457,816
Other assets, net 200,531 824,082
-------------------- --------------------
$ 31,528,188 $ 30,594,402
==================== ====================
(Continued)
See accompanying notes to consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
(Continued)
Liabilities and Stockholders' Equity 2001 2000
-------------------- --------------------
(Restated-Note 6) (Restated-Note 6)
Current liabilities:
Current installments of notes payable to bank and
long-term debt (note 4) $ 3,738,680 $ 3,489,618
Accounts payable 487,451 316,449
Accrued compensation expense 917,776 915,542
Accrued expenses 869,933 1,044,081
-------------------- --------------------
Total current liabilities 6,013,840 5,765,690
-------------------- --------------------
Notes payable to bank and long-term debt, less current
installments (note 4) 7,878,227 7,934,387
Commitments and contingencies (note 8)
Stockholders' equity (notes 6 and 7):
Preferred stock, $.0001 par value. Authorized
3,500,000 shares; none issued -- --
Common stock, $.0001 par value. Authorized 25,000,000
shares; issued 8,004,795 and 7,751,295 shares at
December 31, 2001 and 2000, respectively 800 775
Additional paid-in capital 20,363,901 19,936,156
Accumulated deficit (461,440) (3,042,606)
Treasury stock, at cost: 900,200 shares at
December 31, 2001 (2,267,140) --
-------------------- --------------------
Net stockholders' equity 17,636,121 16,894,325
-------------------- --------------------
$ 31,528,188 $ 30,594,402
==================== ====================
See accompanying notes to consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
-------------------- ------------------ ------------------
(Restated-Note 6)
Revenues $ 33,647,167 $ 33,058,293 $ 30,991,155
-------------------- ------------------ ------------------
Direct operating costs and expenses:
Direct 20,512,506 19,721,320 19,753,055
Depreciation 4,305,201 4,160,784 3,258,483
-------------------- ------------------ ------------------
Total operating expenses 24,817,707 23,882,104 23,011,538
-------------------- ------------------ ------------------
Gross profit 8,829,460 9,176,189 7,979,617
Selling, general and administrative expenses 5,039,203 4,648,189 4,569,665
-------------------- ------------------ ------------------
Income from operations 3,790,257 4,528,000 3,409,952
Other income (expense):
Interest expense (1,163,445) (1,240,562) (1,241,356)
Other income (note 10) 542,500 252,532 2,382,639
-------------------- ------------------ ------------------
Income before income taxes 3,169,312 3,539,970 4,551,235
Income taxes (benefit) (note 5) 588,146 29,923 (285,000)
-------------------- ------------------ ------------------
Net income $ 2,581,166 $ 3,510,047 $ 4,836,235
==================== ================== ==================
Net income per share (basic) $ .35 $ .45 $ .65
==================== ================== ==================
Net income per share (diluted) $ .35 $ .44 $ .62
==================== ================== ==================
Weighted average shares outstanding (basic) 7,384,095 7,725,693 7,491,148
==================== ================== ==================
Weighted average shares outstanding (diluted) 7,419,484 8,003,353 7,837,551
==================== ================== ==================
See accompanying notes to consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2001, 2000 and 1999
Common Stock Treasury Stock
------------------------- ----------------------------
Additional Net
Number paid-in Accumulated Number stockholders'
of shares Amount capital deficit of shares Amount equity
------------ ---------- -------------- --------------- ------------ ------------- ---------------
Balance at
December 31, 1998 7,222,575 $ 722 19,792,737 (11,388,888) -- -- 8,404,571
(Restated-Note 6)
Stock issuances 432,071 43 53,219 -- -- -- 127,262
Tax deduction for
non-qualified stock
options and warrants -- -- 74,000 -- -- -- --
Net income -- -- -- 4,836,235 -- -- 4,836,235
------------ ---------- -------------- ------------- ------------ -------------- ---------------
Balance at
December 31, 1999 7,654,646 $ 765 19,919,956 (6,552,653) -- -- 13,368,068
------------ ---------- -------------- ------------- ------------ ------------- ----------------
(Restated-Note 6)
Stock issuances 96,649 10 16,200 -- -- -- 16,210
Net income -- -- -- 3,510,047 -- -- 3,510,047
------------ ---------- -------------- --------------- ------------ ------------- ---------------
Balance at
December 31, 2000 7,751,295 $ 775 19,936,156 (3,042,606) -- -- 16,894,325
------------ ---------- -------------- --------------- ------------ ------------- ---------------
(Restated-Note 6)
Stock issuances 253,500 25 250,745 -- -- -- 250,770
Purchase of treasury stock -- -- -- -- (900,200) (2,267,140) (2,267,140)
Tax deduction for
non-qualified stock
options and warrants -- -- 177,000 -- -- -- 177,000
Net income -- -- -- 2,581,166 -- -- 2,581,166
------------ ---------- -------------- --------------- ------------ ------------- ---------------
(Restated-Note 6)
Balance at
December 31, 2001 8,004,795 $ 800 20,363,901 (461,440) (900,200) (2,267,140) 17,636,121
============ ========== ============== =============== ============ ============= ===============
(Restated-Note 6)
See accompanying notes to consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
--------------- --------------- -----------------
(Restated-Note 6)
Cash flows from operating activities:
Net income $ 2,581,166 $ 3,510,047 $ 4,836,235
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property and equipment 4,305,201 4,160,784 3,258,483
Cancellation of capital lease obligation -- -- (1,276,997)
Provision for doubtful accounts receivable 260,667 274,392 793,315
Deferred income tax expense (benefit) 309,072 -- (500,000)
Write-off of property and equipment -- 99,764 264
Gain on sale of plant, property and equipment (32,290) (79,784) (102,808)
Other 177,743 -- 74,076
Change in assets and liabilities:
Receivables 1,275,512 (474,559) (1,185,912)
Inventory 6,142 (47,823) (10,656)
Prepaid expenses and other current assets (199,399) (15,444) 47,263
Other assets 623,551 (64,055) (61,790)
Accounts payable 171,002 19,115 28,685
Accrued expenses (169,914) 1,039 342,562
Income taxes payable -- (22,820) 5,590
--------------- ---------------
-----------------
Net cash provided by operating activities $ 9,306,453 $ 7,360,656 $ 6,248,310
--------------- --------------- -----------------
Cash flows from investing activities:
Cash purchases of property and equipment (1,805,072) (601,648) (2,313,187)
Financed purchases of property and equipment (3,429,440) (2,060,079) (8,059,667)
--------------- --------------- -----------------
Total property and equipment acquired (5,234,512) (2,661,727) (10,372,854)
Less proceeds borrowed under financing agreements 3,429,440 2,060,079 8,059,667
--------------- --------------- -----------------
Net cash purchases of property and equipment (1,805,072) (601,648) (2,313,187)
Proceeds from disposal of property and equipment 214,266 (605,084) 102,808
Contribution to Composite Image Systems, LLC -- (345,912) --
--------------- --------------- -----------------
Net cash used in investing activities $ (1,590,806) $ (1,552,644) $ (2,210,379)
--------------- --------------- -----------------
See accompanying notes to consolidated financial statements. (Continued)
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
(Continued)
2001 2000 1999
---------------- -------------- --------------
(Restated-Note 6)
Cash flows from financing activities:
Repayments of notes payable to bank and
long-term debt $ (3,236,538) $ (3,695,587) $ (2,851,992)
Net proceeds from stock issuance 250,770 16,210 53,262
Purchase of treasury stock (2,267,140) -- --
---------------- -------------- --------------
Net cash used in financing activities $ (5,252,908) $ (3,679,377) $ (2,798,730)
---------------- -------------- --------------
Net increase in cash and cash equivalents 2,462,739 2,128,635 1,239,201
Cash and cash equivalents at beginning of year 4,527,042 2,398,407 1,159,206
---------------- -------------- --------------
Cash and cash equivalents at end of year $ 6,989,781 $ 4,527,042 $ 2,398,407
================ ============== ==============
Supplementary disclosure of cash flow information:
Cash paid during the year for:
Interest $ 1,086,000 $ 1,198,000 $ 1,176,000
Income taxes 214,000 71,000 182,000
================ ============== ==============
Supplemental disclosure of noncash investing and financing activities:
The Company purchased property and equipment, financed through capital lease
obligations, of $3,429,440, $2,060,079 and $8,059,667 during 2001, 2000 and
1999, respectively.
During 1999 the Company received cancellation of rental payments under a capital
lease obligation, equipment upgrades and equipment in the amount of $2,187,000
related to a technology development agreement (note 10).
See accompanying notes to consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) Nature of Business and Basis of Presentation
Laser-Pacific Media Corporation provides a broad range of post-production
services to the motion picture film and television industry.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Laser-Pacific Media Corporation and its subsidiaries (the "Company").
Accordingly, all significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments, primarily money market
funds, purchased with original maturities of three months or less to be cash
equivalents.
Depreciation and Amortization
Depreciation and amortization of property and equipment is computed by use of
the straight-line method over the estimated useful lives of the related assets
as follows:
Buildings 30 years
Building improvements 10 years
Technical equipment 7 years
Furniture and fixtures 5 years
Automobiles 4 years
Leasehold improvements Remaining life of the lease plus
options to renew or 10 years,
whichever is shorter.
Replacements of equipment components are amortized over 18 months.
Inventory
Inventory consists primarily of tape stock and is valued at the lower of cost
(determined on the first-in, first-out basis) or market (net realizable value).
Other Assets
Other assets at December 31, 2001 consist primarily of security and utility
deposits. Other assets at December 31, 2000 consist primarily of security and
utility deposits and the Company's investment in Composite Image Systems, LLC.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999 (continued)
Revenue Recognition and Credit Risk
Revenue is recognized as services are performed. The Company sells services to
customers in the entertainment industry, principally located in Southern
California. Management performs regular evaluations concerning the ability of
its customers to satisfy their obligations and records a provision for doubtful
accounts based upon these evaluations.
The Company's primary customers are the major motion picture and television
studios and production companies. The Company's ten largest customers accounted
for approximately 70%, 66% and 72% of total revenue in 2001, 2000 and 1999,
respectively. During 2001 three customers each accounted for more than 10% of
the Company's total revenue. One customer accounted for 10%, another customer
for 11%, and another customer was responsible for 12% of the Company's total
revenue for the year ended December 31, 2001. During 2000 three customers each
accounted for more than 10% of the Company's total revenue for the year. Two
customers accounted for 10% each and another customer was responsible for 12% of
the Company's total revenue for the year ended December 31, 2000. During 1999
two customers each accounted for 13% of the Company's total revenue for the year
ended December 31, 1999.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by comparing the carrying amount of the
assets to their fair value.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Stock-Based Compensation
The Company accounts for stock based compensation in accordance with SFAS No.
123, "Accounting for Stock Based Compensation." Under the provisions of SFAS No.
123, the Company has elected to continue to apply the intrinsic value-based
method of accounting prescribed by Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations, in
accounting for stock options issued to employees and directors of the Company
and provide the pro forma disclosure provision of SFAS No. 123. As such,
compensation expense would be recorded on the date of grant only if the current
market price of underlying stock exceeded the exercise price.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999 (continued)
Comprehensive Income
Comprehensive income is the total of net income and all other non-owner changes
in equity. The Company does not have any transactions or other economic events
that qualify as comprehensive income. As such, net income represented
comprehensive income for each of the years in the three year period ended
December 31, 2001.
Disclosures about Segments of an Enterprise
Under the management approach of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" the Company operates in one business segment
- - post-production services.
Earnings 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 could share in the earnings of the
Company.
The reconciliation of basic and diluted weighted average shares is as follows:
Years ended December 31,
2001 2000 1999
------------------ ------------------- -----------------
(Restated-Note 6)
Net income $ 2,581,166 $ 3,510,047 $ 4,836,235
------------------ ------------------- -----------------
Weighted average shares used in basic computation 7,384,095 7,725,693 7,491,148
Dilutive stock options and warrants 35,389 277,660 346,403
------------------ ------------------- -----------------
Weighted average shares used in diluted computation 7,419,484 8,003,353 7,837,551
================== =================== =================
Options and warrants to purchase shares of common stock at prices ranging from
$3.26 to $9.94 were outstanding at December 31, 2001, 2000, and 1999, in the
amounts of 212,000, 0 and 325,000 respectively, but were not included in the
computation of diluted earnings per share because the options exercise price was
greater that the average market price of a common share.
Reclassifications
The Company has reclassified amounts from 2000 and 1999 to conform to current
year presentation.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999 (continued)
(3) Property and Equipment
Property and equipment is comprised of the following:
2001 2000
------------------ ---------------------
Land $ 400,000 $ 400,000
Buildings and improvements 3,346,014 2,879,961
Technical equipment 37,801,344 33,997,661
Furniture and fixtures 1,164,331 872,088
Automobiles 91,602 102,832
Leasehold improvements 485,051 881,379
------------------ ---------------------
Less accumulated depreciation 43,288,342 39,133,921
and amortization 24,083,935 20,676,105
------------------ ---------------------
$ 19,204,407 $ 18,457,816
================== =====================
The Company leases technical equipment under capital leases expiring through
2005. Equipment under capital leases aggregated $13,603,399 and $14,768,007 and
related accumulated depreciation aggregated $5,453,449 and $4,025,341 at
December 31, 2001 and 2000, respectively.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999 (continued)
(4) Notes Payable to Bank and Long-Term Debt
Notes payable to bank and long-term debt are summarized as follows:
2001 2000
---------------- -------------------
Term notes payable to bank were under $4,000,000 and $1,000,000 $ 4,883,333 $ --
credit agreements, secured by eligible property and equipment, as
defined, payable in twelve monthly installments per year at $83,333
plus interest at the 30-day dealer commercial paper rate (1.77% at
December 31, 2001) plus 2.20% and 2.65%, respectively, through 2006.
Additionally, $6.0 million is available under a revolving loan, which
expires on May 31, 2002, subject to renewal annually.
Term notes payable to bank were under a $9,000,000 credit agreement,
secured by eligible accounts receivable, inventory, and property and
equipment, as defined, payable in nine monthly installments per year of
$81,000 plus interest at 9.5% through August 3, 2003. This loan
was replaced in May 2001 with the credited facility outlined above. -- 1,939,183
Capital lease obligations (note 8) 6,733,574 9,484,822
---------------- -------------------
11,616,907 11,424,005
Less current installments 3,738,680 3,489,618
---------------- -------------------
$ 7,878,227 $ 7,934,387
================ ===================
The Company's term note credit agreements contain covenants, including financial
covenants related to leverage and fixed charge ratios. The Company was in
compliance with these covenants at December 31, 2001. The aggregate future
maturities of notes payable to bank and long-term debt exclusive of capital
lease obligations are summarized as follows:
December 31:
2002 $ 1,000,000
2003 1,000,000
2004 1,000,000
2005 1,000,000
2006 883,333
-----------------
$ 4,883,333
=================
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999 (continued)
(5) Income Taxes
A summary of income tax expense (benefit) is as follows:
2001 2000 1999
----------------- ----------------- ----------------
Current: (Restated-Note 6)
Federal $ 21,000 $ 57,000 $ 70,000
State 126,000 (27,000) 145,000
----------------- ----------------- ----------------
Total 147,000 30,000 215,000
Deferred:
Federal 356,000 -- (425,000)
State 85,000 -- (75,000)
----------------- ----------------- ----------------
Total 441,000 -- (500,000)
----------------- ----------------- ----------------
Total expense (benefit) $ 588,000 $ 30,000 $ (285,000)
================= ================= ================
The provision for income taxes at the Company's effective tax rate differed from
the U.S. Federal tax rate as follows:
2001 2000 1999
----------------- ----------------- -----------------
(Restated-Note 6)
Federal income tax expense at "expected
rate" $ 1,078,000 $ 1,203,000 $ 1,547,000
State taxes, net of Federal effect 196,000 216,000 278,000
Nondeductible expenses (7,000) 12,000 37,000
Expiration of income tax credits 212,000 (72,000) --
Change in valuation allowance for deferred
tax assets (879,000) (1,315,000) (2,173,000)
Other (12,000) (14,000) 26,000
----------------- ----------------- -----------------
Income tax expense (benefit) $ 588,000 $ 30,000 $ (285,000)
================= ================= =================
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999 (continued)
(5) Income Taxes (continued)
The tax effect of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31, 2001 and 2000 is
presented below:
2001 2000
------------------ -----------------
Deferred tax assets and liabilities: (Restated-Note 6) (Restated-Note 6)
Net operating loss carryforwards $ 2,333,000 $ 2,622,000
Income tax credit carryforwards 268,000 536,000
Vacation pay 160,000 169,000
Reserve for bad debts 437,000 516,000
Other 86,000 80,000
------------------ -----------------
Total gross deferred tax assets 3,284,000 3,923,000
Less valuation allowance -- 879,000
------------------ -----------------
Deferred tax assets 3,284,000 3,044,000
Deferred tax liabilities - property and equipment (2,922,000) (2,373,000)
------------------ -----------------
Net deferred tax assets $ 362,000 $ 671,000
================== =================
At December 31, 2001, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $6,348,000 that expire principally
from 2004 through 2012. The Company also has approximately $268,000 of tax
credits carryforwards, expiring through 2004.
The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences
become deductible. Management considers the projected future taxable income and
tax planning strategies in making this assessment. Based upon the level of
historical taxable income (losses) and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management
currently believes it is more likely than not the Company will realize all of
the benefits of these deductible differences, accordingly, as of December 31,
2001, no valuation allowance has been recorded for net deferred tax assets.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999 (continued)
(6) Stockholders' Equity
Warrants
In July 2001, 35 Lake Avenue, a California limited partnership in which James R.
Parks, the Company's Chief Executive Officer is a partner, exercised warrants to
purchase 250,000 shares of the Company's common stock at an exercise price of
$1.00. The warrants originally were issued during 1997 in connection with a
short-term debt financing arrangement.
During 1999, the Company issued 137,584 shares of common stock to its principal
lender through the exercise of warrants previously granted. The related warrants
were issued in connection with the initiation and renewal of a loan. The
warrants were valued and recorded as debt issuance costs at the time of
issuance.
Preferred Stock Purchase Rights
On January 9, 2001, the Board of Directors of the Company authorized and
declared a dividend of one preferred stock purchase right for each share of
common stock, par value $.0001 per share, of the Company (the "Common Shares").
The dividend was payable on January 24, 2001 the "Record Date" to the holders of
record of Common Shares as of the close of business on such date.
These Rights only become exercisable on the Distribution Date. The Distribution
Date would follow the announcement that any person or entity (with certain
exceptions) had acquired 20% or more of the voting shares of the Company. Any
outstanding Rights shall expire on January 9, 2011, unless earlier redeemed or
exchanged. The Rights may be exercised through the purchase of Preferred Shares,
purchase of Common Shares or the right to purchase common stock of a successor
Company, all as defined in the underlying agreement.
Treasury Stock
In June 2001, the Company purchased 825,200 shares of its common stock in a
private transaction for $2,063,000.
Stock Repurchase Plan
In November 2001, the Company announced that it would commence a stock
repurchase program. The Board of Directors authorized the Company to allocate up
to $2,000,000 to purchase its common stock at suitable market prices through
November 1, 2002. Under the stock repurchase program, the Company may purchase
outstanding shares in such amounts and at such times and prices determined at
the sole discretion of management. The funds for the stock repurchases were
provided by cash balances. There is no assurance that the Company will
repurchase the entire $2,000,000 of common stock. In November 2001, the Company
purchased 75,000 shares of its common stock on the open market for $204,140.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999 (continued)
(6) Stockholders' Equity (continued)
Restatement
In April 2002, the Great American Food Corporation, formerly known as Laser
Edit East Inc., an insolvent subsidiary of the Company, received a collection
notice from the New York State Department of Taxation and Finance. The sales tax
liability assessed to Laser Edit East, Inc. as of December 31, 2001 is $187,565,
with the addition of statutory interest and penalties of $473,274 the total
liability is $660,839. The sales tax was assessed for the periods March 1, 1989
to August 31, 1991 and June 1, 1992 to May 31, 1994. When the sales tax was
originally assessed, Laser Edit East, Inc. appealed the assessment. The appeal
was denied and a determination was issued in June 1997. At that time, Laser Edit
East, Inc. was insolvent. Counsel advised the Company at that time that
Laser-Pacific Media Corp. would not be liable for the assessment on its
insolvent subsidiary. At December 31, 1997 the Company did not accrue a
liability related to the assessment. In April 2002, when the notice was
received, the Company again consulted with counsel. Counsel has again advised
that Laser-Pacific Media Corp. would not be held responsible for the liability
of an insolvent subsidiary. The Company believes that it will not be required to
pay the assessment. However, the Company has restated its previously issued
consolidated financial statements to reflect the cumulative net impact of the
assessment on prior periods and recorded the liability net of income tax benefit
as of December 31, 1998. The effect is an increase of the accumulated deficit of
$307,617, net of income tax benefit of $171,000. The annual impact of the
assessment on each period from January 1, 1999 to December 31, 2001 is not
material to the Company's consolidated financial statements. The additional
interest expense of $182,000 and related income tax benefit of $73,000 for the
three-year period ended December 31, 2001, collectively decreasing net income by
$109,000 ($0.01 per share) have been reflected in the consolidated statement of
income for the year and quarter ended December 31, 2001. The net adjustment, for
all periods, increased accumulated deficit at December 31, 2001 by $416,899, net
of income tax benefit.
(7) Stock-based Compensation and Other Option Grants
The Company's 1997 incentive stock option plan, as amended, provides for grants
of 1,000,000 of incentive or nonqualified stock options to officers, directors
and key employees at exercise prices equal to or greater than the fair value of
the Company's common stock at the date of grant. Options currently expire no
later than 10 years from the grant date and are generally vested at date of
grant. 296,050 options outstanding under the plan are vested and 60,000 options
outstanding under the plan are not vested at December 31, 2001.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999 (continued)
(7) Stock-based Compensation and Other Option Grants (continued)
Activity under the plan for the years ended December 31, 2001, 2000 and 1999 follows:
Weighted average
Number of shares exercise price Options exercisable
-------------------- --------------------- --------------------
Shares under option at December 31, 1998 461,381 $ 0.57 461,381
Granted 325,000 9.94
Exercised (294,487) 0.22
Expired and cancelled (3,713) 0.22
-------------------- --------------------- --------------------
Shares under option at December 31, 1999 488,181 7.02 488,181
Granted 237,000 4.01
Exercised (96,649) 1.90
Expired and cancelled (313,982) 9.81
-------------------- --------------------- --------------------
Shares under option at December 31, 2000 314,550 3.41 264,550
Granted 45,000 3.50
Exercised (3,500) 0.22
Expired and cancelled -- --
-------------------- --------------------- --------------------
Shares under option at December 31, 2001 356,050 $ 3.43 296,050
==================== ===================== ====================
The following table summarizes information about options outstanding under the
plan at December 31, 2001:
Outstanding Options
------------------------------------------------------------------------------------------
Remaining
Options weighted average
Options outstanding and contractual life Weighted average
outstanding exercisable (in years) exercise price
-------------------- -------------------- --------------------- --------------------
17,900 17,900 6.00 $ 0.22
20,000 20,000 5.80 1.78
10,000 10,000 9.30 2.13
36,150 36,150 0.80 2.50
20,000 20,000 9.50 3.26
20,000 20,000 5.30 4.13
217,000 167,000 8.30 4.13
15,000 5,000 9.70 5.25
-------------------- -------------------- --------------------- --------------------
Total 356,050 296,050 7.00 $ 3.43
==================== ==================== ===================== ====================
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999 (continued)
Pro Forma Information
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, for the stock options granted to employees no compensation cost has
been recognized in the accompanying consolidated statements of income because
the exercise price equaled or exceeded the fair value of the underlying common
stock at the date of grant. Had compensation cost for the Company's stock
options granted to employees been determined based upon the fair value at the
grant date for awards consistent with SFAS No. 123, the Company's recorded and
pro forma net income and earnings per share for the years ended December 31,
2001, 2000 and 1999 would have been as follows:
Year ended December 31,
----------------------------------------------------------------
2001 2000 1999
-------------------- ------------------ ------------------
Net income: (Restated-Note 6)
As reported $ 2,581,166 $ 3,510,047 $ 4,836,235
Pro forma 2,477,316 2,820,997 4,738,735
==================== ================== ==================
Basic net income per share:
As reported $ .35 $ .45 $ .65
Pro forma .34 .37 .63
Diluted net income per share:
As reported $ .35 $ .44 $ .62
Pro forma .33 .35 .60
==================== ================== ==================
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:
2001 2000 1999
----------------- ----------------- -----------------
Expected life (in years) 10.00 10.00 10.00
Risk-free interest rate 3.33-4.19 4.50 6.25
Volatility 1.06 .78-1.22 .60
Dividend yield -- -- --
Fair value - grant date 1.97-4.83 1.47-3.95 .30
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the fair
value of its options.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999 (continued)
(8) Commitments and Contingencies
Leases
The Company leases certain technical equipment under capital leases that expire
through 2005.
The Company also leases corporate offices, certain operating facilities and
equipment under non-cancelable operating leases that expire through 2006.
The present value of future minimum capital lease payments and future minimum
lease payments under non-cancelable operating leases, principally facility
leases, are as follows:
Capital leases Operating leases
Year ending December 31:
2002 $ 3,168,421 $ 646,935
2003 2,579,180 635,750
2004 1,530,865 652,148
2005 322,165 670,821
2006 -- 143,709
------------------ ----------------------
Total minimum lease payments 7,600,631 2,749,363
======================
Less amount representing interest 867,057
------------------
Present value of minimum lease payments $ 6,733,574
==================
Rent expense amounted to $954,686, $834,759 and $884,209 for the years ended
December 31, 2001, 2000 and 1999, respectively.
Legal Matters
The Company may have certain contingent liabilities resulting from litigation
and claims incident to the ordinary course of business. Management believes that
the probable resolution of such contingencies will not materially affect the
Company's financial statements taken as a whole.
Employment Agreements
The Company has employment agreements with certain officers that require written
notices of termination ranging from one to five years.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999 (continued)
(8) Commitments and Contingencies (continued)
Contingencies
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.
(9) Benefit Plan
The Company has a defined contribution Profit Sharing 401(k) Savings Plan that
covers substantially all of its employees. Under the terms of the plan,
employees can elect to defer up to 15% of their wages, subject to certain
Internal Revenue Service (IRS) limitations, by making voluntary contributions to
the plan. Additionally, the Company, at the discretion of management, can elect
to match up to 100% of the voluntary contributions made by its employees, but
may not exceed 4% of an employee's compensation. For the years ended December
31, 2001, 2000 and 1999 the Company did not contribute to the plan on behalf of
its employees.
(10) Other Income
Other income in 2001 consists of income recognized in connection with a research
and development collaboration agreement of $193,000, income from a gain on the
sale of the Company's interest in CIS of $83,000 discussed above, and interest
income earned from cash balances. Other income in 2000 consists primarily of
interest earned from cash balances. During 1999, the Company entered into a
collaboration agreement (the Agreement) with a major equipment manufacturer and
supplier. Under the agreement, the Company provided research, development and
engineering services related to the development of technical equipment used in
connection with high definition post-production. In consideration for services
provided, the Company received replacement equipment, discounts on the purchase
of equipment and the cancellation of rental payments under a capital lease
obligation due to the supplier. The Company recorded other income of $2,187,000
pursuant to this agreement.
(11) Related Party Transactions
James R. Parks, Chairman of the Board and Chief Executive Officer of the
Company, is an executive director of CBIZ Southern California Inc, (CBIZ)
formerly known as Parks, Palmer Business Services, Inc. CBIZ provides tax
accounting and management consulting services to the Company. CBIZ charges were
approximately $83,000, $77,000, and $55,000 for the years ended December 31,
2001, 2000 and 1999 respectively.
The Company performed services on a movie produced by Local Boys, LLC from
September 2001 through February 2002. James R. Parks, Chairman of the Board and
Chief Executive Officer of the Company, is a member of Local Boys, LLC and an
executive producer for the movie. Fees for services were billed at the Company's
standard rates and the total amount billed for services during that period was
$189,000. As of March 20, 2002, $145,000 of the total amount billed was
outstanding.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999 (continued)
(11) Related Party Transactions (continued)
In July 2001, 35 Lake Avenue, a California limited partnership in which James R.
Parks, the Company's Chief Executive Officer is a partner, exercised warrants to
purchase 250,000 shares of the Company's common stock at an exercise price of
$1.00. The warrants originally were issued during 1997 in connection with a
short-term debt financing arrangement.
In April 2001, the Company engaged Gerard Klauer Mattison & Co., Inc., as it's
financial advisor. David Merritt, a director of the Company is a member of that
firm. Fees of $75,000 were paid to Gerard Klauer Mattison & Co., Inc for
services during the year-ended December 31, 2001.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts
Years ended December 31, 2001, 2000 and 1999
Column A Column B Column C Column D Column E
- ------------------------------- -------------------- -------------------- ------------------- ---------------------
Balance at
beginning of Charged to costs Deductions Balance at end
Description period and expenses write-offs (1) of period
- ------------------------------- -------------------- -------------------- ------------------- ---------------------
Allowance for bad debts:
1999 $ 1,044,000 793,000 (465,000) 1,372,000
==================== ==================== =================== =====================
2000 $ 1,372,000 274,000 (359,000) 1,287,000
==================== ==================== =================== =====================
2001 $ 1,287,000 261,000 (451,000) 1,097,000
==================== ==================== =================== =====================
(1) Uncollectible accounts written off, net of recoveries.
PART III
All references in this Part III to the registrant's definitive proxy
statement for its 2002 Annual Meeting of Stockholders are exclusive of the
information set forth under the captions "Report of the Board of Directors on
Executive Compensation," "Audit Committee Report" and "Stock Performance Graph
and Table" therein.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this Item is incorporated by reference to the registrant's
definitive proxy statement for its 2002 Annual Meeting of Stockholders, to be
filed on or before April 30, 2002, for the limited purpose of providing the
information necessary to comply with this item.
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item is incorporated by reference to the registrant's
definitive proxy statement for its 2002 Annual Meeting of Stockholders, to be
filed on or before April 30, 2002, for the limited purpose of providing the
information necessary to comply with this item.
Item 12. Security Ownership of Certain Beneficial Owners AND MANAGEMENT
The response to this Item is incorporated by reference to the registrant's
definitive proxy statement for its 2002 Annual Meeting of Stockholders, to be
filed on or before April 30, 2002, for the limited purpose of providing the
information necessary to comply with this item.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item is incorporated by reference to the registrant's
definitive proxy statement for its 2002 Annual Meeting of Stockholders, to be
filed on or before April 30, 2002, for the limited purpose of providing the
information necessary to comply with this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1 and 2. Financial Statements and Financial Statement Schedule:
The financial statements and financial statement schedule are
listed in the accompanying index to the Consolidated Financial
Statements on page 14 of the Form 10-K. The financial
statements indicated on the index appearing on page 14 hereof
are incorporated herein by reference.
3. Exhibits: The exhibits are listed on the accompanying index
to exhibits and are incorporated herein by reference or are
filed as part of this Form 10-K.
3.1 Certificate of Incorporation of the Company. (1)
3.2 Certificate of Amendment to Certificate of Incorporation
of the Company, filed August 29, 1990. (2)
3.3 Certificate of Amendment to Certificate of Incorporation
of the Company, filed August 14, 1991. (3)
3.4 Amended and Restated By-Laws of the Company. (13)
4.1 Form of Common Stock Certificate. (2)
4.2 Rights Agreement, dated as of January 12, 2001,
between the Company and U.S. Stock Transfer Corporation,
as Rights Agent. (12)
4.3 Certificate of Designations of Series B Junior Participating
Cumulative Preferred Stock. (12)
10.1 1990 Stock Option Plan. (1)
10.2 1997 Stock Option Plan. (7)
10.3 Amended 1997 Stock Option Plan. (10)
10.5 Employment Agreement, dated as of May 15, 1990, between
the Company and Emory Cohen. (1)
10.8 CIT Credit Agreement signed on August 3, 1992. (4)
10.8A Amended Loan Agreement, between CIT and the Company, dated
as of April 12, 1995. (5)
10.8B Amended Loan Agreement, between CIT and the Company, dated
as of April 10, 1997. (6)
10.8C Amended Loan Agreement, between CIT and the Company, dated
as of June 15, 1998. (9)
10.8D Amended Loan Agreement, between CIT and the Company, dated
as of June 7, 1999. (11)
10.14 Bank of America Amended Loan Agreement, dated as of
February 29, 1996. (5)
10.14A Bank of America Settlement Agreement, dated as of
December 2, 1998. (9)
10.15 Employment Agreement, dated as of July 24, 1995, between
the Company and Randolph Blim. (5)
10.18 Sale of Subsidiary (PVC). (8)
10.19 Employment Agreement, dated as of August 1, 1999, between
the Company and Robert McClain. (11)
10.20 Lease Agreement, dated as of February 7, 2001, by and
between the Company and Morton La Kretz, Trustee of the
Crossroads Trust, UTD April 28, 1982. (13)
10.21 Lease Agreement, dated as of March 1, 2001, by and between
the Company and NTA Partners. (13)
10.22 Term Loan and Security Agreement (including all other related
loan documents), as amended, dated as of June 5, 2001, between
the Company and Merrill Lynch Business Financial Services,
Inc. (14)
10.23 Lease Agreement, dated April 1, 2001 by and between the
Company and Melba Investments, LLC. (15)
21.1 List of Subsidiaries. (3)
23.1 Consent of KPMG LLP, Independent Public Accountants. (15)
(1) Previously filed on June 7, 1991, with the Company's
Registration Statement on Form S-1 and incorporated by
reference hereto (File No. 33-41085).
(2) Previously filed on July 23, 1991, with the Company's
Registration Statement on Form S-1 and incorporated by
reference hereto (File No. 33-41085).
(3) Previously filed on April 10, 1992 with the Company's
Form 10-K and incorporated by reference hereto.
(4) Previously filed on August 12, 1992 with the Company's
Form 10-Q and incorporated by reference hereto.
(5) Previously filed on April 14, 1996 with the Company's
Form 10-K and incorporated by reference hereto.
(6) Previously filed on April 14, 1997 with the Company's
Form 10-K and incorporated by reference hereto.
(7) Previously filed on December 16, 1997 with the Company's
Form S-8 and incorporated by reference hereto
(8) Previously filed on June 2, 1998 with the Company's
Form 8-K and incorporated by reference hereto.
(9) Previously filed on March 29, 1999 with the Company's
Form 10-K and incorporated by reference hereto.
(10) Previously filed on October 15, 1999 with the Company's
Form S-8 and incorporated by reference hereto.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
(11) Previously filed on March 30, 2000 with the Company's
Form 10-K and incorporated by reference hereto.
(12) Previously filed on January 19, 2001 with the Company's
Form 8-K and incorporated by reference hereto.
(13) Previously filed on March 29, 2001 with the Company's
Form 10-K and incorporated by reference hereto.
(14) Previously filed on August 8, 2001 with the Company's
Form 10-Q and incorporated by reference hereto.
(15) Filed herewith.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on May 20, 2002.
LASER-PACIFIC MEDIA CORPORATION
By: /s/ James R. Parks
James R. Parks
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ James R. Parks
James R. Parks Chairman of the Board and May 17, 2002
Chief Executive Officer
(Principal Executive Officer)
/s/ Emory M. Cohen
Emory M. Cohen President, Chief Operating Officer May 17, 2002
and Director
/s/ Robert McClain
Robert McClain Vice President, Chief Financial Officer May 17, 2002
and Corporate Secretary
(Principal Financial and Accounting Officer)
/s/ Thomas D. Gordon
Thomas D. Gordon Director May 17, 2002
Craig A. Jacobson Director May 17, 2002
David C. Merritt Director May 17, 2002