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, 1997
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
(213) 462-6266
(Address, including zip code and telephone number, including area code of
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of each of the registrant's classes of common
stock, as of November 1, 1997 was 7,128,172 shares of Common Stock, $.0001 par
value.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Table of Contents
Page
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements. . . . . . . . . . . . 1
Condensed Consolidated Balance Sheets. . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations. . . . . . . . . . 2
Condensed Consolidated Statements of Cash Flows. . . . . . . . . . 3
Notes to Condensed Consolidated Financial Statements . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 5
Part II - Other Information
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Audited) (Unaudited)
December 31, September 30,
1996 1997
----------- ----------
Assets
Current assets . . . . . . . . . $5,278,786 $5,754,667
Net property and equipment . . . 17,233,085 16,668,908
Other assets . . . . . . . . . . 650,580 640,728
============ ============
$23,162,451 $23,064,303
============ ============
Liabilities and Stockholders' Equity
Current liabilities. . . . . . . $7,777,226 $8,956,363
Notes payable to bank and long-term
debt, less current installments. 7,958,554 8,390,850
Minority interest in
consolidated subsidiary . . . . 1,325,893 1,323,485
Stockholders' equity: Common stock,
$.0001 par value. Authorized
25,000,000 shares; issued and
outstanding 7,128,172 shares at
December 31, 1996 and 7,128,172 shares
at September 30, 1997, respectively . 713 713
Additional paid-in capital . . 19,753,690 19,772,440
Accumulated deficit . . . . . . (13,653,625) (15,379,548)
------------- -------------
Net stockholders' equity. . . 6,100,778 4,393,605
------------- -------------
$23,162,451 $23,064,303
============= =============
See accompanying notes to 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,
------------------ -----------------
------------------ -----------------
1996 1997 1996 1997
Revenues . . . . . . . . .$7,275,799 $6,885,113 $19,738,519 $19,335,729
Operating costs. . . . . . 5,910,922 5,444,128 17,676,955 16,566,800
---------- ---------- ----------- -----------
Gross profit. . . . . . 1,364,877 1,440,985 2,061,564 2,768,929
Selling, general and
administrative and other
expenses . . . . . . . . . 947,253 1,125,037 3,350,666 3,349,729
---------- ---------- ----------- -----------
Income (loss) from
operations . . . . . 417,624 315,948 (1,289,102) (580,800)
Interest expense . . . . . 393,872 438,412 1,148,093 1,170,078
Other Income (expense) . . (72,512) --- 22,997 24,955
---------- ---------- ----------- ------------
Net loss. . . . . . . ($48,760) ($122,464) $(2,414,198) $(1,725,923)
========== ========== =========== ============
Net loss per common and
common Equivalent shares . $(.01) $(.02) $(.34) $(.24)
---------- ---------- ----------- ------------
Weighted average common
and common Equivalent
shares outstanding . . . . 7,068,172 7,128,172 7,068,172 7,128,172
========== ========== =========== ============
See accompanying notes to condensed consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30,
---------------- --- -----------------
---------------- -----------------
1996 1997
Cash flows from operating activities
Net loss . . . . . . . . . . . . ($2,414,198) ($1,725,923)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization . 3,790,769 3,180,473
Write-off of obsolete property
and equipment . . . . . . . . . 226,681 ---
Provision for doubtful
accounts receivable . . . . . . 208,319 193,415
Other . . . . . . . . . . . . . (93,699) (2,409)
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable. . . . . 2,925,584 (142,725)
Inventory. . . . . . . . . . 54,778 41,624
Prepaid expenses and other
current assets . . . . . . . 14,869 (119,952)
Other assets . . . . . . . . (198,295) 9,853
Increase (decrease) in:
Accounts payable and
accrued expenses . . . . . . (2,366,293) (161,551)
------------ -----------
Net cash provided by operating
activities . . . . . . . . . . . . 2,148,515 1,272,805
------------ -----------
Cash flows from investing activities:
Purchases of property and
equipment. . . . . . . . . . . . (3,801,516) (2,628,542)
Net proceeds from disposal of
property and equipment . . . . . --- 30,995
------------ -----------
Net cash used by investing
activities . . . . . . . . . . . . (3,801,516) (2,597,547)
------------ -----------
Cash flows from financing activities :
Proceeds borrowed under notes
payable to bank and long-term
debt . . . . . . . . . . . . . . 3,834,171 5,018,600
Repayment of notes payable to
bank and long-term debt. . . . . (3,382,643) (3,245,616)
Proceeds from issuance of
common stock . . . . . . . . . . 426,789 ---
------------ -----------
Net cash from financing activities 878,317 1,772,984
------------ -----------
Net increase (decrease) in cash (774,684) 448,242
Cash at beginning of period. . . . 812,989 283,082
------------ -----------
Cash at end of period. . . . . . . $ 38,305 $ 731,324
============ ===========
Supplementary disclosure of cash flow information:
Cash paid during the period for
interest. . . . . . . . . . . . . $1,148,098 $1,170,078
============ ===========
See accompanying notes to condensed consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring items) necessary to present fairly the financial position of
Laser-Pacific Media Corporation ("the Company") and its subsidiaries as of
September 30, 1997 and December 31, 1996, the consolidated results of operations
for the three and nine month periods ended September 30, 1996 and 1997, and the
consolidated statements of cash flows for the nine month periods ended September
30, 1996 and 1997. 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.
The company has a controlling financial interest (77%) in Pacific Video,
Canada Ltd. ("PVC") and in accordance with generally accepted accounting
principles has consolidated the accounts of PVC into these consolidated
financial statements. The amount of minority interest at September 30, 1997
represents the 23% ownership of PVC's outstanding capital stock held by the
minority stockholders of PVC.
In accordance with the directives of the Securities and Exchange Commission
under Rule 10-01 of Regulation S-X, the accompanying consolidated financial
statements and footnotes have been condensed and do not contain certain
information included in the Company's annual consolidated financial statements
and notes thereto.
(2) Loss per Share
Net loss per common and common equivalent shares are based upon the
weighted average number of common and common equivalent shares outstanding. The
outstanding stock options, warrants and convertible notes have not been included
in the calculations as their effect would not be material or would be
anti-dilutive.
(3) Income Taxes
The Company did not provide for income taxes for the nine month period
ending September 30, 1997 due to the operating loss incurred.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Revenues for the nine months ended September 30, 1997 decreased to
$19,336,000 from $19,739,000 for the same year-ago period, a decrease of
$403,000 or 2.0%. The decrease in revenues is comprised of a decrease of
$359,000 in Production Services, and a decrease of $53,000 in Film Production
Services and an increase of $9,000 in Post Production Services. The Revenues for
the nine months ended September 30, 1997 at the Company's U.S. facilities
decreased $614,000 versus the year-ago period, while revenues from International
Operations increased $211,000 versus the year-ago period.
Revenues for the quarter ended September 30, 1997 decreased to $6,885,000
from $7,276,000 for the same year-ago period, a decrease of $391,000 or 5.4%.
This decrease in revenues is comprised of a decrease of $216,000 in Production
Services, a decrease of $171,000 in Film Production Services and a decrease of
$4,000 in Post Production Services. The Revenues for the quarter ended September
30, 1997 at the Company's U.S. facilities decreased $521,000 versus the year-ago
period, while revenues from International Operations increased $130,000 versus
the year-ago period.
For the nine months ended September 30, 1997 the Company recorded a gross
profit of $2,769,000 compared with $2,062,000 for the same year ago period, an
increase of $707,000 or 34.3%. Operating costs for nine months ended September
30, 1997 were $16,567,000 versus $17,677,000 for the year-ago period, a decrease
of $1,110,000 or 6.3%. Operating costs, as a percentage of revenues for the nine
months ended September 30, 1997 were 85.7% compared with 89.6% for the same
year-ago period. The decrease in operating costs is primarily attributable to
reduced depreciation expense of $611,000, lower direct material costs of
$233,000 and lower labor cost of $119,000.
For the quarter ended September 30, 1997 the Company recorded a gross
profit of $1,441,000 compared to a gross profit of $1,365,000 for the same year
ago period, an increase of $76,000 or 5.6%. Operating costs for quarter ended
September 30, 1997 were $5,444,000 versus $5,911,000 for the year-ago period, a
decrease of $467,000 or 7.9%. Operating costs, as a percentage of revenues for
the quarter ended September 30, 1997 were 79.1% compared with 81.2% for the same
year-ago period. The decrease in operating costs is primarily attributable to
reduced depreciation expense of $123,000, lower direct material costs of $85,000
and lower labor cost of $99,000.
Selling, general and administrative (S, G & A), and other expenses for the
nine months ended September 30, 1997 were $3,350,000 as compared to $3,351,000
during the same year-ago period, a decrease of $1,000 or 0.0%. Selling, general
and administrative (S G & A), and other expenses for the three months ended
September 30, 1997 were $1,125,000 as compared to $947,000 during the same
year-ago period, an increase of $178,000 or 18.8%.
Interest expense for the nine months ended September 30, 1997 was
$1,170,000 compared to $1,148,000 for the same year-ago period, an increase of
$22,000 or 1.9%. Interest expense for the three months ended September 30, 1997
was $438,000 compared to $394,000 for the same year-ago period, an increase of
$44,000 or 11.2%. The increase in interest expense primarily resulted from an
increase in debt.
Depreciation expense for the nine months ended September 30, 1997 was
$3,180,000 compared to $3,791,000 for the same year-ago period, a decrease of
$611,000 or 16.1%. Depreciation expense for the three months ended September 30,
1997 was $1,078,000 compared to $1,201,000 for the same year-ago period, a
reduction of $123,000 or 10.2%. The depreciation expense for both the nine and
three months ended September 30, 1997 was lower than for the same periods in
1996. The depreciation expense reductions were the result of the company
acquiring less equipment than the amount of equipment that became fully
depreciated during the nine and three months ended September 30, 1997. Also
contributing to the difference in depreciation expense was the accelerated
depreciation taken in 1996 on obsolete Spectra Edit systems.
Liquidity and Capital Resources
The Company and its subsidiaries are operating under a loan agreement with
The CIT Group/Credit Finance with a maturity date of August 3, 2000. The maximum
credit under the agreement is $9 million. The amended loan agreement provides
for borrowings up to $5.4 million under the term loan (limited to 85% of
eligible equipment appraisal value) and $3.6 million under the revolving loan
(limited to 85% of eligible accounts receivable). At September 30, 1997 $484,000
was available under the revolving loan agreement. The outstanding balance of the
term loan was $3,791,000 at September 30, 1997. The term loan is payable in
monthly installments of $106,000 plus interest at prime plus 2% through August
3, 2000. Principal payments are not required in June, July or August. Future
principal payments may be increased to compensate for a significant reduction in
the appraised value of the assets, which secure the loan. The revolving loan had
an outstanding balance of $2,250,000 at September 30, 1997. It bears interest at
prime plus 2%, which is payable monthly. The loan contains automatic renewal
provisions for successive terms of two years after maturity unless terminated as
of August 3, 2000 or as of the end of any renewal period by either party upon at
least 60 day written notice.
During May, 1997 CIT Group/Credit Finance agreed to provide the Company
with an additional Loan Accommodation of $600,000 subject to the same terms and
conditions of the loan agreement. The Loan Accommodation was to be repaid in
installments of $32,000 per week commencing August 4, 1997 and continuing weekly
until repaid. The Loan Accommodation was paid in full as of October 30, 1997.
The initial advance under the Loan Accommodation was $125,000. The remaining
$475,000 was advanced in increments as the Company received cash under the
short-term notes explained below. At September 30, 1997 the outstanding balance
was $376,000.
To fund a cash shortfall in the second and third quarters of 1997, the
Company issued $1,000,000 of short-term Installment (Fixed Rate) Line of Credit
Notes, Series 1997 to 35 Lake Avenue, a California limited partnership. James R.
Parks, the Company's, Chief Executive Officer, is a partner in 35 Lake Avenue.
The principal balance of each Note bears interest at the rate of fourteen
percent (14%) per annum. The accrued interest on the outstanding principal is
payable on September 30, 1997, December 31, 1997, January 30, 1998, February 28,
1998 and March 30, 1998. The outstanding principal balance is to be paid in
three equal installments on January 30, 1998, February 28, 1998 and March 31,
1998. The Company granted 35 Lake Avenue warrants to purchase one (1) share of
the Company's common stock at the exercise price of $1.00 per share, for each
$4.00 of original principal amount of debt loaned. 250,000 warrants were issued.
The warrants will expire two years from the date of grant. The Company's
obligations under the Notes are secured by a pledge of 2,424,488 shares of the
Common Stock of Pacific Video Canada Ltd. and a third deed of trust against the
building where the Company provides film processing and sound services.
The Company has an outstanding real estate loan with the Bank of America.
The loan is secured by the building where the Company provides film processing
and sound services. The loan agreement matures December 31, 1998 with an option
to extend the maturity an additional year upon payment to the Bank of America of
a $25,000 loan extension fee prior to December 31, 1998. The outstanding balance
as of September 30, 1997 was $1,347,000.
The Company's principal source of funds is cash generated by operations. As
of September 30, 1997, the Company had a working capital deficiency of
approximately $3,102,000 and an accumulated deficit of approximately
$15,400,000. On an annual basis the Company anticipates that existing cash
balances and availability under existing loan agreements and cash generated from
operations will not be sufficient to service existing debt. The Company
experienced a cash shortfall in the second and third quarters of 1997. As
explained above the cash shortfall was financed by a Loan Accomodation from CIT
and the issuance of short-term Notes. The Company also anticipates the
possibility of a cash shortfall in the first quarter of 1998 which is discussed
in detail below. These factors, among others, indicate that the Company may be
unable to continue as a going concern. The financial statements do not include
any adjustments that may be necessary should the Company be unable to continue
as a going concern. The Company's continuation as a going concern is dependent
upon its ability to obtain financing, generate sufficient cash flow to meet its
obligations on a timely basis and ultimately to attain profitable operations.
During the first quarter of 1998 the Company is required to repay the
remaining $900,000 of short-term notes issued during July 1997. Cash generated
from operations may not be sufficient to pay this obligation. $100,000 of the
notes was repaid on October 30, 1997. The Company is currently negotiating with
35 Lake Avenue to extend the required principal payments until the fourth
quarter of 1998. Additionally, the company will attempt to secure other sources
of financing. Management is of the opinion that the company will reach an
agreement with the lender to postpone principal payments or secure additional
financing. There is no assurance that these uncertainties will be resolved.
Forward looking statements and comments in this document relating to, among
other things the prospects for the Company to achieve growth in sales, the
ability to reduce overhead and ability to achieve positive operating results are
necessarily subject to risks and uncertainties. These risks and uncertainties
are significant in scope and nature, including risks related to competition,
continuation of sales levels and in particular the risks related to the cost and
availability of capital.
Signatures
LASER-PACIFIC MEDIA CORPORATION
(Registrant)
Dated: November 14, 1997 /s/James R. Parks
James R. Parks
Chairman of the Board
and Chief Executive Officer
Dated: November 14, 1997 /s/Robert McClain
Robert McClain
Secretary and
Chief Financial Officer
(Principal Financial and Accounting Officer)