UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[Mark one]
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) of the SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended December 31, 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
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (323) 462-6266
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock ($.0001 par value)
Preferred Stock ($.0001 par value)
Series A Preferred Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 22, 1999 (based upon the closing price on the NASDQ
Small-Cap Market System on that date) was $15,364,000.
Number of shares of Common Stock, $.0001 par value, outstanding as of March 22,
1999: 7,304,976.
DOCUMENTS INCORPORATED BY REFERENCE Registrant's Notice of Annual Meeting of
Shareholders and definitive Proxy Statement, which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than 120
days after the close of the Registrant's fiscal year.
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Table of Contents
Page
Part I
Item 1 Business 1
Item 2 Properties 2
Item 3 Legal Proceedings 3
Item 4 Submission of Matters to a Vote of Security Holders 3
Part II
Item 5 Market for Registrant's Common Stock and Related Security
Holder Matters 4
Item 6 Selected Financial Data 5
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Item 8 Financial Statements and Supplementary Data 11
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 11
Part III
Item 10 Directors and Executive Officers of the Registrant 35
Item 11 Executive Compensation 35
Item 12 Security Ownership of Certain Beneficial Owner and Management 35
Item 13 Certain Transactions 35
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 36
Signatures 37
<PAGE>
PART I
ITEM 1. BUSINESS
General
Laser-Pacific Media Corporation ("Laser-Pacific" or the "Company") was
formed by a merger of Spectra Image, Inc. and Pacific Video, Inc. in September,
1990. Both of the predecessor companies were organized in 1983.
In January 1988, Pacific Video acquired a 75% equity interest in Pacific
Video Canada, Ltd., ("PVC"), formerly known as Tegra Industries, Inc., whose
film processing and post-production facilities are located in Vancouver, Canada.
The Company's interest in PVC grew to 77% as of December 31, 1997. On May 15,
1998 the Company sold its interest in PVC and realized a net profit of $875,000.
Laser-Pacific is a leading provider of a broad range of post production
services to the Hollywood motion picture film and television industry. These
post production services include technical and creative services to the
producers of prime-time network television series and television movies,
services for the creation of digital masters for high definition and standard
definition television, home video, DVD as well as other master delivery formats.
In addition the Company provides motion picture film processing, technical and
creative services for visual effects, digital sound editing and mixing and other
ancillary and related services that assist in the preparation of film,
television and digital content for a variety of distribution methods.
The Company is recognized as an industry leader and pioneer in the
development and introduction of new methods and technology in service of
television, motion pictures and digital multimedia. The Company led the
television industry in the move from film to electronic and digital based
techniques in post production through the introduction of its proprietary
Electronic Laboratory and has received four Emmy Awards for Outstanding
Achievement in Engineering for its developments. The Company's new High
Definition Television and movie mastering capabilities are reinforcing the long
standing reputation for state-of-the-art services and facilities.
The Company offers a full range of post-production services to television
producers at its facilities in Hollywood, California and Burbank, California.
These services, which begin immediately after completion of photography and end
with the delivery of a videotape master ready for television broadcasting,
include film processing, film to videotape transfer, electronic editing of the
videotape (including the addition of special effects and titles), color
correction, sound editing and mixing, and duplication.
The principal categories of services offered by the Company are:
Motion Picture Film Processing - The Company operates four negative
processing machines at its Pacific Film Laboratories facility, located in
Hollywood, CA. These machines are used to develop customers' negatives after
photography. A fifth machine is being prepared for operation in the second
quarter of 1999. With the addition of the fifth machine the Company will have
the capacity to develop approximately 2 million feet of film per week.
Telecine Transfer - The Company operates seven telecine suites that are
used to transfer customers' film to videotape for subsequent post-production
processing. These telecine suites are used for daily transfers for electronic
post production as well as video masters of completed motion pictures. Currently
six telecine suites are used for digital standard definition and one is used for
both digital standard definition as well as digital High Definition. An eighth
telecine suite, also capable of High Definition transfers, is currently planned
for completion in the third quarter of 1999.
Editing - The Company operates nine editing suites, five in its Hollywood
facility and four in its Burbank facility, for preparing broadcast quality
videotape masters for its customers. These editing suites are primarily used for
assembly of television programs, visual effects, and adding titles and graphics.
One of the rooms is equipped exclusively for High Definition editing.
Additionally, the Company's Emmy Award winning Super-Computer Assembly system
provides the show assembly capability equivalent of four or five additional
conventional editing rooms.
Color Timing - The Company operates four timing suites which are used for
the final color balancing and image enhancement of customers' programs. One of
these suites is equipped specifically for digital High Definition programs.
Digital Graphics and Visual Effects - The Company's Visual Effects
Department, located at the Burbank facility, is equipped with several digital
video effects systems specifically designed to create graphical elements,
special effects, titles and other specialized work for television and motion
pictures.
Sound Editing and Mixing - The Company's post-production sound department,
Pacific Sound Services, includes ten digital sound editing systems, a sound
effects and dialogue recording studio, and a re-recording studio for
accomplishing the final sound mix of customers' programs.
Digital Compression Services - Using an IBM SuperComputer and other
specialized computer systems, the Company provides digital compression and
related services which results in the creation of data recordings for use in
CD-ROM, digital file servers and video-on-demand applications. The Company also
provides digital compression and "authoring" services for the new DVD format.
"Authoring" is the industry term that describes the creation of disc navigation
and interactivity capability in a DVD replication master, including DVD menu
design and formatting.
Production Services - A subsidiary of the Company, PDS Video Productions,
Inc., leases complete videotape production equipment packages, including video
camera, professional videotape recorders, switchers, and monitoring, to
producers of multi-camera situation comedy television shows.
Duplication and Other Services - The Company provides duplication,
restoration, digital file conversion, screening, and a variety of other services
at its Hollywood and Burbank locations to fulfill the production and delivery
needs of its customers.
Employees
At December 31, 1998, the Company had approximately 200 employees.
Approximately 35 employees are represented by the International Alliance of
Theatrical and Stage Employees pursuant to a collective bargaining agreement,
which expires in the year 2000. The Company has never experienced a work
stoppage, and considers its relations with its employees to be excellent.
Competition
The Company experiences competition in all phases of its business from a
number of companies. Some of the Company's competitors specialize in specific
service areas, such as sound, laboratory, or editing, and some are fully
integrated and offer a complete range of post-production services. Due to the
nature of the Company's core business, post production for television programs,
the majority of the Company's competitors are located in the Southern California
area.
<PAGE>
ITEM 2. PROPERTIES
The Company owns a 29,000 square foot building located on a 39,000 square
foot lot in Hollywood, California where its film processing and sound editing
and mixing services are provided. In addition, the Company leases approximately
25,000 square feet in six buildings in Hollywood, California, which contain its
executive offices and the balance of its Hollywood post-production facilities,
primarily on a month-to-month basis. The Company also leases approximately
23,000 square feet at two locations in Burbank, California on a month-to-month
basis. The Company believes that its facilities are adequate for its operations
as now conducted. If operations continue to expand the Company will acquire
additional space.
The Company believes that its facilities, some of which include the use of
chemical products, substantially comply with all applicable environmental and
other laws and regulations.
ITEM 3. LEGAL PROCEEDINGS
The Company may have certain contingent liabilities and claims incident to
the ordinary course of business. The Company is not involved in any material
litigation at this time and is not aware of any pending lawsuits. Management
believes that the probable resolution of such contingencies will not materially
affect the financial position, results of operations, or liquidity of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
The Company's Common Stock trades on The NASDAQ SmallCap Markettm tier of
the NASDAQ Stock Markettm under the symbol LPAC.
High Low
1997
First Quarter $0.90625 $0.53125
Second Quarter $0.8125 $0.375
Third Quarter $0.50 $0.3125
Fourth Quarter $0.4375 $0.125
1998
First Quarter $0.6275 $0.1562
Second Quarter $2.25 $0.50
Third Quarter $1.125 $0.6875
Fourth Quarter $2.40625 $0.78125
1999
First Quarter $3.71875 $1.9375
The Company had 246 stockholders of record on March 22, 1999. This number
does not include the several hundred stockholders holding their stock in street
name. On March 22, 1999, 4,453,094 shares were held by CEDE & Company.
The Company has never paid a cash dividend on its shares of Common Stock
and currently intends to retain its earnings, if any, for use in its operations
and the expansion of its business. Consequently, it does not anticipate paying
any cash dividends in the foreseeable future. In addition, the Company's Credit
Agreement with the CIT Group prohibits the payment of cash dividends on its
Common Stock without bank approval. The Company does not anticipate that the
restriction on the payment of cash dividends will be eliminated in the
foreseeable future.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected financial data of the Company and
its consolidated subsidiaries for each of the last five fiscal years:
(in thousands except for per share data.)
<TABLE>
<S> <C> <C> <C> <C> <C>
1994(1) 1995 1996 1997 1998
Statement of Operations Data:
Revenues $30,244 $28,693 $28,878 $28,291 $30,699
Operating expenses:
17,545 18,022 18,847 18,343 19,183
Direct
Depreciation and amortization 5,295 4,983 5,318 4,207 3,572
--------------- ------------ -------------- -------------- ---------------
22,840 23,005 24,165 22,550 22,755
--------------- ------------ -------------- -------------- ---------------
Gross profit 7,404 5,688 4,713 5,741 7,944
Selling, general and administrative expense 4,874 4,978 4,678 4,279 4,616
Write off property and equipment --- --- 148 --- ---
--------------- ------------ -------------- -------------- ---------------
Income (loss) from operations 2,530 710 (113) 1,461 3,328
Interest expense (1,891) (1,813) (1,563) (1,563) (1,288)
Gain on sale of subsidiary --- --- --- --- 875
Other income 103 404 42 41 133
Minority interest income (loss) (119) (59) (53) (54) (19)
Income tax expense (142) (291) (165) (232) (109)
--------------- ------------ -------------- -------------- ---------------
Net income (loss) before litigation 481 (1,049) (1,852) (347) 2,920
settlement...
Litigation settlement --- 3,209 --- --- ---
=============== ============ ============== ============== ===============
Net income (loss) 481 2,160 (1,852) (347) 2,920
=============== ============ ============== ============== ===============
Basic net income (loss) before
litigation settlement per share $0.07 ($0.16) ($0.26) ($0.05) $0.41
Net income (loss) per share (basic) $0.07 $0.33 ($0.26) ($0.05) $0.41
--------------- ------------ -------------- -------------- ---------------
Net income (loss) per share (diluted) $0.07 $0.32 ($0.26) ($0.05) $0.39
--------------- ------------ -------------- -------------- ---------------
Weighted average shares outstanding 6,418 6,568 7,061 7,128 7,163
(basic)
=============== ============ ============== ============== ===============
Weighted average shares outstanding 6,425 6,711 7,061 7,128 7,510
(diluted)
=============== ============ ============== ============== ===============
Balance Sheet Data:
Working capital ($6,720) ($2,099) (2,498) (2,332) 2,769
(deficiency)
Total assets 26,009 28,172 22,304 22,488 20,226
Current installments of notes payable,
notes payable to related parties, and
and long-term debt 7,746 6,521 5,278 5,894 2,462
Long-term debt, excluding current
installments 5,794 7,893 7,959 8,139 7,629
Net stockholders' equity 5,298 7,458 6,101 5,772 8,712
</TABLE>
(1) Certain prior year balances have been reclassified to conform with the
current year's presentation.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
1998 Compared to 1997
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
$3,830,000 and recognized a net gain on sale of $875,000. The total sales price
of $3,830,000 was determined through arms-length negotiations. The proceeds were
used to reduce outstanding debt and to provide working capital.
Revenues for the year ended December 31, 1998 increased to $30.7 million
from $28.3 million for 1997, an increase of $2.4 million or 8.5%. The overall
increase in revenues was offset by a decline in revenues from International
Operations which is the result of the sale of our Canadian subsidiary Pacific
Video Canada Ltd. (PVC) on May 15, 1998. All of Laser Pacific's International
Operations are attributable to PVC. The revenues for the year ended December 31,
1998 at the Company's U.S. facilities increased $4.8 million or 20.9% versus
1997, while revenues from International Operations decreased $2.4 million versus
the year-ago period. The increase in revenues at U.S. facilities is comprised of
an increase of $4.7 million in Post-Production Services, an increase of $182,000
in Film Production Services and a decrease of $95,000 in Production Services.
The Company's Production Services business has declined over the last four years
and is no longer material to the Company's sales or operating profits. The
increase in revenues at our U.S. Facilities for Post-Production Services is
attributable to an increased demand for the Company's post-production services
with significant increases in digital compression services; including digital
video discs, and revenues from feature film mastering, a service the Company
began offering in November 1997. The increase in revenues from Compression
Services amounted to $1,183,000 for the period, while revenues from High
Definition services increased $893,000 for the period. The revenue increase in
Film Production Services reflects an overall increased demand for negative film
services, offset by the elimination of positive film services in 1998. Negative
film services increased $531,000 or 18.9% during 1998.
Operating costs excluding depreciation for the year ended December 31, 1998
were $19,183,000 versus $18,343,000 for the year-ago period, an increase of
$840,000 or 4.6%. There was an increase in operating cost at our U.S. facilities
in addition to the decline in operating costs from International Operations,
which is the result of the sale of PVC. The operating costs for the year ended
December 31, 1998 at the Company's U.S. facilities increased $1,828,000 or 11.3%
versus 1997, while operating costs from Canada decreased $1,088,000 versus the
year-ago period. The increase in operating costs from our US operations is
attributable primarily to an increase in labor costs of $2,043,000 which is a
result of a higher number of employees. These increases in labor costs were
partially offset by a reduction in depreciation expense at the U.S. facilities
of $323,000. Operating costs as a percentage of revenues for the year ended
December 31, 1998 were 62.5% compared with 64.8% for the same year-ago period.
Depreciation expense for the year ended December 31, 1998 was $3,572,000
compared to $4,207,000 for the same year-ago period, a decrease of $635,000 or
15.1%. The depreciation expense reductions were the result of the sale of PVC
(discussed above), and a reduction in the net capital acquisitions in 1998 from
1997. The decrease in depreciation expense in the U.S. was $323,000 for the
period.
For the year ended December 31, 1998, the Company recorded a gross profit
of $7,944,000 compared with $5,741,000 for the same year ago period, an increase
of $2,203,000 or 38.4%. The gross profit for the year ended December 31, 1998 at
the Company's U.S. facilities increased $3,174,000 or 80.3% versus the year-ago
period, while gross profit from Canada decreased $971,000 versus the year-ago
period. The increase in gross profit at U.S. facilities is the result of
increased sales volume, discussed above, offset by increased operating costs, as
explained below.
Selling, general and administrative (SG&A), and other expenses for the year
ended December 31, 1998 were $4,616,000 as compared to $4,279,000 during the
same year-ago period, an increase of $337,000 or 7.9%. There was an increase in
SG&A of $384,000 at our U.S. facilities while SG&A for our international
operations decreased $47,000 as the result of the sale of PVC discussed above.
The increase of SG&A in the U.S. is primarily attributable to increases in
advertising and promotion, and higher wages for non-operations staff.
Interest expense in 1998 was $1,288,000 versus $1,563,000 in 1997, a
decrease of $275,000. The decrease in interest expense is the result of lower
borrowing in the U.S., the elimination of related debt of PVC (discussed above)
and the negotiation of lower interest rates with the Company's lenders. Interest
expense decreased $232,000 in the U.S. Total U.S. debt was reduced significantly
after May 15, 1998 with the proceeds from the sale of PVC.
For the year ended December 31, 1998, the Company had Other Income of
$133,000 compared to Other Income of $41,000 in 1997. The increase of $92,000 in
1998 was comprised primarily of the proceeds from the sale of equipment.
The provision for income tax of $109,000 for 1998 is comprised of U.S.
Federal and State Income Tax in the amount of $55,000 and $54,000 in foreign
tax. The U.S. Federal and State Income Tax is primarily composed of alternative
minimum tax. This occurred because net operating loss carryforwards (deferred
tax assets) were utilized against U.S. pre-tax income. The full benefit of the
net tax operating loss carryforwards is limited for alternative minimum tax
purposes. Foreign income tax relates to Canadian income tax imposed on the
pre-tax income of the Canadian subsidiary through May 15, 1998. In 1997, there
was no provision for U.S. Federal Income Tax as a result of the net operating
loss incurred. The Income Tax expense of $232,000 in 1997 was comprised of
foreign income tax expense in the amount of $227,000 relating to Canadian income
tax imposed on the pre-tax income of the Canadian subsidiary in the amount of
$462,000 and State income tax expense in the amount of $5,000.
As a consequence of the above factors, the Company reported net income of
$2,920,000 or $0.39 (diluted) per share in 1998 versus a net loss of $347,000 or
$0.05 per share in 1997.
As of December 31, 1998, the Company has recorded gross deferred tax assets
of $5,389,000, a related valuation allowance of $4,367,000 and deferred tax
liabilities of $1,022,000 (see note 7 to the consolidated financial statements).
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income (losses) and
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not the
Company may not realize all of the benefits of these deductible differences.
1997 Compared to 1996
Company revenues during 1997 were $28.3 million compared with $28.9 million
in 1996, a decrease of $587,000 or 2.0%. The decrease in revenue is comprised
primarily of a decrease in Film Production Services of $452,000, an increase of
$272,000 in Post Production Services, and a decrease of $407,000 in Production
Services. At our United States facilities revenues were down $703,000, a
decrease of 3.0% and revenues from International operations increased $116,000
or 2.3%. The decline in revenues at our United States facilities was brought
about by the continued decline in revenues associated with the use of the
Spectra Edit System, decline in production services and our elimination of
positive film services. These declines were offset by growth and significant
increases in other services offered by the company such as Digital Compression,
Special Effects and Graphics and Movie Mastering.
Direct operating expenses excluding depreciation and amortization were
$18.3 million in 1997 as compared with $18.8 million in 1996, a decrease of
$504,000 or 2.7%. The decrease is the result of a decrease in the cost of
materials and lower bad debt expense which were partially offset by an increase
in health insurance costs and occupancy costs. The decrease in material cost is
the result of the changing mix of services provided by the company which require
lower material costs.
Depreciation and amortization expense was $4.2 million for the year ended
December 31, 1997, compared to $5.3 million for 1996, a decrease of $1,111,000
or 20.9% The decrease is the result of the Company purchasing less depreciable
capital equipment in 1996 and 1997, than the amount of equipment that became
fully depreciated during the same period.
Consolidated gross profit was $5.7 million in 1997 as compared with $4.7
million in 1996, a $1,027,000 increase or 21.8%. The Company's consolidated
total operating expenses for 1997 were $22.6 million, as compared with $24.2
million in 1996, a decrease of $1,615,000 or 6.7%. As a percentage of total
revenues, total operating expenses were 79.7% in 1997 versus 83.7% in 1996. The
increase in gross profit is due to the combined effects of decreased operating
costs and decreased depreciation expense, offset by lower sales as explained
above.
The Company's selling, general and administrative (SG&A) expenses were $4.3
million during 1997 as compared to $4.8 million in 1996, a decrease of $547,000
or 11.3%. The decrease in SG&A is attributable to cost savings in many areas
including advertising, office supplies, accounting, legal, travel and
promotions. The cost savings are attributable to the Company's emphasis in
containing and reducing expenses. Also, there was a write-off of $148,000 in
equipment in 1996 with no corresponding write-offs in 1997.
The Company had no significant change in interest expense in 1997, it was
$1.6 million versus $1.6 million in 1996. Although the borrowing in 1997 was
higher than 1996, the effective interest rate on the loans was lower.
In 1997, there was no provision for U.S. Federal Income Tax as a result of
the net operating loss incurred. The Income Tax expense of $232,000 in 1997 was
comprised of foreign income tax expense in the amount of $227,000 relating to
Canadian income tax imposed on the pre-tax income of the Canadian subsidiary in
the amount of $462,000 and State income tax expense in the amount of $5,000
composed of the minimum Franchise tax.
As a consequence of the above factors, the Company reported a net loss of
$347,189 or a loss of $0.05 per share in 1997 versus a net loss of $1,852,550 or
a loss of $0.26 per share in 1996.
As of December 31, 1997, the Company has recorded gross deferred tax assets
of $6,621,000, a related valuation allowance of $5,624,000 and deferred tax
liabilities of $997,000 (see note 7 to the consolidated financial statements).
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income (losses) and
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not the
Company may not realize all of the benefits of these deductible differences.
Seasonality and Variation of Quarterly Results
The Company's business is subject to substantial quarterly variations as a
result of seasonality, which the Company believes is typical of the television
post-production industry. Historically, revenues and net income have been
highest during the first and fourth quarters, when the production of television
programs and consequently the demand for the Company's services is at its
highest. Revenues have been substantially lower during the second and third
quarters, when the Company historically has incurred operating losses.
Liquidity and Capital Resources
Improved operating results and the sale of Pacific Video Canada had a very
positive effect on the liquidity and capital resources of the company. The
improved operating results and the cash generated enabled the company to reduce
debt, borrow at better terms and increase availability under existing loan
agreements. The impact can be seen in the increase in available cash,
improvement in working capital and decrease in current debt. The Company's
current ratio (the ratio of current assets to current liabilities) improved from
0.71 at December 31, 1997 to 1.71 at December 31, 1998.
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 of up to $5.4 million under the term loan
(limited to 100% of eligible equipment appraisal value) and $3.6 million under
the revolving loan (limited to 85% of eligible accounts receivable. The
outstanding balance of the term loan was $3,405,000 at December 31, 1998. It is
payable in monthly installments of $81,000 plus interest at 10.5% through August
3, 2003. Principal payments are not required in June, July or August. The
revolving loan had an outstanding balance of $0 at December 31, 1998, and at
March 1, 1999, $3,000,000 was available under the revolving loan The revolving
loan bears interest at prime plus 1.5%, which is payable monthly. The loan
agreement contains automatic renewal provisions for successive terms of two
years thereafter unless terminated as of August 3, 2001 or as of the end of any
renewal term by either party by giving the other party at least 60 day written
notice.
The Company had an outstanding real estate loan with Bank of America,
secured by the building where the Company provides film processing and sound
services. The loan required interest and principal payable in nine monthly
installments per year of $26,667 through December 31, 1998. The interest rate
was 11.71%. This note was paid and cancelled on December 3, 1998.
The $1,000,000 of short-term Installment (Fixed Rate) Line of Credit Notes,
Series 1997 issued to 35 Lake Avenue, a California limited partnership, were
paid as of May 15, 1998. The outstanding balance as of December 31, 1998 was $0.
James R. Parks, the Company's, Chief Executive Officer, is a partner in 35 Lake
Avenue. The principal balance of the Notes had an interest rate of fourteen
percent (14%) per annum. 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 originally expired two years from the date of
grant and were later extend to July 2001.
The Company's principal source of funds is cash generated by operations. On
an annual basis, 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 capital
requirements for fiscal 1999. Management is of the opinion that the Company will
be able to meet its obligations on a timely basis. There is no assurance that
management's plan will be achieved.
Recent Accounting Pronouncements
Comprehensive Income
The Company adopted the SFAS No. 130, "Reporting Comprehensive Income" on
January 1, 1998. SFAS No. 130 establishes standards to measure all changes in
equity that result from transactions and other economic events other than
transaction with owners. Comprehensive income is the total of net earnings
(loss) and all other non-owner changes in equity. The Company does not have any
transactions or other economic events that qualify as comprehensive income as
defined under SFAS No. 130. As such, net earnings (loss) approximated
comprehensive income for each of the years in the three year period ended
December 31, 1998.
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 adopted SFAS No. 131 effective January 1, 1998. Under the management
approach of SFAS No. 131, the Company operates in one segment, providing
post-production services. The Company had certain geographic segments. See note
11.
Income (Loss) per Share
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", is effective for financial statements issued for periods ending after
December 15, 1997. SFAS 128 replaces Accounting Principles Board Opinion (APB)
No. 15 and simplifies the computation of earnings per share (EPS) by replacing
the presentation of primary EPS with a presentation of basic EPS. Basic EPS is
computed by dividing income (loss) available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution from securities that could share in the earnings
of the Company, similar to fully diluted EPS under APB No. 15. The statement
requires dual presentation of basic and diluted EPS by entities with complex
capital structures. The Company adopted SFAS No. 128 for the financial
statements ended December 31, 1997. All years presented have been restated to
reflect basic and diluted net income (loss) per share. For the years ended
December 31, 1996 and 1997, stock options issued under the Company's Stock
Option Plans and warrants were not included in the computation of diluted EPS
because to do so would have been antidilutive. As of December 31, 1998, the
dilutive effect on the weighted average shares outstanding, assuming dilution,
was an increase of 64,799 and 288,453 shares relating to options and warrants,
respectively.
Year 2000
State of Readiness
The Company is aware of what could be a critical problem with older
computer systems. The critical problem refers to computers that designate the
year as a two-digit number and thus may recognize the year 2000 as the year
1900. The Company has created a task force to ascertain its Year 2000
compliance. The task force is lead by the Senior Vice President of Engineering.
The Company uses a wide variety of microprocessor based equipment, which
runs software on numerous computer platforms. The Company is in the process of
determining the potential impact of the century date change by conducting an
inventory of computerized equipment and testing all of the Company's systems for
compliance. The Company is also contacting third party vendors regarding their
Year 2000 compliance. Testing of internal systems is complete on approximately
90% of both information technology systems and non-information technology
systems. No significant Year 2000 issues have been revealed. The Company
anticipates that the remaining systems testing will be completed in 1999.
Cost to address the Company's year 2000 issues.
When systems are identified that are not 2000 compliant the Company
contracts with vendors to obtain updates, which will ensure compliance, and in a
limited number of instances the systems are replaced. Some older equipment will
need to be reset after January 01, 2000 but should function properly thereafter.
The cost to remedy Year 2000 compliance to date has not been material and is
being funded out of operating cash flow. The Company estimates that any future
remedial costs will not be material and should not exceed $100,000.
The Company's Risk
The failure to correct a material Year 2000 problem could result in an
interruption or failure of certain normal business activities or operations.
Such failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition. To date, the only conditions that
the Company has determined that may result in the Company's inability to provide
services to our clients, and consequently, a loss of revenue, would be a loss of
service to the Company by regulated public utility companies. The Company cannot
assess the likelihood of this occurrence. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000-readiness of third-party suppliers, the Company is unable to determine
at this time whether the consequences of Year 2000 failures will have a material
impact on the Company's results of operations, liquidity or financial condition.
The Company believes its continuing actions will significantly reduce the
Company's level of uncertainty about the Year 2000 problem and in particular
about Year 2000 Compliance. The Company believes that the completion of Year
2000 testing will reduce the possibility of significant interruptions of normal
operations.
Contingency Plans
The Company will test new products for Year 2000 compliance. To the extent
the Company has not been able to determine third party vendor compliance, plans
for alternative backup suppliers are being established and the Company plans to
acquire an additional supply of critical parts to reduce the chance of a loss of
services. The first week of January is traditionally a period of very low demand
for the Company's services. The Company plans to have appropriate technical
staff monitor operations on and after January 1 and take necessary action to
provide services to our customers. The Company will continue to refine its
contingency plans throughout the remainder of 1999.
Forward-looking statements and comments in this 10K 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 and successfully resolve
Year 2000 issues 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.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements for the Company and independent auditors' report
are set forth on pages 12 thru 34 and is incorporated herein. See Page 12 for an
index to all the consolidated financial statements and supplementary financial
information which are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Index to Consolidated Financial Statements and
Financial Statement Schedule
Page
Consolidated Financial Statements:
Independent Auditors' Report 13
Consolidated Balance Sheets - December 31, 1997 and 1998 14
Consolidated Statements of Operations
- Years Ended December 31, 1996, 1997 and 1998 16
Consolidated Statements of Stockholders' Equity
- Years Ended December 31, 1996, 1997 and 1998 17
Consolidated Statements of Cash Flows
- Years Ended December 31, 1996, 1997 and 1998 18
Notes to Consolidated Financial Statements 20
Consolidated Financial Statement Schedule - Valuation and Qualifying
Accounts - Years Ended December 31, 1996, 1997 and 1998 34
All other schedules are omitted because they are not applicable or the
required information is shown in the Company's consolidated financial statements
or the related notes thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Laser-Pacific Media Corporation:
We have audited the accompanying consolidated financial statements of
Laser-Pacific Media Corporation and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Laser-Pacific Media Corporation and subsidiaries as of December 31, 1998 and
1997 and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/KPMG LLP
Los Angeles, California
March 4, 1999
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1998
<TABLE>
<S> <C> <C>
Assets 1997 1998
------------------ ----------------
Current assets:
Cash $ 367,363 1,159,206
Receivables (note 5):
Trade 5,303,582 5,540,510
Other 382,403 250,905
------------------ ----------------
5,685,985 5,791,415
Less allowance for doubtful receivables 1,087,058 1,044,272
------------------ ----------------
4,598,927 4,747,143
------------------ ----------------
Inventory 300,532 216,156
Prepaid expenses and other current assets 455,999 531,730
------------------ ----------------
Total current assets 5,722,821 6,654,235
------------------ ----------------
Net property and equipment, at cost (note 3 and 5) 16,194,498 13,219,739
------------------ ----------------
Other assets, net 570,472 352,325
------------------ ----------------
$ 22,487,791 20,226,299
================== ================
</TABLE>
(Continued)
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1998
(Continued)
<TABLE>
<S> <C> <C>
Liabilities and Stockholders' Equity 1997 1998
------------------ -----------------
Current liabilities:
Current installments of notes payable to bank and $ 4,994,308 2,462,324
long-term debt (note 5)
Note payable to related parties (note 6) 900,000 -
Accounts payable 1,028,381 268,649
Accrued expenses 988,736 1,137,320
Income taxes payable (note 7) 143,545 17,230
------------------ -----------------
Total current liabilities 8,054,970 3,885,523
------------------ -----------------
Notes payable to bank and long-term debt, less current 8,139,042 7,628,588
installments (note 5)
Minority interest (note 4) 521,440 -
Commitments and contingencies (notes 5 and 10)
Stockholders' equity (notes 8 and 9):
Preferred stock, $.0001 par value. Authorized
3,500,000 shares; none issued - -
Common stock, $.0001 par value. Authorized 25,000,000
shares; issued and outstanding 7,128,172 and
7,222,575 shares at December 31, 1997 and 1998, 713 722
respectively
Additional paid-in capital 19,772,440 19,792,737
Accumulated deficit (14,000,814) (11,081,271)
------------------ -----------------
Net stockholders' equity 5,772,339 8,712,188
------------------ -----------------
$ 22,487,791 20,226,299
================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<S> <C> <C> <C>
1996 1997 1998
------------------ ------------------ ------------------
Revenues $ 28,878,422 28,290,924 30,699,137
------------------ ------------------ ------------------
Operating expenses:
Direct 18,847,361 18,343,474 19,183,337
Depreciation and amortization 5,317,862 4,206,915 3,571,744
------------------ ------------------ ------------------
24,165,223 22,550,389 22,755,081
------------------ ------------------ ------------------
Gross profit 4,713,199 5,740,535 7,944,056
Selling, general and administrative expenses 4,826,155 4,279,026 4,616,364
------------------ ------------------ ------------------
Income (loss) from operations (112,956) 1,461,509 3,327,692
Interest expense (1,563,559) (1,563,316) (1,287,920)
Gain on sale of subsidiary (note 4) - - 874,578
Other income 41,952 40,688 133,325
Minority interest in net income of consolidated
subsidiary (note 4) (52,987) (54,070) (19,132)
------------------ ------------------ ------------------
Income (loss) before income taxes (1,687,550) (115,189) 3,028,543
Income tax expense (note 7) 165,000 232,000 109,000
------------------ ------------------ ------------------
Net income (loss) $ (1,852,550) (347,189) 2,919,543
================== ================== ==================
Net income (loss) per share (basic) $ (.26) (.05) .41
================== ================== ==================
Net income (loss) per share (diluted) (.26) (.05) .39
================== ================== ==================
Weighted average shares outstanding (basic) 7,061,061 7,128,172 7,163,047
================== ================== ==================
Weighted average shares outstanding (diluted) 7,061,061 7,128,172 7,510,300
================== ================== ==================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1997, and 1998
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Common Stock
-------------------------------- Additional Net
Preferred Number of paid-in Accumulated stockholders'
Stock shares Amount capital deficit equity
-------------- ---------------- ------------- --------------- ---------------- -------------
Balance at December 31, 1995 --- 6,568,172 657 19,258,746 (11,801,075) 7,458,328
Stock issuances and 560,000 56 494,944 --- 495,000
warrants
Net loss --- --- --- (1,852,550) (1,852,550)
-------------- ----------------- ------------- --------------- ---------------- ---------------
Balance at December 31, 1996 --- 7,128,172 $ 713 19,753,690 (13,653,625) 6,100,778
-------------- ----------------- ------------- --------------- ---------------- ---------------
Warrant issuance --- --- 18,750 --- 18,750
Net loss --- --- --- (347,189) (347,189)
-------------- ----------------- ------------- --------------- ---------------- ---------------
Balance at December 31, 1997 --- 7,128,172 $ 713 19,772,440 (14,000,814) 5,772,339
-------------- ----------------- ------------- --------------- ---------------- ---------------
Stock issuances 94,403 9 20,297 20,306
Net income 2,919,543 2,919,543
-------------- ----------------- ------------- --------------- ---------------- ---------------
Balance at December 31, 1998 --- 7,222,575 $ 722 19,792,737 (11,081,271) 8,712,188
============== ================= ============= =============== ================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<S> <C> <C> <C>
1996 1997 1998
------------------ ----------------- ----------------
Cash flows from operating activities:
Net income (loss) $ (1,852,550) (347,189) 2,919,543
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment 5,317,862 4,206,915 3,171,887
Provision for doubtful accounts receivable 447,354 279,848 274,996
Write-off of property and equipment 148,569 --- 39,911
Gain on sale of subsidiary --- --- (874,578)
Gain on sale of plant, property and equipment --- (27,670) (152,592)
Other 76,334 32,057 847
Change in assets and liabilities:
(Increase) decrease in:
Receivables 3,045,103 (545,308) (1,229,644)
Inventory 15,005 24,541 33,977
Prepaid expenses and other current assets (3,943) (118,836) (127,793)
Other assets 38,456 77,258 35,147
Increase (decrease) in:
Accounts payable 90,896 (122,280) (47,684)
Accrued expenses (1,862,245) (207,030) 153,124
Accrued severance (391,451) --- ---
Deferred revenue (160,123) --- ---
Income taxes payable (228,798) (8,915) 12,689
----------------------------------------------------------
Net cash provided by operating activities $ 4,680,469 3,243,391 4,209,830
----------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (4,470,045) (3,989,513) (4,568,681)
Proceeds from disposal of property and equipment 31,500 33,946 160,422
Net effect of sale of subsidiary --- --- 3,402,091
----------------------------------------------------------
Net cash used in investing activities $ (4,438,545) (3,955,567) (1,006,168)
----------------------------------------------------------
</TABLE>
(Continued)
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<TABLE>
<S> <C> <C> <C>
1996 1997 1998
---------------- -------------- ---------------
Cash flows from financing activities:
Net repayments of notes payable to bank and
long-term debt $ (856,831) (103,543) (1,532,125)
(Repayments) borrowings of notes payable to related
parties (320,000) 900,000 (900,000)
Net proceeds from stock issuance 405,000 --- 20,306
---------------- -------------- ---------------
Net cash provided by (used in) financing activities $ (771,831) 796,457 (2,411,819)
---------------- -------------- ---------------
Net increase (decrease) in cash (529,907) 84,281 791,843
Cash at beginning of year 812,989 283,082 367,363
---------------- -------------- ---------------
Cash at end of year $ 283,082 367,363 1,159,206
================ ============== ===============
Supplementary disclosure of cash flow information:
Cash paid during the year for:
Interest $ 1,600,000 1,600,000 1,288,000
State income taxes 1,200 1,200 25,000
================ ============== ===============
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
The Company purchased property and equipment, financed through capital lease
obligations, of $2,112,535, $2,226,841 and $3,065,945 during 1996, 1997 and
1998, respectively.
In 1997, the Company issued 250,000 warrants in connection with the issuance of
$1,000,000 in short-term notes to 35 Lake Avenue. Accordingly, such warrants
were accounted for as debt issuance costs of $18,750 and will be amortized to
interest expense over the term of the related credit facility.
In May 1996, the Company converted a promissory note receivable and related
accrued interest due from PVC totaling approximately $579,000 in exchange for
526,000 shares of common stock. This transaction increased the Companys
ownership of PVC from 72% to 77%.
In 1996 the Company issued 75,000 warrants in connection with the renewal of its
credit facility. Accordingly, such warrants were accounted for as debt issuance
costs of $90,000 and are amortized to interest expense over the term of the
related credit facility.
See accompanying notes to consolidated financial statements.
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(1) Nature of Business and Basis of Presentation
Laser-Pacific provides of a broad range of post production services to the
Hollywood motion picture film and television industry. Laser-Pacific Media
Corporation, a Delaware corporation, is a result of a business combination
transaction between Spectra Image and Pacific Video, Inc. consummated in
September 1990. Both of these entities were organized in 1983.
Per the Company's 8-K Filing as of June 1, 1998, the Company sold their
equity interest in their majority owned (77%) subsidiary in Pacific Video Canada
(PVC). Proceeds from the sale were approximately $3.8 million less transaction
costs. The Company recorded a gain on the transaction of approximately $875,000.
See note (4)
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Laser-Pacific and subsidiaries. Accordingly, all significant inter-company
accounts and transactions have been eliminated in consolidation.
Depreciation and Amortization
Depreciation and amortization of property and equipment is provided by use
of the straight-line method over the estimated useful lives of the related
assets as follows:
Buildings 30 years
Building improvements 10 years
Technical equipment 4 to 7 years
Furniture and fixtures 5 to 6 years
Automobiles 3 to 5 years
Leasehold improvements Remaining life of the lease or
the estimated useful life,
whichever is the shorter
Inventory
Inventory consisting primarily of tape stock is valued at the lower of cost
(determined on the first-in, first-out basis) or market (net realizable value).
Other Assets
Other assets at December 31, 1997 and 1998 consist primarily of security
and utility deposits and debt extension fees which are amortized over the
extension term of the related debt.
<PAGE>
LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998 (continued)
Revenue Recognition
Revenue is recognized as services are performed.
The Company had one significant customer in 1996, 1997 and 1998, which
accounted for approximately 16%, 14% and 17% of revenues, respectively.
Foreign Currency Translation
Assets and liabilities of the foreign operations are translated at the rate
of exchange at the balance sheet date. Revenues and expenses have been
translated at the weighted average rate of exchange during the period. Foreign
currency translation adjustments were immaterial to the accompanying
consolidated financial statements.
Credit Risk
The Company sells services to customers in the entertainment industry,
principally located in Southern California. Management performs regular
evaluations concerning the ability of its customers to satisfy their obligations
and records a provision for doubtful accounts based upon these evaluations.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. The Company did not
record any impairment charges during 1997 or 1998.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998 (continued)
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year's presentation.
Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, in accounting for its
fixed plan stock options. As such, compensation expense would be recorded on the
date of grant only if the current market price of underlying stock exceeded the
exercise price.
Comprehensive Income
The Company adopted the SFAS No. 130, "Reporting Comprehensive Income" on
January 1, 1998. SFAS No. 130 establishes standards to measure all changes in
equity that result from transactions and other economic events other than
transaction with owners. Comprehensive income is the total of net earnings
(loss) and all other non-owner changes in equity. The Company does not have any
transactions or other economic events that qualify as comprehensive income as
defined under SFAS No. 130. As such, net earnings (loss) approximated
comprehensive income for each of the years in the three year period ended
December 31, 1998.
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 adopted SFAS No. 131 effective January 1, 1998. Under the management
approach of SFAS No. 131, the Company operates in one segment, providing
post-production services. The Company had certain geographic segments. See note
11.
Income (Loss) per Share
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", is effective for financial statements issued for periods ending after
December 15, 1997. SFAS 128 replaces Accounting Principles Board Opinion (APB)
No. 15 and simplifies the computation of earnings per share (EPS) by replacing
the presentation of primary EPS with a presentation of basic EPS. Basic EPS is
computed by dividing income (loss) available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution from securities that could share in the earnings
of the Company, similar to fully diluted EPS under APB No. 15. The statement
requires dual presentation of basic and diluted EPS by entities with complex
capital structures. The Company adopted SFAS No. 128 for the financial
statements ended December 31, 1997. All years presented have been restated to
reflect basic and diluted net income (loss) per share. For the years ended
December 31, 1996 and 1997, stock options issued under the Company's Stock
Option Plans and warrants were not included in the computation of diluted EPS
because to do so would have been antidilutive. As of December 31, 1998, the
dilutive effect on the weighted average shares outstanding, assuming dilution,
was an increase of 64,799 and 288,453 shares relating to options and warrants,
respectively.
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998 (continued)
(3) Property and Equipment
Property and equipment is comprised of the following:
<TABLE>
<S> <C> <C>
1997 1998
------------------- ---------------------
Land $ 1,237,690 400,000
Buildings and improvements 4,330,064 2,835,990
Technical equipment 36,835,628 25,200,555
Furniture and fixtures 634,146 557,685
Automobiles 25,092 23,907
Leasehold improvements 1,336,416 828,835
------------------- ---------------------
44,399,036 29,846,973
Less accumulated depreciation and amortization 28,204,538 16,627,233
------------------- ---------------------
$ 16,194,498 13,219,739
=================== =====================
</TABLE>
The Company leases technical equipment under capital leases expiring
through 2003. Equipment under capital leases aggregated $7,199,619, and
$8,605,080, and related accumulated amortization aggregated $1,537,697 and
$1,292,586 at December 31, 1997 and 1998, respectively.
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998 (continued)
(4) 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
$3,830,000 and a gain on sale of $875,000.
The balance sheet of PVC presented below reflects the amounts attributable
to PVC, on a gross basis, which are included in the 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 April 30, 1998.
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.
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998 (continued)
(4) Sale of Subsidiary (cont.)
The statement of operations for PVC presented below reflects the amounts
attributable to PVC which are included in the condensed consolidated financial
statements of the Company, as of the year ended December 31, 1998.
PACIFIC VIDEO CANADA, Ltd.
Condensed Statement of Operations
<TABLE>
<S> <C> <C>
Year ended Year ended
December 31, 1997 December 31, 1998
---------------------------- --------------------------
Sales $ 5,265,654 $ 2,894,972
Direct expenses 3,479,954 2,079,822
---------------------------- --------------------------
Gross Profit 1,785,699 815,151
SG&A expenses 1,213,183 606,257
---------------------------- --------------------------
Earnings from Operations 572,517 208,893
Interest and Other expenses 110,311 71,166
---------------------------- --------------------------
Earnings before income taxes 462,206 137,727
Income taxes 227,022 54,544
============================ ==========================
Net earnings $ 235,184 $ 83,183
============================ ==========================
</TABLE>
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998 (continued)
(5) Notes Payable to Bank and Long-Term Debt
Notes payable to bank and long-term debt are summarized as follows:
<TABLE>
<S> <C> <C>
1997 1998
---------------- -------------------
Advances under a $9,000,000 credit agreement, secured by eligible $ 1,905,610 -
accounts receivable, as defined, bearing interest at the bank's
prime rate (7.75% at December 31, 1998) plus 1.5%, expiring August
3, 2001. (1) (3)
Term notes payable to bank of up to $5,400,000 under the $9,000,000 3,281,210 3,404,631
credit agreement, secured by eligible accounts receivable,
inventory, and property and equipment, as defined, payable in nine
monthly installments per year of $81,000 plus interest at 10.5%
through August 3, 2003 (1)
Note payable to bank, secured by a first Trust Deed on land and 1,294,154 -
buildings. This loan was repaid during 1998.
Term notes payable to bank, secured by certain property and equipment 1,510,313 -
as defined. (2)
Capital lease obligations (note 10) 5,102,412 6,686,281
Other 39,651 -
---------------- -------------------
13,133,350 10,090,912
Less current installments 4,994,308 2,462,324
---------------- -------------------
$ 8,139,042 7,628,588
================ ===================
</TABLE>
(1) This agreement provides for a facility fee of $70,000 per year, to be
paid by the Company on each anniversary of the closing.
(2) Note related to the obligations of Pacific Video Canada. See footnote
(4).
(3) The Company had approximately $3,600,000 available under the line of
credit agreement as of December 31, 1998.
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998 (continued)
(5) Notes Payable to Bank and Long Term Debt (cont.)
The aggregate future maturities of notes payable to bank and long-term debt
are summarized as follows:
December 31:
1999 732,724
2000 732,724
2001 732,724
2002 732,724
2003 473,735
------------------
$ 3,404,631
==================
(6) Note payable to Related Parties
At December 31, 1997, the Company had a note payable to a related party, 35
Lake Avenue, secured by a third Trust Deed on the land, buildings, and the
capital stock of PVC (note 4). The note had an interest rate of 14%. On January
28, 1998, the terms of the note were amended to extend the due date to November
30, 1998. In addition the expiration of the warrants issued in connection with
the debt was extended for a two-year period. Concurrent with the sale PVC (note
4), the note was paid in full.
(7) Income Taxes
A summary of income tax expense is as follows:
<TABLE>
<S> <C> <C> <C>
1996 1997 1998
----------------- ----------------- ----------------
Current:
Federal $ - - 36,000
State 5,000 5,000 19,000
Foreign 166,000 204,000 54,000
----------------- ----------------- ----------------
Current provision for
income taxes 171,000 209,000 109,000
Deferred - Foreign (6,000) 23,000 -
----------------- ----------------- ----------------
Total expense $ 165,000 232,000 109,000
================= ================= ================
</TABLE>
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998 (continued)
The provision for income taxes at the Company's effective tax rate differed
from the provision for income taxes at the U.S. Federal tax rate as follows:
<TABLE>
<S> <C> <C> <C>
1996 1997 1998
------------------ ----------------- -----------------
Federal income tax expense (benefit) at (41,000) 1,036,000
"expected rate" $ (574,000)
Expiration of net operating loss 54,000
carryforward - -
Nondeductible expenses 58,000 - 11,000
Other (21,000) 19,000 21,000
State taxes, net of Federal effect 2,000 4,000 178,000
Impact of foreign taxation at different 150,000 114,000
rates 35,000
Minority interest 24,000 18,000 6,000
Change in valuation allowance for
deferred tax assets 641,000 28,000 (1,257,000)
------------------ ----------------- -----------------
Income tax expense $ 165,000 232,000 109,000
================== ================= =================
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1997 and 1998 is
presented below:
<TABLE>
<S> <C> <C>
1997 1998
----------------- -----------------
Deferred tax assets and liabilities:
Net operating loss carryforwards $ 5,334,000 3,952,000
Income tax credit carryforwards 803,000 877,000
Vacation pay 135,000 141,000
Reserve for bad debts 349,000 419,000
----------------- -----------------
Total gross deferred tax assets 6,621,000 5,389,000
Less valuation allowance 5,624,000 4,367,000
----------------- -----------------
Deferred tax assets $ 997,000 1,022,000
Deferred tax liabilities - property and (997,000) (1,022,000)
equipment
----------------- -----------------
Net deferred tax assets $ --- ---
================= =================
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards for
Federal and state income tax purposes of approximately $14,800,000 and
$4,800,000, respectively, which expire principally from 2004 through 2012. The
Company also has approximately $240,000 and $500,000 of unused research and
development tax credits and investment tax credit carryforwards, respectively,
expiring through 2004.
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998 (continued)
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the projected future taxable
income and tax planning strategies in making this assessment. Based upon the
level of historical taxable income (losses) and projections for future taxable
income over the periods in which the deferred tax assets are deductible,
management currently does not believe it is more likely than not the Company
will realize all of the benefits of these deductible differences, accordingly, a
valuation allowance has been recorded for net deferred tax assets.
(8) Stockholders' Equity
Preferred Stock
The Company has authorized 3,500,000 shares of $.0001 par value preferred
stock, and designated 1,400,000 shares as Series A preferred stock. As of
December 31, 1997 and 1998, no preferred stock was outstanding.
Common Stock
In January 1996, in connection with the settlement of additional lease
commitments related to the closure of certain facilities, the Company issued
500,000 shares of common stock valued at $.75 per share. In November 1996, the
Company issued 60,000 shares of common stock valued at $0.50 to related parties.
During 1998, the Company issued 94,403 shares of the Company's common stock
through the exercise of options granted to employees under the Company's
incentive stock option plan. (see footnote 9).
Warrants
Warrants to purchase 100,000 shares of common stock at $0.563 per share
were outstanding at December 31, 1997 and 1998. The warrants are exercisable
through August 2004.
Warrants to purchase 80,000 shares of common stock at $0.50, and 80,000
shares of common stock at $1.13, were outstanding at December 31, 1996. The
warrants for 80,000 shares of common stock at $0.50 expired on March 31, 1997.
The warrants for the remaining 80,000 shares of common stock at $1.13 expired on
August 31, 1998.
In June 1996 the Company issued warrants to purchase 75,000 shares of
common stock to its principal lender in connection with a loan renewal. The fair
value was determined using the Black-Scholes option pricing model and was
recorded as debt issuance costs. The warrants are exercisable through August 3,
2004 at an exercise price of $1.44.
In June 1997, the Company issued warrants to purchase 250,000 shares of
common stock to a related party, 35 Lake Avenue, in connection with a short-term
debt financing arrangement. The fair value of the warrants was determined using
the Black-Scholes option pricing model and was recorded as debt issuance costs.
Subsequent to December 31, 1997, the expiration date of the warrants was
extended to July 2001 at an exercise price of $1.00. On the date of extension,
the market value of the stock was less than the exercise price.
(9) Stock-based Compensation and Other Option Grants
The Company has an incentive stock option plan which provides for grants of
500,000 of incentive or nonqualified stock options to officers, directors and
key employees at prices equal to or greater than the fair market value at the
date of grant. Options currently expire no later than 10 years from the grant
date and generally vest at date of grant. All options outstanding under the plan
are fully vested at December 31, 1998. Under a prior stock option plan, which
has expired, 97,781 stock options remain outstanding and are exercisable at
December 31, 1998.
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998 (continued)
Activity under the plans for the years ended December 31, 1996, 1997 and
1998 follows:
<TABLE>
<S> <C> <C> <C>
Number of shares Weighted average Options
exercise price exercisable
----------------- ------------------- ----------------
Shares under option at December 31, 1995 239,651 3.78 239,651
Granted -
Exercised -
Expired and terminated (40,915) 2.86
----------------- ------------------- ----------------
Shares under option at December 31, 1996 198,736 3.97 198,736
Granted 459,400
.22
Exercised - -
Expired and terminated 5.94
(40,220)
----------------- ------------------- ----------------
Shares under option at December 31, 1997 617,916 1.05 617,916
Granted - -
Exercised (94,403) 0.22
Expired and terminated (62,135) 5.88
----------------- ------------------- ----------------
Shares under option at December 31, 1998 461,378 $ 0.57 461,378
================= =================== ================
</TABLE>
The following table summarizes information about options outstanding
under the Plans at December 31, 1998:
<TABLE>
<S> <C> <C> <C>
Outstanding Options
---------------------------------------------------------------
Shares Remaining Weighted
outstanding and weighted average
exercisable average exercise
contractual price
life (in
years)
----------------- ----------------- -----------------
Range of Exercisable prices:
$0.22 363,600 9.00 $ .22
$0.50 30,000 1.80 .50
$2.50 67,778 3.80 2.50
================= ================= =================
Total 461,378 7.80 0.57
================= ================= =================
</TABLE>
At December 31, 1998, under all plans, all options are exercisable, and
42,000 shares remained available for future grant.
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998 (continued)
Pro Forma Information
The Company has adopted the disclosure-only provisions of Statement No.
123. Accordingly, for the stock options granted to employees no compensation
cost has been recognized in the accompanying consolidated statements of
operations because the exercise price equaled or exceeded the fair value of the
underlying common stock at the date of grant. Had compensation cost for the
Company's stock options granted to employees been determined based upon the fair
value at the grant date for awards consistent with Statement No. 123, the
Company's recorded and pro forma net income (loss) and earnings (loss) per share
for the years ended December 31, 1996, 1997 and 1998 would have been as follows:
<TABLE>
<S> <C> <C> <C>
Year ended December 31
----------------------------------------------------------------
1996 1997 1998
-------------------- ------------------ ------------------
Net income (loss):
As reported $ (1,852,550) (347,189) 2,919,543
Pro forma (1,858,550) (416,100) 2,919,543
==================== ================== ==================
Basic net income (loss) per share:
As reported $ (.26) (.05) .41
Pro forma (.26) (.06) .41
Diluted net income (loss) per share:
As reported $ (.26) (.05) .39
Pro forma (.26) (.06) .39
==================== ================== ==================
</TABLE>
Pro Forma income reflects only options granted in 1996, 1997 and 1998.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income (loss) amounts
presented above because compensation cost is reflected over the options vesting
period and compensation cost for options granted prior to January 1, 1995 is not
considered.
Further, the effects of applying SFAS No. 123 for disclosing compensation
costs may not be representative of the effects on reported net income for future
years.
Fair value of common stock options is estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted average
assumptions:
1996 1997 1998
--------------- ----------------- ---------
Expected life (in years) 3.00 10.00 -
Risk-free interest rate 6.04 5.87 -
Volatility .50 .50 -
Dividend yield - - -
Fair value - grant date .30 .15 -
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company-s options have
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998 (continued)
characteristics significantly different from those of trade options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in the opinion of management, the existing models do not
necessarily provide a reliable single measure of the fair value of its options.
No options were granted in 1998.
(10) Commitments and Contingencies
Leases
The Company leases certain technical equipment under capital leases that
expire through 2003.
The Company also leases corporate offices, certain operating facilities and
equipment under non-cancelable operating leases that expire through 2000.
The present value of future minimum capital lease payments and future
minimum lease payments under non-cancelable operating leases, principally
facility leases, are as follows:
<TABLE>
<S> <C> <C>
Capital leases Operating leases
------------------ ---------------------
Year ending December 31:
1999 2,386,459 78,142
2000 2,240,453 11,727
2001 1,858,662
2002 1,265,744
2003 443,303
------------------ ---------------------
Total minimum lease payments 8,194,621 89,869
=====================
Less amount representing interest 1,508,340
------------------
Present value of minimum lease payments $ 6,686,281
==================
</TABLE>
Rent expense amounted to $924,747, $1,029,329 and $842,320 for the years
ended December 31, 1996, 1997 and 1998, respectively.
Legal Matters
The Company may have certain contingent liabilities resulting from
litigation and claims incident to the ordinary course of business. Management
believes that the probable resolution of such contingencies will not materially
affect the financial position, results of operations, or liquidity of the
Company.
Employment Agreements
The Company has employment agreements with certain officers that require
written notices of termination ranging from one to five years.
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998 (continued)
(11) Business Segment Data
The following table shows revenues, operating earnings (loss) and
identifiable assets by geographic segment for the years 1996, 1997 and 1998:
<TABLE>
<S> <C> <C> <C>
1996 1997 1998
------------------ ------------------ -------------------
Revenues:
U.S. $ 23,729,024 23,025,270 27,804,165
International (1) 5,149,398 5,265,654 2,894,972
------------------ ------------------ -------------------
$ 28,878,422 28,290,924 30,669,137
================== ================== ===================
Income (loss) from operations
U.S. $ (569,068) 747,150 3,040,096
International (1) 456,112 714,359 287,596
------------------ ------------------ -------------------
$ (112,956) 1,461,509 3,327,692
================== ================== ===================
Identifiable assets:
U.S. $ 17,188,781 16,667,222 20,226,299
International (1) 5,115,147 5,820,569 -
------------------ ------------------ -------------------
$ 22,303,928 22,487,791 20,226,299
================== ================== ===================
</TABLE>
(1) Consists of the Company's subsidiary, Pacific Video Canada, which was
sold on May 15, 1998, see note (4).
(12) Pension Plan
The Company has a defined contribution Profit Sharing 401(k) Savings Plan
that covers substantially all of its employees. The plan became effective on
March 1, 1996. Under the terms of the plan, employees can elect to defer up to
15% of their wages, subject to certain Internal Revenue Service (IRS)
limitations, by making voluntary contributions to the plan. Additionally, the
Company, at the discretion of management, can elect to match up to 100% of the
voluntary contributions made by its employees.
For the years ended December 31, 1997 and 1998 the Company did not
contribute to the plan on behalf of its employees.
<PAGE>
LASER-PACIFIC MEDIA CORPORATION
AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<S> <C> <C> <C> <C>
Column A Column B Column C Column D Column E
- ---------------------------- -------------------- ------------------- -------------------- ---------------------
Balance at Charged to costs Balance at end
beginning of and expenses Deductions of period
Description period write-offs (1)
- ---------------------------- -------------------- ------------------- -------------------- ---------------------
Allowance for bad debts:
1996 $ 853,000 448,000 (491,000) 810,000
==================== =================== ==================== =====================
1997 $ 810,000 280,000 (3,000) 1,087,000
==================== =================== ==================== =====================
1998 $ 1,087,000 275,000 (318,000) 1,044,000
==================== =================== ==================== =====================
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this Item is incorporated by reference to the Registrant's
definitive proxy statement for its 1999 Annual Meeting of Stockholders, to be
filed on or before April 30, 1999.
Item 11. EXECUTIVE COMPENSATION
The response to this Item is incorporated by reference to the Registrant's
definitive proxy statement for its 1999 Annual Meeting of Stockholders, to be
filed on or before April 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The response to this Item is incorporated by reference to the Registrant's
definitive proxy statement for its 1999 Annual Meeting of Stockholders, to be
filed on or before April 30, 1999.
ITEM 13. CERTAIN TRANSACTIONS
The response to this Item is incorporated by reference to the Registrant's
definitive proxy statement for its 1999 Annual Meeting of Stockholders, to be
filed on or before April 30, 1999.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1 and 2. Financial Statements and Financial Statement Schedules: The
financial statements and financial statement schedules are listed in the
accompanying index to the Consolidated Financial Statements on page 12 on
Form 10-K. The financial statements indicated on the index appearing on
page 12 hereof are incorporated herein by reference.
3. Exhibits: The exhibits are listed on the accompanying index to exhibits and
are incorporated herein by reference or are filed as part of this Form
10-K.
3.1 Certificate of Incorporation of the Company. (1)
3.2 Certificate of Amendment to Certificate of Incorporation of the Company
filed August 29, 1990. (2)
3.3 Certificate of Amendment to Certificate of Incorporation of the Company
filed August 14, 1991. (4)
3.4 By-Laws of the Company. (1)
4.1 Form of Common Stock Certificate. (2)
10.1 1990 Stock Option Plan. (1)
10.2 1997 Stock Option Plan (10)
10.5 Employment Agreement dated as of May 15, 1990 between the Company and
Emory Cohen. (1).
10.8 CIT Credit Agreement signed on August 3, 1992. (5)
10.8A Amended Loan Agreement between CIT and the Company dated April
12, 1995. (7)
10.8B Amended Loan Agreement between CIT and the Company dated June 6, 1996. (8)
10.8C Amended Loan Agreement between CIT and the Company dated June 15, 1998
(filed herewith)
10.10 Lease Agreement dated as of May 14, 1987 by and between the Company and
Morton La Kretz, Trustee, Cross Roads Trust, UTD April 28, 1982. (2)
10.11 Lease Agreement dated as of July 18, 1983 by and between the Company and
Title House. (2)
10.12 Lease Agreement dated as of February 13, 1984 by and between the Company
and Morton La Kretz, Trustee, Cross Roads Trust, UTD April 28, 1982. (2)
10.14 Bank of America Amended Loan Agreement dated February 29, 1996. (7)
10.14 A Bank of America Settlement Agreement dated December 22, 1998 (filed
herewith)
10.15 Employment Agreement dated as of July 24, 1995 between the Company and
Randolph Blim. (7)
10.16 Settlement Agreement between 305 E. 45th Associates and the Company dated
January 12, 1996. (7)
10.17 Settlement Agreement between the Company and Gregory L. Biller dated March
31, 1996. (8)
10.18 Sale of Subsidiary (PVC) (11)
22.1 List of Subsidiaries. (4)
24.1 Consent of incorporation by reference from KPMG LLP. (10)
(1) Previously filed on June 7, 1991, with the Company's Registration Statement
on Form S-1 (File No. 33-41085)
(2) Previously filed on July 23, 1991, with the Company's Registration
Statement on Form S-1 (File No. 33-41085)
(3) Previously filed on August 8, 1991, with the Company's Registration
Statement on Form S-1 (File No. 33-41085)
(4) Previously filed on April 10, 1992 with the Company's Form 10-K.
(5) Previously filed on August 12, 1992 with the Company's Form 10-Q.
(6) Previously filed on May 13, 1994 with the Company's Form 10-Q.
(7) Previously filed on April 14, 1996 with the Company's Form 10-K.
(8) Previously filed on April 11, 1997 with the Company's Form 10-K.
(9) Previously filed on April 14, 1998 with the Company's Form 10-K.
(10) Previously filed on December 16, 1997 with the Company's Form S-8
(11) Previously filed on June 1, 1998 with the Company's Form 8-K
(b) Reports on Form 8-K
During the second quarter ended June 30, 1998, the Registrant filed a
Current Report on Form 8-K dated May 14, 1998 reporting the sale of the
Registrant's investment in Pacific Video Canada Ltd.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on March 26, 1999.
LASER-PACIFIC MEDIA CORPORATION
/s/ James R. Parks
James R. Parks
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title
Date
/s/ James R. Parks
James R. Parks Chairman of the Board and
March 26, 1999 Chief Executive Officer
(Principal Executive Officer)
/s/ Emory M. Cohen
Emory M. Cohen President, Chief Operating Officer and Director
March 26, 1999
/s/ Robert McClain
Robert McClain Vice President and Chief Financial Officer
March 26, 1999
/s/ Ronald Zimmerman
Ronald Zimmerman Director
March 26, 1999
/s/ Cornelius P. McCarthy III
Cornelius P. McCarthy III Director
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 1,159
<SECURITIES> 0
<RECEIVABLES> 5,791
<ALLOWANCES> (1,044)
<INVENTORY> 216
<CURRENT-ASSETS> 6,654
<PP&E> 29,847
<DEPRECIATION> (16,627)
<TOTAL-ASSETS> 20,227
<CURRENT-LIABILITIES> 3,886
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 8,712
<TOTAL-LIABILITY-AND-EQUITY> 20,226
<SALES> 30,699
<TOTAL-REVENUES> 30,699
<CGS> 22,755
<TOTAL-COSTS> 22,755
<OTHER-EXPENSES> 4,616
<LOSS-PROVISION> 275
<INTEREST-EXPENSE> 1,288
<INCOME-PRETAX> 3,028
<INCOME-TAX> 109
<INCOME-CONTINUING> 2,920
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,920
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.39
</TABLE>
Loan No.: 9677186330/042 Lin # T563
Co-Borrowers: Laser Pacific Media Corporation, and Pacific Video Inc.
Discounted Loan Payoff Agreement
(the "Agreement")
Date: December 2, 1998
To: Pacific Video, Inc.
Laser Pacific Media Corporation
809 N. Cahuenga Blvd
Hollywood, CA 90038
Attn: Mr. Robert McClain, CFO and Secretary
Dear Mr. McClain:
The undersigned, Bank of America National Bank and Savings Association,
successor by merger to Security Pacific National Bank (the "Bank"), on the one
hand, and Laser Pacific Media Corporation, a Delaware corporation ("LPMC"), and
Pacific Video, Inc., a Delaware corporation ("PVI") LPMC and PVI together,
collectively (the "Co-Borrowers"), on the other, hereby agree to and give you
notice of the following.
1. Existing Loan. The Co-Borrowers are the makers of that certain promissory
note in favor of the Bank (the "Note") secured by that certain deed of
trust (the "Deed of Trust") as set forth in Exhibit A attached hereto,
encumbering certain property (the "Subject Property"). The Note was
subsequently modified pursuant to a Modification Agreement dated as of
February 29, 1996. In connection with the Loan, PVI executed an Unsecured
Environmental Indemnity ("PVI Unsecured Indemnity").
2. Discounted Payoff Amount. The Co-Borrowers hereby agree to pay the Bank the
amount of $1,000,000.00 (the "Discounted Payoff Amount") plus accrued
interest on the then outstanding balance. The Bank agrees to accept the
same in full satisfaction of the Co-Borrowers' obligations under the Note,
provided that each of the conditions set forth in paragraph 3 below is
satisfied on or before December 4, 1998 (the "Discounted Loan Payoff
Deadline").
3. Conditions. As a condition of the Bank accepting the discounted amount set
forth above, the Co-Borrowers shall deliver to the Bank the following:
(a) a duly executed original of this Agreement,
(b) the sum of $1,000,000.00, by wire transfer of funds. (See Exhibit
B for wiring instructions), plus accrued interest of $342.89 per diem.
(c) A duly executed Release in the form set forth in Exhibit C hereto.
(d) A duly executed Reaffirmation of Environmental Indemnity set forth
as Exhibit D.
(e) No event of default exists under the Note, and,
(f) This Agreement shall terminate and be not of further force or
effect at the end of business date on the Discounted Note Payoff Deadline.
4. Satisfaction of Note. If the conditions set forth in paragraph 3 above are
fully and timely satisfied, then the Bank will cause its Trustee to issue a
Full Deed of Reconveyance. The Full Deed of Reconveyance will be forwarded
(via Airborne Express) within 14 days to Mr. Robert McClain to the above
address for recording in the County in which the subject property is
located. Additionally, we will include the original (or certified copy)
Note stamped "Satisfied". The Co-Borrowers' obligations under the Note
shall thereafter be deemed satisfied.
5. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
6. Confidentiality. Each of the parties hereto and their respective attorneys
agrees to keep the terms of this Agreement confidential, and not to
disclose the same to any other parties except to the extent necessary to
implement the terms of this Agreement or as may be required by the state or
federal law, or by an other rule or regulation to which the parties are
subject, or as may otherwise be agreed to by both parties in writing.
7. Arbitration
(a) Any controversy or claim between the Co-Borrowers and Bank,
including but not limited to those arising out of or relating or
incidental to this Agreement or any agreements or instruments
relating hereto or delivered in conjunction herewith, whether in
contract or tort, shall at the request of any party be determined
by arbitration, which shall be held in Los Angeles, California.
The arbitration shall be in accordance with the Commercial
Arbitration Rules of the American Arbitration Association ("AAA")
and, to the extent not inconsistent therewith and notwithstanding
any choice of law provision in the Agreement, in accordance with
United States Arbitration Code (Title 9, U.S. Code). The
arbitrator shall give effect to statutes of limitation in
determining any claim. Any controversy concerning whether an
issue is arbitrable shall be determined by the arbitrator.
Judgement upon the arbitration award may be entered in any court
having jurisdiction. The institution and maintenance of an action
for judicial relief or pursuit of a provisional or ancillary
remedy shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the controversy or claim to
arbitration if any party contests such action for judicial
relief. This Section 7 shall not limit the right of either party
to this Agreement to exercise self-help remedies such as setoff
or to obtain provisional or ancillary remedies from a court of
competent jurisdiction before, after, or during the pendency of
any arbitration or other proceeding. The exercise of a remedy
does not waive the right of either party to resort to
arbitration.
(b) Without limiting the generality of the preceding Section 7(a),
each of the parties agrees that money damages would not be a
sufficient remedy for any breach or threatened breach of this
Agreement by the Co-Borrowers, and agrees that in addition to all
other remedies, the arbitrator may award specific performance and
injunctive or other equitable relief as a remedy for any such
breach or threatened breach.
(c) Where the arbitrator determines that there is a prevailing party
in the arbitration, the arbitrator shall assess against the
non-prevailing party all expenses of the arbitration as well as
other reasonable out-of-pocket-expenses of the prevailing party.
In witness whereof, the parties hereto have executed this agreement as
of the date first above written.
CO-BORROWERS:
LASER-PACIFIC MEDIA CORPORATION,
A Delaware corporation
By: /s/ Robert McClain
Name: Robert McClain
Title: Chief Financial Officer and Secretary
PACIFIC VIDEO, INC.
A Delaware corporation
By: /s/ Robert McClain
Name: Robert McClain
Title: Chief Financial Officer and Secretary
BANK:
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION,
a national banking association
By: /s/ Michelle Chen
Name: Michelle Chen
Title: Vice President
<PAGE>
EXHIBIT A
TO DISCOUNTED LOAN PAYOFF AGREEMENT
<TABLE>
<S> <C> <C> <C> <C> <C>
Loan Date Co-Borrowers Original Principal Deed of Trust (Complete
No. Amount of Note Info)
9677186330/042 05/12/89 LPMC & PVI $2,100,000.00 Dated: 05/12/89
Recorded: 06/06/89
County: Los Angeles
State: California
Instrument 89-912702
No.:
Executed By: PVI
Trustee: Equitable De
</TABLE>
<PAGE>
Exhibit B
BANK OF AMERICA WIRING INSTRUCTIONS
Loan Accounting Department #1503
333 South Beaudry Avenue, 26th Floor
Los Angeles, CA 90017
Attention: Johnny McMillan (213) 345-7405
ABA # 121-000-358
Account # 15036-00457
Reference Loan #: 9677186330/042
Borrower: Pacific Video, Inc.
<PAGE>
EXHIBIT C
RELEASE AGREEMENT
To induce Bank of America National Trust and Savings Association, a
national banking association ("Bank"), to enter into that certain
Discounted Loan Payoff Agreement, dated as of December 2, 1998- (the
"Agreement"), and to satisfy one of the conditions precedent set forth in
the Agreement, each of the undersigned (each a "Releasor"), on behalf of
itself and each of its successors and assigns, does hereby forever release,
discharge and acquit Bank, and its parent, subsidiary and affiliate
corporations, and their officers, directors, shareholders, agents and
employees, and their successors, heirs and assigns, and each of them
(collectively and severally, "Releasees") of and from any and all
liabilities, indebtedness, breaches of contract, breaches of duty or any
relationship, acts, omission, misfeasance, malfeasance, actions or causes
of action, debts, sums of money, accounts, compensations, contracts,
controversies, promises, damages, costs, losses and expenses, of every
type, kind, nature description or character, and irrespective of how, why
or by reason of what facts, whether heretofore, now existing or hereafter
arising, or which could, might, or may be claimed to exist, or whatever
kind or name, whether known or unknown, though fully set forth herein at
length, which in any way arise out of, are connected with or relate to the
Agreement and the transactions contemplated thereby, the Note, Deed of
Trust and/or the Subject Property and any and all guaranties of the
indebtedness evidenced by the Note or Deed of Trust and with respect to the
credit relationship involved therewith; provided, however, that nothing
contained herein shall release Bank from its obligation to observe and
perform the express terms and condition binding upon Bank under the
Agreement.
As further consideration for the herein release contained, Releasor
hereby agrees, represents and warrants that the matters released herein are
not limited to matters which are known or disclosed, and Releasor hereby
waives and any all rights and benefits which Releaser now has, or in the
future may have, conferred upon Releasor by virtue of the provision of
Section 1542 of the Civil Code of the State of California which provides as
follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT
WITH THE DEBTOR.
In this connection, Releasor hereby agrees, represents, and warrants
that it realizes and acknowledges that factual matters now unknown to
Releasor may have given or may hereafter give rise to causes of action,
claims, demands, debts, controversies, damages, costs, losses and expenses
which are presently unknown, unanticipated and unsuspected, and Releasor
further agrees, represents and warrants that his Release has been
negotiated and agreed upon in light of that realization and the Releasor
nevertheless hereby intents to release, discharge and acquit the Releasees
from any such unknown claims which would be Claims if known on the date
hereof.
It is hereby further understood and agreed that the acceptance of
delivery of this Release Agreement by Releasees shall not be deemed or
construed as an admission of liability by any Releasee, and each Releasee
by accepting this Release Agreement expressly denies liability of any
nature whatsoever arising from or relating to the subject of this release
Agreement.
Releasor hereby agrees, represents and warrants that Releasor has had
advice of counsel of Releasor's own choosing in negotiations for and the
preparation of this Release Agreement and that Releasor has had this
Release Agreement fully explained by such counsel and is fully aware of its
contents and legal effect.
Releasor hereby agrees that this Release Agreement shall be governed
by and construed in accordance with the internal laws of the State of
California.
DATED: December 2, 1998.
LASER PACIFIC MEDIA CORPORATION
A Delaware corporation.
By: /s/ Robert McClain
Name: Robert McClain
Title: Chief Financial Officer and Secretary
Pacific Video, Inc.,
A Delaware corporation and a wholly-owned
Subsidiary of LPMC.
By: /s/ Robert McClain
Name: Robert McClain
Title: Chief Financial Officer and Secretary
<PAGE>
Certification of Counsel
I have advised the Releasor under the above Release Agreement of the
meaning and effect of the provisions of Section 1542 of the California
Civil Code and that Releasor, acting as its authorized agents, has
voluntarily waived any rights Releasor may have thereunder, as well as
under any other statutes or common law principles of similar effect.
________________________________________________
Attorney for Releasor
PLEASE SIGN BELOW IF CERTIFICATION OF COUNSEL IS WAIVED
LASER PACIFIC MEDIA CORPORATION
A Delaware corporation.
By: /s/ Robert McClain
Name: Robert McClain
Title: Chief Financial Officer and Secretary
Pacific Video, Inc.,
A Delaware corporation and a wholly-owned
Subsidiary of LPMC.
By: /s/ Robert McClain
Name: Robert McClain
Title: Chief Financial Officer and Secretary
<PAGE>
EXHIBIT D
REAFFIRMATION OF ENVIRONMENTAL INDEMNITY
(Discounted Loan Payoff Agreement)
This Reaffirmation of Environmental Indemnity is made and dated as of
December 2, 1998 by the undersigned ("Indemnitor") for the benefit of Bank
of America national trust and Savings Association, a notional banking
association, as successor in interest by merger to Security Pacific
National Bank (the "Bank").
RECITALS
A. Indemnitor executed and delivered to the Bank that certain
Environmental Indemnity dated May 12, 1989, as amended by a Modified
Unsecured Indemnity Agreement dated February 26, 1996 (the "Existing
Indemnity").
B. Pursuant to that certain Discount Loan Payoff Agreement dated as of
December 2, 1998, (the "Agreement"), the Bank has agreed to accept a payoff
of the loan made to the Co-Borrowers, which loan is secured by the real
property which is the subject of the Existing Indemnity on the terms and
subject to the conditions set forth more particularly in the Agreement.
C. One such condition is the requirement that Indemnitor reaffirm the
Existing Indemnity.
Now, therefore, in order to induce the Bank to consummate the
transaction contemplated by the Agreement and for other good and valuable
consideration, the Indemnitor hereby agrees as follows:
AGREEMENT
The Existing Indemnity and all of the obligations of Indemnitor and
all the rights, powers, remedies of the Bank therein and thereunder shall
survive the consummation of the transactions contemplated by the Agreement
and shall continue in full force and effect in accordance with its terms.
Dated as of the day and year first above written.
Pacific Video, Inc.,
A Delaware corporation and a wholly-owned
Subsidiary of LPMC.
By: /s/ Robert McClain
Name: Robert McClain
Title: Chief Financial Officer and Secretary
June 15, 1998
Laser-Pacific Media Corporation
Laser Edit Inc.
PDS Video Productions, Inc.
Spectra Systems, Inc.
Pacific Film Laboratories Inc.
Pacific Video, Inc.
809 North Cahuenga Blvd.
Los Angeles, CA 90038
Attn: James Parks, Chief Executive Officer
Re: Loan and Security Agreement with the CIT Group / Credit Finance, Inc.
Amendment No. 7
Gentleman:
Reference is made to your respective Loan and Security Agreements
wherein each of you is a "Borrower" and the CIT Group / Credit Finance,
Inc. is the "Lender", all of which Loan and Security Agreements are dated
August 3, 1992 (the "Agreements"). Lender and each Borrower have agreed to
amend the Agreements as follows effective immediately. Except as amended
herein, the Agreements shall remain unchanged and in full force and effect.
1. Annual appraisals.
Section 2.2 of each of the agreements is hereby amended to eliminate
the requirement for annual appraisals, provided Borrower is not in Default
to Lender. However, Lender may conduct appraisals at any time upon prior
notice to Borrower and at Lender's expense.
2. Extension of Term.
Section 9.1 of each of the Agreements is hereby amended to read as
follows:
"This Agreement shall continue in full force and effect through August
3, 12001 and shall be deemed automatically renewed for successive terms of
two (2) years thereafter unless terminated as of August 3, 2001 or as of
the end of any renewal term (each a "Term") by either party giving the
other written notice at least sixty (60) days prior to the end of the
then-current Term."
3. Early Termination Fee Reduction.
Section 9.2(a) of each of the Agreements is hereby amended to read as
follows:
"(a) one and one-half percent (1.50%) of the Maximum Credit if
termination occurs during the current Term or any renewal Term of the
agreement."
4. Minimum Borrowing Reduction.
Section 10.1(e) of each of the Agreements is hereby amended to
decrease the Minimum Borrowing from $4,000,000.00 to $2,500,000.00.
5. Term Loan.
Section 10.2 of each of the Agreements is hereby amended to read as
follows:
"10.2 Existing Equipment Term Loan: 100% of a current appraised
auction value of unencumbered equipment as per appraisal conducted by
appraiser acceptable to Lender, not to exceed $5,370,000.00, subject to the
provisions of Section 2.2 hereof and to be amortized over 60 months with no
payments in June, July and August of each year.
New Equipment Term Loan: 100% of auction value of appraisals
acceptable to CIT, not to exceed $500,000.00 per year in aggregate."
6. Interest Rate Reduction.
Section 10.4(a) of each of the Agreements is hereby amended to read as
follows:
"(a)(1) Interest Rate for Revolving Loans: Prime Rate plus 1.5% over a
360-day year
(a)(2) Interest Rate for Term Loans: 10.5% over a 360-day year"
7. Facility Fee Reduction.
Section 10.4(b) of each of the Agreements is hereby amended to read as
follows:
"(b) Facility Fee $70,000.00"
8. Annual Special Advance.
Provided Borrowers are not in default to Lender at such time and
Borrower's annual cash flow projections are acceptable to Lender in its
sole discretion, lender agrees to make an advance of up to $500,000.00 in
excess of the loans available under Borrower's lending formulas on May 1 of
each year. Such advance shall be repaid in equal installments commencing on
September 15 until October 31 of each year at which time the full amount of
the Special Advance must be repaid in full.
9. Extension of Stock Option.
Borrower agrees to extend the expiration date of the Warrant with a
Date of Grant of August 3, 1992 to August 3, 2001, and to effectuate said
extension, agrees to sign any and all amendments or other documents Lender
may deem necessary to accomplish same.
If all of the foregoing correctly sets forth our understanding, will
each of you please sign a copy of this letter where indicated below and
return the original of this document to the undersigned.
Very truly yours,
THE CIT GROUP/Credit Finance, Inc.
Gregory Badura
Vice President
All of the foregoing is hereby agreed to.
Laser-Pacific Media Corporation Laser Edit, Inc.
By: /s/ James R. Parks By: /s/ James R. Parks
Title: C.E.O. Title: C.E.O.
PDS Video Productions Spectra Systems, Inc.
By: /s/ James R. Parks By: /s/ James R. Parks
Title: C.E.O. Title: C.E.O.
Pacific Film Laboratories, Inc. Pacific Video, Inc.
By: /s/ James R. Parks By: /s/ James R. Parks
Title: C.E.O. Title: C.E.O.
