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Laser Pacific Media Corp – ‘10-K’ for 12/31/96

As of:  Monday, 4/14/97   ·   For:  12/31/96   ·   Accession #:  875738-97-4   ·   File #:  0-19407

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  As Of                Filer                Filing    For·On·As Docs:Size

 4/14/97  Laser Pacific Media Corp          10-K       12/31/96    4:127K

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 2: 10-K        Annual Report for Period Ended 12/31/96               48±   207K 
 4: EX-10       Exhibit 10.17                                          3±    14K 
 3: EX-10       Exhibit 10.7E                                          3±    12K 
 1: EX-27     ƒ Financial Data Schedule                                1      7K 


10-K   —   Annual Report for Period Ended 12/31/96
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Item 1. Business
"Item 2. Properties
"Item 3. Legal Proceedings
"Item 4. Submission of Matters to A Vote of Security Holders
"Item 5. Market for Registrant's Common Stock and Related Security Holder Matters
"Item 6. Selected Financial Data
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
"Item 8. Financial Statements and Supplementary Data
"Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
"Item 10. Directors and Executive Officers of the Registrant
"Item 11. Executive Compensation
"Item 12. Security Ownership of Certain Beneficial Owners
"Item 13. Certain Transactions
"Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K


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 [FEE REQUIRED] For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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: (213) 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant on March 31, 1997,(based upon the closing price on the NASDQ Small- Cap Market System on that date was $4,455,108). Number of shares of Common Stock, $.0001 par value, outstanding as of March 31, 1997: 7,128,172. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Table of Contents Page Item 1 Business 1 Item 2 Properties 4 Item 3 Legal Proceedings 4 Item 4 Submission of Matters to a Vote of Security Holders 4 Item 5 Market for Registrant's Common Stock and Related Security Holder Matters 5 Item 6 Selected Financial Data 6 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 8 Financial Statements and Supplementary Data 10 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 10 Item 10 Directors and Executive Officers of the Registrant 32 Item 11 Executive Compensation 36 Item 12 Security Ownership of Certain Beneficial Owner and Management 41 Item 13 Certain Transactions 43 Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 44 PART I ITEM 1. BUSINESS A. General Laser-Pacific Media Corporation (LASER-PACIFIC or the COMPANY) primarily provides post-production services to producers of prime-time network television series and television movies made in North America. The Company believes it is a leading provider of these services. Through its Electronic LaboratoryTM , and other related operations the Company provides all technical aspects of processing picture and sound after principal photography has been completed, known as post-production. The Electronic LaboratoryTM , for which the Company received an Emmy award in 1989 for Outstanding Achievement in Engineering Development was the first facility specifically designed to apply electronic post-production technology to filmed television programs and its use has led to significant savings of time and money for producers. The Company believes that the Electronic LaboratoryTM , and the systems approach utilized in its development, differentiates the Company from other film and videotape post-production companies and has resulted in an industry model for merging video and film technologies. The Company offers a full range of post-production services to television producers at its facilities in Hollywood and Burbank, California and Vancouver, Canada. 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 Company also developed and leases a transportable computerized editing systems called Spectra System, which uses proprietary laser disc technology for editing filmed or videotaped programs. In 1988, the Company received an Emmy Award for Outstanding Achievement in Engineering Development for the D220 dual-headed laser disc player, which is part of the Spectra System. In addition to its primary business activities, the Company (i) provides traditional post-production services to producers of videotaped shows, (ii) leases mobile studio units for videotaped productions, (iii) offers film processing and sound editing, mixing services to the producers of theatrical motion pictures, and provides digital video compression. Both Laser-Pacific Media Corporation (formerly Spectra Image) and Pacific Video (which merged with the Company in September 1990) were organized in 1983. Spectra Image began by building its post-production service capability and facilities primarily focused on the post-production of filmed situation comedies (sitcoms) produced for prime-time network television. In addition, it began developing the Spectra System electronic editing system in 1985 and introduced it in late 1986. Pacific Video, targeting the post-production market for filmed dramatic television series, introduced the Electronic LaboratoryTM in 1985. Both Pacific Video and Spectra Image focused on the post-production of filmed television programs, as approximately 80% of prime-time network television series are shot on film as opposed to videotape. In addition, it was believed, and management still believes, that film will remain the medium of choice for these television programs because of viewer preference for the look of television programming shot on film and numerous other film advantages such as lower equipment cost, greater availability of skilled camera operators working on film and greater portability of film cameras. Beginning in the mid-1980s, management recognized that the Company could obtain a significant customer base and become the leader in the post-production of filmed prime-time network television programs by offering producers the speed and cost advantages of electronic post-production at a fully-integrated facility. 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. Pacific Video sought a presence in the Vancouver market because an increasing number of television producers shooting programs in Canada intended for United States network television were having their post-production work performed in Canada. The Company's Vancouver presence has generated additional business for its Hollywood facilities. At the present time, the Company owns approximately 72% of the outstanding capital stock of PVC. It is anticipated the future growth of the Company's business will be the result of the expansion of its services offered to theatrical motion picture producers, digital compression and digital video services, electronic graphics and effects, and the continued development and enhancement of proprietary post-production systems by its engineering staff. B. Post-Production Services Industry Background. Post-production services comprise all of the technical functions and operations necessary to complete a television program or commercial advertisement after the principal photography has been completed. The photography is completed on film or videotape depending upon the desired characteristics of the visual images needed for the program or commercial. In general, movies, mini-series and dramatic shows produced for television are shot on film. During the last 20 years, many producers of television programming have chosen to contract for many post-production services rather than doing the work themselves because of the high fixed overhead cost, high level of capital investment and the expertise required to provide quality post-production services. Post-production services include film processing, film-to-videotape transfer, film or videotape editing, addition of special effects, titles and credits, addition of music and sound effects, sound mixing, color correction and duplication of completed master videotapes. The Company provides a full range of these post-production services to its clients. Videotape Editing. The editing process at the Company begins with the developed negative with respect to filmed programs and with the delivered videotape as to shows shot on videotape, since videotape can be played back and viewed immediately after recording without any processing. Post production services with respect to filmed programming continue in the Company's Electronic LaboratoryTM where the Company performs all of the post-production services required after negative development of the film up to the delivery of high-quality duplicates of the final color-corrected videotape master for television broadcasting. The first step in the Electronic LaboratoryTM process is to transfer the developed negative images to videotape, a process called telecine, for subsequent electronic editing and processing. In addition, the magnetic tape containing the sound, which is recorded as the camera is capturing the images, is converted to digital information and transferred to digital audio cassette for synchronization to the negative. The digital audio tape is subsequently transferred onto a computer for sound editing and mixing. See 'SOUND EDITING AND MIXING' below. After completion of the film-to-tape transfer, the initial editing of the videotape is usually performed at the customers premises by their employees on electronic editing machines rented from the Company or another manufacturer. This editing is typically called OFFLINE EDITING and the process is performed on lower-cost recordings which are made from the high-quality videotapes created in the film-to-tape transfer. The offline editing uses a time-code based computer control system to record all of the basic editing decisions. The Spectra Systems competes with other electronic editing systems such as Avid, Montage and Lightworks, which are in extensive use and which are also leased by the Company's customers. The Company was awarded an Emmy by the Academy of Television Arts and Sciences in 1987 for Outstanding Achievement in Engineering Development for The D220 dual-headed laser disc player, which is part of the Spectra System. This proprietary system incorporates an edit controller, a video switcher, single and dual-headed laser disc players, video monitors, videotape recorders, terminal equipment and associated software. After the completion of the offline editing process, the resultant edit decision list is returned to the Company's facilities where the final ONLINE EDITING is completed. The goal of online editing is to produce a finished broadcast-quality videotape master, including all special optical effects, titles and credits. The online editing rooms are equipped with all of the broadcast-quality equipment needed to complete the visual elements of a television program, and as such these rooms are expensive to build and equip and result in a high hourly rental rate. The Company has four online editing rooms at its Hollywood facility, four in Burbank, and two in Canada. In November of 1993 the Company introduced its SuperComputer Assembly system. Installed in its Hollywood facility, the SuperComputer Assembly system enables the Company to online assemble television programs three to four times faster than conventional techniques. The proprietary system has been used on dozens of series and movies for television, reducing the Company's labor costs and providing its clients with faster service at highest quality. Digital Graphics and Effects. Utilizing digital workstation technology, the Company creates and designs graphical elements, special effects, titles and other specialized work on television and motion pictures. The tools used have the capability of very high quality film resolution for combining and manipulation of images digitally. Digital Compression Services. Using SuperComputer and other digital media technology, the Company provides digital compression and other services which results in the creation of recordings that can be used in CD-ROM, digital file servers and Video-on Demand applications. Color Timing. Color timing is a post-production step which is generally required on dramatic programs whether the program editing is done on film or videotape. The Company has designed and assembled a customized color timing system for final balance of color contrast and brightness which produces cost-effective color corrections on a basis significantly faster than the traditional film laboratory equivalent. At the present time, the Company has three rooms equipped with electronic color correction capabilities. Sound Editing and Mixing. Sound editing and mixing is one of the last steps in the post-production process. To be in a position to offer complete post-production services and facilities to its customers, the Company established Pacific Sound Services in September, 1989, which provides sound editing and mixing services for both television and theatrical motion picture producers. This is a unique all-digital, tapeless sound editing and mixing facility includes sound studios for the original recording of sound effects and dialogue and, for the final mixing of complex programs shot on film and for mixing videotaped programs, plus digital sound editing systems Release Services. After the videotape master is in its final form for delivery, including color correction, finished soundtrack and title and credits, videotape copies are made in any format required for broadcast or archival storage in limited quantities by the Company. C. Film Production Services Film Processing. After film photography is completed, the film negative must be developed in a processing laboratory before it can be exposed to light. Then, either the negative is electronically transferred to videotape or positive film prints are struck from the developed negative for subsequent viewing daily. Dailies are processed for delivery by early the following day for viewing by the production staff. The acquisition of certain assets of United Color Laboratories in 1988 enabled the Company to expand its services and increase its operating hours and efficiency. Pacific Film Laboratories has four negative film developing machines with a capacity of approximately 210,000 feet of film per day. The filming of an average one hour dramatic television show results in the exposure of approximately 5,000 to 6,000 feet of film daily. In addition, the facility has two positive developing machines, several negative-to-positive printers, preparation and color value machines and other support equipment necessary to perform the tasks required for high-quality film processing. Alpha Cine Service, PVC's processing laboratory division, has two negative film developing machines with a capacity of approximately 100,000 feet of film per day, In addition, the facility has one positive developing machine, several negative-to-positive printers, preparation and color value machines and other support equipment. D. Production Services A subsidiary of the Company, PDS Video Productions, Inc., leases complete videotape production equipment to producers of television shows. The Company's three mobile studios are typically used to record multiple-camera sitcom shows and can be used in a studio or on location. The Company currently provides production service to shows such as LIVING SINGLE and HANGING WITH MR. COOPER. E. Employees At December 31, 1996, the Company had approximately 231 employees (including employees of PVC). Many of the Company's employees are skilled technicians and the Company's future success will depend, in large part, on its ability to continue to attract, retain and motivate highly qualified persons. Approximately 34 employees are represented by the International Alliance of Theatrical and Stage Employees pursuant to a collective bargaining agreement which expires in the year 2000 (which includes a supplemental memorandum expiring in December 1997). The Company has never experienced a work stoppage, and considers its relations with its employees to be excellent. F. Competition The Company experiences competition in all phases of its business. Some of the Company's competitors have been in one or more of the same lines of business for a longer period of time, have established reputations and offer have greater financial resources than the Company. Moreover, the Company does have a few competitors which are also fully integrated and offer a complete range of post-production services. The Company believes it is distinguished from its competition through the Electronic Laboratory, which combines proprietary technology and software with the Company's marketing and organizational approach to post-production. There can be no assurance that the Company will be able to maintain its competitive advantage as rapid technological change takes place. 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 24,700 square feet in six buildings in Hollywood, California, which contains its executive offices and the balance of its Hollywood post-production facilities. Lease terms expire from 1996 through 1999, with renewal options in most instances. 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 and for the foreseeable future. Pacific Video Canada owns an 11,000 square foot building in Vancouver where its processing services are located. In addition, PVC leases approximately 12,000 square feet which contains its post-production facilities. 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 is involved in legal matters which arise out of the ordinary course of the Business: The Company is not involved in any legal proceedings of a material nature. 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 1996. 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 Marketsm tier of the Nasdaq Stock Marketsm under the symbol LPAC. High Low 1995 First Quarter $1.5625 $0.375 Second Quarter $1.875 $1.00 Third Quarter $1.5625 $1.0625 Fourth Quarter $1.25 $0.75 1996 First Quarter $1.125 $0.625 Second Quarter $2.50 $0.6875 Third Quarter $1.625 $0.5625 Fourth Quarter $1.4375 $0.625 1997 January 1 - February 28 $0.90265 $0.53125 The Company had 262 stockholders of record on April 1, 1997. This number does not include the several hundred stockholders holding their stock in street name, on April 1, 1997, 3,401,000 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 prohibit 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. 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.) 1992 1993(1) 1994(1) 1995 1996 Statement of Operations Data: Revenues $37,034 $30,064 $30,244 $28,693 $28,878 Operating expenses: Direct 24,093 20,862 17,545 18,022 18,847 Depreciation and amortization 6,842 6,464 5,295 4,983 5,318 Loss on restructuring charge --- 2,550 --- --- --- ------ ------ ------ ------ ------ 30,935 29,876 22,840 23,005 24,165 ------ ------ ------ ------ ------ Gross profit 6,099 188 7,404 5,688 4,713 Selling, general and administrative expense 6,549 6,210 4,874 4,978 4,678 Severance costs --- 1,770 --- --- --- Write off property and equipment --- 2,168 --- --- 148 ------ ------ ------- ------- ------ Income (loss) from operations (450) (9,960) 2,530 710 (113) Interest expense (1,702) (1,949) (1,891) (1,813) (1,563) Other income --- 105 103 404 42 Minority interest income (loss) 92 51 (119) (59) (53) Income tax expense --- 55 142 291 165 ------ ------ ------ ------ ------ Net income (loss) before litigation settlement (2,060) (11,808) 481 (1,049) (1,852) Litigation settlement --- --- --- 3,209 --- ====== ====== ====== ====== ====== Net income (loss) (2,060) (11,808) 481 2,160 (1,852) ====== ====== ====== ====== ====== Net income (loss) before litigation settlement per common and common equivalent share ($0.32) ($1.84) $0.07 ($0.16) ($0.26) Net income (loss) per common and common equivalent share ($0.32) ($1.84) $0.07 $0.33 ($0.26) Weighted average common and common equivalent shares outstanding 6,418 6,418 6,493 6,568 7,061 Balance Sheet Data: Working capital (deficiency) ($909) ($13,951) ($6,720) ($2,099) (2,498) Total assets 36,972 28,776 26,009 28,172 23,162 Current installments of notes payable and long-term debt 5,258 13,235 7,746 6,521 5,278 Convertible notes payable 600 --- --- --- --- Long-term debt, excluding current installments 10,577 2,284 5,794 7,893 7,959 Net stockholders equity 16,597 4,789 5,298 7,458 6,101 (1) Certain prior year balances have been reclassified to conform with the current year's presentation. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations 1996 Compared to 1995 Company revenues during 1996 were $28.9 million compared with $28.7 million in 1995, an increase of $185,000 or 0.6%. The increase in revenue is comprised of an increase in Film Production Services of $355,000 an increase of $42,000 in Post Production Service, and a decrease of $212,000 in Production Services. The increase in revenues is a consequence of higher levels of activity at our United States facilities where revenues were up $420,000, an increase of 1.8%. The revenues from International operations decreased $235,000 or 4.8%. The continued decline in Spectra Edit System rentals was offset by increases in Film Productions Services, Sound Services and revenues from Special Effects and Graphics. Direct operating expenses excluding depreciation and amortization were $18.8 million in 1996 as compared with $18.0 million in 1995, an increase of $825,000 or 4.6%. The Company's direct operating expenses for U.S. operations increased by $533,000 while the direct operating expenses increased $292,000 in our international operations. The increase for both U.S. and International operations is the result of increased labor costs. In the U.S. the increase in labor costs was partially offset by a reduction in health insurance costs. Depreciation and amortization expense was $5.3 million for the year ended December 31, 1996, compared to $5.0 million for 1995. The increase is primarily the consequence of accelerated depreciation due to the obsolescence of the Spectra Systems. Consolidated gross profit was $4.7 million in 1996 as compared with $5.7 million in 1995, a $1.0 million decrease. The Company's consolidated total operating expenses for 1996 were $24.2 million, as compared with $23.0 million in 1995, an increase of $1.2 million or 5.2%. As a percentage of total revenues, total operating expenses were 83.7% in 1996 versus 80.2% in 1995. The increase is due to the combined effects of increased labor costs and accelerated depreciation explained above. The Company's selling, general and administrative (S,G &A) expenses were $4.7 million during 1996 as compared to $5.0 million in 1995, a decrease of $300,000 or 6.0%. Other income was $42,000 in 1996 versus $404,000 in 1995. The decrease is the result of the settlement of obligations with an equipment supplier during 1995 where the supplier provided the Company with equipment valued at $300,0000. There was income resulting from a litigation settlement in 1995 of approximately $3.2. There was no revenue from litigation settlement in 1996. In 1996, there was no provision for U.S. Federal Income Tax as a result of the net operating loss incurred. The Income Tax expense of $165,000 in 1996 was comprised of foreign income tax expense in the amount of $160,000 relating to Canadian income tax imposed on the pre-tax income of the Canadian subsidiary in the amount of $369,000 and State income tax expense in the amount of $5,000 entirely composed of the minimum Franchise tax. The Company's interest expense in 1996 was $1.6 million versus $1.8 million in 1995. As a consequence of the above factors, the Company reported a net loss of $1,852,550 or a loss of $0.26 per share in 1996 versus a net loss before litigation settlement of $1,049,000 or a loss of $0.16 per share in 1995. The net profit for 1995 after taking into consideration income resulting from litigation settlements was $2.16 million or $.33 per share in 1995. As of December 31, 1996, the Company has recorded net deferred tax assets of $5.6 million and a related valuation allowance of $5.6 million (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. 1995 Compared to 1994 Company revenues during 1995 were $28.7 million compared with $30.2 million in 1994, a decrease of $1.5 million or 5.0%. The decrease in revenue was comprised of an increase of $235,000 in Production Services, an increase in Film Production Services of $434,000 and a decrease of $2,311,000 in Post Production Service. The decline in revenues was a consequence of lower levels of activity at our United States facilities where revenues went down $2.7 million a drop of 10.8% . This lower level of U.S. revenue was primarily caused by increased competition. The revenues from International operations increased $1.2 million or 27.5%. This increase in International Sales was the result of a combination of increased motion picture and television activity in Western Canada, partially due to the strong U.S. dollar, Pacific Video Canada's diversification into commercial work and improvement in Pacific Video Canada's technical facilities. Direct operating expenses were $18.0 million in 1995 as compared with $17.5 million in 1994, a increase of 478,000 or 2.7%. The Company's direct operating expenses for U.S. operations remained constant while the direct operating expenses climbed $500,000 in our international operations. The increase in international expenses was the result of a higher level of sales activity. U.S. operations continue to benefit from savings brought about by the Company's 1993 restructuring. Depreciation and amortization expense was $5.0 million for the year ended December 31, 1995, compared $5.3 million for 1994. This reduction was a consequence of the Company purchasing less property and equipment during 1995 than the amount of property and equipment which became fully depreciated during 1994. Consolidated gross profit was $5.7 million in 1995 as compared with $7.4 million in 1994, a $1.7 million decrease. The Company's consolidated total operating expenses for 1995 were $23.0 million, as compared with $22.8 million in 1994, an increase of $0.2 million or 0.9%. As a percentage of total revenues, total operating expenses were 80.2% in 1995 versus 75.5% in 1994. The Company's selling, general and administrative (S,G &A) expenses were $5.0 million during 1995 as compared to $4.9 million in 1994, an increase of $.1 million or 2.0%. The increase in S,G &A in International operations resulted from a higher level of sales activity. The increase in S,G & A from US operations resulted from increase in salaries and a decreases in rent, insurance and professional services. Other income was $404,258 in 1995 versus $103,455 in 1994. The increase was the result of the settlement of obligations with an equipment supplier where the supplier provided the company with equipment valued at $300,0000. There was a litigation settlement in 1995 of approximately $3.2 million. There was no revenue from litigation settlement in the prior year. The 1995 provision for U.S. and State income tax expense in the amount of $48,000 was entirely composed of the alternative minimum tax. This occurred because net operating loss carryforwards (deferred tax assets) were utilized against U.S. pre-tax income in the amount of $1.9 million, while full benefit of the net tax operating loss carryforwards is limited for alternative minimum tax purposes. The foreign provision for income tax expense in the amount of $243,000 related to Canadian income tax imposed on the pre-tax income of the Canadian subsidiary in the amount of $587,000. As of December 31, 1995, the Company has recorded net deferred tax assets of $5.0 million and a related valuation allowance of $5.0 million (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. The Company's interest expense in 1995 was $1.8 million versus $1.9 million in 1994. The decrease in interest expense resulted from negotiation of lower variable rates from the Company's principal lender and a decreases in the prime interest rate. As a consequence of the above factors, the Company produced a net loss before litigation settlement of $1,049,000 or a loss of $0.16 per share in 1995 versus net income of $481,000 or $0.07 per share in 1994. The net profit for 1995 after taking into consideration income resulting from litigation settlements was $2.16 million or $.33 per share in 1995 compared to a net profit of $481,000 or $.07 per share in 1994. At December 31,1995 $1,392,000 remained of the Company's restructuring reserve established in 1993. This amount was reserved for settlement of the remaining lease obligations associated with the closing of the New York facility. The obligations associated with the termination of the New York lease were settled on January 12, 1996 at an amount approximating the reserve. 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 The Company and its subsidiaries are operating under a loan agreement with The CIT Group/Credit Finance with a maturity date of August 3, 2000. The maximum credit under the agreement is $9 million. The amended loan agreement provides for borrowings up to $5.4 million under the term loan (limited to 85% of eligible equipment appraisal value) and $3.6 million under the revolving loan (limited to 85% of eligible accounts receivable) and at March 31, 1997, $450,000 was available. The outstanding balance of the term loan was $4,321,000 at December 31, 1996. It is payable in monthly installments of $106,000 plus interest at prime plus 2% through August 3, 2000. Principal payments are not required in June, July or August. The revolving loan had an outstanding balance of $1,673,000 million at December 31, 1996). It bears interest at prime plus 2% which is payable monthly. The loan contains automatic renewal provisions for successive terms of two years thereafter unless terminated as of August 3, 2000 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 has an outstanding real estate loan with Bank of America which was amended February 29, 1996. The loan is secured by the building where the Company provides film processing and sound services. The loan agreement matures December 31, 1998 with an option to extend the maturity an additional year upon payment to the Bank of America of a $25,000 loan extension fee prior to December 31, 1998. The outstanding balance as of December 31, 1996 was $1,507,490. The Company's principal source of funds is cash generated by operations. On an annual basis, the Company anticipates that existing cash balances and availability under existing loan agreements and cash generated from operations will be sufficient to service existing debt. Due to seasonal variations the Company anticipates a cash shortfall in the second quarter of 1997. As of December 31, 1996, the Company had a working capital deficiency of approximately $2,500,000 and an accumulated deficit of approximately $13,600,000, respectively. In addition the Company sustained a net loss of approximately $1,850,000 for the year ended December 31, 1996. These factors, among others indicate that the Company may be unable to continue as a going concern. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern The Company's continuation as a going concern is dependent on upon its ability to obtain additional financing, generate sufficient cash flow to meet its obligations on a timely basis and ultimately to attain profitable operations. The Company is currently in negotiations with its principal lender to restructure its term loan to provide additional financing for the next fiscal year. Additionally, the Company is attempting to secure other sources of financing. Management is of the opinion that the Company will be able to meet its obligations on a timely basis and sustain operations by obtaining such additional financing and eventually achieving profitable operations. There is no assurance that these uncertainties will be settled or that management's plan will be achieved. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 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. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Consolidated Financial Statements and Financial Statement Schedules December 31, 1995 and 1996 (With Independent Auditors' Report Thereon) 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, 1995 and 1996 14 Consolidated Statements of Operations - Years Ended December 31, 1994, 1995 and 1996 16 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1994, 1995 and 1996 17 Consolidated Statements of Cash Flows - Years Ended December 31, 1994, 1995 and 1996 18 Notes to Consolidated Financial Statements 20 Consolidated Financial Statement Schedule - Valuation and Qualifying Accounts - Years Ended December 31, 1994, 1995 and 1996 31 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. KPMG Peat Marwick LLP 725 South Figueroa Street Los Angeles CA 90017 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, 1995 and 1996 and the results their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. Also in our opinion, the related 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. The accompanying consolidated financial statements have been prepared assuming that Laser-Pacific Media Corporation will continue as a going concern. As discussed in note 1 to the consolidated financial statements, the Company has a working capital deficiency, an accumulated deficit and has sustained a net loss in current year. These matters raise substantial doubt about the entity's ability to continue as a going concern. Management's plans in regard to these matters are also described in note 1. The consolidated financial statements do not include any adjustments that might result for the outcome of this uncertainty. /s/KPMG Peat Marwick LLP Los Angeles, California March 14, 1997 LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1995 and 1996 Assets 1995 1996 ------------------ ----------------- ------------------ ----------------- Current assets: Cash $ 812,989 283,082 Receivables (note 6): Trade 5,651,308 4,854,214 Other 3,027,617 289,384 ------------------ ----------------- ------------------ ----------------- 8,678,925 5,143,598 Less allowance for doubtful receivables 853,000 810,130 ------------------ ----------------- 7,825,925 4,333,468 Inventory (note 6) 340,078 325,073 Prepaid expenses and other current assets 333,220 337,163 ------------------ ----------------- ------------------ -----------------\ Total current assets 9,312,212 5,278,786 ------------------ ----------------- ------------------ ----------------- Property and equipment, at cost (note 3, 4 and 6) 41,397,806 41,941,277 Less accumulated depreciation and amortization 23,136,835 24,708,192 ------------------ ----------------- ------------------ ----------------- Net property and equipment 18,260,971 17,233,085 ------------------ ----------------- ------------------ ----------------- Other assets, net 599,036 650,580 $ 28,172,219 23,162,451 ================== ================= (Continued) LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1995 and 1996 (Continued) Liabilities and Stockholders' Equity 1995 1996 ------------------ ----------------- ------------------ ----------------- Current liabilities: Current installments of notes payable to bank and long-term debt $ 6,200,819 5,278,339 Notes payable to related parties (note 6) 320,000 --- Accounts payable 1,059,765 1,150,661 Accrued expenses 3,058,011 1,195,766 Accrued severance (note 5) 391,451 --- Income taxes payable 381,258 152,460 ------------------ ----------------- Total current liabilities 11,411,304 7,777,226 ------------------ ----------------- ------------------ ----------------- Notes payable to bank and long-term debt, less current installments (note 6) 7,892,905 7,958,554 Deferred revenue 160,123 --- Minority interest (note 11) 1,249,559 1,325,893 Commitments and contingencies (notes 4, 6 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 6,568,172 and 7,128,172 shares at December 31, 1995 and 1996 respectively 657 713 Additional paid-in capital 19,258,746 19,753,690 Accumulated deficit (11,801,075) (13,653,625) ------------------ ----------------- Net stockholders' equity 7,458,328 6,100,778 ------------------ ----------------- $ 28,172,219 23,162,451 ================== ================= See accompanying notes to consolidated financial statements. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1994, 1995 and 1996 1994 1995 1996 ----------- ------------ ----------- Revenues $30,243,630 28,693,047 28,878,422 ------------ ---------- ---------- ------------ ---------- ---------- Operating expenses: Direct 17,544,357 18,022,097 18,847,361 Depreciation and amortization 5,295,427 4,983,001 5,317,862 ----------- ---------- ---------- 22,839,784 23,005,098 24,165,223 ----------- ---------- ---------- ----------- ---------- ---------- Gross profit 7,403,846 5,687,949 4,713,199 Selling, general and administrative expenses 4,874,088 4,977,824 4,677,586 Write-off of property and equipment --- --- 148,569 ------------ ----------- ---------- ------------ ----------- ---------- Income from operations 2,529,758 710,125 (112,956) Interest expense (1,890,723) (1,813,428) (1,563,559) Litigation settlement (note 12) --- 3,208,830 --- Other income 103,455 404,258 41,952 Minority interest in net income of consolidated subsidiary (note 11) (119,473) (58,850) (52,987) ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes 623,017 2,450,935 (1,687,550) Income tax expense 142,000 291,000 165,000 ----------- ---------- ----------- Net income (loss) $481,017 2,159,935 (1,852,550) ============ ========== =========== Net income (loss) per common and common equivalent shares $.07 .33 (.26) ============= ============ ========== ============= ============ ========== Weighted average common and common equivalent shares outstanding 6,493,172 6,568,172 7,061,061 ============= ============ ========= ============= ============ ========= LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 1994, 1995, and 1996 Common Stock --------------------------------------- Number of shares Amount ------------------ --------------- Balance at December 31, 1993 6,418,172 $642 Stock issuance in connection with settlement of certain lease 150,000 15 Net income --- --- ------------------ --------------- Balance at December 31, 1994 6,568,172 657 Net income ------------------ --------------- Balance at December 31, 1995 6,568,172 657 Stock issuances and warrants 560,000 56 Net loss --- --- ------------------ --------------- Balance at December 31, 1996 7,128,172 $ 713 ================== =============== ================== =============== Additional paid-in Accumulated capital deficit ------------------ -------------- Balance at December 31, 1993 19,230,636 (14,442,027) Stock issuance in connection with settlement of certain lease 28,110 --- commitments Net income --- 481,017 ------------------ --------------- Balance at December 31, 1994 19,258,746 (13,961,010) Net income ------------------ --------------- Balance at December 31, 1995 19,258,746 (11,801,075) Stock issuances and warrants 494,944 --- Net loss --- (1,852,550) ------------------ --------------- Balance at December 31, 1996 (13,653,625) 6,100,778 ================== =============== ================== =============== Net Stockholders' equity ------------------ Balance at December 31, 1993 4,789,251 Stock issuance in connection with settlement of certain lease 28,125 commitments Net income 481,017 ------------------ Balance at December 31, 1994 5,298,393 Net income 2,159,935 ------------------ Balance at December 31, 1995 7,458,328 Stock issuances and warrants 495,000 Net loss (1,852,550) ------------------ Balance at December 31, 1996 6,100,778 ================== ================== See accompanying notes to consolidated financial statements. ================================================================================ ================================================================================ LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1994, 1995 and 1996 1994 1995 1996 ---- ---- ---- Cash flows from operating activities: Net income (loss) $481,017 2,159,935 (1,852,550) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of property and equipment 5,295,427 4,983,001 5,317,862 Provision for doubtful accounts receivable 351,000 539,000 447,354 Write-off of property and equipment --- --- 148,569 Other (45,485) 71,751 76,334 Change in assets and liabilities: (Increase) decrease in: Accounts receivable (1,009,814) (3,076,993) 3,045,103 Inventory 9,834 15,023 15,005 Prepaid expenses and other current assets 86,795 2,864 (3,943) Other assets (91,568) 719,818 38,456 Increase (decrease) in: Accounts payable 288,020 (2,257,842) 90,896 Accrued expenses (1,127,380) 1,662,804 (1,862,245) Accrued severance (791,746) (461,803) (391,451) Deferred revenue 29,994 2,000 (160,123) Income taxes payable 62,642 318,616 (228,798) ----------- ----------- ----------- Net cash provided by operating activities 3,538,736 4,678,174 4,680,469 ----------- ----------- ----------- Cash flows from investing activities: Purchases of property and equipment (785,838) (2,114,185) (4,470,045) Proceeds from disposal of property and equipment 1,099,402 44,000 31,500 Purchase of subsidiary common stock --- (114,495) --- --------- ---------- --------- Net cash provided (used) by investing activities 313,564 (2,184,680) (4,438,545) --------- ---------- ---------- (Continued) LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued 1994 1995 1996 ------------- ----------- ---------- Cash flows from financing activities: Repayment of notes payable to bank and long-term debt $(3,844,047) (1,908,985) (856,831) (Repayments) borrowings of notes payable to related parties 100,000 (55,000) (320,000) Proceeds from stock issuance --- --- 405,000 ------------- ----------- ------------ Net cash used by financing activities (3,744,047) (1,963,985) (771,831) ------------- ----------- ------------ Net increase (decrease) in cash 108,253 529,509 (529,907) Cash at beginning of year 175,227 283,480 812,989 ------------- ---------- ------------ Cash at end of year $283,480 812,989 283,082 ============= ========== ============ Supplementary disclosure of cash flow information: Cash paid during the year for: Interest $1,900,000 1,800,000 1,600,000 State income taxes 1,200 1,200 1,200 ========== ========== ========= Supplemental disclosure of noncash investing and financing activities. The Company purchased property and equipment of $1,722,000 and $2,112,535 during 1995 and 1996, financed through capital lease obligations. In 1995, the Company received equipment valued at $300,000 as settlement from an equipment supplier. 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 Company's 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 will be amortized to interest expense over the term of the related credit facility. See accompanying notes to consolidated financial statements. ================================================================================ ================================================================================ 1 LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1995 and 1996 (1) Basis of Presentation The accompanying consolidated financial statements include the accounts of Laser-Pacific Media Corporation and subsidiaries(altogether, the Company). All significant inter-company accounts and transactions have been eliminated in consolidation. Liquidity The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, as of December 31, 1996, the Company had a working capital deficiency of approximately $2,500,000 and an accumulated deficit of approximately $ 13,650,000, respectively. In addition the Company sustained a net loss of approximately $1,850,000 for the year ended December 31, 1996. Theses factors, among others indicates that the Company may be unable to continue as a going concern. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern The Company's continuation as a going concern is dependent on upon its ability to obtain additional financing, generate sufficient cash flow to meet its obligations on a timely basis and ultimately to attain profitable operations. The Company is currently in negotiations with its principal lender to restructure its term loan to provide additional financing and is also seeking other sources of financing for the next fiscal year. Management is of the opinion that the Company will be able to meet its obligations on a timely basis and sustain operations by obtaining such additional financing and eventually achieving profitable operations. There is no assurance that these uncertainties will be settled or that management's plan will be achieved. (2) Summary of Significant Accounting Policies 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). Income (Loss) per Share Net income (loss) per common and common equivalent shares is based on the weighted average number of common and common equivalent shares outstanding. The outstanding stock options and warrants are included in the calculations when considered material and not antidilutive. Fully diluted net loss per common and common equivalent share is not presented since the amounts are immaterial. Revenue Recognition Revenues are recognized as services are performed. The Company had one significant customer in 1994, 1995 and 1996 which accounted for approximately 16%, 11% and 16% 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. 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 adopted the provisions SFAS No. 121, 'Accounting for the Implement of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,' during 1995. This Statement requires that Long-Lived assets be reviewed 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 exceed the fair value of the assets. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations or liquidity. 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. Reclassifications Certain prior year balances have been reclassified to conform with the current year's presentation. Accounting for Stock Options Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ('APB') Opinion No. 25, 'Accounting for Stock Issued to Employees', and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No.123, 'Accounting for Stock-Based Compensation', which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provision of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995, and 1996 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (3) Property and Equipment Property and equipment is comprised of the following: 1995 1996 ----------------- --------------- ----------------- --------------- Land $1,439,077 1,437,486 Buildings and improvements 4,157,341 4,226,630 Technical equipment 33,852,456 33,875,483 Furniture and fixtures 800,403 1,101,532 Automobiles 39,283 39,283 Leasehold improvements 1,109,246 1,260,863 ----------------- --------------- $41,397,806 41,941,277 ================= =============== During 1995, the Company accelerated depreciation and removed fully depreciated property and equipment from the accounting records. This policy resulted in a reduction of property and equipment and related accumulated depreciation of approximately $27,600,000 as of December 31, 1995. The Company leases technical equipment under capital leases expiring through 2001. Equipment under capital leases aggregated $7,377,239 and $7,950,354 and related accumulated amortization aggregated $2,073,507 and $2,024,833 at December 31, 1995 and 1996, respectively. (4) Restructuring Charge The Company recognizes restructuring charges during the period in which liabilities are incurred or assets are impaired resulting from the implementation of a formal restructuring plan. The amount of liabilities incurred is estimated by management based on estimated costs to settle such liabilities. The amount of asset impairment is measured based on projected discounted future results using a discount rate reflecting the Company's average cost of funds or management's estimate of recoverability through anticipated disposal of such assets. The Company implemented a formal plan (Plan) to close certain of its operating facilities during 1993. In connection with these closures, the Company recognized a restructuring charge of $2,550,000 in the 1993 consolidated financial statements. The restructuring charge primarily included estimated losses on anticipated sale of property and equipment, a provision for the settlement of future lease commitments and other related closure costs. During 1994, the Company sold certain of the related property and equipment at auction and received net proceeds of $903,000 which were applied to various debt obligations. In addition, the Company settled certain lease commitments for aggregate consideration of $472,000 including the issuance of 150,000 shares of stock plus warrants to purchase 25,000 shares of common stock at $.50 per share. The excess of the net proceeds over the net carrying value of the property and equipment sold as well as the excess of the amounts provided to settle the lease commitments over the settlement amounts was applied to the Company's restructuring reserve. In January 1996, the Company settled lease agreements related to the closure of its facilities for aggregate consideration of $1,375,000, which included the issuance of 500,000 shares of the Company's common stock valued at $.75 per share and cash consideration of $1,000,000. The Company had made adequate provisions for these settlement costs in the 1993 restructuring charge. Under terms of the lease settlement, the Company was required to sign a confession of judgment in the approximate amount of $4,200,000. The confession of judgment was held in escrow and expired January 13, 1997. (5) Nonrecurring Costs During 1993, the Company's former chief executive officer and certain other employees entered into severance arrangements requiring payments aggregating $1,770,000 through October 1996, which have been provided in the accompanying consolidated financial statements. At December 31, 1996 the accrued severance obligation was paid in full. (6) Notes Payable to Bank and Long-Term Debt Notes payable to bank and long-term debt are summarized as follows: 1995 1996 ------- ------ ------- ------ Advances under a $9,000,000 credit agreement, secured by eligible accounts receivable, inventory and property and equipment, as defined, bearing interest at the bank's prime rate (8.25% at December 31, 1996) plus 2.0%, expiring August 3, 2000, (1) $2,421,100 1,672,926 Term notes payable to bank of up to $5,400,000 under the $9,000,000 credit agreement, secured by eligible accounts receivable, inventory, and property and equipment, as defined, and guarantees of certain stockholders, payable in nine monthly installments per year of $106,000 plus interest at prime (8.25% at December 31, 1996) plus 2% through August 3, 2000 (1) 3,842,734 4,320,894 Term note payable to bank, as amended, secured by certain real property, payable in monthly installments of up to $50,000 plus interest at prime (8.25% at December31, 1996) plus 3% through August 1996 399,904 - Note payable to bank, secured by a first deed on land and buildings, bearing interest at 11.71%, interest and principal payable in nine monthly installments per year of $26,667 through December 31, 1998. $2,040,826 1,507,490 Term notes payable to bank, secured by certain property and equipment as defined, bearing interest at 8%, payable monthly, in arrears, with installments of $8,700 through March 31, 2004 618,645 508,941 Notes payable to related parties and others, unsecured, bearing interest at 14%, due November 30, 1996 320,000 - Capital lease obligations (note 10) 4,636,814 5,140,129 Other 133,701 86,513 --------- ---------- --------- ---------- 14,413,724 13,236,893 Less current installments, including loans in default of $399,904 at December 31, 1995 and $0 at December 31, 1996 6,200,819 5,278,339 Less notes payable to related parties 320,000 - --------- --------- $7,892,905 7,958,554 ========== ========= (1) This agreement provides for a facility fee to be paid by the Company of $90,000 per year on each anniversary of the closing. The aggregate future maturities of notes payable to bank and long-term debt are summarized as follows: December 31: 1997 $ 5,278,339 1998 3,328,672 1999 1,829,663 2000 1,723,224 2001 916,282 Thereafter 160,713 ------------------ $ 13,236,893 ================== (7) Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards Board No. 109, 'Accounting for Income Taxes,' which requires the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes 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. 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. Under Statement 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A summary of taxes on income (loss) is as follows: 1994 1995 1996 ---- ---- ---- Current: Federal $ --- 35,000 --- State --- 13,000 5,000 Foreign 64,000 348,000 166,000 ------------ ------------ ----------- 64,000 396,000 171,000 ------------ ------------ ----------- Deferred: --- --- --- Federal State --- --- --- Foreign 78,000 (105,000) (6,000) ------------ ----------- ----------- 78,000 (105,000) (6,000) ------------ ----------- ----------- $142,000 291,000 165,000 ============ =========== =========== 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: 1994 1995 1996 ---- ---- ---- Federal income tax expense (benefit) at 'expected rate' $212,000 833,000 (574,000) Utilization of net operating loss carryforward (116,000) (618,000) --- Nondeductible expenses 13,000 580,000 58,000 Other (109,000) (88,000) (21,000) State taxes, net of Federal effect --- 13,000 2,000 Impact of foreign taxation at different rates 5,000 43,000 35,000 Minority interest 41,000 20,000 24,000 Valuation allowance for deferred tax assets 96,000 (492,000) 641,000 ------- ------- ------- $142,000 291,000 165,000 ======== ======= ======= The tax effect of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 1995 and 1996 is presented below: 1995 1996 ---------- ---------- Deferred tax assets and liabilities: Net operating loss carryforwards $4,338,000 5,378,000 Income tax credit carryforwards 783,000 773,000 Allowance for restructuring and severance costs 687,000 --- Reserve for bad debts 282,000 231,000 Property and equipment (1,135,000) (786,000) Less valuation allowance (4,955,000) (5,596,000) ----------- ----------- ----------- ----------- Net deferred tax assets $ --- --- =========== =========== At December 31, 1996, the Company had net operating loss carryforwards for Federal and state income tax purposes of approximately $14,800,000 and $5,400,000, respectively, which expire principally from 2003 through 2011. 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. 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 will not realize the benefits of these deductible differences. (8) Stockholders' Equity 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, 1995 and 1996, no preferred stock was outstanding. During 1992, the Company granted common stock warrants to purchase 64,182 shares of common stock at $2.50 per share. During 1994, the warrants were canceled and replaced with warrants to purchase 100,000 shares of common stock at amounts approximating the closing bid price for the Company's common stock on the replacement date of $.563 per share. The warrants are exercisable anytime between the third and eighth year after the closing of the agreement. In connection with the 14% notes issued in 1993, the Company issued warrants to purchase 257,500 shares of common stock at amounts approximating the closing bid prices for the Company's common stock on the effective dates of the notes. During 1994 and 1995, the Company extended the maturity dates of these notes to August 31, 1995 and November 30, 1996, respectively. In connection with the extensions of these notes, the Company issued warrants to purchase an additional 160,000 shares of common stock at amounts approximating the closing bid prices for the Company's common stock on the extension dates. The warrants are exercisable for three years from the effective dates of issuance at prices ranging from $.50 to $2.13 per share. During 1994, in connection with the settlement of certain lease commitments (note 4), the Company issued 150,000 shares of common stock and warrants to purchase 25,000 shares of common stock at an amount approximating the closing bid price for the Company's common stock on the date of issuance of $.50 per share. Proceeds from the sale of common stock issued under outstanding warrant arrangements will be credited to common stock at the time the warrant is exercised. The Company recorded no charges to operations with respect to these warrants since the warrants were issued at amounts approximating fair market value. In January 1996 in connection with the settlement of additional lease commitments (note 4) related to the closure of its 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 to related parties in exchange for $30,000. Additionally, in June 1996 the Company issued to purchase 75,000 shares of common stock to its principal lender in connection with a loan renewal. The fair value of the warrants was determined in accordance with SFAS No. 123 and was recorded as debt issuance costs. (9) Stock Options Plans and Other Option Grants The Company has three stock option plans which provide for 615,029 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. Activity under three plans for the years ended December 31, 1995 and 1996 follows: 1994 1995 1996 ---- ---- ---- Balance at beginning of year 368,658 373,908 239,650 Options granted 30,000 --- --- Options canceled (24,750) (134,258) (40,914) -------- --------- -------- -------- --------- -------- Balance at end of year 373,908 239,650 198,736 ======= ======== ======== ======= ======== ======== Price range of options outstanding at end of year $.50 -6.00 .50 - 6.00 .50 - 6.25 ========== ========== =========== ========== ========== =========== Price of options granted during the year $.50 --- --- ========== ========== =========== Under all plans, all options are exercisable and 140,000 shares remained available for future grant, at December 31, 1996. In 1996, two new directors were granted fully vested options to purchase 10,000 shares each of common stock at a price of $0.50 per share. (10) Commitments and Contingencies Leases The Company leases certain technical equipment under capital leases that expire through 2001. The Company also leases corporate offices, certain operating facilities and equipment under noncancelable operating leases that expire through 1999. The present value of future minimum capital lease payments and future minimum lease payments under noncancelable operating leases, principally facility leases, are as follows: Capital leases Operating leases ------------------ ------------------ ------------------ ------------------ Year ending December 31: 1997 $ 2,398,988 633,021 1998 1,651,830 550,395 1999 927,169 113,823 2000 739,233 - 2001 385,309 - ------------------ ----------------- Total minimum lease payments 6,102,529 $ 1,297,239 ================== ================== Less amount representing interest 962,400 ------------------ Present value of minimum lease payments $ 5,140,129 ================== Rent expense amounted to $1,144,000, $1,127,162 and $ 924,747 for the years ended December 31, 1994, 1995 and 1996, respectively. Legal Matters The Company is involved in legal matters arising in the ordinary course of business. In the opinion of management, the ultimate resolution of all pending claims and legal proceedings will not have a material adverse effect on the Company's business or financial condition. Employment Agreements The Company has employment agreements with certain officers that require written notices of termination ranging from one to five years. (11) Minority Interest in Subsidiary In December 1995, the Company purchased 350,000 additional shares of common stock of Pacific Video Canada Ltd. (PVC), in exchange for approximately $114,000, thereby increasing the Company's ownership of PVC from 58% to 77%. 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 Company's ownership of PVC from 72% to 77% The amounts in minority interest at December 31, 1996 represent the 23% ownership of PVC's outstanding capital stock held by the minority stockholders of PVC. (12) Litigation Settlement The Company was involved in a lawsuit against its former patent lawyer and insurance carrier in connection with prior settlements of lawsuits relating to the Company's patent for high-resolution transfer of images. This matter was settled during the year ended December 31, 1995 resulting in a net recovery of $3,208,830. (13) Business Segment Data The following table shows revenues, operating earnings (loss) and identifiable assets by geographic segment for the years 1994, 1995 and 1996: 1994 1995 1996 ------------------ ------------------ ------------------ ------------------ ------------------ Revenues: U.S. $ 26,021,487 23,309,444 23,729,024 International 4,222,143 5,383,603 5,149,398 ------------------ ------------------ ------------------ $ 30,243,630 28,693,047 28,878,422 ================== ================== ================== Operating earnings (loss): U.S. $ 1,883,336 (640,750) (569,068) International 646,422 1,350,875 456,112 ------------------ ------------------ ------------------ $ 2,529,758 710,125 (112,956) ================== ================== ================== Identifiable assets U.S. $ 19,671,297 21,954,986 17,188,781 International 6,337,336 6,217,233 5,973,670 ------------------ ------------------ ------------------ $ 26,008,633 28,172,219 23,162,451 ================== ================== ================== (14) Accounting for Stock Based Compensation The per share fair value of stock options granting during 1995 and 1996 ranged from $.43 to $1.20 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1996 and 1995 - expected dividend yield 0%, expected volatility of 50%, risk-free interest rate ranging from 5.2% to 6.3%, and an expected life of 4 years. The Company applies APB Opinion No. 25 in accounting for its Plans and, accordingly, no compensation cost was recognized to the extent the exercise price of the stock options equaled the fair value. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income (loss) and earnings (loss) per share would have been reduced as indicated below: ------------------------------------------------------------------------------- Year Ended December 31, ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- 1995 1996 Net Income (Loss) ----------------- ------- -------------------- -------------------------------- As Reported $2,159,935 $(1,858,550) Pro forma $1,977,095 $(1,858,550) ----------------- ------- -------------------- ---------------------- ----------------- ------- -------------------- ---------------------- Net Income (Loss)per share As Reported $.33 $(.26) Pro forma $.30 $(.26) ----------------- ------- -------------------- ---------------------- ----------------- ------- -------------------- ---------------------- Weighted average common stock and common stock equivalents outstanding (note 1) 6,568,172 7,061,061 ---------------------- ------- -------------------- ---------------------- Pro forma net income reflects only options granted in 1995 and 1996. 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 of up to four years 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. (15) Pension Plan The Company has a defined contribution Profit Sharing 401(k) Savings Plan which 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 year ended December 31, 1996 the Company did not contribute to the plan on behalf of its employees. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Schedule II LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 1994, 1995 and 1996 Column A Column B Column C Column D Column E ----------------- -------- -------- -------- -------- Balance at Charged to Balance at beginning costs and end of of period expenses Deductions period Description write-offs (1) ----------------- --------- -------- -------- -------- Allowance for bad debts: 1994 $441,000 351,000 (105,000) 687,000 ======== ======== ======== ======= 1995 $687,000 539,000 (373,000) 853,000 ======== ======== ========= ======= 1996 $853,000 448,000 (491,000) 810,000 ======== ======== ========= ======= (1) Uncollectible accounts written off, net of recoveries. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information as of April 1, 1997 with respect to the members of the Board of Directors: Director Name Age Since Position with Company James R. Parks (1) (3) 46 1984 Chairman of the Board and Chief Executive Officer Emory M. Cohen (1) (3) 54 1983 President, Chief Operating Officer and Director Ronald Zimmerman (2) 57 1996 Director Cornelius P. McCarthy III(2) 37 1996 Director (1) Includes service as a director of a predecessor corporation. (2) Member of the Audit Committee. (3) Member of the Stock Option Plan Committee. Biographical Information The following biographical information is furnished with respect to the Company's directors: James R. Parks was a director of Spectra Image Inc. ('Spectra Image') from July 1984 until its merger (the 'Combination') with Pacific Video, Inc. ('Pacific Video') to form the Company in 1990, and since then has been a director of the Company. Mr. Parks has been Chairman of the Board and Chief Executive Officer of the Company since March of 1994. Since 1978, Mr. Parks has been a member of Parks, Palmer, Turner & Yemenidjian, certified public accountants. During the last six years Mr. Parks has been actively involved in performing financial turnarounds on various real estate projects. As part of that activity, Mr. Parks was an officer of a corporation that was co-general partner of several limited partnerships owning real estate which filed for reorganization under Chapter 11 of the Federal Bankruptcy Law. All of the partnerships filing pre-1995 Chapter petitions have been reorganized and emerged from Chapter 11. In 1995, a partnership in which Mr. Parks was an officer of the corporate general partner and which held real property, filed for reorganization under Chapter 11. In 1996, the reorganization was dismissed and the Property was sold. Mr. Parks was a director of Olympic National Bank ('ONB'), which went into receivership with the FDIC. The assets of ONB were subsequently sold to Western Bank, a Los Angeles based financial institution. Emory M. Cohen is the Company's President and Chief Operating Officer and a director and has held such positions since the Combination. Previously, he was President and Chief Operating Officer of Pacific Video from May 1983 until the Combination. From 1963 until February 1978, Mr. Cohen was employed by Glen Glenn Sound, a leading motion picture and television sound recording company. He served in many different capacities at Glen Glenn Sound. From 1974 to 1978, he held the position of Vice President-Operations. In 1978, he joined Compact Video, where he became Group Vice President-Service Companies, as well as President of Compact Video Services, Inc. and of Image Transform, Inc., both Compact Video subsidiaries. Mr. Cohen received a motion picture Academy Award in 1978 for inventing a system that applies electronic and videotape technology to motion picture post-production sound recording and an Emmy Award in 1989 in connection with the Company's Electronic Laboratory. Ronald Zimmerman has served as a director of the Company since October 1996. Mr. Zimmerman is a self-employed financial advisor and businessman. From 1986 to 1994 he served as Director, Senior Vice President and Chief Financial Officer of the Todd-AO Corporation. Cornelius P. McCarthy III has served as a director of the Company since October 1996. Since December, 1996, Mr. McCarthy has been employed as an investment banker with Pennsylvania Merchant Group, Ltd. as Senior Vice President. Mr. McCarthy has served in similar capacities with Laidlaw and Company, November, 1993 to December, 1996, McCarthy and Company (January 1993 to November 1993) and Kemper Securities (1988-1992). Mr. McCarthy currently serves on the Boards of Directors of Bonded Motors, Inc. and Phoenix International Life Sciences, Inc. No family relationships exist between any of the officers or directors of the Company. EXECUTIVE OFFICERS Officers are appointed by the Board of Directors of the Company. Information with respect to Messrs.. James R. Parks (chairman of the Board and Chief Executive Officer) and Emory M. Cohen (President and Chief Operating Officer) is set forth above. Information with respect to Leon D. Silverman, Robert McClain and Randolph D. Blim is set forth below: Name Age Position with Company Leon D. Silverman 42 Executive Vice President Randolph D. Blim 50 Senior Vice President Robert McClain 49 Chief Financial Officer Vice President and Secretary Leon D. Silverman has served as Executive Vice President since the Combination. He was Pacific Video's Vice President of Marketing and Sales from 1982 until the Combination. Previous to joining Pacific Video, he was Director of Marketing and Sales at Compact Video Services, Inc., a subsidiary of Compact Video. Mr. Silverman is a Founding Member of the Technology Council of the Television and Motion Picture Industry and currently serves as Secretary of its Executive Committee. In addition, he currently serves on the Board of Directors of the International Teleproduction Society. Randolph D. Blim has been the Senior Vice President of Engineering since the Combination. He was Vice President of Engineering for Pacific Video and Pacific Video Industries, Inc. (a predecessor company of Pacific Video) from 1972 until the Combination. During the period 1982-1984 Mr. Blim served as a consultant to the American Broadcasting Company providing design services for the 1984 Los Angeles Summer Olympic Games. From 1969 to 1972 he was employed by ABC, working on special camera and engineering projects for ABC's Wide World of Sports. From 1966 to 1969 he was Director of Engineering for TelWest Productions, and Seros Mobile Videotape Productions, both television facilities companies. Mr. Blim was awarded an Emmy in 1989 for Outstanding Achievment in Engineering Development in connection with the Company's Electronic Laboratory. Robert McClain became Chief Financial Officer in November 1994. He was employed by Arthur Andersen and Co. from 1975 through 1978. He was a Senior Accountant and a Certified Public Accountant when he left. He was employed at TRE Corporation, a diversified manufacturing company, from 1978 through 1987 where he served in various capacities ranging from Director of Taxation and Insurance to Assistant to the CEO, leaving when TRE was acquired by ALCOA Aluminum Corp. He was employed by Memtech Technology Corp., a manufacturer of computer memory, as General Manager and CFO from 1987 through 1991 and by Betson Pacific, a video game developer and distributor, as CFO and Director of Operations from 1992 through November 1994 when he left to join Laser-Pacific. Mr. McClain is a Director of the Orange County Chapter of the American Red Cross. BOARD OF DIRECTORS Committees The Company has two standing committees of the Board of Directors, the Audit Committee and the Stock Option Plan Committee. The Audit Committee met once during 1994 and once in March 1996. The principal duties of the Audit Committee are to approve selection and engagement of independent auditors and review with them the plan and scope of their audit for each year, the results of such audit when completed and their fees for services performed. Mr. Zimmerman and Mr. McCarthy became members of the Audit Committee in November of 1996, and are currently the sole members of the Audit Committee. The principal duty of the Stock Option Plan Committee is to administer the Company's stock option plan. James R. Parks and Emory M. Cohen are the sole appointed members of this committee. The Stock Option Plan Committee did not meet in 1996. Attendance and Compensation During the year ended December 31, 1996, the Board of Directors of the Company met ten times. Each of the directors attended at least 90% of all of the meetings of the Board of Directors. Directors who are not officers or employees of the Company receive $1,000 per month. Delinquent Filings Based solely on a review of forms 3 and 4 and any amendments thereto furnished to the Company pursuant to Rule 16a-3 (e) under the Securities Exchange Act of 1934, or representations that no Forms 5 were required, the Company believes that with respect to fiscal 1995, its officers, directors and beneficial owners of more than 10% of its equity timely complied with all applicable Section 16 (a) filing requirements, with the following exceptions: Mr. McCarthy and Mr. Zimmerman did not timely file Form 3 upon being appointed to the Board of Directors in October of 1996, and did not timely file Form 4 upon the issuance of options in November of 1996. The delinquent reports were filed on April 3, 1997. Item 11. EXECUTIVE COMPENSATION Under rules adopted by the Securities and Exchange Commission (the 'SEC') in October 1992, the Company is required to provide certain data and information relating to the compensation and benefits provided to the Company's chief executive officer and the four other most highly compensated executive officers of the Company at the end of 1996, a report furnished by the Company's Board of Directors regarding executive compensation, and certain information regarding the performance of the Company's Common Stock. Report of the Board of Directors on Executive Compensation The Board of Directors is responsible for reviewing benefits and compensation for all of the Company's officers. The Board's executive compensation policies are designed to enhance the financial performance of the Company, and thus stockholder value, by significantly aligning the financial interest of the key executives with those of stockholders The executive compensation program is viewed in total considering all of the component parts: base salary and long-term incentive compensation in the form of restricted stock awards and stock options. In evaluating the performance and setting the base salary and incentive compensation of the executive officers, the Board considers, in the aggregate, the following factors: industry factors, taking into account compensation paid by competitors and the amount required to be paid by the Company to retain key employees, the progress made by the Company in the growth of business, performance of the Company's stock and the Company's overall financial performance The Board of Directors did not award any performance bonuses for the fiscal year ended December 31, 1996. Following is a summary of the current compensation of the Chief Executive Officer of the Company and the four other most highly compensated executive officers of the Company. James R. Parks is currently employed by the Company at an annual salary of $208,000. Mr. Parks is not employed pursuant to a written agreement, but serves at the discretion of and on terms determined by the Board of Directors. Emory M. Cohen has a five-year employment agreement with the Company, entered into as of May 15, 1990, which has no termination date but is terminable upon five years' written notice or upon 30 days notice for cause, as defined. Under the terms of the agreement, Mr. Cohen is entitled to a minimum annual salary of $350,000, subject to adjustment if the cost of living increases more than 10 percent in any year, with a bonus in an amount to be determined by the Board of Directors, and he is entitled to other specified benefits such as an automobile, reimbursement of expenses, and health, life and disability insurance. In the event of a change in control of the Company, Mr. Cohen shall be entitled to a lump sum payment of three times his annual compensation or if he is terminated other than for specified reasons or if he terminates his contract within nine months of such event. Leon D. Silverman is employed by the Company at a current annual salary of $215,000, and is entitled to other specified benefits such as an automobile allowance, reimbursement of expenses, health, life and disability benefits. Mr. Silverman currently has no written agreement with the Company and serves at the discretion of the Board of Directors. Randolph D. Blim is employed by the Company pursuant to the terms of a three-year employment agreement entered into as of July 24, 1995. The agreement expires on July 23, 1998 if the executive is given written notice 120 dates prior to date of termination. If the 120 day written notice is not given by either party at the end of the current three year term and in all subsequent years the agreement will be renewed for one additional year. The agreement is terminable upon 30 days notice for cause as defined. Mr. Blim is entitled to a minimum annual salary of $189,000 with required minimum yearly increases of 3% over the term of the agreement, with an annual bonus in an amount to be determined by the Board of Directors. He is also entitled to other specified benefits such as an automobile allowance, reimbursement of expenses, health, life and disability benefits. Robert McClain is employed by the Company at a current annual salary of $145,000 and is entitled to specified benefits such as an automobile allowance, reimbursement of expenses, health, life and disability benefits. Mr. McClain is employed under a letter of agreement with the Company and serves at the discretion of the Board of Directors The SEC requires public companies to state their compensation policies with respect to recently enacted federal income tax laws that limit to $1,000,000 the deductibility of compensation paid to executive officers named in the proxy statement of such companies. In light of the current level of compensation of the Company's named executive officers, the Board of Directors of the Company has not adopted a policy with respect to the deductibility limit, but will adopt such a policy should it become relevant. SUBMITTED BY THE BOARD OF DIRECTORS OF LASER-PACIFIC MEDIA CORPORATION James R. Parks, Chairman Emory M. Cohen Ronald Zimmerman Cornelius P. McCarthy III ================================================================================ SUMMARY COMPENSATION TABLE ================================================================================ Annual Compensation ------------------------------------------- (a) (b) (c) (d) (e) Other Name Annual and Compen- Principal sation Position Year Salary ($) Bonus ($) ($) James R. Parks 1994 168,000 -0- -0- CEO 1995 208,000 -0- -0- 1996 208,000 -0- -0- Emory M. Cohen 1994 292,100 -0- 7,338 President 1995 317,577 -0- 21,965 1996 * 410,002 -0- 17,394 Gregory L. Biller 1994 195,000 -0- 2,134 Vice Chairman of the 1995 180,000 -0- 19,738 Board (Retired 3/31/96) 1996 * 39,067 -0- * 107,000 Leon D. Silverman 1994 175,223 -0- 11,227 Vice President 1995 215,000 -0- 72,427 1996 * 244,372 -0- 9,868 Randolph D. Blim 1994 157,937 -0- 6,192 Vice President 1995 178,519 -0- 3,562 1996 * 244,462 -0- 4,753 Robert McClain 1994 13,781 -0- -0- Vice President, CFO 1995 134,483 -0- 8,919 1996 153,464 -0- 13,349 * Includes repayment in 1996 of voluntary payroll deferrals in 1993, 1994, and 1995. Awards Payouts ---------------------------------------- (f) (g) (h) (i) Name Restricted Securities All Other and Stock Underlying LTIP Compen- Principal Award(s) Options Payouts sation Position ($) ($) ($) James R. Parks 1994 -0- -0- -0- -0- CEO 1995 -0- -0- -0- -0- 1996 -0- -0- -0- -0- Emory M. Cohen 1994 -0- -0- -0- -0- President 1995 -0- -0- -0- -0- 1996 -0- -0- -0- -0- Gregory L. Biller 1994 -0- -0- -0- -0- Vice Chairman of the 1995 -0- -0- -0- -0- Board (Retired 3/31/96) 1996 -0- -0- -0- -0- Leon D. Silverman 1994 -0- -0- -0- -0- Vice President 1995 -0- -0- -0- -0- 1996 -0- -0- -0- -0- Randolph D. Blim 1994 -0- -0- -0- -0- Vice President 1995 -0- -0- -0- -0- 1996 -0- -0- -0- -0- Robert McClain 1994 -0- -0- -0- -0- Vice President, CFO 1995 -0- -0- -0- -0- 1996 -0- -0- -0- -0- * Includes repayment in 1996 of voluntary payroll deferrals in 1993, 1994, and 1995. ----------------------------------------------------------------------------- The following Performance Graph compares the Company's cumulative total shareholder return on its Common Stock for the period starting January 1, 1992 to December 31, 1996, with the cumulative return of the Standard and Poor's Stock Index and a peer group of companies, the Standard andPoor's Entertainment Index, neither of which include the Company. The Performance Graph assumes $100 invested on January 1, 1992 in the Company's Common Stock, the S&P 500 Index and the S&P Entertainment Index. ------------------------------------------------------------------------------ Company/Index Dec92 Dec93 Dec94 Dec95 Dec96 -------------------------- --------- ---------- --------- ---------- ---------- Laser-Pacific Media Corp. -10.71 -82.02 33.45 0.00 -16.67 S&P Entertainment-500 43.00 15.58 -4.62 20.14 1.53 S&P 500 Index 7.62 10.08 1.32 37.58 22.96 Base Period Company/Index Dec91 Dec92 Dec93 Dec94 Dec95 Dec96 --------------------------- ------- ------- -------- -------- ------- -------- Laser-Pacific Media Corp. 100 89.29 16.06 21.43 21.43 17.86 S&P Entertainment-500 100 143.00 165.28 157.64 189.40 196.30 S&P 500 Index 100 107.62 118.46 120.03 165.13 203.05 Stock Options In April 1985, Spectra Image adopted a ten-year employee stock option plan which provided for the grant to executive officers and key employees of options qualified under the Internal Revenue Code of 1986, as amended ('incentive stock options') to purchase up to 300,000 shares of common stock at an exercise price not less than the fair market value of the common stock on the date of grant. In connection with the Combination, outstanding options under the plan became exercisable into shares of Common Stock of the Company. This plan terminated April, 1995, 89,531 options to purchase common stock remain outstanding as of December 31, 1996. In June 1987, Pacific Video adopted a nine-year stock option plan providing for the issuance of options to officers, directors and key employees to acquire up to an aggregate of 165,029 shares of Common Stock pursuant to incentive or non-qualified stock options. The exercise price of all options granted under the plan was required to be not less than the fair market value on the date of grant. In connection with the Combination, outstanding options under the plan became exercisable into shares of Common Stock of the Company. This plan terminated April, 1996, 69,206 options to purchase common stock remain outstanding as of December 31, 1996. In September 1990 in connection with the Combination, the Board of Directors of the Company adopted the 1990 Stock Option Plan which provides for the issuance of incentive or non-qualified stock options. An aggregate of 150,000 shares of Common Stock were initially reserved for grant under the Plan to officers, directors and key employees of the Company. The exercise price of a stock option granted under the plan may not be less than the fair market value of the underlying shares on the date of the grant; options may be granted for a term of up to 10 years. Under the terms of the Plan, participants may receive options to purchase Common Stock in such amounts and for such prices as may be established by the stock option plan committee (the 'Plan Committee'); provided, however, that the exercise price of a stock option granted under the Plan may not be less than the fair market value of the underlying shares on the date of grant. The options may be granted for a term of up to 10 years. The Plan provides that the aggregate fair market value (determined at the time the option is granted) of the Common Stock with respect to which incentive stock options are exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. All options granted under the Plan are nontransferable during the optionee's lifetime, but are transferable at death unless otherwise determined by the Plan Committee. Options granted terminate within a specified period of time following termination of an optionee's employment with the Company, not to exceed 30 days. The Board of Directors may amend the Plan and, with the consent of each affected optionee, the option agreements; provided, however, that certain changes may only be made with the approval of the Company's stockholders. Item 12. Security Ownership of Certain Beneficial Owners The following table sets forth information with respect to those persons known by the Company to own beneficially more than 5% of the Company's common stock as of April 1, 1997. Except as otherwise noted, and subject to applicable community property and similar laws, each person listed has sole voting power (if applicable) and investment discretion with respect to the securities shown as beneficially owned. Name and Address Amount and Nature of Percent of Of Beneficial Owner Beneficial Ownership(1) Class(1) John Paul De Joria 606,000 7.6% 2745 S. Buffalo Las Vegas, Nevada 89117 Robert E. Seidenglanz (2) (3) (5) 983,563 12.3% 9831 Civic Center Drive, Suite 103 Beverly Hills, California 90210 James R. Parks (3) (4) (5) 458,403 5.7% 1990 South Bundy Drive Los Angeles, California 90025 304 E. 45th Associates 500,000 6.3% C/O Williams Real Estate Company, Inc. 530 5th Avenue New York, New York 10036 McCrae Holdings Inc. 512,993 6.4% C/O Chemical Bank 270 Park Avenue New York, New York 10017 (1) For the purposes of calculating each person's percentage and that of all officers and directors as a group, shares which may be acquired within 60 days upon the exercise of warrants, stock options have been treated as outstanding. (2) Includes 111,111 shares issuable upon the exercise of outstanding stock options and 55,000 shares beneficially held by Mrs. Seidenglanz for which Mr. Seidenglanz disclaims control. (3) With respect to Mr. Parks, the number of shares in the table does not include 502,960 shares held as pledgee by 35 Lake Avenue (a limited partnership which is affiliated with Mr. Parks) which is the assignee of Olympic National Bank, under a pledge given by Mr. Seidenglanz to secure obligations under a note in favor of the bank in which the current amount due is approximately $150,000. Mr. Seidenglanz is presently in default under the note. The pledge agreement permits pledgee to register the shares in its name and exercise voting rights prior to foreclosure. Mr. Parks disclaims beneficial ownership with respect to the 502,960 excluded shares. Accordingly, the 502,960 shares remain included in the amount of shares reported as beneficially owned by Mr. Seidenglanz. (4) Includes 344,590 shares of Common Stock held by partnerships in which Mr. Parks is a partner and 37,500 shares issuable upon the exercise of outstanding warrants held by partnerships in which Mr. Parks is a partner. (5) Includes 91,351 shares transferred to Mr. Parks by Mr. Seidenglanz under a letter of agreement in settlement of professional fees. The shares have been removed from Mr. Seidenglanz' total and added to Mr. Parks' total. At April 1, 1997, the shares had not been transferred. Mr. Seidenglanz has stated that he also transferred 100,000 shares to his attorney. The 100,000 shares have been removed from Mr. Seidenglanz's total even though the shares had not been transferred at April 1, 1997. Security Ownership of Management The following table sets forth information with respect to the beneficial ownership of the Company's common stock as of April 1, 1997 by all the Company's directors and the Company's chief executive officer and the four other most highly compensated executive officers of the Company at the end of 1996. Except as otherwise noted, and subject to applicable community property and similar laws, each person listed has sole voting power (if applicable) and investment discretion with respect to the securities shown as beneficially owned. An asterisk (*) denotes beneficial ownership of less than 1%. Name and Address Amount and Nature of Percent of Of Beneficial Owner Beneficial Ownership(1) Class(1) Randolph D. Blim (2) 40,387 * Emory M. Cohen (3) 203,900 2.6% James R. Parks (4) (5) (6) 458,403 5.7% Leon D. Silverman (7) 59,425 * Cornelius McCarthy (8) 10,000 * Robert McClain (9) 30,000 * Ronald Zimmerman (10) 10,000 * All Directors and Officers as a Group 812,115 10.18% (7 persons) (11) (1) For purposes of calculating each person's percentage, shares which may be acquired within 60 days upon exercise of warrants or stock options have been treated as outstanding. (2) Includes 29,527 shares issuable upon exercise of stock options (3) Includes 58,249 shares issuable upon exercise of stock options (4) Includes 344,590 shares of Common Stock held by partnerships in which Mr. Parks is a partner and 37,500 shares issuable upon the exercise of outstanding warrants held by partnerships in which Mr. Parks is a partner. (5) With respect to Mr. Parks, the number of shares in the table does not include 502,960 shares held as pledgee by 35 Lake Avenue (a limited partnership which is affiliated with Mr. Parks) which is the assignee of Olympic National Bank, under a pledge given by Mr. Seidenglanz to secure obligations under a note in favor of the bank in which the current amount due is approximately $150,000. Mr. Seidenglanz is presently in default under the note. The pledge agreement permits pledgee to register the shares in its name and exercise voting rights prior to foreclosure. Mr. Parks disclaims beneficial ownership with respect to the 502,960 excluded shares. Accordingly, the 502,960 shares remain included in the amount of shares reported as beneficially owned by Mr. Seidenglanz. (6) Includes 91,351 shares transferred to Mr. Parks by Mr. Seidenglanz under a letter of agreement in settlement of professional fees. The shares have been removed from Mr. Seidenglanz' total and added to Mr. Parks' total. At April 1, 1997, the shares had not been transferred. (7) Includes 48,565 shares issuable upon exercise of stock options (8) Includes 10,000 shares issuable upon exercise of stock options. (9) Includes 30,000 shares issuable upon exercise of stock options. (10)Includes 10,000 shares issuable upon exercise of stock options. (11) Includes 186,341 shares issuable on exercise of stock options and 37,500 shares issuable upon exercise of warrants. Item 13. CERTAIN TRANSACTIONS James R. Parks, Chairman of the Board and Chief Executive Officer of the Company, is a member of Parks, Palmer, Turner & Yemenidjian (PPTY), an accounting firm, which provides tax accounting and management consulting services to the Company. PPTY's billings for the year ended December 31, 1996 were approximately $39,000. Mr. Parks purchased 60,000 shares of Laser-Pacific Common Stock from the company in November 1996 at $.50 per share. The shares purchased are subject to 144 Trade Restrictions. On the date of the transaction, the last trade on NASDAQ was at $.75. In 1993, the Company borrowed amounts ranging from $100,000 to $225,000 from Delores C. Biller, wife of Gregory R. Biller and from Partnerships in which Mr. Parks was a partner. Each of the borrowings was evidenced by a promissory note which provided that the borrowings were to be fully repaid on or before March 31, 1994, and until fully repaid, each of the borrowings would accrue interest at the rate of 14% per annum payable quarterly. During 1994, and 1995, the loans were partially repaid and to the extent not repaid were extended to August 31, 1995, and again to November 30, 1996. All notes were fully repaid in 1996. As additional consideration for making and then extending the loans, the Company granted warrants to purchase the Company's Stock at prices ranging from $.50 to $1.6888 per share. In total, the participants were issued 352,500 warrants. None of the warrants have been exercised. As of April 1, 1997, 282,500 warrants had expired only 70,000 are exersiable. In connection with Gregory L. Biller's retirement on March 31, 1996 the Company entered into a settlement agreement with Mr. Biller for any and all claims he may have had against the Company. Mr. Biller was paid $75,000 as of the date of the agreement and an additional $100,000 in October 1996. The Company had previously accrued $150,000 for past due wages. These amounts included any and all payments made for past due wages, reimbursement of interest charges for the delayed sale of real estate caused by his guarantee to the Bank of California and any emotional distress and suffering. Due to the nature of the payments they are not included as compensation on the summary compensation table. In April 1993 the Company retired debentures payable to Gregory L. Biller and PPTY in the principal amounts of $500,000 and $100,000 respectively. Bank of California, a lender to the Company, brought suit against Mr. Biller and PPTY alleging that Mr. Biller and PPTY had executed agreements subordinating their respective right to the repayment of principal amount of the debentures to repayment to the Bank of California's loan to the Company. In 1994 the Bank of California obtained a summary judgment against Mr. Biller in the amount of $500,000. PPTY believed that they were not parties to the subordination agreement andthat they had a valid cause of action against Bank of California. In March 1995, after extensive negotiations the Company amended its loan agreement with Bank of California. As part of the renegotiation of the loan agreement with the Bank of California, Bank of California agreed to drop its suit against PPTY and not to enforce its judgment against Mr. Biller on the condition that PPTY waive any cause of action against the Bank of California and that the Company continue to timely perform its obligations under the renegotiated loan agreement. In the event Bank of California were ever to enforce its judgment against Mr. Biller, it is likely that Mr. Biller would have a right of subrogation against the company. The Company had outstanding borrowings aggregating $400,000 at December 31, 1995 with the Bank of California under an amended loan agreement. The loan is secured by certain real property, payable in monthly installments of up to $65,000 plus interest at prime plus 3%. The loan was paid in full as of August, 1996. 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: These documents are listed in the Index to the Consolidated Financial Statements and Financial Statement Schedules. 3. Exhibits: 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) 10.5 Employment Agreement dated as of May 15, 1990 between the Company and Emory Cohen. (1). 10.7 Credit Agreement dated as of September 28, 1990 between the Company and The Bank of California, N.A., as amended by the First Amendment to Credit Agreement dated as of October 12, 1990 and as further amended by the Second Amendment to Credit Agreement dated as of June 3, 1991. (1) 10.7A Letter of Agreement dated August 7, 1991 between the Company and The Bank of California, N.A., further amending the Credit Agreement filed as Exhibit 10.7. (3) 10.7B Commitment Letter dated April 8, 1992 from The Bank of California, N.A. (4) 10.7C Fourth Amendment to Credit Agreement Signed on June 18, 1992. (5) 10.7D Fifth Amendment to Credit Agreement Signed July 31, 1992. (5) 10.7E Amended and Restated Credit Agreement between the Company and The Bank of California dated March 1, 1995. (Filed herewith) 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. (Filed herewith) 10.9 Opinions of Cooper & Dunham, patent counsel to the Company, dated June 4, 1991 and June 6, 1991. (2) 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) 10.13 Robert E. Seidenglanz Employment Severance Agreement signed October 20, 1993. (6) 10.14 Bank of America Amended Loan Agreement dated February 29, 1996. (7) 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. (Filed Herewith) 22.1 List of Subsidiaries. (4) 24.4 Consent of Cooper & Dunham, patent counsel (4). (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 May 13, 1994 with the Company's Form 10-Q. (7) Previously filed April 14, 1996 with the Company's Form 10K. (b Reports on Form 8-K There were no reports on Form 8-K filed by the Registrant during the last quarter of the period covered by this report. 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 April 2, 1996. 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. Signature Title Date /s/ James R. Parks James R. Parks Chairman of the Board and April 2, 1996 Chief Executive Officer (Principal Executive Officer) /s/ Emory M. Cohen Emory M. Cohen President, Chief Operating Officer and Director April 2, 1996 /s/ Robert McClain Robert McClain Vice President and Chief Financial Officer April 2, 1996 /s/ Cornelius P. McCarthy III Cornelius P. McCarthy III Director April 2, 1996

Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-K’ Filing    Date    Other Filings
3/31/04
8/3/00
12/31/9810-K,  DEF 14A
7/23/98
Filed on:4/14/97
4/3/97
4/1/97
3/31/9710-Q
3/14/97
1/13/97
For Period End:12/31/96DEF 14A,  NT 10-K
11/30/96
6/6/96
4/14/96
4/2/96
3/31/9610-Q,  10-Q/A,  NT 10-Q
3/1/96
2/29/96
1/12/96
1/1/96
12/31/95
8/31/95
7/24/95
4/12/95
3/1/95
1/1/95
12/31/94
5/13/94
3/31/94
10/20/93
8/12/92
8/3/92
7/31/92
6/18/92
4/10/92
4/8/92
1/1/92
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