SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Quarterly Period Ended June 30, 1998
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, 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 August 1, 1998 was 7,157,872 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 3
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II - Other Information
Item 3. Submission of Matters to a Vote of Security Holders 11
Item 4. Exhibits and Reports on Form 8-K 11
Signatures 12
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<S> <C> <C>
Audited (Unaudited)
December 31, June 30
1997 1998
---------------- ----------------
Assets
Current assets $ 5,722,821 4,178,248
Net property and equipment 16,194,498 11,761,029
Other assets 570,472 311,996
================ ================
================ ================
22,487,791 16,251,273
================ ================
Liabilities and Stockholders' Equity
Current liabilities 8,054,970 3,982,623
Notes payable to bank and long-term debt, less current installments 8,139,042 5,879,864
Minority Interest 521,440 ---
Stockholders' equity:
Common stock, $.0001 par value. Authorized 25,000,000 shares; issued and
outstanding 7,128,172 shares at December 31, 1997 and 7,157,872 at June 713 716
30, 1998.
Additional paid-in capital 19,772,440 19,778,971
Accumulated deficit (14,000,814) (13,390,901)
---------------- ----------------
Net stockholders' equity 5,772,339 6,388,786
================ ================
$ 22,487,791 16,251,273
================ ================
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------- --------------------------------
1997 1998 1997 1998
-------------- ---------------- -------------- -------------
Revenues $ 4,789,069 6,576,480 12,429,360 14,628,331
Operating costs 5,081,011 5,686,161 11,122,671 11,613,847
-------------- ---------------- -------------- -------------
Gross profit (291,942) 890,319 1,306,689 3,014,484
Selling, general and administrative
and other expenses 1,003,120 1,309,546 2,224,692 2,510,887
-------------- ---------------- -------------- -------------
Income (loss) from operations (1,295,063) (419,227) (918,003) 503,597
Gain on sale of subsidiary, net of applicable taxes 874,578 874,578
Interest expense 351,597 352,431 731,666 729,753
Other Income (expense) 3,700 6,242 46,210 16,036
-------------- ---------------- -------------- -------------
Income before income taxes (1,642,960) 109,162 (1,603,459) 664,458
Provision for income taxes - 54,544 - 54,544
============== ================ ============== =============
Net income (loss) $ (1,642,960) 54,618 (1,603,459) 609,914
============== ================ ============== =============
Net Income (loss) Per Share
Basic Net Income (0.23) 0.01 (0.23) 0.09
-------------- ---------------- -------------- -------------
Diluted Net Income (0.23) 0.01 (0.23) 0.08
-------------- ---------------- -------------- -------------
Weighted average shares outstanding (basic) 7,128,172 7,157,872 7,128,172 7,157,872
============== ================ ============== =============
Weighted average shares outstanding (diluted) 7,128,172 7,592,178 7,128,172 7,592,178
============== ================ ============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<S> <C> <C>
Six Month ended June 30
------------------------------------
1997 1998
--------------- ---------------
Cash flows from operating activities
Net income (loss) (1,603,459) 609,914
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,102,098 1,563,860
Gain on sale of subsidiary --- (874,578)
Gain on sale of Property and equipment 125,993 (46,957)
Provision for doubtful accounts receivable (34,360) 115,742
Other --- 810
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,976,695 1,723,997
Inventory 25,054 27,937
Prepaid expenses and other current assets (372,397) (28,251)
Other assets (60,417) 75,476
Increase (decrease) in:
Accounts payable and accrued expenses (46,552) 285,633
=============== ===============
Net cash provided by operating activities 2,112,655 3,453,583
=============== ===============
Cash flows from investing activities:
Purchases of property and equipment (424,433) (1,454,204)
Net proceeds from disposal of property and equipment 30,995 46,957
Net effect of sale of subsidiary --- 3,402,091
--------------- ---------------
Net cash (used in) provided by investing activities (393,438) 1,994,844
=============== ===============
Cash flows from financing activities :
Proceeds borrowed under notes payable to bank and long-term debt 758,626 ---
Net (repayment) proceeds of notes payable to bank and long- term debt (2,289,724) (3,351,252)
(Repayments) borrowing of notes payable to related parties --- (900,000)
Proceeds from issuance of common stock --- 6,534
=============== ===============
Net cash (used in) financing activities (1,531,098) (4,224,718)
=============== ===============
Net increase in cash 118,119 1,203,709
Cash at beginning of period 283,082 367,363
--------------- ---------------
Cash at end of period 471,201 1,571,072
=============== ===============
Supplementary disclosure of cash flow information:
Cash paid during the period for interest 731,666 729,753
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
LASER-PACIFIC MEDIA CORPORATION
Notes to Condensed Financial Statements
(Unaudited)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments (consisting of normal recurring
items) necessary to present fairly the financial position of Laser-Pacific Media
Corporation (the Company) and its subsidiaries as of June 30, 1998 and December
31, 1997; the results of operations for the three and six month periods ended
June 30, 1997 and 1998; and the statements of cash flows for the six month
periods ended June 30, 1997 and 1998. Included in the Condensed Consolidated
Financial Statements is the activity of the Company's consolidated subsidiary,
Pacific Video Canada, Ltd. ("PVC"). On May 15, 1998 the Company sold all of its
investment in PVC. Accordingly, revenue and expense of PVC through May 15, 1998
is included in the results of operations for the three and six month periods
ended June 30, 1998. The assets and liabilities of PVC are included in the
Condensed Consolidated Balance Sheets at December 31, 1997 and excluded from the
Condensed Consolidated Balance Sheets at June 30, 1998. The Company's business
is subject to the prime time television industry's typical seasonality.
Historically, revenues and income from operations have been highest during the
first and fourth quarters, when production of television programs and demand for
the Company's services is at its highest. The net income or loss of any interim
quarter is seasonally disproportionate to revenues because selling, general and
administrative expenses and certain operating expenses remain relatively
constant during the year. Therefore, interim results are not indicative of
results to be expected for the entire fiscal year.
In accordance with the directives of the Securities and Exchange Commission
under Rule 10-01 of Regulation S-X, the accompanying consolidated financial
statements and footnotes have been condensed and do not contain certain
information included in the Company's annual consolidated financial statements
and notes thereto.
(2) Income Taxes
The provision for income tax expense for the three and six months ended
June 30, 1998 was $54,500, which represents foreign income tax expense relating
to Canadian income. At June 30, 1998, federal income tax expense of $19,700 and
state income tax expense of $5,600 related to the sale of the subsidiary (see
Note 4) were offset against the gain on the sale of subsidiary. Income tax
expense for the quarter ended June 30 1998 was computed using the estimated
effective tax rate to apply for 1998 after considering the impact of net
operating loss carry-forwards.
(3) Reporting Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement which establishes standards for reporting and disclosure
of comprehensive income, is effective for interim and annual periods beginning
after December 15, 1997, although earlier adoption is permitted.
Reclassification of financial information for earlier periods presented for
comparative purposes is required under SFAS 130. As this statement only requires
additional disclosure in the Company's consolidated financial statements, its
adoption will not have any impact on the Company's consolidated financial
position or result of operations. The Company has adopted SFAS No. 130 effective
January 1, 1998 and its adoption has not had any impact on the Company's
consolidated financial position or results of operations.
(4) Disclosures about Segments of an Enterprise
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise." This statement, which establishes standards for reporting and
disclosures of certain information about operating segments in complete sets of
financial statements, is effective for interim and annual periods beginning
after December 15, 1997, although earlier adoption is permitted.
Reclassifications of financial information for earlier periods presented for
comparative purposes is required under SFAS No. 131 if it is practical to do so.
The Company has adopted SFAS No. 130 effective January 1, 1998 and its adoption
has not had any impact on the Company's consolidated financial position or
results of operations.
LASER-PACIFIC MEDIA CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
(5) Earnings per share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No 128, "Earnings per Share" (SFAS 128). SFAS
128 requires dual presentation of basic earnings per share ("EPS") and diluted
EPS on the face of all statements of earnings for all entities with complex
capital structures. Basic EPS is computed as net earnings divided by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock-based compensation plans including stock options, restricted stock
awards, warrants and other convertible securities using the treasury stock
method. The following summarizes the computation of Basic EPS and Diluted EPS:
<TABLE>
<S> <C> <C> <C> <C>
Three Months ended Six Months ended
6/30/97 6/30/98 6/30/97 6/30/98
Numerator for basic and diluted per share computations:
Net income (loss) available to common shareholders $ (1,642,960) 54,618 (1,603,459) 609,914
============= ============ ============= =============
Denominator:
Shares used for basic per share computations
weighted average shares outstanding 7,128,172 7,157,872 7,128,172 7,157,872
Effect of dilutive securities - stock options & warrants -- 434,306 -- 434 306
Shares used for dilutive per share computations 7,128,172 7,592,178 7,128,172 7,592,178
Net income (loss) per share:
Basic $ (0.23) 0.01 (0.23) 0.09
Diluted (0.23) 0.01 (0.23) 0.08
</TABLE>
(6) Sale of Subsidiary
On May 15, 1998 the Company sold all of its investment in PVC to Command
Post and Transfer Corporation. The Company realized cash consideration of
$3,810,000 and a gain on sale of $874,000, net of applicable taxes.
The balance sheet of PVC presented below reflects the amounts attributable
to PVC, on a gross basis, which are included in the condensed consolidated
financial statements of the Company, as of December 31, 1997. The Company owned
approx. 77% of the outstanding shares of PVC as of December 31, 1997 and May 15,
1998.
LASER-PACIFIC MEDIA CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
(6) Sale of Subsidiary (cont.)
PACIFIC VIDEO CANADA, Ltd.
Condensed Balance Sheet
<TABLE>
<S> <C> <C>
Included as of
December 31, 1997 (1) April 30, 1998
Assets
Current Assets $ 1,496,757 1,225,429
Capital Assets 4,020,572 4,052,391
======================= ========================
Total Assets 5,517,329 5,277,820
======================= ========================
Liabilities
Current Liabilities 1,264,224 1,395,072
Long Term Debt and other liabilities 1,985,991 1,576,666
Equity
Share Capital 1,722,072 1,706,996
Retained Earnings 545,042 599,086
======================= ========================
Total Liabilities & Equity $ 5,517,329 5,277,820
======================= ========================
</TABLE>
(1) The balance sheet of PVC as of April 30, 1998 is included as it was the
last interim balance sheet available prior to the sale, and materially
represents the value of the assets underlying the stock of PVC sold.
The statement of operations of PVC presented below reflects the amounts
attributable to PVC, which are included in the condensed consolidated financial
statements of the Company, as of the three and six month periods ended June 30,
1998.
PACIFIC VIDEO CANADA, Ltd.
Condensed Statement of Operations
<TABLE>
<S> <C> <C>
3 Months ended 6 Months ended
June 30, 1998 June 30, 1998
--------------------------- ------------------------
Sales 1,645,067 $ 2,894,972
Direct expenses 1,172,840 2,079,822
--------------------------- ------------------------
Gross Profit 472,228 815,151
SG&A expenses 333,146 606,257
--------------------------- ------------------------
Earnings from Operations 139,081 208,893
Interest and Other expenses 36,628 71,166
--------------------------- ------------------------
Earnings before income taxes 102,453 137,727
Income taxes 38,318 54,544
=========================== ========================
Net earnings 64,135 $ 83,183
=========================== ========================
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Revenues for the six months ended June 30, 1998 increased to $14,628,000
from $12,429,000 for the same year-ago period, an increase of $2,199,000 or
17.7%. The increase in revenues is comprised of an increase of $39,000 in
Production Services, and an increase of $184,000 in Film Production Services and
an increase of $1,976,000 in Post Production Services. The Revenues for the six
months ended June 30, 1998 at the Company's U.S. facilities increased $1,497,000
versus the year-ago period, while revenues from International Operations
increased $702,000 versus the year-ago period. The increase in revenues from
Post-Production Services is primarily attributable to increased demand for the
Company's digital compression services including digital video disc and
additional revenues from feature film mastering, a service the Company began
offering in November 1997. The increase in revenues from Compression Services
and the additional revenue from Film Mastering amounted to $968,000 for the
period. Although revenue from Film Production Services has increased, the
increase was offset by the impact of the elimination of positive film services
in 1997. The Company's Canadian subsidiary PVC was sold on May 15, 1998. In
accordance with Generally Accepted Accounting Principles, the Canadian revenues
through May 15, 1998 have been included in the revenue for the period.
Revenues for the quarter ended June 30, 1998 increased to $6,576,000 from
$4,789,000 for the same year-ago period, an increase of $1,787,000 or 37%. This
increase in revenues is comprised of an increase of $43,000 in Production
Services, an increase of $296,000 in Film Production Services and an increase of
$1,469,000 in Post Production Services. The Revenues for the quarter ended June
30, 1998 at the Company's U.S. facilities increased $1,132,000 versus the
year-ago period, while revenues from International Operations increased $676,000
versus the year-ago period. The increase in revenues from Post-Production
Services is primarily attributable to increased demand for the Company's digital
compression services including digital video disc and revenues from feature film
mastering, a service the Company began offering in November 1997. The increase
in revenues from Compression Services and the additional revenue from Film
Mastering amounted to $602,000 for the period. Although revenue from Film
Production Services has increased, this increase was offset by the impact of the
elimination of positive film services in 1997. The Company's Canadian subsidiary
PVC was sold on May 15, 1998.
For the six months ended June 30, 1998, the Company recorded a gross profit
of $3,014,000 compared with $1,307,000 for the same year ago period, an increase
of $1,707,000 or 131%. Operating costs for the six months ended June 30, 1998
were $11,614,000 versus $11,123,000 for the year-ago period, an increase of
$491,000 or 4.4%. Operating costs, as a percentage of revenues for the six
months ended June 30, 1998 were 79.4% compared with 89.5% for the same year-ago
period. The increase in operating costs is attributable primarily to an increase
in direct material costs of $162,000 and an increase in labor costs of $463,000,
which are a result of the increased level of sales. These increases were
partially offset by a reduction in depreciation expense of $193,000. In
accordance with Generally Accepted Accounting Principles, the Canadian revenue
and expenses for PVC through May 15, 1998 have been included for the period.
For the quarter ended June 30, 1998 the Company recorded a gross profit of
$890,000 compared to a loss of $292,000 for the same year ago period, an
increase of $1,182,000 or 404%. Operating costs for quarter ended June 30, 1998
were $5,686,000 versus $5,081,000 for the year-ago period, an increase of
$605,000 or 11.9%. Operating costs, as a percentage of revenues for the six
months ended June 30, 1998 were 86.5% compared with 106.61 for the same year-ago
period. The increase in operating costs is primarily attributable to an increase
in direct material costs of $138,000 and an increase in labor costs of 456,000,
which are a result of the increased level of sales. These increases were
partially offset by a reduction in depreciation expense of $148,000.
Selling, general and administrative (S, G & A), and other expenses for the
six months ended June 30, 1998 were $2,511,000 as compared to $2,225,000 during
the same year-ago period, an increase of $286,000 or 12.8%. The increase is
primarily attributable to an increase in advertising and promotion, and higher
audit, appraisal and loan costs. SG&A and other expenses for the three months
ended June 30, 1998 were $1,309,000 as compared to $1,003,000 during the same
year-ago period, an increase of $306,000 or 30.5%. The increase is primarily
attributable to an increase in advertising and promotion, and higher audit,
appraisal and loan costs.
Interest expense for the six months ended June 30, 1998 was $730,000
compared to $732,000 for the same year-ago period, a decrease of $2,000 or 0.2%.
Interest expense for the three months ended June 30, 1998 was $352,000 compared
to $351,000 for the same year-ago period, a decrease of $1,000 or 0.2%. The
change in interest expense is the result of higher borrowing at our Canadian
facility and lower borrowing at our U.S. facilities. Total U.S. debt was reduced
significantly after May15, 1998 with the proceeds from the sale of PVC.
Depreciation expense for the six months ended June 30, 1998 was $1,924,000
compared to $2,102,000 for the same year-ago period, a decrease of $178,000 or
8.5%. Depreciation expense for the three months ended June 30, 1998 was
$1,076,000 compared to $1,209,000 for the same year-ago period, a reduction of
$133,000 or 11.0%. The depreciation expense for both the six and three months
ended June 30, 1998 was lower than for the same periods in 1997. The
depreciation expense reductions were the result of the company acquiring less
equipment than the amount of equipment that became fully depreciated during the
six and three months ended June 30, 1998.
Liquidity and Capital Resources
The Company and its subsidiaries are operating under a loan agreement with
The CIT Group/Credit Finance, which has been amended and extended to August 3,
2001. 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 100% of the appraisal value of eligible equipment) and $3.6 million
under the revolving loan (limited to 85% of eligible accounts receivable). At
June 30, 1998 $1,311,000 was available under the revolving loan agreement. The
revolving loan had an outstanding balance of $24,000 at June 30, 1998. It bears
interest at prime plus 1 1/2%, which is payable monthly. The outstanding balance
of the term loan was $2,663,000 at June 30, 1998. The term loan is payable in
monthly installments of $60,000 plus interest at a fixed annual rate of 10.5%
through August 3, 2001. Principal payments are not required in June, July or
August. Future principal payments may be increased if additional amounts are
borrowed under the term facility. The loan agreement contains automatic renewal
provisions for successive terms of two years after maturity unless terminated as
of August 3, 2001, or as of the end of any renewal period by either party upon
at least 60 days written notice.
The Company has an outstanding real estate loan with 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 Bank of America, of a
$25,000 loan extension fee prior to December 31, 1998. The outstanding loan
balance as of June 30, 1998 was $1,188,000. The company anticipates extending
the loan agreement prior to December 31, 1998.
The $1,000,000 of short-term Installment (Fixed Rate) Line of Credit Notes
issued to 35 Lake Avenue, a California limited partnership in July 1997, were
paid in full as of May 15, 1998. James R. Parks, the Company's, Chief Executive
Officer, is a partner in 35 Lake Avenue.
The Company's principal source of funds is cash generated by operations.
The Company anticipates that existing cash balances and availability under
existing loan agreements and cash generated from operations will be sufficient
to service existing debt. The Company received approximately $3,810,000 in the
2nd Quarter of 1998 from the sale of the Company's stock ownership of PVC. This
additional funding was used to retire debt and to fund the upgrading of the
Company's plant and equipment.
Forward-looking statements and comments in this press release are made
pursuant to the Safe-Harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements relating to, among other things, the
prospect for the Company to continue to achieve growth in sales, the ability to
reduce overhead and the ability to achieve positive operating results are
necessarily subject to risks and uncertainties, some of which are significant in
scope and nature, including risks related to competition, availability of
capital and continuation of sales levels. These risks and uncertainties are
significant in scope and nature, including risks related to competition,
continuation of sales levels and the risks related to the cost and availability
of capital.
Year 2000
The Company has reviewed its systems and communicated with all of its
significant suppliers and equipment and software providers. All of the systems
tested and the majority reviewed with third parties to date are year 2000
compliant. Year 2000 costs are not expected to have a material impact on the
Company's operations. There is no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted and would not have
an adverse effect on the Company's systems.
Item 1. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on June 19, 1998, the
following individuals were elected to the Board of Directors.
Emory M. Cohen
Cornelius P. McCarthy III
James R. Parks
Ronald Zimmerman
Item 2. Exhibits and Reports on Form 8-K
(a) Form 8-K filed on June 1, 1998, relating to the sale of the Company's
majority interest in the shares of Pacific Video Canada, Ltd.
Signatures
LASER-PACIFIC MEDIA CORPORATION
(Registrant)
Dated: August 13, 1998 /s/James R. Parks
Chairman of the Board
and Chief Executive Officer
Dated: August 13, 1998 /s/Robert McClain
Secretary and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1,000
<CASH> 1,571
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0
0
<COMMON> 19,779
<OTHER-SE> 6,389
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<SALES> 6,576
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