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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K/A





Amendment No. 1





FOR ANNUAL AND TRANSITION REPORTS


PURSUANT TO SECTIONS 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





(Mark One)





|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------




For the fiscal year ended December 31, 2001





OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  [NO FEE REQUIRED]
|- |  | -----------------------------------------------------------------------------------------------------------




For the transition period from
 to





Commission file number 000-29642





FILM ROMAN, INC.


(Exact name of registrant as specified in charter)





Delaware

95-4585357(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)





12020 Chandler Boulevard, Suite 300


North Hollywood, California 91607


(Address of principal executive offices)(Zip
Code)





Registrants telephone number, including area code:  (818) 761-2544





Securities registered pursuant to 12(b) of the Act:


None





Securities registered pursuant to 12(g) of the Act:


Common Stock, $.01 par value


(Title of Class)





Check 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 at least the past 90 days.    YES  x    NO  ̈ .





Check if 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 10-K or any amendment to this Form 10-K.  ̈





As of June 3, 2002, the aggregate
market value of Film Romans common stock, par value $0.01 per share (Common Stock) held by nonaffiliates of the registrant was approximately $1,163,902 based upon the last reported sales price of the Common Stock as reported by the
National Association of Securities Dealers Over the Counter Bulletin Board (NASD OTCBB). Shares of Common Stock held by each executive officer, director, holder of greater than 10% of the outstanding Common Stock of the registrant and
persons or entities known to the registrant to be affiliates of the foregoing have been excluded in that such persons may be deemed to be affiliates. This assumption regarding affiliate status is not necessarily a conclusive determination for other
purposes.





As of July 15, 2002, 8,577,690 shares of Common Stock were outstanding.





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This Amendment No. 1 to the Form 10-K of Film Roman, Inc. (the Company) for the year ended
December 31, 2001 is amending the Companys Form 10-K to correctly state the following: (1) the number of authorized shares of Common Stock and preferred stock, par value $0.01 per share (Preferred Stock) of the Company (See
Item 8Financial Statements and Supplementary Data) and (2) the aggregate market value of the Companys Common Stock held by nonaffiliates as of March 15, 2002 was approximately $905,257 based upon the last reported sales price
of the Common Stock as reported by the National Association of Securities Dealers Over the Counter Bulletin Board. Shares of Common Stock held by each executive officer, director, holder of greater than 10% of the outstanding Common Stock of the
registrant and persons or entities known to the registrant to be affiliates of the foregoing were excluded in that such persons may be deemed to be affiliates. This assumption regarding affiliate status is not necessarily a conclusive determination
for other purposes.




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TABLE OF CONTENTS





PART II



1Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

1SIGNATURES

2INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1




1




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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION.    This Report contains
statements that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words expect,
estimate, anticipate, predict, believe, plan, should, will, may, projects and similar expressions and variations thereof are intended to
identify forward-looking statements. Such statements appear in a number of places in this filing and include statements regarding the intent, belief or current expectations of the Company, its directors or officers with respect to, among other
things, (a) trends affecting the financial condition or results of operations of the Company, (b) the business and growth strategies of the Company, and (c) the Companys objectives, planned or expected activities and anticipated financial
performance. The stockholders of the Company are cautioned not to put undue reliance on such forward-looking statements. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual
results may differ materially from those projected in this Report, for the reasons, among others, discussed in the Section Managements Discussion and Analysis of Financial Condition and Results of OperationsRisk Factors. The
Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K filed by the Company.





PART II





Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The
financial statements and supplementary data are set forth in this annual report on Form 10-K/A commencing on page F-1.




1




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SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of the 23 rd day of July, 2002.





FILM ROMAN, INC.By:

/s/    JOHN HYDEJohn Hyde President, Chief
Executive Officer and acting Chief Financial Officer




2




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FILM ROMAN, INC.





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





PageIndex to Consolidated Financial Statements

F-1FILM ROMAN, INC.Report of Independent Auditors

F-2Consolidated Balance Sheets as of December 31, 2000 and 2001

F-3Consolidated Statements of Operations for the Years Ended December 31, 1999, 2000 and 2001

F-4Consolidated Statements of Stockholders Equity (Deficiency) for the Years Ended December 31, 1999, 2000, and
2001

F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001

F-6Notes to Consolidated Financial Statements

F-7




F-1




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##### Table of Contents

REPORT OF INDEPENDENT AUDITORS





The Board of Directors


Film Roman, Inc.





We have audited the accompanying consolidated balance sheets of Film Roman, Inc. as of December 31, 2000 and
2001, and the related consolidated statements of operations, stockholders equity (deficiency), and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.





We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Film Roman, Inc. at December 31, 2000 and 2001, and the
consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.





ERNST & YOUNG LLP





Los Angeles, California


March 14, 2002




F-2




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FILM ROMAN, INC.





CONSOLIDATED BALANCE SHEETS





December 31,2000


2001ASSETSCash and cash equivalents

$
4,203,221


$
2,776,757Accounts receivable


249,893



259,784Film costs, net of accumulated amortization of $54,322,930 (2000) and $50,663,342 (2001)


24,558,709



22,030,027Property and equipment, net of accumulated depreciation and amortization of $2,437,270 (2000) and $2,797,025
(2001)


735,552



493,552Deposits and other assets


652,455



612,492Total assets

$
30,399,830


$
26,172,612LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)Accounts payable

$
1,672,785


$
1,678,063Accrued expenses


1,826,860



1,964,982Deferred revenue


24,815,940



26,312,646Total liabilities


28,315,585



29,955,691CommitmentsStockholders equity (deficiency):Preferred Stock, $.01 par value, 10,000,000 shares authorized, none issued






Common Stock, $.01 par value, 40,000,000 shares authorized, 8,565,190 shares issued and outstanding in 2000 and
8,577,690 shares issued and outstanding in 2001issued and outstanding in 2001


85,652



85,777Additional paid-in capital


6,370,365



36,379,615Accumulated deficit


(34,371,772
)


(40,248,471
)Total stockholders equity (deficiency)


2,084,245



(3,783,079
)Total liabilities and stockholders equity (deficiency)

$
30,399,830


$
26,172,612





See accompanying notes.




F-3




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FILM ROMAN, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS





Year Ended December 31,1999


2000


2001Revenue

$
48,605,144


$
44,552,140


$
44,088,173Cost of revenue


48,683,993



43,106,536



45,345,423Selling, general and administrative expenses


7,756,561



4,308,109



4,337,615Operating loss


(7,835,410
)


(2,862,505
)


(5,594,865
)Interest income


359,118



278,196



82,166Loss before cumulative effect of a change in accounting principle and provision for income taxes


(7,476,292
)


(2,584,309
)


(5,512,699
)Cumulative effect of a change in accounting principle










(364,000
)Provision for income taxes


(16,763
)


(1,588
)


Net loss

$
(7,493,055
)

$
(2,585,897
)

$
(5,876,699
)Loss before cumulative effect of a change in accounting principle, per common share basic and diluted


$
(0.88
)

$
(0.30
)

$
(0.64
)Net loss per common share basic and diluted

$
(0.88
)

$
(0.30
)

$
(0.69
)Weighted average number of shares outstanding basic and diluted


8,523,609



8,563,682



8,571,560





See accompanying notes.




F-4




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##### Table of Contents

FILM ROMAN, INC.





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY)





Common Stock

Additional Paid-In Capital

Accumulated Deficit


Total Stockholders Equity (Deficiency)Shares

AmountBalance as of December 31, 1998

8,522,190

$
85,222

$
36,305,685

$
(24,292,820
)

$
12,098,087Options exercised

2,000


20


2,840






2,860Compensation expense relating to employee stock options







3,313






3,313Net loss










(7,493,055
)


(7,493,055
)Balance as of December 31, 1999

8,524,190


85,242


36,311,838

$
(31,785,875
)

$
4,611,205Options exercised

41,000


410


58,527






58,937Net loss










(2,585,597
)


(2,585,897
)Balance as of December 31, 2000

8,565,190

$
85,652

$
36,370,365

$
(34,371,772
)

$
2,084,245Options exercised

12,500


125


9,250






9,375Net loss










(5,876,699
)


(5,876,699
)Balance as of December 31, 2001

8,577,690

$
85,777

$
36,379,615

$
(40,248,471
)

$
(3,783,079
)





See accompanying notes.




F-5




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FILM ROMAN, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS





Year Ended December 31,1999


2000


2001Operating activities:Net loss

$
(7,493,055
)

$
(2,585,897
)

$
(5,876,699
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


462,562



415,596



359,755Amortization of film costs


48,683,993



43,106,536



45,345,423Compensation expense relating to employee stock options


3,313







Cumulative effect of a change in accounting principle










364,000Changes in operating assets and liabilities:Accounts receivable


608,386



230,939



(9,891
)Film costs


(46,483,717
)


(48,961,750
)


(43,180,741
)Deposits and other assets


32,112



(195,362
)


39,963Accounts payable


1,086,484



(41,920
)


5,278Accrued expenses


145,886



(669,721
)


138,122Deferred revenue


(344,414
)


5,488,687



1,496,706Net cash used in operating activities


(3,298,450
)


(3,212,892
)


(1,318,084
)Investing activities:Additions to property and equipment


(434,123
)


(200,497
)


(117,755
)Net cash used in investing activities


(434,123
)


(200,497
)


(117,755
)Financing activities:Option and warrants exercised and other


2,860



58,937



9,375Net cash provided by financing Activities


2,860



58,937



9,375Net decrease in cash and cash equivalents


(3,729,713
)


(3,354,452
)


(1,426,464
)Cash and cash equivalents at beginning of period


11,287,386



7,557,673



4,203,221Cash and cash equivalents at end of period

$
7,557,673


$
4,203,221


$
2,776,757Supplemental disclosure of cash flow information:Cash paid during the period for:Interest

$



$



$
Income taxes

$
16,763


$
1,588


$






See accompanying notes.




F-6




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##### Table of Contents

FILM ROMAN, INC


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2001





1.    Summary of Significant Accounting Policies





Business and
Organization





Film Roman, Inc., a Delaware corporation (the Company), currently conducts all
of its operations through its wholly owned subsidiaries, Film Roman, Inc., a California corporation; Namor Productions, Inc., a California corporation; Chalk Line Productions, Inc., a California corporation; Diversion Entertainment, Inc., a Delaware
corporation and Level 13 Entertainment, Inc., a Delaware corporation, and Special Project Films, Inc., a Delaware corporation. The Company operates in one segment and develops, produces and distributes a broad range of television programming for the
television network, cable television, first-run domestic syndication and international markets.





Management
Strategies and Basis of Presentation





At December 31, 2001, the Company had cash and cash equivalents of
approximately $2.8 million compared to $4.2 million at December 31, 2000. The Companys cash and cash equivalent balances have continued to decline since December 31, 2000, and the Company would expect cash balances to decline further during
fiscal 2002.





Throughout 2001, the Company has taken a substantial number of actions in order to implement
significant cost reductions. Company management has taken these steps without severely impacting operations.





Management believes that its existing cash balances and cash equivalents, combined with anticipated cash inflows and outflows, will be sufficient to meet its cash requirements through at least the next 12 months. In the event that
cash flows are not as anticipated, the Company may implement further cost reductions.





In addition, the Company
may need to secure additional equity or debt financing during fiscal 2002/2003 in order to fund its operations and/or fulfill its growth strategies. However, recent operating losses, the Companys declining cash balances, trends in the
entertainment industry adversely affecting independent production companies similar to the Company and the Companys historical stock performance may make it difficult for the Company to attract equity investments on terms that are deemed to be
favorable to the Company. In addition, the Companys losses may make it more difficult for the Company to attract debt financing. As a consequence, there can be no assurance that the Company would be successful in arranging for additional
equity or debt financing at levels sufficient to meet its planned needs, should it be required to do so. The failure to obtain such financing could have an adverse effect on the implementation of the Companys growth strategies and its ability
to successfully run its operation.





The Company believes it has sufficient flexibilities in order to operate for
the foreseeable future. Accordingly, the accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern.




F-7




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##### Table of Contents



FILM ROMAN, INC


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2001







1.    Summary of Significant Accounting Policies
(Continued)





Cash and Cash Equivalents





The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less and investments in
money market accounts to be cash equivalents.





Concentration of Credit Risk





Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash equivalents and
trade receivables. The Company places its cash equivalents with high credit, quality financial institutions. The Company has not incurred any losses relating to these investments.





The Company performs production services for various companies within the entertainment industry and licenses various rights in its product to distributors throughout the
world. The Company performs periodic credit evaluations of its customers financial condition and generally does not require collateral. At December 31, 2001, substantially all of the Companys trade receivables were from customers in the
entertainment industry. Receivables generally are due within 30 days. Credit losses relating to customers in the entertainment industry consistently have been within managements expectations.





Financial Instruments





Financial instruments are carried at historical cost which approximates fair value.





Revenue Recognition and Film Costs





Effective January 1, 2001, the Company
recognizes revenue based on the new accounting standard Statement of Position (SOP) 00-2 (see note 12). Revenue earned from fee-for-service productions is the principal source of revenue earned by the Company. During 2000 and 2001, such
revenues accounted for more than 90% of the Companys total revenues. License fees received by the Company for its work on fee-for-hire productions are recognized on an episode-by-episode basis as each episode is completed and delivered to the
customer in accordance with the terms of the existing arrangement.





Revenue earned from proprietary programs is
recognized as such programs are exploited in the markets in which the Company has retained ownership rights, typically upon the receipt of statements from the Companys licensees. In the event that a licensee pays the Company a nonrefundable
minimum guarantee at the beginning of a license term, the Company will record this amount as revenue if all of the criteria for recognition pursuant to SOP 00-2 is met.




F-8




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##### Table of Contents



FILM ROMAN, INC


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2001







1.    Summary of Significant Accounting Policies
(Continued)





Costs incurred in connection with the acquisition of story rights, the development
of stories, production and allocable overhead are capitalized as film costs. Film costs are stated at the lower of unamortized cost or fair value. The costs of fee-for-service produced episodes are capitalized and subsequently amortized to cost of
revenues at the time revenue is recognized. If the costs of an episode are expected to exceed the corresponding license fee, all costs incurred in excess of this license fee will be expensed to cost of revenues as incurred. The cost of each
proprietary program is capitalized and is amortized in the proportion that revenue realized relates to managements estimate of the total revenue expected to be realized from such programs.





Depreciation and Amortization





Property and equipment are recorded at cost. Depreciation on furniture and equipment is computed by the double-declining balance method over their estimated useful lives, ranging from five to seven
years. Leasehold improvements are amortized over their estimated useful lives, or the remaining term of the related lease, whichever is shorter, using the straight-line method.





Income Taxes





The
Company uses the liability method required by Financial Accounting Standards Board Statement (FAS) No. 109, Accounting for Income Taxes. Deferred taxes are provided for any differences between the carrying value of assets and liabilities
for financial reporting and tax purposes.





Stock-based Compensation





The Company accounts for its stock compensation arrangements under the provisions of Accounting Principles Board (APB) No. 25,
Accounting for Stock Issued to Employees and intends to continue to do so. The Company has adopted the disclosure provisions of FAS No. 123, Accounting for Stock-Based Compensation (see Note 9).





Use of Estimates





The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ from those estimates.





Net Loss Per Common Share





The per share data is based on the weighted average
number of common and common equivalent shares outstanding during the period. Common equivalent shares, consisting of outstanding stock options of 1,192,500 (1999), 1,525,250 (2000) and 1,247,000 (2001) are not included since they are antidilutive.




F-9




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FILM ROMAN, INC


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2001







2.    Film Costs





The components of unamortized film costs consist of the following:





December 31,2000

2001Film productions released, net of amortization

$
678,154

$
Film productions in process


22,549,666


21,844,184Film productions in development


1,300,889


185,843$
24,558,709

$
22,030,027





Based on managements estimates of future gross revenues as of
December 31, 2001, approximately 100% of unamortized film costs applicable to released films will be amortized during the three years ending December 31, 2004.





3.    Property and Equipment





Property
and equipment consists of the following:





December 31,2000


2001Leasehold improvements

$
398,577


$
398,577Furniture and fixtures


617,109



724,534Office equipment


2,157,136



2,167,4663,172,822



3,290,577Less accumulated depreciation and amortization


(2,437,270
)


(2,797,025
)$
735,552


$
493,552




F-10




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##### Table of Contents



FILM ROMAN, INC


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2001







4.    Income Taxes





The significant components of the Companys net deferred tax assets (liabilities), for which a 100% valuation allowance has been
provided and which have not been recognized in the Companys financial statements, are as follows:





December 31,2000


2001Film costs

$
29,269


$
Property and Equipment


4,276



92,915Nondeductible accrual


171,419



158,576Foreign Tax Credit Carryforward


162,995



162,995Other


278,818



48,539Net operating loss carryforwards


10,237,618



12,430,72210,884,395



12,893,747Valuation allowance


(10,884,395
)


(12,893,747
)$



$






The provision for income taxes is as follows:





December 31,1999

2000

2001Current:Foreign

$
16,763

$
1,588

$
$
16,763

$
1,588

$






A reconciliation of income tax computed at the statutory federal
income tax rate to the effective tax rate for the Company is as follows:





December 31,1999


2000


2001Benefit for income taxes at statutory rate of 35%

$
(2,655,788
)

$
(905,064
)

$
(2,056,908
)Permanent Differences


59,231



23,440



20,319Benefit of deferred tax assets not currently recognized


2,596,558



881,624



2,036,589$



$



$






At December 31, 2001, the Company had available federal and state
tax net operating loss carryforwards of approximately $32,775,286 and $16,696,340, respectively, expiring through 2021 and 2011, respectively. At December 31, 2001, the Company had available foreign tax credit carryforwards of approximately
$162,995. Under Section 382 of the Internal Revenue Code, the utilization of the net operating loss carryforward may be limited based on changes in the percentage of ownership of the Company.




F-11




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##### Table of Contents



FILM ROMAN, INC


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2001







5.    Stockholders Equity (Deficiency)





The Companys Board of Directors, without the approval of the holders of the Common Stock, is authorized to designate for
issuance up to 10,000,000 shares of preferred stock, par value $0.01 per share, in such series and with such rights, privileges and preferences as the Board of Directors may from time to time determine. Issuance of preferred stock may adversely
affect the rights, privileges and preferences afforded the holders of Common Stock, including a decrease in the amount available for distribution to holders of the Common Stock in the event of a liquidation or payment of preferred dividends.
Issuance of shares of preferred stock may also have the effect of preventing or delaying a change in control of the Company without further action by the stockholders and could make removal of present management of the Company more difficult. The
Company currently has no plans to designate and/or issue any shares of preferred stock.





6.    Commitments





The Company leases facilities for office space and its animation studios under an operating lease for a five-year
period expiring August 31, 2003 with an option for an additional five-year term. Under the terms of the lease agreement the Company is required to pay a pro-rata share of the buildings operating expenses, maintenance and property taxes. The
lease agreement includes certain free rent periods and an escalation in the monthly rental amount, as defined. The accompanying statements of operations for the years ended December 31, 1999, 2000 and 2001 reflect rent expense on a
straight-line basis over the term of the lease. The Company also has various lease agreements for equipment and additional office space which expire through 2004. The following is a schedule of the future minimum lease payments under all
noncancelable operating lease agreements:





Year ending December 312002

$
1,320,1562003


898,5442004


24,3722005


19,4282006


1,532Total minimum lease payments

$
2,264,032





Rent expense for the years ended December 31, 1999, 2000 and 2001,
prior to any allocation of rent to capitalized film costs, was $1,280,933, $1,224,079, and $1,237,130, respectively.





At December 31, 2001, the Company had outstanding employment agreements with various employees with initial terms ranging from one to two years. Under the terms of the agreements, the Company is obligated to pay the following
amounts:





Year ending December 312002

$
729,0582003


450,9752004


187,979$
1,368,012




F-12




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##### Table of Contents



FILM ROMAN, INC


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2001







7.    401(k) Profit Sharing 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 January 1, 1991 and was amended effective January 1, 1992. 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. The Company has received determination letters from the IRS indicating that
the above plan is qualified within the terms of the applicable provisions of the Employee Retirement Income Security Act of 1974.





For the years ended December 31, 1999, 2000, and 2001 the Company contributed $167,881, $180,395 and $155,020, respectively, to the plan on behalf of its employees.





8.    Significant Customers and Properties





In 1999, the Company earned revenue from two significant customers of $37,620,000 (77%) and $5,930,000 (12%). In 2000, the Company earned revenue from two significant customers of $31,420,000 (71%) and $11,110,000 (25%). In 2001, the
Company earned revenue from three significant customers of $27,590,000 (62%), $8,190,000 (19%) and $3,820,000 (9%).





In 1999, the Company earned revenue from four significant properties of $16,260,000 (33%), $14,740,000 (30%), $6,620,000 (14%) and $5,930,000 (12%). In 2000, the Company earned revenue from three significant properties of $15,750,000
(35%), $15,560,000 (35%), and $6,940,000 (16%). In 2001, the Company earned revenue from four significant properties of $14,390,000 (33%), $13,190,000 (30%), $6,950,000 (16%) and $3,550,000 (8%).





9.    Stock Option Plan





In
1996 the Company adopted a stock option plan (the 1996 Plan). All regular salaried employees of the Company may, at the discretion of the compensation committee of the Board of Directors, be granted incentive and non-qualified stock
options to purchase shares of Common Stock at an exercise price not less than 100% of the fair market value of such shares on the grant date. Directors of the Company, consultants and other persons who are not regular salaried employees of the
Company are not eligible to receive incentive stock options, but are eligible to receive non-qualified stock options.





The maximum number of shares subject to the 1996 Plan is 2,100,000 and the 1996 Plan will terminate on August 7, 2005, unless sooner terminated by the Board of Directors. The options generally vest over a five-year period and expire
ten years from the date of issuance.





On June 16, 1999, the shareholders ratified the 1999 Non-Employee
Directors Stock Option Plan (A1999 Plan). As amended by the Board of Directors the 1999 Plan provides that on the date of each annual meeting of the Company, each non-employee Director who is then serving on the Board shall be granted
options to purchase 5,000 shares of Common Stock with an effective date of grant as of the date such annual meeting. The exercise price for such option shall be 100% of the fair market value of such shares on the grant date. The maximum number of
shares subject to the 1999 Plan is 100,000 and the




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##### Table of Contents



FILM ROMAN, INC


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2001







9.    Stock Option Plan (Continued)





1999 Plan will terminate on June 16, 2009, unless sooner terminated by the Board of Directors. The options vest upon issuance and expire ten years from the date
of issuance.





In June 2000, the Company combined both the 1996 Plan and 1999 Plan into one combined plan called
the Amended and Restated 2000 Stock Option Plan (2000 Plan). The maximum number of shares subject to the 2000 Plan is the 2,200,000 shares that were subject to the previous plans. Options granted under the 2000 Plan vest in the same
manner as the 1996 Plan and the 1999 Plan and expire ten years from the date of issuance. The 2000 Plan will terminate on June 14, 2010, unless sooner terminated by the Board of Directors.





The Company applies Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock
options. Accordingly, no compensation cost has been recognized. Had compensation cost been determined based on the fair value at the grant date for such awards, as set forth under FASB Statement No. 123, Accounting for Stock-Based
Compensation (FAS 123), the Companys net loss and net loss per common share would have been increased to the pro forma amounts indicated below:





Year ended December 31,1999


2000


2001Net lossAs reported

$
(7,493,055
)

$
(2,585,897
)

$
(5,876,699
)Pro forma

$
(7,831,169
)

$
(2,805,502
)

$
(6,345,587
)Net loss per shareAs reported

$
(0.88
)

$
(0.30
)

$
(0.69
)Pro forma

$
(0.92
)

$
(0.33
)

$
(0.74
)





Since compensation expenses associated with option grants is
recognized over the vesting period, the initial impact of applying FAS 123 on pro forma net loss and pro forma net loss per share is not representative of the potential impact on pro forma amounts in future years, when the effect of the recognition
of a portion of compensation expenses from multiple awards would be reflected.





The weighted average fair value of
options granted during the year was $2.09, $1.18 and $0.77 for the years ended December 31, 1999, 2000 and 2001. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:





Year ended December 31,1999


2000


2001Dividend yield







Expected volatility

96.8
%

96.1
%

102.1
%Risk-free interest rate

6.38
%

6.52
%

5.33
%Expected term (years)

8


8


8




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##### Table of Contents



FILM ROMAN, INC


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2001







9.  Stock Option Plan (Continued)





A summary of stock option activity under the Plan is as follows:





Shares


Weighted Average Exercise
PriceBalance at December 31, 1998 (including 780,009 options exercisable at a weighted average exercise price of $1.32 per
share)

1,829,034Granted

203,000


$
2.457Exercised

(69,500
)

$
0.049Cancelled

(770,034
)

$
1.607Balance at December 31, 1999 (including 631,817 options exercisable at a weighted average exercise price of $1.53 per
share)

1,192,500Granted

630,000


$
1.367Exercised

(41,000
)

$
1.529Cancelled

(256,250
)

$
1.585Balance at December 31, 2000 (including 936,450 options exercisable at a weighted average exercise price of $1.51 per
share)

1,525,250Granted

255,000


$
0.877Exercised

(12,500
)

$
0.750Cancelled

(520,750
)

$
1.370Balance at December 31, 2001 (including 810,669 options exercisable at a weighted average exercise price of $1.51 per
share)

1,247,000





Exercise prices for options outstanding as of December 31, 2001,
ranged from $0.72 to $2.94. The weighted-average remaining contractual life of these options is 7.3 years.





As of
December 31, 2000 and 2001, shares available under the 2000 Plan for future grants of options were 631,280 and 897,030, respectively.





10.    Related Party Transactions





A firm in which an outside director
of the Company is a shareholder provides accounting and tax services to the Company and fees paid to that firm during 2000 and 2001 amounted to $2,500 and $6,750 respectively. A firm in which an outside director of the Company is the principal acts
as a legal consultant to the Company and fees paid to that firm during 1999, 2000 and 2001 amounted to $87,615, $140,706 and $250,296, respectively.




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##### Table of Contents



FILM ROMAN, INC


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2001







11.    Change in Accounting Principle





In June 2000, Statement of Position 00-2 Accounting by Producers or Distributors of Films (SOP 00-2) was issued.
SOP 00-2 establishes new financial accounting and reporting standards for producers and distributors of films, including changes in accounting for advertising, development and overhead costs. The Company adopted the provisions of SOP 00-2 as of
January 1, 2001.





SOP 00-2 requires that certain indirect overhead costs and development costs for abandoned
projects be charged directly to expense, instead of those costs being capitalized to film costs as was required under the previous accounting model. In connection with the adoption of SOP 00-2, the Company recorded a non cash charge of $364,000 to
reduce the carrying value of its film inventory. Such amount is primarily due to the expensing of certain indirect overhead costs and development costs for abandoned projects, which were previously capitalized. The non-cash charge is reflected as a
cumulative effect of a change in accounting principle in the accompanying consolidated statement of operations for the year ended December 31, 2001.





12.    Pentamedia Transaction





The Company had anticipated the receipt
of approximately $10,000,000 to $15,000,000 in cash from the issuance and sale of common stock to Pentamedia Graphics, Ltd. (Pentamedia). However, after several attempts to restructure the stock purchase transaction between the two
companies, and two closing date extensions, Pentamedia continued to provide no satisfactory evidence of its ability to deliver the agreed upon purchase price in the agreed upon manner. Consequently, on May 18, 2001, Film Roman terminated the
transaction between the two companies and later submitted a demand for arbitration on the grounds that Pentamedia had breached the agreements between the two companies. Film Roman is no longer constrained from pursuing other strategic alliances and
financing sources. On July 9, 2001, the Company received $350,000 in cash from Pentamedia as a result of the Settlement Agreement entered into by the two companies. The $350,000 was offset against costs incurred under selling, general and
administrative expenses. Additional terms of the Settlement Agreement included each partys release of the other party from any past or future claims arising out of the prior agreements between the companies.




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##### Table of Contents



FILM ROMAN, INC


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2001







14.    Quarterly Information (Unaudited)





(In thousands, except per share and share data)

2001 Three months
endedMarch 31


June 30


September 30


December 31Statement of Operations Data:Revenue

$
19,199


$
9,401


$
3,715


$
11,773Expenses:Cost of revenue


18,254



9,287



4,405



13,399Selling, general and administrative expenses


923



1,416



1,342



657Operating loss


22



(1,032
)


(2,032
)


(2,283
)Interest income (expense), net


40



8



19



15Loss before cumulative effect of a change in accounting principle and provision for income taxes


62



(1,294
)


(2,013
)


(2,268
)Cumulative effect of a change in accounting principle


364











Provision for income taxes


0











Net loss


(302
)


(1,294
)


(2,013
)


(2,268
)Loss before cumulative effect of a change in accounting principle, per common share basic and diluted


$
0.01


$
(0.15
)

$
(0.23
)

$
(0.26
)Net loss per common share basic and diluted

$
(0.04
)

$
(0.15
)

$
(0.23
)

$
(0.26
)Weighted average number of shares outstanding basic and diluted


8,565,190



8,565,465



8,577,690



8,577,690(In thousands, except per share and share data)

2000 Three months
endedMarch 31


June 30


September 30


December 31Statement of Operations Data:Revenue

$
12,686


$
7,936


$
5,040


$
18,880Expenses:Cost of revenue


12,910



7,935



4,652



17,909Selling, general and administrative expenses


1,307



872



834



1,295Operating loss


(1,221
)


(871
)


(446
)


(324
)Interest income (expense), net


71



71



71



65Loss before provision for income taxes


(1,150
)


(800
)


(375
)


(259
)Provision for income taxes


2











Net loss


(1,152
)


(800
)


(375
)


(259
)Net loss per common share basic and diluted

$
(0.13
)

$
(0.09
)

$
(0.04
)

$
(0.03
)Weighted average number of shares outstanding basic and diluted


8,559,124



8,565,190



8,565,190



8,565,190




F-17