10-K 1 form10k123101.txt FORM 10-K DATED 12/31/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) of the SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _______ Commission File Number 0-19407 LASER-PACIFIC MEDIA CORPORATION (Exact Name of Registrant as Specified in its Charter) Delaware 95-3824617 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 809 N. Cahuenga Blvd., Hollywood, California 90038 (Address of (Zip Code) Principal Executive Offices) Registrant's telephone number, including area code: (323) 462-6266 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Common Stock ($.0001 par value per share) Preferred Share Purchase Rights (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x] The aggregate market value of the voting stock held by non-affiliates of the registrant on March 15, 2002 (based upon the closing price on the Nasdaq National Market on that date) was $17,335,000. Number of shares of Common Stock, $.0001 par value per share, outstanding as of March 15, 2002: 7,104,595. DOCUMENTS INCORPORATED BY REFERENCE Registrant's Notice of 2002 Annual Meeting of Stockholders and definitive Proxy Statement, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than April 30, 2002. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Table of Contents

PART I ITEM 1. BUSINESS Statements included within this document, other than statements of historical facts, that address activities, events or developments that Laser Pacific Media Corporation, ("Laser-Pacific" or the "Company") expects or anticipates will or may occur in the future, including such things as business strategy and measures to implement strategy, competitive strengths, goals, expansion and growth of the Company's business and operations, plans, references to future success and other such matters, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as amended, and fall under the safe harbor. The forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. However, actual results and financial position could differ materially in scope and nature from those anticipated in the forward-looking statements as a result of a number of factors, including but not limited to, the Company's ability to successfully expand capacity; general economic, market or business conditions; the opportunities (or lack thereof) that may be presented to and pursued by the Company; competitive actions by other companies; changes in laws or regulations; investments in new technologies; continuation of sales levels; the risks related to the cost and availability of capital; and other factors, many of which are beyond the control of the Company. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company or its business operations. Readers are urged to carefully review and consider various disclosures made by the Company in its filings with the Securities and Exchange Commission to advise interested parties of certain risks and other factors that may affect the Company's business and operating results. General Laser-Pacific Media Corporation, a Delaware corporation, was formed by a merger of Spectra Image, Inc. and Pacific Video, Inc. in September 1990. Both of the predecessor companies were organized in 1983. Laser-Pacific is a leading provider of a broad range of post-production services to the Hollywood motion picture film and television industries. These post-production services include technical and creative services to the producers of prime-time network television series, television movies, and theatrical motion pictures, services for the creation of digital masters for high definition and standard definition television, home video, DVD as well as other master delivery formats. In addition, the Company provides motion picture film processing, technical and creative services for visual effects, digital sound editing and mixing and other ancillary and related services that assist in the preparation of film, television and digital content for a variety of distribution methods. The Company is recognized as an industry leader and pioneer in the development and introduction of new methods and technology in service of television, motion pictures and digital multimedia. The Company led the television industry in the move from film to electronic and digital based techniques in post-production through the introduction of its proprietary Electronic Laboratory(TM) and has received five Emmy Awards for Outstanding Achievement in Engineering for its developments. The Company's new high definition television and movie mastering capabilities are reinforcing the long standing reputation for state-of-the-art services and facilities. The Company offers a full range of post-production services to television and motion picture producers at its facilities in Hollywood, California. These services, which begin immediately after completion of photography and end with the delivery of a videotape master ready for television broadcasting or a film master ready for feature film release printing. The services include film processing, film to videotape transfer, electronic editing (including the addition of special effects and titles), color correction, sound editing and mixing, film recording and videotape duplication. The principal categories of services offered by the Company are: Motion Picture Film Processing - The Company operates five negative processing machines at its Pacific Film Laboratories facility, located in Hollywood, California. These machines are used to develop customers' negatives after photography, with the capacity to develop approximately 2 million feet of film per week. Telecine Transfer - The Company operates eight telecine suites that are used to transfer customers' film to videotape for subsequent post-production processing. These telecine suites are used for daily transfers for electronic post-production as well as video masters of completed motion pictures. Currently three telecine suites are used for digital standard definition and five are used for both digital standard definition as well as digital high definition. Revenues from telecine transfer accounted for approximately 23%, 24% and 22% of the Company's total revenue in 2001, 2000, and 1999 respectively. Editing - The Company operates seven editing suites, for preparing broadcast quality videotape masters or conformed digital motion picture masters for its customers. These editing suites are conforming or assembly of television programs and motion pictures, including creation of visual effects, titles, and graphics. Four of the rooms are equipped for high definition editing, and three are equipped for standard definition editing. Additionally, the Company's Emmy Award winning Super-Computer Assembly system provides high definition and standard definition assembly capability equivalent to four or five additional conventional editing rooms. Revenues from editing accounted for approximately 25%, 23% and 22% of the Company's total revenue in 2001, 2000, and 1999 respectively. Color Timing - The Company operates six timing suites that are used for the final color balancing and image enhancement of customers' programs. Three of these suites are equipped specifically for digital high definition programs. Digital Graphics and Visual Effects - The Company's Visual Effects Department, is equipped with several digital video effects systems specifically designed to create graphical elements, special effects, titles and other specialized work for television and motion pictures. Sound Editing and Mixing - The Company's post-production sound department, Pacific Sound Services, includes ten digital sound editing systems, a sound effects and dialogue recording studio, and a re-recording studio for accomplishing the final sound mix of customers' programs. Digital Compression Services - Using an IBM SuperComputer and other specialized computer systems, the Company provides digital compression and related services which results in the creation of data recordings for use in CD-ROM, digital file servers and video-on-demand applications. The Company also provides digital compression and "authoring" services for the new DVD format. "Authoring" is the industry term that describes the creation of disc navigation and interactivity capability in a DVD replication master, including DVD menu design and formatting. Duplication and Other Services - The Company provides duplication, restoration, digital file conversion, screening, and a variety of other services to fulfill the production and delivery needs of its customers. The Company's primary customers are the major motion picture and television studios and production companies. The Company's ten largest customers accounted for approximately 70% of total revenue in 2001. During 2001, sales to Sony Pictures Entertainment, 20th Century Fox and Paramount Pictures and their affiliated companies, accounted for 12%, 11% and 10% respectively of the Company's total revenue for the year. Seasonality and Variation of Quarterly Results The Company's business is subject to substantial quarterly variations as a result of seasonality, which the Company believes is typical of the television post-production industry. Historically, revenues and net income have been highest during the first and fourth quarters, when the production of television programs and consequently the demand for the Company's services are at their highest. Revenues have been substantially lower during the second and third quarters, when the Company historically has incurred operating losses. Employees At December 31, 2001, the Company had approximately 215 employees. Approximately 30 employees are represented by the International Alliance of Theatrical and Stage Employees pursuant to a collective bargaining agreement, which expires on July 15, 2002. The Company has never experienced a work stoppage and considers its relations with its employees to be excellent. Competition The Company experiences competition in all phases of its business from a number of companies. Some of the Company's competitors specialize in specific service areas, such as sound, laboratory, or editing, and some are fully integrated and offer a complete range of post-production services. Some of the Company's competitors have financial resources that are materially greater than the Company's. Some of the Company's customers have post-production capabilities. Due to the nature of the Company's core business, post-production for television programs, the majority of the Company's competitors are located in the Southern California area. ITEM 2. PROPERTIES The Company owns two buildings with a total of 22,000 square feet located on lots totaling 39,000 square feet in Hollywood, California, where it provides film processing and sound editing and mixing services. In addition, the Company leases approximately 47,000 square feet in five buildings in Hollywood, California, which contain executive offices and the balance of its post-production facilities. Three of the larger facilities are on five-year leases through the year 2006. Two of the leases are on a month-to-month basis. The Company believes that its facilities are adequate for its operations as now conducted. If operations expand, the Company will acquire additional space. The Company believes that its facilities, some of which include the use of chemical products, substantially comply with all applicable environmental and other laws and regulations. ITEM 3. LEGAL PROCEEDINGS The Company may have certain contingent liabilities and claims incident to the ordinary course of business. The Company is not involved in any material litigation at this time and is not aware of any pending lawsuits. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2001. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market under the symbol "LPAC". The following table reflects the range of high and low intra-day selling prices of the Company's common stock by quarter for 2001 and 2000. This information is based on intra-day selling prices as reported by the Nasdaq National Market. High Low 2001 First Quarter $3.31 $1.38 Second Quarter $3.90 $1.25 Third Quarter $5.50 $2.63 Fourth Quarter $5.55 $2.20 2000 First Quarter $14.94 $5.00 Second Quarter $6.00 $2.63 Third Quarter $4.75 $2.25 Fourth Quarter $3.13 $1.00 The Company had approximately 2,600 stockholders on March 13, 2002. The Company has never paid a cash dividend on its shares of Common Stock and currently intends to retain its earnings, if any, for use in its operations and the expansion of its business. Consequently, it does not anticipate paying any cash dividends in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA The following table summarizes selected financial data of the Company and its consolidated subsidiaries for each of the last five fiscal years:

Quarterly Financial Information The following table summarizes unaudited selected financial data of the Company and its consolidated subsidiaries for each quarter of the last two fiscal years:

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical Accounting Policies Laser Pacific Media Corporation's critical accounting policies are as follows: Depreciation and amortization of property and equipment Valuation of long-lived assets Accounting for income taxes Depreciation and Amortization of Property and Equipment The Company, a capital-intensive enterprise, depreciates and amortizes property and equipment on a straight-line basis over the estimated useful life of the related assets. Significant management judgment is required to determine the useful lives. Should the useful lives be revised, the impact on its results of operations could be material. Valuation of Long-Lived Assets The Company periodically assesses the impairment of its long-lived assets, which require it to make assumptions and judgments regarding the carrying value of these assets. The assets are considered to be impaired if the Company determines that the carrying value may not be recoverable based upon its assessment of the following events or changes in circumstances: The asset's ability to continue to generate income from operations and positive cash flow in future periods, Significant changes in strategic business objectives and utilization of the assets, or The impact of significant negative industry or economic trends. If the assets are considered to be impaired, the impairment that is recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. If a change were to occur in any of the above mentioned factors or estimates, the likelihood of a material change in the reported results would increase. Accounting for Income Taxes Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount more likely than not to be realized. The likelihood of a material change in the Company's expected realization of these assets depends on future taxable income, the ability to deduct tax loss carryforwards against future taxable income, the effectiveness of the tax planning and strategies among the various tax jurisdictions in which the Company operated, and any significant changes in the tax laws. For the years ended December 31, 2001, 2000 and 1999, valuation allowance of $879,000, $1,315,000 and $2,173,000 were eliminated since management determined that it was more likely than not that the related deferred tax assets would be realized. In the event that the actual results differ from the estimates or the Company adjusts the estimates in future periods it may need to establish an additional valuation allowance which could materially impact the financial position and results of operations. The Company's effective tax rate in 2001 was 19.7%, principally resulting from the elimination of valuation allowances of $879,000. The Company's estimated tax rate for 2002 is 40%. This rate is subject to ongoing review and evaluation by management. Results of Operations 2001 Compared to 2000 Revenues for the year ended December 31, 2001 increased to $33.6 million from $33.1 million for the year ended December 31, 2000, an increase of $0.5 million or 1.8%. The minimal increase in sales is the result of an increase in demand for the Company's services in the first six months of 2001, which was offset by a decline in demand for the Company's services during the last six months of 2001. The following factors impacted the decrease in revenues during the third and fourth quarters of 2001: 1) a slowing of movie production in the second and third quarters because studios and networks stockpiled shows to ride out a threatened strike by the writers and actors that did not materialize, which impacted the services the Company provides on feature movies such as movie mastering, preview services and digital compression; 2) the impact of the September 11, 2001 terrorist attacks that resulted in the cancellation and rescheduling of certain production and delayed the beginning of the fall broadcast season; 3) a significant decline in the number of movies made for television with much of the remaining television movie production business being moved outside of the United States; and 4) the overall slowdown in the economy and general weakness of the entertainment industry, which has impacted advertising revenues and the programs supported by those revenues such that there are fewer non-broadcast and off-network shows and the shows that are being produced have lower post-production budgets. For the year ended December 31, 2001, the Company recorded a gross profit of $8.8 million compared with $9.2 million for the same year-ago period, a decrease of $0.4 million or 3.8%. The decrease in gross profit is primarily the result of relatively flat sales and increased operating costs, as discussed below. Operating costs, excluding depreciation and amortization for the year ended December 31, 2001, were $20.5 million versus $19.7 million for the year-ago period, an increase of 4.0%. The increase in operating costs is primarily the result of increased labor cost of $365,000, increased equipment maintenance and rental expense of $239,000 and increased transmission cost of $116,000. Depreciation and amortization expense for the year ended December 31, 2001 was $4.3 million compared to $4.2 million for the same year-ago period, an increase of $144,000 or 3.5%. Total operating costs, including depreciation and amortization, as a percentage of revenues for the year ended December 31, 2001, were 73.8% compared with 72.2% for the same year-ago period. Selling, general and administrative expenses ("SG&A expenses") for the year ended December 31, 2001 were $5.0 million as compared to $4.6 during the same year-ago period, an increase of 8.4%. The increase in SG&A expenses is primarily attributable to increased wages for non-operations staff of $175,000 and increased legal, financial advisory and consulting fees of $238,000, partially offset by minor reductions in other costs. Income from operations for the year ended December 31, 2001 was $3.8 million compared to $4.5 million for the same year-ago period, a decrease of $0.7 million or 16.3%. The decrease in income from operations is primarily the result of decreased sales volume and increased operating and SG&A expenses, as discussed above. Interest expense for the year ended December 31, 2001 was $1.0 million compared to $1.2 million for the same year-ago period, a decrease of $0.2 million or 20.9%. The decrease in interest expense is primarily due to lower interest rates on borrowings. Other income for the year ended December 31, 2001 was $543,000 compared to other income of $253,000 in 2000. The increase of $290,000 is primarily attributable to income of $193,000 recognized in connection with a collaboration agreement and the gain on the sale of the Company's interest in Composite Image Systems, LLC ("CIS") of $83,000 (see note 10 to the consolidated financial statements hereto). Income tax expense amounted to $661,000 in 2001 as compared to $29,923 in 2000. The effective tax rate was 19.7% in 2001 and 8.5% in 2000. The Company's effective tax rate differed from the statutory U.S. Federal tax rate of 34% in 2001 principally from the elimination of a valuation allowance for deferred tax assets of $879,000. When a threatened strike by the writers and actors did not materialize, the Company determined that it was more likely than not that all deferred tax assets would be realized and eliminated the valuation allowance established in prior years. The 2000 income tax expense is comprised of U.S. Federal income tax of $57,000 and state income tax benefit in the amount of $27,000. In 2000 U.S. Federal income tax is primarily composed of alternative minimum tax. The state income tax benefit is the result of utilization of state tax credits. The Company anticipates that the combined Federal and state effective tax rate for 2002 will be 40% (see note 5 to the consolidated financial statements hereto). As a consequence of the above factors, the Company reported net income of $2.7 million or $0.36 per diluted share in 2001 versus reported net income of $3.5 million or $0.44 per diluted share in 2000. Fourth Quarter 2001 The following table summarizes selected financial data of the Company and its consolidated subsidiaries for the fourth quarters ended December 31, 2001 and December 31, 2000.

Revenues for the three months ended December 31, 2001 decreased $1.4 million or 13.5% from the same period in 2000. The decrease in the revenues is attributable to a decreased demand for the Company's services throughout all areas of service that the Company provides. Factors contributing to the decreased demand for services in the fourth quarter were: the overall economic downturn in the entertainment and advertising sectors and the associated corporate cost cutting; the continuing trend of reality programming which uses little of the Company's services; and the fact that there were fewer movies for television and fewer theatrical releases. The Company anticipates that these trends will continue through the first six months of 2002. For the three months ended December 31, 2001, the Company's gross profit decreased $1.1 million or 26.4%. The decrease in gross profit is the result of the decrease in revenues discussed above, net of a decrease in operating costs of $351,000. The decrease in operating costs is primarily the result of a decrease in labor cost of $203,000 and a reduction in rawstock expense of $103,000. Total operating costs, including depreciation and amortization, as a percentage of revenues for the three months ended December 31, 2001 were 67.4% compared with 61.6% for the same year-ago period. Income from operations decreased $1.3 million for the three months ended December 31, 2001 compared to the same period in 2000. The decrease in income from operations is the result of the sales decrease partially offset by decreased operating costs and an increase in SG&A expenses. Other income for the fourth quarter of 2001 decreased $30,000 or 48.4% from the fourth quarter of 2000. Other income is primarily interest income earned on cash balances and the decrease is the result of a decline in interest rates. Income tax expense for the fourth quarter 2001 increased $530,000 from the fourth quarter 2000. The increase is principally the result of an increase in the Company's effective tax rate in 2001. The increase in the Company's effective tax rate is the result of the full utilization of the Company's deferred tax benefit. 2000 Compared to 1999 Revenues for the year ended December 31, 2000 increased to $33.1 million from $31.0 million for the year ended December 31, 1999, an increase of $2.1 million or 6.7%. The increase is primarily attributable to an increased demand for the Company's services. Revenues from the majority of services that the Company provides increased significantly while revenues from some services decreased. Revenue increases in television post-production services, which includes high definition services, digital compression services including digital video discs, and feature film mastering aggregated $3.1 million and were partially offset by decreased revenue from the following services: 1) The elimination of the Company's production rental services business in October 1999 reduced revenue by $68,000; 2) Revenues from laser disc services declined $203,000; 3) Revenues from Graphic Services declined $605,000 as a result of a lower demand for special effects from our customers; and 4) a decrease of $124,000 in Film Production Revenues reflects increased use by some customers of film formats that require a lower volume of film processing. For the year ended December 31, 2000, the Company recorded a gross profit of $9.2 million compared with $8.0 million for the same year-ago period, an increase of $1.2 million or 15.0%. The increase in gross profit is primarily the result of the increased sales volume discussed above, partially offset by an increase in depreciation expense, as discussed below. Operating costs, excluding depreciation and amortization for the year ended December 31, 2000, were $19.7 million versus $19.8 million for the year-ago period, a decrease of less than 1.0%. The decrease in operating costs is the result of reduced bad debt expense of $519,000 and reduced equipment maintenance and rental expense of $254,000 offset by increased labor cost of $427,000 and increased stock cost of $304,000. Depreciation and amortization expense for the year ended December 31, 2000 was $4.2 million compared to $3.3 million for the same year-ago period, an increase of $902,000 or 27.7%. The increase in depreciation and amortization expense is due to significant capital equipment expansion in the third and fourth quarters of 1999. Total operating costs, including depreciation and amortization, as a percentage of revenues for the year ended December 31, 2000, were 72.2% compared with 74.2% for the same year-ago period. SG&A expenses for the year ended December 31, 2000 were $4,648,000 as compared to $4,570,000 during the same year-ago period, an increase of 1.7%. The small increase in SG&A expenses is attributable to increased wages for non-operations staff of $86,000 and increased professional fees of $39,000, offset by a reduction in property tax expense of $107,000. Income from operations for the year ended December 31, 2000 was $4.5 million compared to $3.4 million for the same year-ago period, an increase of $1.1 million or 32.8%. The increase in income from operations is primarily the result of increased sales volume and decreased operating expenses, partially offset by increased SG&A expenses, as discussed above. Interest expense for the year ended December 31, 2000 was $1.2 million compared to $1.2 million for the same year-ago period. There was no significant change in interest expense from last year. Interest expense was higher for the first and second quarters and lower in the third and fourth quarters of the year ended December 31, 2000 compared to the year ended December 31, 1999. Other income for the year ended December 31, 2000 was $253,000 compared to other income of $2.4 million in 1999. The other income for the year ended December 31, 2000 is primarily interest income earned on higher cash balances. The other income in 1999 was primarily the result of a technology development agreement that the Company entered into with a major equipment manufacturer and supplier. Under the agreement the Company provided research, development and engineering services related to the development of technical equipment used in connection with high definition post-production. In consideration for services provided, the Company received replacement equipment, discounts on the purchase of equipment and the cancellation of rental payments under a capital lease obligation due to the equipment supplier. The Company recognized income of $2.2 million during the fourth quarter of 1999 pursuant to this agreement. Revenue recognition was deferred until the end of the fourth quarter as the earnings process was not complete until December 31, 1999 when the collaboration was complete. Costs that the Company incurred in connection with the agreement were expensed, primarily as operating costs, as incurred throughout the year ended December 31, 1999. The Company does not anticipate future revenue recognition from the technology development agreement. The 2000 income tax expense is comprised of U.S. Federal income tax of $57,000 and state income tax benefit in the amount of $27,000. The U.S. Federal income tax is primarily composed of alternative minimum tax. The state income tax benefit is primarily the result of utilization of state tax credits. The income tax benefit of $285,000 during 1999 is comprised of a deferred income tax benefit of $500,000 resulting from a reduction in the valuation allowance to reflect the anticipated future benefit from operating loss carryforwards which are likely to be utilized, partially offset by income tax expense of $215,000. The 1999 income tax expense is comprised of U.S. Federal income tax of $70,000 and state income tax in the amount of $145,000. The U.S. Federal and state income tax is primarily composed of alternative minimum tax. This occurred because net operating loss carryforwards were utilized to offset taxable income. The full benefit of the net tax operating loss carryforwards is limited for alternative minimum tax purposes. The benefit of the state net tax operating loss was completely utilized as of December 31, 1999. As of December 31, 2000, the Company had recorded gross deferred tax assets of $3.8 million, a related valuation allowance of $879,000 and deferred tax liabilities of $2.4 million (see note 5 to the consolidated financial statements hereto). In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income (losses) and projections for future taxable income over the periods in which the deferred tax assets are deductible, management can not predict at December 31, 2000 that the Company will realize all of the benefits of these deductible differences. Based on these assessments, the valuation allowance was reduced in 2000 by $1.3 million and in 1999 by $2.2 million. As a consequence of the above factors, the Company reported net income of $3.5 million or $0.44 per diluted share in 2000 versus reported net income of $4.8 million or $0.62 per diluted share in 1999. Matters Affecting Operations Some producers of television shows have begun to shoot their programs on videotape instead of film. If this practice continues and becomes more widespread the Company's revenue from film developing and film to tape transfer will decrease. On July 9, 2001, the Company entered into an agreement with its joint venture partner in Composite Image Systems, LLC ("CIS"), to sell its interest in CIS to its joint venture partner. Under the terms of the agreement, the Company transferred to its joint venture partner the Company's 50% interest in CIS and certain equipment previously leased to CIS in exchange for a cash payment of $575,000. The Company has given corporate guarantees regarding a lease obligation of the joint venture, CIS and the joint venture partner have agreed to indemnify the Company for up to the amount of the principal obligation for any claims that might arise under the guarantee should CIS default on the lease obligation. The lease obligation is also secured by the equipment purchased under the lease. Liquidity and Capital Resources As of December 31, 2001, the Company and its subsidiaries are operating a credit facility with Merrill Lynch Business Financial Services. The maximum credit available under the facility is $11.0 million. The facility provides for borrowings of up to $6.0 million under a revolving loan and $5.0 million in equipment term loans. There was no outstanding balance under the revolving loan at December 31, 2001. The equipment term loans had a combined outstanding balance of $4.9 million at December 31, 2001. The revolving loan and the equipment term loans are payable monthly and bear interest at the 30-day dealer commercial paper rate plus 2.20% to 2.65%. The revolving loan is for a one-year term and can be renewed annually. The equipment term loans are for a five-year term. As of December 31, 2001, the Company had outstanding equipment loans and capital lease obligations of approximately $11.6 million with various lenders (including the $4.9 million in equipment term loans, discussed above) in connection with the acquisition of equipment. The capital leases are for terms of up to 60 months, at fixed interest rates ranging from 7.5% to 12.75% and the equipment term loans, as discussed above, bear interest at a variable interest rate. The Company's term note credit agreements contain covenants, including financial covenants related to leverage and fixed charge ratios. The Company was in compliance with these covenants at December 31, 2001. The obligations are secured by the equipment financed. The equipment was acquired to expand the Company's capabilities and to support the increasing demand for the Company's services. In addition, the Company has obligations under operating leases aggregating $2.7 million as of December 31, 2001. The Company's principal source of funds is cash generated by operations. The Company anticipates that existing cash balances, availability under existing loan agreements and cash generated from operations will be sufficient to service existing debt and to meet the Company's operating and capital requirements for fiscal 2002. Recent Accounting Pronouncements Accounting for Business Combinations and Goodwill and other Intangible Assets In July 2001, the Financial Accounting Standards Board issued FASB Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and other Intangible Assets. Statement No. 141 requires that the purchase method be used for all business combinations initiated after June 30, 2001. Statement No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment in an annual basis. The Company is required to adopt Statement No. 142 effective January 1, 2002 and the Company anticipates that the adoption of this pronouncement will have no impact on the Company's financial position or results of operations. Accounting for the Impairment or Disposal of Long-Lived Assets In August 2001, the Financial Accounting Standards Board issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets which supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Statement No. 144 retains the fundamental provisions in Statement No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving certain implementation issues associated with Statement No. 121. The Company is required to adopt Statement No. 144 no later than the year beginning after December 15, 2001. Management does not expect the adoption of Statement No. 144 for long-lived assets held for use to have a material impact on the Company's financial statements. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, management cannot determine the potential effects that adoption of Statement No. 144 will have on the Company's financial statements with respect to assets held for sale or disposals. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Derivative Instruments. The Company does not invest, and during the year ended December 31, 2001 did not invest, in market risk sensitive instruments. Market Risk. The Company's market risk exposure with respect to financial instruments is to changes in the "30 day dealer commercial paper rate" in the United States. The Company had borrowings of $4.9 million at December 31, 2001 under a term loan (discussed above) and may borrow up to $6.0 million under a revolving loan. Amounts outstanding under the term loan and revolving credit facility bear interest at the 30-day dealer commercial paper rate plus 2.20% to 2.65%. If, under the existing credit facility, the "30-day dealer commercial paper" rate were to change by 1%, the amortized interest expense would change by approximately $45,000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements for the Company and independent auditors' report therein are set forth on pages 15 through 35 incorporated herein. See Page 14 for an index to all the consolidated financial statements and supplementary financial information which are attached hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Index to Consolidated Financial Statements and Financial Statement Schedule

All other schedules are omitted because they are not applicable or the required information is shown in the Company's consolidated financial statements or the related notes thereto. INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Laser-Pacific Media Corporation: We have audited the accompanying consolidated financial statements of Laser-Pacific Media Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Laser-Pacific Media Corporation and subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/KPMG LLP Los Angeles, California March 1, 2002 LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2001 and 2000

See accompanying notes to consolidated financial statements. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2001 and 2000 (Continued)

See accompanying notes to consolidated financial statements. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 2001, 2000 and 1999

See accompanying notes to consolidated financial statements. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 2001, 2000 and 1999

See accompanying notes to consolidated financial statements. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2001, 2000 and 1999

LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2001, 2000 and 1999 (Continued)

Supplemental disclosure of noncash investing and financing activities: The Company purchased property and equipment, financed through capital lease obligations, of $3,429,440, $2,060,079 and $8,059,667 during 2001, 2000 and 1999, respectively. During 1999 the Company received cancellation of rental payments under a capital lease obligation, equipment upgrades and equipment in the amount of $2,187,000 related to a technology development agreement (note 10). See accompanying notes to consolidated financial statements. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (1) Nature of Business and Basis of Presentation Laser-Pacific Media Corporation provides a broad range of post-production services to the motion picture film and television industry. (2) Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of Laser-Pacific Media Corporation and its subsidiaries (the "Company"). Accordingly, all significant intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents The Company considers all highly liquid investments, primarily money market funds, purchased with original maturities of three months or less to be cash equivalents. Depreciation and Amortization Depreciation and amortization of property and equipment is computed by use of the straight-line method over the estimated useful lives of the related assets as follows: Buildings 30 years Building improvements 10 years Technical equipment 7 years Furniture and fixtures 5 years Automobiles 4 years Leasehold improvements Remaining life of the lease plus options to renew or 10 years, whichever is shorter. Replacements of equipment components are amortized over 18 months. Inventory Inventory consists primarily of tape stock and is valued at the lower of cost (determined on the first-in, first-out basis) or market (net realizable value). Other Assets Other assets at December 31, 2001 consist primarily of security and utility deposits. Other assets at December 31, 2000 consist primarily of security and utility deposits and the Company's investment in Composite Image Systems, LLC. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (continued) Revenue Recognition and Credit Risk Revenue is recognized as services are performed. The Company sells services to customers in the entertainment industry, principally located in Southern California. Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based upon these evaluations. The Company's primary customers are the major motion picture and television studios and production companies. The Company's ten largest customers accounted for approximately 70%, 66% and 72% of total revenue in 2001, 2000 and 1999, respectively. During 2001 three customers each accounted for more than 10% of the Company's total revenue. One customer accounted for 10%, another customer for 11%, and another customer was responsible for 12% of the Company's total revenue for the year ended December 31, 2001. During 2000 three customers each accounted for more than 10% of the Company's total revenue for the year. Two customers accounted for 10% each and another customer was responsible for 12% of the Company's total revenue for the year ended December 31, 2000. During 1999 two customers each accounted for 13% of the Company's total revenue for the year ended December 31, 1999. Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by comparing the carrying amount of the assets to their fair value. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock-Based Compensation The Company accounts for stock based compensation in accordance with SFAS No. 123, "Accounting for Stock Based Compensation." Under the provisions of SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for stock options issued to employees and directors of the Company and provide the pro forma disclosure provision of SFAS No. 123. As such, compensation expense would be recorded on the date of grant only if the current market price of underlying stock exceeded the exercise price. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (continued) Comprehensive Income Comprehensive income is the total of net income and all other non-owner changes in equity. The Company does not have any transactions or other economic events that qualify as comprehensive income. As such, net income represented comprehensive income for each of the years in the three year period ended December 31, 2001. Disclosures about Segments of an Enterprise Under the management approach of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" the Company operates in one business segment - post-production services. Earnings per Common Share The Company presents basic and diluted earnings per share ("EPS"). Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company. The reconciliation of basic and diluted weighted average shares is as follows:

Options and warrants to purchase shares of common stock at prices ranging from $3.26 to $9.94 were outstanding at December 31, 2001, 2000, and 1999, in the amounts of 212,000, 0 and 325,000 respectively, but were not included in the computation of diluted earnings per share because the options exercise price was greater that the average market price of a common share. Reclassifications The Company has reclassified amounts from 2000 and 1999 to conform to current year presentation. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (continued) (3) Property and Equipment Property and equipment is comprised of the following:

The Company leases technical equipment under capital leases expiring through 2005. Equipment under capital leases aggregated $13,603,399 and $14,768,007 and related accumulated depreciation aggregated $5,453,449 and $4,025,341 at December 31, 2001 and 2000, respectively. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (continued) (4) Notes Payable to Bank and Long-Term Debt Notes payable to bank and long-term debt are summarized as follows:

The Company's term note credit agreements contain covenants, including financial covenants related to leverage and fixed charge ratios. The Company was in compliance with these covenants at December 31, 2001. The aggregate future maturities of notes payable to bank and long-term debt exclusive of capital lease obligations are summarized as follows: December 31: 2002 $ 1,000,000 2003 1,000,000 2004 1,000,000 2005 1,000,000 2006 883,333 ----------------- $ 4,883,333 ================= LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (continued) (5) Income Taxes A summary of income tax expense (benefit) is as follows:

The provision for income taxes at the Company's effective tax rate differed from the U.S. Federal tax rate as follows:

LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (continued) (5) Income Taxes (continued) The tax effect of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 2001 and 2000 is presented below:

At December 31, 2001, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $6,144,000 that expire principally from 2004 through 2012. The Company also has approximately $268,000 of tax credits carryforwards, expiring through 2004. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income (losses) and projections for future taxable income over the periods in which the deferred tax assets are deductible, management currently believes it is more likely than not the Company will realize all of the benefits of these deductible differences, accordingly, as of December 31, 2001, no valuation allowance has been recorded for net deferred tax assets. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (continued) (6) Stockholders' Equity Warrants In July 2001, 35 Lake Avenue, a California limited partnership in which James R. Parks, the Company's Chief Executive Officer is a partner, exercised warrants to purchase 250,000 shares of the Company's common stock at an exercise price of $1.00. The warrants originally were issued during 1997 in connection with a short-term debt financing arrangement. During 1999, the Company issued 137,584 shares of common stock to its principal lender through the exercise of warrants previously granted. The related warrants were issued in connection with the initiation and renewal of a loan. The warrants were valued and recorded as debt issuance costs at the time of issuance. Preferred Stock Purchase Rights On January 9, 2001, the Board of Directors of the Company authorized and declared a dividend of one preferred stock purchase right for each share of common stock, par value $.0001 per share, of the Company (the "Common Shares"). The dividend was payable on January 24, 2001 the "Record Date" to the holders of record of Common Shares as of the close of business on such date. These Rights only become exercisable on the Distribution Date. The Distribution Date would follow the announcement that any person or entity (with certain exceptions) had acquired 20% or more of the voting shares of the Company. Any outstanding Rights shall expire on January 9, 2011, unless earlier redeemed or exchanged. The Rights may be exercised through the purchase of Preferred Shares, purchase of Common Shares or the right to purchase common stock of a successor Company, all as defined in the underlying agreement. Treasury Stock In June 2001, the Company purchased 825,200 shares of its common stock in a private transaction for $2,063,000. Stock Repurchase Plan In November 2001, the Company announced that it would commence a stock repurchase program. The Board of Directors authorized the Company to allocate up to $2,000,000 to purchase its common stock at suitable market prices through November 1, 2002. Under the stock repurchase program, the Company may purchase outstanding shares in such amounts and at such times and prices determined at the sole discretion of management. The funds for the stock repurchases were provided by cash balances. There is no assurance that the Company will repurchase the entire $2,000,000 of common stock. In November 2001, the Company purchased 75,000 shares of its common stock on the open market for $204,140. (7) Stock-based Compensation and Other Option Grants The Company's 1997 incentive stock option plan, as amended, provides for grants of 1,000,000 of incentive or nonqualified stock options to officers, directors and key employees at exercise prices equal to or greater than the fair value of the Company's common stock at the date of grant. Options currently expire no later than 10 years from the grant date and are generally vested at date of grant. 296,050 options outstanding under the plan are vested and 60,000 options outstanding under the plan are not vested at December 31, 2001. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (continued) (7) Stock-based Compensation and Other Option Grants (continued) Activity under the plan for the years ended December 31, 2001, 2000 and 1999 follows:

The following table summarizes information about options outstanding under the plan at December 31, 2001:

LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (continued) Pro Forma Information The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, for the stock options granted to employees no compensation cost has been recognized in the accompanying consolidated statements of income because the exercise price equaled or exceeded the fair value of the underlying common stock at the date of grant. Had compensation cost for the Company's stock options granted to employees been determined based upon the fair value at the grant date for awards consistent with SFAS No. 123, the Company's recorded and pro forma net income and earnings per share for the years ended December 31, 2001, 2000 and 1999 would have been as follows:

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:

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its options. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (continued) (8) Commitments and Contingencies Leases The Company leases certain technical equipment under capital leases that expire through 2005. The Company also leases corporate offices, certain operating facilities and equipment under non-cancelable operating leases that expire through 2006. The present value of future minimum capital lease payments and future minimum lease payments under non-cancelable operating leases, principally facility leases, are as follows:

Rent expense amounted to $954,686, $834,759 and $884,209 for the years ended December 31, 2001, 2000 and 1999, respectively. Legal Matters The Company may have certain contingent liabilities resulting from litigation and claims incident to the ordinary course of business. Management believes that the probable resolution of such contingencies will not materially affect the Company's financial statements taken as a whole. Employment Agreements The Company has employment agreements with certain officers that require written notices of termination ranging from one to five years. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (continued) (8) Commitments and Contingencies (continued) Contingencies On July 9, 2001, the Company entered into an agreement with its joint venture partner in Composite Image Systems, LLC ("CIS"), to sell its interest in CIS to its joint venture partner. Under the terms of the agreement, the Company transferred to its joint venture partner the Company's 50% interest in CIS and certain equipment previously leased to CIS in exchange for a cash payment of $575,000. The Company has given corporate guarantees regarding a lease obligation of the joint venture, CIS and the joint venture partner have agreed to indemnify the Company for up to the amount of the principal obligation for any claims that might arise under the guarantee should CIS default on the lease obligation. The lease obligation is also secured by the equipment purchased under the lease. (9) Benefit Plan The Company has a defined contribution Profit Sharing 401(k) Savings Plan that covers substantially all of its employees. Under the terms of the plan, employees can elect to defer up to 15% of their wages, subject to certain Internal Revenue Service (IRS) limitations, by making voluntary contributions to the plan. Additionally, the Company, at the discretion of management, can elect to match up to 100% of the voluntary contributions made by its employees, but may not exceed 4% of an employee's compensation. For the years ended December 31, 2001, 2000 and 1999 the Company did not contribute to the plan on behalf of its employees. (10) Other Income Other income in 2001 consists of income recognized in connection with a research and development collaboration agreement of $193,000, income from a gain on the sale of the Company's interest in CIS of $83,000 discussed above, and interest income earned from cash balances. Other income in 2000 consists primarily of interest earned from cash balances. During 1999, the Company entered into a collaboration agreement (the Agreement) with a major equipment manufacturer and supplier. Under the agreement, the Company provided research, development and engineering services related to the development of technical equipment used in connection with high definition post-production. In consideration for services provided, the Company received replacement equipment, discounts on the purchase of equipment and the cancellation of rental payments under a capital lease obligation due to the supplier. The Company recorded other income of $2,187,000 pursuant to this agreement. (11) Related Party Transactions James R. Parks, Chairman of the Board and Chief Executive Officer of the Company, is an executive director of CBIZ Southern California Inc, (CBIZ) formerly known as Parks, Palmer Business Services, Inc. CBIZ provides tax accounting and management consulting services to the Company. CBIZ charges were approximately $83,000, $77,000, and $55,000 for the years ended December 31, 2001, 2000 and 1999 respectively. The Company performed services on a movie produced by Local Boys, LLC from September 2001 through February 2002. James R. Parks, Chairman of the Board and Chief Executive Officer of the Company, is a member of Local Boys, LLC and an executive producer for the movie. Fees for services were billed at the Company's standard rates and the total amount billed for services during that period was $189,000. As of March 20, 2002, $145,000 of the total amount billed was outstanding. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (continued) (11) Related Party Transactions (continued) In July 2001, 35 Lake Avenue, a California limited partnership in which James R. Parks, the Company's Chief Executive Officer is a partner, exercised warrants to purchase 250,000 shares of the Company's common stock at an exercise price of $1.00. The warrants originally were issued during 1997 in connection with a short-term debt financing arrangement. In April 2001, the Company engaged Gerard Klauer Mattison & Co., Inc., as it's financial advisor. David Merritt, a director of the Company is a member of that firm. Fees of $75,000 were paid to Gerard Klauer Mattison & Co., Inc for services during the year-ended December 31, 2001. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Schedule II Valuation and Qualifying Accounts Years ended December 31, 2001, 2000 and 1999

PART III All references in this Part III to the registrant's definitive proxy statement for its 2002 Annual Meeting of Stockholders are exclusive of the information set forth under the captions "Report of the Board of Directors on Executive Compensation," "Audit Committee Report" and "Stock Performance Graph and Table" therein. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The response to this Item is incorporated by reference to the registrant's definitive proxy statement for its 2002 Annual Meeting of Stockholders, to be filed on or before April 30, 2002, for the limited purpose of providing the information necessary to comply with this item. ITEM 11. EXECUTIVE COMPENSATION The response to this Item is incorporated by reference to the registrant's definitive proxy statement for its 2002 Annual Meeting of Stockholders, to be filed on or before April 30, 2002, for the limited purpose of providing the information necessary to comply with this item. Item 12. Security Ownership of Certain Beneficial Owners AND MANAGEMENT The response to this Item is incorporated by reference to the registrant's definitive proxy statement for its 2002 Annual Meeting of Stockholders, to be filed on or before April 30, 2002, for the limited purpose of providing the information necessary to comply with this item. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The response to this Item is incorporated by reference to the registrant's definitive proxy statement for its 2002 Annual Meeting of Stockholders, to be filed on or before April 30, 2002, for the limited purpose of providing the information necessary to comply with this item. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1 and 2. Financial Statements and Financial Statement Schedule: The financial statements and financial statement schedule are listed in the accompanying index to the Consolidated Financial Statements on page 14 of the Form 10-K. The financial statements indicated on the index appearing on page 14 hereof are incorporated herein by reference. 3. Exhibits: The exhibits are listed on the accompanying index to exhibits and are incorporated herein by referenc or are filed as part of this Form 10-K. 3.1 Certificate of Incorporation of the Company. (1) 3.2 Certificate of Amendment to Certificate of Incorporation of the Company, filed August 29, 1990. (2) 3.3 Certificate of Amendment to Certificate of Incorporation of the Company, filed August 14, 1991. (3) 3.4 Amended and Restated By-Laws of the Company. (13) 4.1 Form of Common Stock Certificate. (2) 4.2 Rights Agreement, dated as of January 12, 2001, between the Company and U.S. Stock Transfer Corporation, as Rights Agent. (12) 4.3 Certificate of Designations of Series B Junior Participating Cumulative Preferred Stock. (12) 10.1 1990 Stock Option Plan. (1) 10.2 1997 Stock Option Plan. (7) 10.3 Amended 1997 Stock Option Plan. (10) 10.5 Employment Agreement, dated as of May 15, 1990, between the Company and Emory Cohen. (1) 10.8 CIT Credit Agreement signed on August 3, 1992. (4) 10.8A Amended Loan Agreement, between CIT and the Company, dated as of April 12, 1995. (5) 10.8B Amended Loan Agreement, between CIT and the Company, dated as of April 10, 1997. (6) 10.8C Amended Loan Agreement, between CIT and the Company, dated as of June 15, 1998. (9) 10.8D Amended Loan Agreement, between CIT and the Company, dated as of June 7, 1999. (11) 10.14 Bank of America Amended Loan Agreement, dated as of February 29, 1996. (5) 10.14A Bank of America Settlement Agreement, dated as of December 2, 1998. (9) 10.15 Employment Agreement, dated as of July 24, 1995, between the Company and Randolph Blim. (5) 10.18 Sale of Subsidiary (PVC). (8) 10.19 Employment Agreement, dated as of August 1, 1999, between the Company and Robert McClain. (11) 10.20 Lease Agreement, dated as of February 7, 2001, by and between the Company and Morton La Kretz, Trustee of the Crossroads Trust, UTD April 28, 1982. (13) 10.21 Lease Agreement, dated as of March 1, 2001, by and between the Company and NTA Partners. (13) 10.22 Term Loan and Security Agreement (including all other related loan documents), as amended, dated as of June 5, 2001, between the Company and Merrill Lynch Business Financial Services, Inc. (14) 10.23 Lease Agreement, dated April 1, 2001 by and between the Company and Melba Investments, LLC. (15) 21.1 List of Subsidiaries. (3) 23.1 Consent of KPMG LLP, Independent Public Accountants. (15) (1) Previously filed on June 7, 1991, with the Company's Registration Statement on Form S-1 and incorporated by reference hereto (File No. 33-41085). (2) Previously filed on July 23, 1991, with the Company's Registration Statement on Form S-1 and incorporated by reference hereto (File No. 33-41085). (3) Previously filed on April 10, 1992 with the Company's Form 10-K and incorporated by reference hereto. (4) Previously filed on August 12, 1992 with the Company's Form 10-Q and incorporated by reference hereto. (5) Previously filed on April 14, 1996 with the Company's Form 10-K and incorporated by reference hereto. (6) Previously filed on April 14, 1997 with the Company's Form 10-K and incorporated by reference hereto. (7) Previously filed on December 16, 1997 with the Company's Form S-8 and incorporated by reference hereto. (8) Previously filed on June 2, 1998 with the Company's Form 8-K and incorporated by reference hereto. (9) Previously filed on March 29, 1999 with the Company's Form 10-K and incorporated by reference hereto. (10) Previously filed on October 15, 1999 with the Company's Form S-8 and incorporated by reference hereto. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (Continued) (11) Previously filed on March 30, 2000 with the Company's Form 10-K and incorporated by reference hereto. (12) Previously filed on January 19, 2001 with the Company's Form 8-K and incorporated by reference hereto. (13) Previously filed on March 29, 2001 with the Company's Form 10-K and incorporated by reference hereto. (14) Previously filed on August 8, 2001 with the Company's Form 10-Q and incorporated by reference hereto. (15) Filed herewith. (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on March 26, 2002. LASER-PACIFIC MEDIA CORPORATION By: /s/ James R. Parks James R. Parks Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date /s/ James R. Parks James R. Parks Chairman of the Board and March 21, 2002 Chief Executive Officer (Principal Executive Officer) /s/ Emory M. Cohen Emory M. Cohen President, Chief Operating Officer and Director March 21, 2002 /s/ Robert McClain Robert McClain Vice President, Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer) March 21, 2002 /s/ Thomas D. Gordon Thomas D. Gordon Director March 21, 2002 /s/ Craig A. Jacobson Craig A. Jacobson Director March 21, 2002 /s/ David C. Merritt David C. Merritt Director March 21, 2002

LASER PACIFIC MEDIA CORP 10-K