SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Quarterly Period Ended September 30, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Transition Period from ............... to ...............
Commission File Number 0-19407
LASER-PACIFIC MEDIA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-3824617
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
809 N. Cahuenga Blvd.
Hollywood, California 90038
(323) 462-6266
(Address, including zip code and telephone number,
with area code of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of each of the registrant's classes of common
stock, as of October 31, 2002 was 7,101,295 shares of Common Stock, $.0001 par
value per share.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Table of Contents
Page
------
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets (Unaudited) 3
Condensed Consolidated Statements of Operations (Unaudited) 4
Condensed Consolidated Statements of Cash Flows (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Item 4. Controls and Procedures 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Certification 15
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2002 2001
--------------- ----------------
Assets
Current Assets:
Cash and cash equivalents $ 6,239,582 $ 6,989,781
Receivables, net of allowance for doubtful accounts 3,957,050 3,803,652
Other current assets 1,245,549 1,329,817
--------------- ----------------
Total Current Assets 11,442,181 12,123,250
Net property and equipment 18,967,332 19,204,407
Other assets 229,807 200,531
--------------- ----------------
Total Assets $ 30,639,320 $ 31,528,188
=============== ================
Liabilities and Stockholders' Equity
Current Liabilities:
Current installments of notes payable to bank and long-term debt $ 3,777,237 $ 3,738,680
Other current liabilities 2,760,049 2,275,160
--------------- ----------------
Total Current Liabilities 6,537,286 6,013,840
Notes payable to bank and long-term debt, less current installments 6,482,791 7,878,227
Stockholders' Equity:
Preferred stock, $.0001 par value. Authorized 3,500,000 shares; none issued -- --
Common stock, $.0001 par value. Authorized 25,000,000 shares; issued
7,101,295 shares at September 30, 2002 and 8,004,795 shares at
December 31, 2001 710 800
Additional paid-in capital 18,089,061 20,363,901
Accumulated deficit (470,528) (461,440)
Treasury stock, at cost: 900,200 shares at December 31, 2001 -- (2,267,140)
--------------- ----------------
Net Stockholders' Equity 17,619,243 17,636,121
--------------- ----------------
Total Liabilities and Stockholders' Equity $ 30,639,320 $ 31,528,188
=============== ================
See accompanying notes to the condensed consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months ended Nine Months ended
September 30, September 30,
---------------------------------- --------------------------------
2002 2001 2002 2001
--------------- --------------- -------------- --------------
Revenues $ 7,619,085 $ 6,856,819 $ 21,414,585 $ 24,364,577
Operating costs
Direct costs 4,715,232 4,734,264 13,846,655 15,388,676
Depreciation and amortization 1,179,933 1,073,060 3,476,172 3,176,515
--------------- --------------- -------------- --------------
Total operating costs 5,895,165 5,807,324 17,322,827 18,565,191
--------------- --------------- -------------- --------------
Gross profit 1,723,920 1,049,495 4,091,758 5,799,386
Selling, general and administrative
and other expenses 1,216,723 1,174,426 3,569,113 3,543,438
--------------- --------------- -------------- --------------
Income (loss) from operations 507,197 (124,931) 522,645 2,255,948
Interest expense 199,219 229,243 631,733 774,033
Other income and interest income 25,604 329,463 95,332 510,750
--------------- --------------- -------------- --------------
Income (loss) before income tax expense (benefit) 333,582 (24,711) (13,756) 1,992,665
Income tax expense (benefit) 133,896 (400,141) (4,668) 144,977
--------------- --------------- -------------- --------------
Net income (loss) $ 199,686 $ 375,430 $ (9,088) $ 1,847,688
=============== =============== ============== ==============
Income (loss) per share (basic) $ 0.03 $ 0.05 $ (0.00) $ 0.25
--------------- --------------- -------------- --------------
Income (loss) per share (diluted) $ 0.03 $ 0.05 $ (0.00) $ 0.25
--------------- --------------- -------------- --------------
Weighted average shares outstanding (basic) 7,101,295 7,178,595 7,102,395 7,468,928
=============== =============== ============== ==============
Weighted average shares outstanding (diluted) 7,118,784 7,227,083 7,102,395 7,503,313
=============== =============== ============== ==============
See accompanying notes to the condensed consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months ended September 30,
---------------------------------------
2002 2001
----------------- -----------------
Cash flows from operating activities:
Net income (loss) $ (9,088) $ 1,847,688
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,476,172 3,176,515
Gain on sale of property and equipment (6,623) (25,713)
Provision (recovery) of doubtful accounts receivable (70,885) 167,840
Change in assets and liabilities:
Receivables (82,514) 1,082,521
Other current assets 54,992 (75,350)
Other current liabilities 484,889 829,357
Other -- 561,680
----------------- -----------------
Net cash provided by operating activities 3,846,943 7,564,538
Cash flows from investing activities:
Purchases of property and equipment (3,239,098) (4,496,227)
Net proceeds from disposal of property and equipment 6,623 206,979
----------------- -----------------
Net cash used in investing activities (3,232,475) (4,289,248)
Cash flows from financing activities:
Proceeds borrowed under notes payable to bank and long-term debt 1,500,000 2,870,251
Repayment of notes payable to bank and long-term debt (2,856,879) (4,083,454)
Proceeds from issuance of common stock -- 250,550
Purchase of treasury stock (7,788) (2,063,000)
----------------- -----------------
Net cash used in financing activities (1,364,667) (3,025,653)
Net increase (decrease) in cash and cash equivalents (750,199) 249,637
Cash and cash equivalents at beginning of period 6,989,781 4,527,042
----------------- -----------------
Cash and cash equivalents at end of period $ 6,239,582 $ 4,776,679
================= =================
See accompanying notes to the condensed consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring items) necessary to present fairly the financial position of
Laser-Pacific Media Corporation (the "Company") and its subsidiaries as of
September 30, 2002 and December 31, 2001; the results of its operations for the
three and nine month periods ended September 30, 2002 and 2001; and cash flows
for the nine month periods ended September 30, 2002 and 2001. The Company's
business is subject to the prime time television industry's typical seasonality.
Historically, revenues and income from operations have been highest during the
first and fourth quarters, when production of television programs and demand for
the Company's services is at its highest. The net income or loss of any interim
quarter is seasonally disproportionate to revenues because selling, general and
administrative expenses and certain operating expenses remain relatively
constant during the year. Therefore, interim results are not indicative of
results to be expected for the entire fiscal year.
In accordance with the regulations of the Securities and Exchange
Commission ("SEC") under Rule 10-01 of Regulation S-X, the accompanying
consolidated financial statements and footnotes have been condensed and do not
contain certain information included in the Company's annual consolidated
financial statements and notes thereto.
(2) Income per Share
The Company presents basic and diluted earnings per share ("EPS"). Basic
EPS is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution from securities that are issuable and that could
share in the earnings of the Company, unless those securities are anti-dilutive.
The reconciliation of basic and diluted weighted average shares is as
follows:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income (loss) $ 199,686 $ 375,430 $ (9,088) $ 1,847,688
============= ============= ============= =============
Shares:
Weighted average shares used in basic computation 7,101,295 7,178,595 7,102,395 7,468,928
Dilutive stock options and warrants 17,489 48,488 -- 34,385
------------- ------------- ------------- -------------
Weighted average shares used in diluted computation 7,118,784 7,227,083 7,102,395 7,503,313
Net income (loss) per common share:
Basic $ 0.03 $ 0.05 $ (0.00) $ 0.25
Diluted $ 0.03 $ 0.05 $ (0.00) $ 0.25
Options to purchase shares of common stock at exercise prices ranging from
$0.22 to $5.25 per share were outstanding for the three and nine month periods
ended September 30, 2002 in the amount of 473,000 and 510,000, respectively, and
for the three and nine months ended September 30, 2001 in the amount of 212,000
and 192,000, respectively. Outstanding options were not included in the
computation of diluted earnings per share when the exercise price of the options
was greater than the average market price of a common share, or the options were
anti-dilutive.
(3) Income Taxes
Income tax expense (benefit) was computed using the estimated effective tax
rate to apply for all of 2002. The Company's estimated tax rate for 2002 is 40%.
This rate is subject to ongoing review and evaluation by management.
(4) Treasury Stock
In March 2002, the Company retired 900,200 shares of common stock held in
treasury.
In April 2002, the Company purchased 3,300 shares of its common stock for
$7,788 and subsequently retired the shares.
(5) Segment Reporting
In compliance with disclosure regarding SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, the Company has determined
that it has one business segment - post-production services.
(6) Recent Accounting Pronouncements
Accounting for Business Combinations and Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and
Other Intangible Assets. Statement No. 141 requires that the purchase method be
used for all business combinations initiated after June 30, 2001. Statement No.
142 requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment on an annual basis. The Company adopted Statement No.'s
141 and 142 effective January 1, 2002. The adoption of the pronouncement did not
have a material impact on the Company's financial statements.
Accounting for the Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. Statement No. 144 retains the fundamental provisions in
Statement No. 121 for recognizing and measuring impairment losses on long-lived
assets held for use and long-lived assets to be disposed of by sale, while also
resolving certain implementation issues associated with Statement No. 121. The
Company adopted Statement No. 144 effective January 1, 2002. The adoption of
Statement No. 144 did not have a material impact on the Company's financial
statements.
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections
The FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections, on April
30, 2002. Statement No. 145 rescinds Statement No. 4, which required all gains
and losses from the extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. Upon
adoption of Statement No. 145, companies will be required to apply the criteria
in APB Opinion No. 30, Reporting the Results of Operations, Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions ("Opinion No. 30"), in
determining the classification of gains and losses resulting from
extinguishments of debt.
Additionally, Statement No. 145 amends Statement No. 13 to require that
certain lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
Statement No. 145 will be effective for fiscal years beginning after May
15, 2002 (e.g., January 1, 2003 for calendar-year companies), with early
adoption of the provisions related to the rescission of Statement No. 4
encouraged. Upon adoption, companies must reclassify prior period items that do
not meet the extraordinary item classification criteria in Opinion No. 30. The
Company adopted Statement No. 145 effective January 1, 2002. The adoption of
Statement No. 145 did not have a material impact on the Company's financial
statements.
Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit and Disposal Activities. Statement No. 146 nullifies
Emerging Issues Task Force ("EITF") issue 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). Under EITF issue 94-3, a
liability for an exit cost is recognized at the date of an entity's commitment
to an exit plan. Under Statement No. 146, the liabilities associated with an
exit or disposal activity will be measured at fair value and recognized when the
liability is incurred and meets the definition of a liability in the FASB's
conceptual framework. This Statement is effective for exit or disposal
activities initiated after December 31, 2002. Management believes the adoption
of Statement No. 146 will not have a material impact on the Company's financial
statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements included within this report, other than statements of historical
facts, that address activities, events or developments that the Company expects
or anticipates will or may occur in the future, including such things as
business strategy and measures to implement strategy, competitive strengths,
goals, expansion and growth of the Company's business and operations, plans,
references to future success and other such matters, are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities and Exchange Act of 1934, as amended,
and fall under the respective safe harbors. 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 SEC to advise interested parties of certain
risks and other factors that may affect the Company's business and operating
results.
Critical Accounting Policies
Laser-Pacific Media Corporation's critical accounting policies are as
follows:
Depreciation and amortization of property and equipment,
Valuation of long-lived assets,
Accounting for income taxes, and
Valuation of Accounts Receivable.
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 lives
of the related assets. Significant management judgment is required to determine
the useful lives of the assets. The useful lives are as follows:
-------------------------------- --------------------------
Type of Asset Useful Life
-------------------------------- --------------------------
Automobiles 4 years
-------------------------------- --------------------------
Furniture and Fixtures 5 years
-------------------------------- --------------------------
Technical Equipment 7 years
-------------------------------- --------------------------
Leasehold Improvements 10 years
-------------------------------- --------------------------
Building Improvements 10 years
-------------------------------- --------------------------
Buildings 30 years
-------------------------------- --------------------------
Should the useful lives of the assets be revised, the impact on the
Company's results of operations could be material.
Valuation of Long-Lived Assets
The Company periodically assesses the impairment of its long-lived assets,
which requires 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:
The asset's ability to continue to generate income from operations and
positive cash flow in future periods;
Significant changes in strategic business objectives and utilization of the
assets; or
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 management believes is more likely than not to be
realized. The likelihood of a material change in the Company's expected
realization of these assets depends on future taxable income, the ability to
deduct tax loss carry forwards against future taxable income, the effectiveness
of the tax planning and strategies among the various tax jurisdictions in which
the Company operated, and any significant changes in the tax laws. For the years
ended December 31, 2001, 2000 and 1999, valuation allowances 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.
As of September 30, 2002 and December 31, 2001, the Company had no valuation
allowance related to deferred tax assets of $369,000 and $362,000, respectively.
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. Income tax expense for
2002 is computed using the estimated effective tax rate of 40% to apply for all
of 2002. The rate is subject to ongoing review and evaluation by management.
Valuation of Accounts Receivable
The Company regularly assesses its accounts receivable balance and creates
an allowance for the amount the Company considers uncollectable. The purpose of
this allowance is to reduce the accounts receivable balance to the estimated net
realizable balance. Significant management judgment is required to determine an
appropriate level for the allowance. The allowance is determined considering the
following criteria: delinquency of individual accounts, collection history of
specific customers, and the ability of clients to make payments. If the
allowance were revised to reflect a change in management's assessment of the
criteria described above, the impact on the Company's financial position and
results of operations could be material.
Results of Operations
Revenues for the nine months ended September 30, 2002 decreased to
$21,415,000 from $24,365,000 for the same year-ago period, a decrease of
$2,950,000 or 12.1%. The decrease in revenues is primarily attributable to a
decrease in demand for the Company's services during the first and second
quarters of 2002, which was partially offset by an increase in revenues during
the third quarter of 2002. Factors contributing to this decrease in demand 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; a reduction in the
number of movies for television as well as fewer theatrical releases during the
first and second quarters; and certain clients utilizing formats that require a
lower volume of film processing.
Revenues for the three months ended September 30, 2002 increased to
$7,619,000 from $6,857,000 for the same year-ago period, an increase of $762,000
or 11.1%. The increase in revenues is primarily attributable to an overall
increase in demand for the Company's services. A significant portion of the
increase can be attributed to increased demand for the Company's telecine
services as a result of the increased number of theatrical releases, which was
partially offset by a decrease in film processing services due to certain
clients utilizing formats that require a lower volume of film processing.
Operating costs for the nine months ended September 30, 2002 were
$17,323,000 versus $18,565,000 for the same year-ago period, a decrease of
$1,242,000 or 6.7%. The decrease in operating costs is primarily due to
decreases in the following; wages and salaries of production personnel of
$982,000; bad debt expense of $239,000; and videotape stock expense of $131,000.
The decrease was partially offset by an increase in equipment rental expense of
$93,000. The decreases in wages and salaries and videotape stock expense are
primarily due to the overall decrease in demand for the Company's services that
occurred throughout the first half of the year. The reduction in bad debt
expense is primarily attributable to improved collections. The increase in
equipment rental expense is primarily the result of the increased demand for the
Company's services during the three months ended September 30, 2002. Total
operating costs, including depreciation, as a percentage of revenues for the
nine months ended September 30, 2002 were 80.9% compared with 76.2% for the same
year-ago period.
Operating costs for the three months ended September 30, 2002 were
$5,895,000 versus $5,807,000 for the same year-ago period, an increase of
$88,000 or 1.5%. The increase in operating costs is primarily the result of
increases in videotape stock expense of $126,000 and depreciation expense of
$107,000. The increase in videotape stock expense is primarily attributable to
the increased demand for the Company's services discussed above. The increase in
depreciation expense is primarily the result of purchases of equipment to expand
the Company's capabilities. These increases were partially offset by decreases
in wages and salaries of production personnel of $131,000 and bad debt expense
of $69,000. The decrease in wages and salaries is primarily the result of a
decrease in the number of employees and fewer overtime hours worked. The
reduction in bad debt expense is primarily attributable to improved collections.
Total operating costs, including depreciation, as a percentage of revenues for
the three months ended September 30, 2002 were 77.4% compared with 84.7% for the
same year-ago period.
For the nine months ended September 30, 2002, the Company recorded a gross
profit of $4,092,000 compared with $5,799,000 for the same year-ago period, a
decrease of $1,708,000 or 29.4%. The decrease in gross profit is primarily the
result of the decrease in revenues partially offset by the decrease in operating
costs explained above. Revenues decreased 12.1% while operating costs decreased
6.7% as compared to the same year-ago period.
For the three months ended September 30, 2002, the Company recorded a gross
profit of $1,724,000 compared to a gross profit of $1,049,000 for the same
year-ago period, an increase of $674,000 or 64.3%. The increase in gross profit
is primarily the result of the increase in revenues partially offset by the
increase in operating costs explained above. The operating costs were further
minimized by the decrease in wages discussed above. Revenues increased 11.1%
while operating costs increased 1.5% as compared to the same year-ago period.
Selling, general and administrative and other expenses ("SG&A expenses")
for the nine months ended September 30, 2002 were $3,569,000 compared to
$3,543,000 during the same year-ago period, an increase of $26,000 or 0.7%. The
increase is primarily attributable to increases in wages and salaries for
administrative personnel of $108,000 and taxes and licenses of $108,000, which
were partially offset by decreases in advertising and promotion of $86,000 and
professional services of $122,000. The increase in wages and salaries is
primarily attributable to compensation increases. The increase in taxes and
licenses is primarily due to adjustments in 2001 that decreased property tax as
the result of a property tax audit concluded in 2001 encompassing tax years
1995-1999. The decrease in advertising and promotion is primarily the result of
management's efforts to reduce expenses. The decrease in professional services
is primarily due to a decrease in investor advisory services and legal fees,
which was partially offset by increases in accounting and consulting fees.
SG&A expenses for the three months ended September 30, 2002 were $1,217,000
compared to $1,174,000 for the same year-ago period, an increase of $42,000 or
3.6%. The increase is primarily attributable to increases in wages and salaries
for administrative personnel of $18,000 and taxes and licenses of $42,000, which
were partially offset by a decrease in advertising and promotion of $24,000. The
increase in wages and salaries is primarily attributable to compensation
increases. The increase in taxes and licenses is primarily due to adjustments in
2001 that decreased property tax as the result of a property tax audit concluded
in 2001 encompassing tax years 1995-1999. The decrease in advertising and
promotion is primarily the result of management's efforts to reduce expenses.
Interest expense for the nine months ended September 30, 2002 was $632,000
compared to $774,000 for the same year-ago period, a decrease of $142,000 or
18.4%. The decrease in interest expense is primarily the result of lower
interest rates on borrowings.
Interest expense for the three months ended September 30, 2002 was $199,000
compared to $229,000 for the same year-ago period, a decrease of $30,000 or
13.1%. The decrease in interest expense is primarily the result of lower
interest rates on borrowings.
Other income and interest income for the nine months ended September 30,
2002 was $95,000 compared to $511,000 for the same year-ago period, a decrease
of $415,000 or 81.3%. In 2002, other income and interest income is primarily
comprised of interest income. In 2001, other income and interest income included
income recognized from a research and development collaboration agreement of
$193,000, a gain on the sale of the Company's interest in Composite Image
Systems, LLC ("CIS") of $83,000, discussed below, and interest income of
$110,000.
Other income and interest income for the three months ended September 30,
2002 was $26,000 compared to $329,000 for the same year-ago period, a decrease
of $304,000 or 92.2%. In 2002, other income and interest income is primarily
comprised of interest income. In 2001, other income and interest income included
income recognized from a research and development collaboration agreement of
$193,000, a gain on the sale of the Company's interest in CIS of $83,000,
discussed below, and interest income of $25,000.
Income tax benefit for the nine months ended September 30, 2002 was $5,000
compared to income tax expense of $145,000 for the same year-ago period, a
decrease of $150,000 or 103.2%. The decrease in income tax expense is
principally due to lower income before income tax expense and/or benefit. The
decrease in income tax expense was partially offset by the elimination of a
valuation allowance against deferred tax assets that occurred during the nine
months ended September 30, 2001.
Income tax expense for the three months ended September 30, 2002 was
$134,000 compared to an income tax benefit of $400,000 for the same year-ago
period, an increase of $534,000 or 398.8%. The increase in income tax expense is
primarily attributable to the elimination of a valuation allowance against
deferred tax assets that occurred during the three months ended September 30,
2001.
Liquidity and Capital Resources
As of September 30, 2002, the Company and its subsidiaries are operating
under a credit facility with Merrill Lynch Business Financial Services. The
maximum credit available under the facility is $12.5 million. The facility
provides for borrowings of up to $6.0 million under a revolving loan and $6.5
million in equipment term loans. The term note credit agreements contain
covenants, including financial covenants related to leverage and fixed charge
ratios. The Company was in compliance with these covenants at September 30,
2002. As of September 30, 2002, the outstanding borrowing under the facility is
listed below:
Merrill Lynch Credit Facility
- -------------------------------------------- ----------------------- -----------------------------------------------------------
Type of Obligation Balance at Interest Rate
September 30, 2002
- -------------------------------------------- ----------------------- -----------------------------------------------------------
Revolving Loan $ 0.00 "30-day dealer commercial paper" rate plus 2.20%
- -------------------------------------------- ----------------------- -----------------------------------------------------------
Variable Rate Equipment Loan $ 733,000 "30-day dealer commercial paper" rate plus 2.65%
- -------------------------------------------- ----------------------- -----------------------------------------------------------
Variable Rate Equipment Loan $ 3,400,000 "30-day dealer commercial paper" rate plus 2.20%
- -------------------------------------------- ----------------------- -----------------------------------------------------------
Fixed Rate Equipment Loan $ 500,000 4.64%
- -------------------------------------------- ----------------------- -----------------------------------------------------------
Fixed Rate Equipment Loan $ 950,000 6.04%
- -------------------------------------------- ----------------------- -----------------------------------------------------------
The revolving loan expires in June 2003 and can be renewed annually. The
equipment term loans expire from June 2006 through October 2007. The revolving
loan and equipment term loans are payable monthly.
In addition to the borrowings listed above, as of September 30, 2002, the
Company had outstanding equipment term loans and capital lease obligations of
approximately $4,677,000 with various other lenders in connection with the
acquisition of equipment. The obligations are for terms of up to 60 months, at
fixed interest rates ranging from 7.50% to 12.75%. The obligations are secured
by the equipment financed. The equipment was acquired to expand the Company's
capabilities and to support the demand for the Company's services. In addition,
the Company has obligations under operating leases, relating to facilities, of
$2.3 million at September 30, 2002.
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
the next twelve months.
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 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 gave a
corporate guarantee in connection with a lease obligation of the joint venture,
and CIS and the joint venture partner have agreed to indemnify the Company for
up to the amount of the principal obligation for any claims that might arise
under the guarantee should CIS default on the lease obligation. The lease
obligation is also secured by the equipment purchased under the lease. The
Company estimates that, as of September 30, 2002, the current principle balance
outstanding on the equipment lease was approximately $220,000.
Seasonality and Variation of Quarterly Results
The Company's business is subject to substantial quarterly variations as a
result of seasonality, which the Company believes is typical of the
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 is at its
highest. Historically, revenues have been substantially lower during the second
and third quarters.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Derivative Instruments. The Company does not invest, and during the nine
and three months ended September 30, 2002 did not invest, in market risk
sensitive instruments.
Market Risk. The Company's market risk exposure with respect to financial
instruments is subject to changes in the "30-day dealer commercial paper" rate
in the United States. The Company had borrowings of $4.1 million at September
30, 2002 under the variable rate equipment term loans (discussed above) and may
borrow up to $6.0 million under a revolving loan. Amounts outstanding under the
variable rate equipment term loans 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 $37,000 annually.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
company's disclosure controls and procedures pursuant to Rules 13a-14 and 13a-15
promulgated under the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"). Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings.
There were no significant changes in the Company's internal controls or in
other factors that would significantly affect those internal controls subsequent
to the date of the most recent evaluation. Since there were no significant
deficiencies or material weaknesses in the Company's internal controls, the
Company did not take any corrective actions.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1 Certification of James R. Parks, Chief Executive
Officer of the Company, Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification of Robert McClain, Chief Financial
Officer of the Company, Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
Laser-Pacific Media Corporation has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
LASER-PACIFIC MEDIA CORPORATION
(Registrant)
Dated: November 13, 2002 /s/James R. Parks
-----------------
James R. Parks
Chief Executive Officer
Dated: November 13, 2002 /s/Robert McClain
-----------------
Robert McClain
Chief Financial Officer
(Principal Financial and Accounting Officer)
Certification
Each of the undersigned, in his capacity as the Chief Executive Officer and
Chief Financial Officer of Laser-Pacific Media Corporation, as the case may be,
provides the following certifications required by 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, and 17 C.F.R.
Section 240.13a-14.
Certification of Chief Executive Officer
I, James R. Parks, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Laser-Pacific
Media Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/James R. Parks
-----------------
James R. Parks
Chief Executive Officer
Certification of Chief Financial Officer
I, Robert McClain, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Laser-Pacific
Media Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/Robert McClain
-----------------
Robert McClain
Chief Financial Officer