Attached files
file | filename |
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EX-31.2 - Point.360 | v166064_ex31-2.htm |
EX-31.1 - Point.360 | v166064_ex31-1.htm |
EX-32.2 - Point.360 | v166064_ex32-2.htm |
EX-32.1 - Point.360 | v166064_ex32-1.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
þ
Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the
quarterly period ended September 30, 2009 or
o Transition report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
For the
transition period from to_______
Commission
file number 001-33468
Point.360
|
||
(Exact
Name of Registrant as Specified in Its
Charter)
|
California
|
01-0893376
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
incorporation
or organization)
|
|
2777
North Ontario Street, Burbank, CA
|
91504
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(818) 565-1400
|
||
(Registrant’s
Telephone Number, Including Area
Code)
|
(Former
Name, Former Address and Former Fiscal Year,
|
||
if
Changed Since Last
Report)
|
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.
þ
Yes o No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
o Yes ¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o
|
Accelerated filer o
|
Non-accelerated filer o
|
Smaller reporting
company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
o Yes þ No
As of
September 30, 2009, there were 10,491,166 shares of the registrant’s common
stock outstanding.
PART
I – FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
POINT.360
CONSOLIDATED
BALANCE SHEETS
(in
thousands)
June
30,
2009*
|
September
30,
2009
(unaudited)
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 5,235 | $ | 4,378 | ||||
Accounts
receivable, net of allowances for doubtful accounts of $537 and
$537, respectively
|
8,347 | 7,453 | ||||||
Inventories,
net
|
401 | 421 | ||||||
Prepaid
expenses and other current assets
|
819 | 551 | ||||||
Prepaid
income taxes
|
1,877 | 1,565 | ||||||
Deferred
income taxes
|
- | - | ||||||
Total
current assets
|
16,679 | 14,368 | ||||||
Property
and equipment, net
|
20,417 | 20,159 | ||||||
Other
assets, net
|
298 | 617 | ||||||
Goodwill
|
- | - | ||||||
Total
assets
|
$ | 37,394 | $ | 35,144 | ||||
Liabilities
and Shareholders’ Equity
|
||||||||
Current
liabilities:
|
||||||||
Current
portion of borrowings under notes payable
|
$ | 2,086 | 2,106 | |||||
Accounts
payable
|
1,708 | 1,319 | ||||||
Accrued
wages and benefits
|
1,438 | 1,312 | ||||||
Other
accrued expenses
|
1,220 | 1,419 | ||||||
Current
portion of deferred gain on sale of real estate
|
178 | 178 | ||||||
Total
current liabilities
|
6,630 | 6,334 | ||||||
Notes
payable, less current portion
|
10,844 | 10,313 | ||||||
Deferred
gain on sale of real estate, less current portion, and other long-term
liabilities
|
1,911 | 1,903 | ||||||
Total
long-term liabilities
|
12,755 | 12,216 | ||||||
Total
liabilities
|
19,385 | 18,550 | ||||||
Commitments
and contingencies
|
- | - | ||||||
Shareholders’
equity
|
||||||||
Parent
company’s invested equity
|
- | - | ||||||
Preferred
stock – no par value; 5,000,000 shares authorized; none
outstanding
|
- | - | ||||||
Common
stock – no par value; 50,000,000 shares authorized; 10,148,700 and
10,491,166 shares
issued and outstanding on June 30, 2008 and 2009,
respectively
|
21,025 | 21,525 | ||||||
Additional
paid-in capital
|
9,547 | 9,604 | ||||||
Retained
(deficit)
|
(12,563 | ) | (14,535 | ) | ||||
Total
shareholders’ equity
|
18,009 | 16,594 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 37,394 | $ | 35,144 |
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
*Amounts
derived from audited financial
statements
|
2
POINT.360
CONSOLIDATED
STATEMENTS OF INCOME (LOSS)
(Unaudited)
Three Months Ended
September 30,
|
||||||||
2008
|
2009
|
|||||||
Revenues
|
$ | 11,556,000 | $ | 9,419,000 | ||||
Cost
of services
|
(7,655,000 | ) | (7,360,000 | ) | ||||
Gross
profit
|
3,901,000 | (2,059,000 | ) | |||||
Selling,
general and administrative expense
|
(3,710,000 | ) | (3,788,000 | ) | ||||
Research
and development expense
|
- | (109,000 | ) | |||||
Operating
income (loss)
|
191,000 | (1,838,000 | ) | |||||
Interest
expense
|
(129,000 | ) | (222,000 | ) | ||||
Interest
income
|
23,000 | 9,000 | ||||||
Other
Income
|
21,000 | 79,000 | ||||||
Income
(loss) before income taxes
|
106,000 | (1,972,000 | ) | |||||
Provision
for income taxes
|
(47,000 | ) | - | |||||
Net
income (loss)
|
$ | 59,000 | $ | (1,972,000 | ) | |||
Earnings
(loss) per share:
|
||||||||
Basic:
|
||||||||
Net
income (loss)
|
$ | 0.01 | $ | (0.19 | ) | |||
Weighted
average number of shares
|
10,504,072 | 10,152,422 | ||||||
Diluted:
|
||||||||
Net
income (loss)
|
$ | 0.01 | $ | (0.19 | ) | |||
Weighted
average number of shares including the dilutive effect of stock
options
|
10,504,572 | 10,152,422 |
See
accompanying notes to consolidated financial statements.
3
POINT.360
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
|
||||||||
2008
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss)
|
$ | 59,000 | $ | (1,972,000 | ) | |||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Stock
based compensation expense
|
51,000 | 56,000 | ||||||
Depreciation
and amortization
|
1,244,000 | 991,000 | ||||||
Provision
for doubtful accounts
|
7,000 | - | ||||||
Changes
in assets and liabilities:
|
||||||||
(Increase)
decrease in accounts receivable
|
(914,000 | ) | 894,000 | |||||
(Increase)
in inventories
|
( 46,000 | ) | (19,000 | ) | ||||
(Increase)
decrease in prepaid expenses and other current assets
|
(491,000 | ) | 818,000 | |||||
(Increase)
decrease in other assets
|
174,000 | (323,000 | ) | |||||
(Increase)
in deferred tax asset
|
(70,000 | ) | - | |||||
Increase
(decrease) in accounts payable
|
111,000 | (389,000 | ) | |||||
Increase
(decrease) in accrued expenses
|
(375,000 | ) | 110,000 | |||||
Net
cash provided by (used in) operating activities
|
(250,000 | ) | 166,000 | |||||
Cash
used in investing activities:
|
||||||||
Capital
expenditures
|
(8,428,000 | ) | (471,000 | ) | ||||
Net
cash used in investing activities
|
(8,428,000 | ) | (471,000 | ) | ||||
Cash
flows provided by (used in) financing
activities:
|
||||||||
Amortization
of deferred gain on sale of real estate
|
(45,000 | ) | (45,000 | ) | ||||
Amortization
of non-compete agreement
|
- | 3,000 | ||||||
(Increase)
decrease in invested equity
|
(95,000 | ) | - | |||||
Increase
(decrease) in notes payable
|
5,548,000 | (475,000 | ) | |||||
Repayment
of capital lease and other Obligations
|
(27,000 | ) | (35,000 | ) | ||||
Net
cash provided by (used in) financing activities
|
5,381,000 | (552,000 | ) | |||||
Net
(decrease) in cash
|
(3,297,000 | ) | (857,000 | ) | ||||
Cash
and cash equivalents at beginning of period
|
13,056,000 | 5,235,000 | ||||||
Cash
and cash equivalents at end of period
|
$ | 9,759,000 | $ | 4,378,000 | ||||
Supplemental
disclosure of cash flow information - Cash paid for:
|
||||||||
Interest
|
$ | 114,000 | $ | 209,000 | ||||
Income
tax
|
$ | 395,000 | $ | - | ||||
Non-cash
investing activities:
|
||||||||
Stock
issued for deposits, property and equipment
|
$ | - | $ | 500,000 |
See
accompanying notes to consolidated financial statements.
4
POINT.360
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September
30, 2009
NOTE
1- THE COMPANY
The
Company provides high definition and standard definition digital mastering, data
conversion, video and film asset management and sophisticated computer graphics
services to owners, producers and distributors of entertainment and advertising
content. The Company provides the services necessary to edit, master,
reformat, convert, archive and ultimately distribute its clients’ film and video
content, including television programming feature films and movie
trailers. The Company’s interconnected facilities provide service
coverage to all major U.S. media centers.
The
Company seeks to capitalize on growth in demand for the services related to the
distribution of entertainment content, without assuming the production or
ownership risk of any specific television program, feature film or other form of
content. The primary users of the Company’s services are
entertainment studios and advertising agencies that choose to outsource such
services due to the sporadic demand of any single customer for such services and
the fixed costs of maintaining a high-volume physical plant.
The accompanying Consolidated Financial
Statements include the accounts and transactions of the Company, including those
of the Company’s only subsidiary, International Video Conversions, Inc.
(“IVC”). The accompanying Consolidated Financial Statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. All intercompany balances and transactions
have been eliminated in the consolidated Financial Statements.
The accompanying unaudited financial
statements have been prepared in accordance with generally accepted accounting
principles and the Securities and Exchange Commission’s rules and regulations
for reporting interim financial statements and footnotes. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three month period ended
September 30, 2009 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 2010. These financial
statements should be read in conjunction with the financial statements and
related notes contained in the Company’s Form 10-K for the period ended June 30,
2009. Certain immaterial reclassifications have been made to the
prior period’s financial statements to conform to the current year
presentation.
Earnings
Per Share
A reconciliation of the denominator of
the basic EPS computation to the denominator of the diluted EPS computation is
as follows (in thousands):
Three Months Ended
September 30,
|
||||||||
2008
|
2009
|
|||||||
Pro
forma weighted average of number of shares
|
||||||||
Weighted
average number of common shares outstanding used in computation of basic
EPS
|
10,504 | 10,152 | ||||||
Dilutive
effect of outstanding stock options
|
- | - | ||||||
Weighted
average number of common and potential Common shares outstanding used in
computation of Diluted EPS
|
10,504 | 10,152 | ||||||
Outstanding
stock options excluded in the computation of diluted EPS due to net
loss
|
- | 22 |
The weighted average number of common
shares outstanding was the same amount for both basic and diluted loss per share
in each of the periods presented. Potentially dilutive securities
outstanding of 22,000 and 0 September 30, 2009 and 2008, respectively, were
excluded from the computation of diluted earnings per share because the Company
reported a net loss, and the effect of inclusion would be antidilutive (i.e.,
including such securities would result in a lower loss per
share). These potentially dilutive securities consist of stock
options.
Fair
Value Measurements
As of September 30, 2009 and June 30,
2009, the carrying value of cash, accounts receivable, accounts
payable, accrued expenses and interest payable approximates fair value due to
the short-term nature of such instruments. The carrying value of
other long-term liabilities approximates fair value as the related interest
rates approximate rates currently available to the Company.
5
Recent
Accounting Pronouncements
On
September 30, 2009, the Company adopted updates issued by the Financial
Accounting Standards Board (FASB) to the authoritative hierarchy of GAAP. These
changes establish the FASB Accounting Standards Codification (ASC) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with GAAP. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. The FASB will no longer issue
new standards in the form of Statements, FASB Staff Positions, or Emerging
Issues Task Force Abstracts; instead the FASB will issue Accounting Standards
Updates. Accounting Standards Updates will not be authoritative in their own
right as they will only serve to update the Codification. These changes and the
Codification itself do not change GAAP. Other than the manner in which new
accounting guidance is referenced, the adoption of these changes had no impact
on the Condensed Consolidated Financial Statements.
On
June 30, 2009, the Company adopted updates issued by the FASB to accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued, otherwise known
as “subsequent events.” Specifically, these changes set forth the period after
the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements, and the disclosures that an entity should make
about events or transactions that occurred after the balance sheet date. The
adoption of these changes had no impact on the Condensed Consolidated Financial
Statements.
On
June 30, 2009, the Company adopted updates issued by the FASB to fair value
accounting. These changes provide additional guidance for estimating fair value
when the volume and level of activity for an asset or liability have
significantly decreased and includes guidance for identifying circumstances that
indicate a transaction is not orderly. This guidance is necessary to maintain
the overall objective of fair value measurements, which is that fair value is
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date under current market conditions. The adoption of these changes
had no impact on the Condensed Consolidated Financial Statements.
On July
1, 2009, the Company adopted updates issued by the FASB to the recognition and
presentation of other-than-temporary impairments. These changes amend existing
other-than-temporary impairment guidance for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities. The recognition
provision applies only to fixed maturity investments that are subject to the
other-than-temporary impairments. If an entity intends to sell, or if it is more
likely than not that it will be required to sell an impaired security prior to
recovery of its cost basis, the security is other-than-temporarily impaired and
the full amount of the impairment is recognized as a loss through earnings.
Otherwise, losses on securities which are other-than-temporarily impaired are
separated into: (i) the portion of loss which represents the credit loss; or
(ii) the portion which is due to other factors. The credit loss portion is
recognized as a loss through earnings, while the loss due to other factors is
recognized in other comprehensive income (loss), net of taxes and related
amortization. A cumulative effect adjustment is required to accumulated earnings
and a corresponding adjustment to accumulated other comprehensive income (loss)
to reclassify the non-credit portion of previously other-than-temporarily
impaired securities which were held at the beginning of the period of adoption
and for which the Company does not intend to sell and it is more likely than not
that the Company will not be required to sell such securities before recovery of
the amortized cost basis. These changes were effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. The Company adopted these changes effective July 1,
2009. The impact of adopting these updates did not have an effect on the
Company’s financial statements.
On
June 30, 2009, the Company adopted updates issued by the FASB to fair value
disclosures of financial instruments. These changes require a publicly traded
company to include disclosures about the fair value of its financial instruments
whenever it issues summarized financial information for interim reporting
periods. Such disclosures include the fair value of all financial instruments,
for which it is practicable to estimate that value, whether recognized or not
recognized in the statement of financial position; the related carrying amount
of these financial instruments; and the method(s) and significant assumptions
used to estimate the fair value. Other than the required disclosures, the
adoption of these changes had no impact on the financial
statements.
On
September 30, 2008, the Company adopted updates issued by the FASB to fair value
accounting and reporting as it relates to nonfinancial assets and nonfinancial
liabilities that are not recognized or disclosed at fair value in the financial
statements on at least an annual basis. These changes define fair value,
establish a framework for measuring fair value in GAAP, and expand disclosures
about fair value measurements. This guidance applies to other GAAP that require
or permit fair value measurements and is to be applied prospectively with
limited exceptions. The adoption of these changes, as it relates to nonfinancial
assets and nonfinancial liabilities, had no impact on the financial
statements.
6
On
July 1, 2009, the Company adopted updates issued by the FASB to accounting
for intangible assets. These changes amend the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset in order to improve the consistency between the
useful life of a recognized intangible asset outside of a business combination
and the period of expected cash flows used to measure the fair value of an
intangible asset in a business combination. The adoption of these changes had no
impact on the financial statements.
On
July 1, 2009, the Company adopted updates issued by the FASB to the
calculation of earnings per share. These changes state that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method for all periods presented. The adoption of these changes had no impact on
the financial statements.
NOTE
2- LONG TERM DEBT AND NOTES PAYABLE
In August
2009 the Company entered into a credit agreement which provides up to $5 million
of revolving credit based on 80% of acceptable accounts receivables, as
defined. The 15 month agreement provides for interest of either (1)
prime (3.25% at September 30, 2009) minus .5% - plus .5% or (2) LIBOR
plus 2.0% - 3.0% depending on the level of the Company’s ratio of outstanding
debt to fixed charges (as defined), or 3.75% or 3.68%, respectively, on
September 30, 2009. The facility is secured by all of the Company’s
assets, except for equipment securing new term loans as described above and real
property securing mortgages. As of June 30, 2009 and September 30, 2009, the
Company had secured a $500,000 standby letter of credit related to a building
lease which reduces the amount available under the credit agreement. No other
amounts were outstanding under the credit agreement on that date.
Our bank
revolving credit agreement requires us to maintain a minimum “leverage ratio”
and “fixed charge coverage ratio.” The leverage ratio compares tangible assets
to total liabilities (excluding the deferred real estate gain). Our
fixed charge coverage ratio compares, on a rolling twelve-month basis, (i)
EBITDA plus rent expense and non-cash charges less income tax payments, to (ii)
interest expense plus rent expense, the current portion of long term debt and
maintenance capital expenditures. As of September 30, 2009, the
leverage ratio was 2.13 compared to a minimum requirement of 1.75, and the fixed
charge coverage ratio was 1.04 as compared to a minimum requirement of
1.10. As of September 30, 2009, the Company was not in compliance
with the fixed charge rate and received a forbearance from the
bank. The forbearance period extends to January 31, 2010, during
which time the amount available under the credit agreement will be limited to $1
million.
In July
2008, the Company entered into a Promissory Note with a bank (the “note”) in
order to purchase land and a building that has been occupied by the Company
since 1998 (the total purchase price was approximately $8.1
million). Pursuant to the note, the company borrowed $6,000,000
payable in monthly installments of principal and interest on a fully amortized
base over 30 years at an initial five-year interest rate of 7.1% and thereafter
at a variable rate equal to LIBOR plus 3.6% (6.4% as of the purchase
date). The mortgage debt is secured by the land and
building. The resulting annual mortgage and interest payments on the
Note will be approximately $0.2 million less than the annual rent payments on
the property at the time of the transaction.
In June
2009, the Company entered into a $3,562,500 million Purchase Money Promissory
Note secured by a Deed of Trust for the purchase of land and a
building. The note bears interest at 7% fixed for ten
years. The principal amount of the note is payable on June 12,
2019. The note is secured by the property.
NOTE
3- PROPERTY AND EQUIPMENT
In March 2006, the Company entered into
a sale and leaseback transaction with respect to its Media Center vaulting real
estate. The real estate was sold for approximately $14.0 million
resulting in a $1.3 million after tax gain. Additionally, the Company
received $0.5 million from the purchaser for improvements. In
accordance with the Accounting Standards Codification, the gain will be
amortized over the initial 15-year lease term as reduced rent. Net
proceeds at the closing of the sale and improvement advance (approximately $13.8
million) were used to pay off the mortgage and other outstanding
debt.
All rights and obligations under the
lease were transferred to the Company in the Spin-off. The lease is
treated as an operating lease for financial reporting purposes. After
the initial lease term, the Company has four five-year options to extend the
lease. Minimum annual rent payments for the initial five years of the lease are
$1,111,000, increasing annually thereafter based on the Consumer Price Index
change from year to year.
7
Property
and equipment consist of the following as of September 30, 2009:
Land
|
$ | 3,985,000 | ||
Building
|
9,081,000 | |||
Machinery
and equipment
|
36,376,000 | |||
Leasehold
improvements
|
6,395,000 | |||
Computer
equipment
|
6,610,000 | |||
Equipment
under capital lease
|
789,000 | |||
Office
equipment, CIP
|
448,000 | |||
Less
accumulated depreciation and Amortization
|
(43,475,000 | ) | ||
Property
and equipment, net
|
$ | 20,209,000 |
NOTE
4- CONTINGENCIES
In July
2008, the Company was served with a complaint filed in the Superior court of the
State of California for the County of Los Angeles by Aryana Farshad and Aryana
F. Productions, Inc. (“Farshad”). The complaint alleges
that Point.360 and its janitorial cleaning company failed to exercise reasonable
care for the protection and preservation of Farshad’s film footage which was
lost. As a result of the defendant’s negligence, Farshad claims to
have suffered damages in excess of $2 million and additional unquantified
general and special damages. While the outcome of this claim cannot
be predicted with certainty, management does not believe that the outcome will
have a material effect on the financial condition or results of operation of the
Company.
On May 1,
2009 the Company was served with a Verified Unlawful Detainer Complaint” by 1220
Highland, LLC, the landlord of the facility in Hollywood, CA that had been
rented by the Company for many years. The Company’s lease on the
facility expired in March 2009. The Complaint seeks possession of the
property, damages for each day of the Company’s possession from May 1, 2009, and
other damages and legal fees. While the outcome of the claim cannot
be predicted with certainty, management does not believe that the outcome will
have a material effect on the financial condition of the Company, especially
since full rent was paid until the property was returned to the landlord on June
30, 2009.
On
October 6, 2009, DG FastChannel, Inc. (“DGFC”) filed a claim in the United
States District Court Central District of California, alleging that the Company
violated certain provisions of agreements governing transactions related to the
August 13, 2007 sale of the Company’s advertising distribution business to
DGFC. DGFC alleges that (i) the Company did not fulfill its
obligation to restrict a former employee from competing against DGFC subsequent
to the transaction and, therefore, DGFC does not owe the Company $500,000
related to that portion of the transaction; (ii) the Company violated the
noncompetition agreement between DGFC and the Company by distributing
advertising content after the transaction; (iii) due to the violation of the
noncompetition agreement, the post production services agreement that required
DGFC to continue to vault its customers’ physical elements at the Company’s
Media Center became null and void; and (iv) the company must return all of
DGFC’s vaulted material to DGFC. DGFC also seeks unspecified monetary
damages.
If DGFC
is successful in its claims, the possibility exists that the Company must return
the DGFC vaulted elements which will result in a future decline in annual
revenues of approximately $0.7 million, partially offset in the first year by
“pull” charges. The Company believes it has adequate defenses against
the claims.
From time to time the Company may
become a party to other legal actions and complaints arising in the ordinary
course of business, although it is not currently involved in any such material
legal proceedings.
NOTE
5- INCOME TAXES
The Accounting Codification Standards
(“ASC”) prescribes a recognition and measurement of a tax position taken or
expected to be taken in a tax return and provides guidance on derecognition of
tax benefits, classification on the balance sheet, interest and penalties,
accounting in interim periods, disclosure, and transition.
The Company assumed all liability for
income taxes of Old Point.360 related to operations prior to the Spin-off and
Merger. The Company or one of its subsidiaries files income tax
returns in the U.S. federal jurisdiction, and various state jurisdictions. With
few exceptions, the Company is no longer subject to U.S. federal state or local
income tax examinations by tax authorities for years before 2002. The Company
has analyzed its filing positions in all of the federal and state jurisdictions
where it is required to file income tax returns. Old Point.360 (the Company’s
predecessor) and consequently, the Company, were last audited by New York taxing
authorities for the years 2002 through 2004 resulting in no
change. Old Point.360 and, consequently, the Company, was previously
notified by the U.S Internal Revenue Service of its intent to audit the calendar
2005 tax return. The audit has since been cancelled by the IRS
without change; however, the audit could be reopened at the IRS’
discretion.
8
Old Point.360 and, consequently, the
Company, was notified by the IRS in September 2009 of its intent to audit
federal tax returns for calendar year 2006 and the period from January 1 to
August 13, 2007.
NOTE
6- STOCK OPTION PLAN, STOCK-BASED COMPENSATION
In May
2007, the Board of Directors approved the 2007 Equity Incentive Plan (the “2007
Plan”). The 2007 Plan provides for the award of options to purchase
up to 2,000,000 shares of common stock, appreciation rights and restricted stock
awards.
Under the
2007 Plan, the stock option price per share for options granted is determined by
the Board of Directors and is based on the market price of the Company’s common
stock on the date of grant, and each option is exercisable within the period and
in the increments as determined by the Board, except that no option can be
exercised later than ten years from the grant date. The stock options
generally vest in one to five years.
The
Company measures and recognizes compensation expense for all share-based payment
awards made to employees and directors based on estimated fair
values. We also estimate the fair value of the award that is
ultimately expected to vest to be recognized as expense over the requisite
service periods in our Consolidated Statements of Income (Loss).
We
estimate the fair value of share-based payment awards to employees and directors
on the date of grant using an option-pricing model. The value of the portion of
the award that is ultimately expected to vest is recognized as expense over the
requisite service periods in the Company’s Consolidated Statements of Income
(Loss). Stock-based compensation expense recognized in the
Consolidated Statements of Income (Loss) for the quarter ended September 30,
2009 included compensation expense for the share-based payment awards based on
the grant date fair value. For stock-based awards issued to employees
and directors, stock-based compensation is attributed to expense using the
straight-line single option method. As stock-based compensation
expense recognized in the Statements of Consolidated Income (Loss) for the
periods reported in this Form 10-Q is based on awards expected to vest,
forfeitures are also estimated at the time of grant and revised, if necessary,
in subsequent periods if actual forfeitures differ from those estimates. For the
periods being reported in this Form 10-Q, expected forfeitures are immaterial.
The Company will re-asses the impact of forfeitures if actual forfeitures
increase in future quarters. Stock-based compensation expense related
to employee or director stock options recognized for the periods ended September
30, 2009 and September 30, 2008 were $56,000 and $51,000,
respectively.
The
Company’s determination of fair value of share-based payment awards to employees
and directors on the date of grant uses the Black-Scholes model, which is
affected by the Company’s stock price as well as assumptions regarding a number
of complex and subjective variables. These variables include, but are
not limited to, the expected stock price volatility over the expected term of
the awards, and actual and projected employee stock options exercise behaviors.
The Company estimates expected volatility using historical data. The expected
term is estimated using the “safe harbor” provisions provided by the
SEC.
During
the quarters ended September 30, 2009 and 2008, the Company granted no awards of
stock options.
As of
September 30, 2009, there were options outstanding to acquire 1,313,300 shares
at an average exercise price of $1.66 per share.
The
following table summarizes the status of the 2007 Plan as of September 30,
2009:
Options
originally available
|
2,000,000 | |||
Stock
options outstanding
|
1,313,300 | |||
Options
available for grant
|
686,700 |
Transactions
involving stock options are summarized as follows:
Number
of Shares
|
Weighted Average
Exercise Price
|
|||||||
Balance
at June 30, 2009
|
1,322,025 | $ | 1.66 | |||||
Granted
|
||||||||
Exercised
|
- | - | ||||||
Cancelled
|
(8,725 | ) | 1.66 | |||||
Balance
at September 30, 2009
|
1,313,300 | $ | 1.66 |
9
As of September 30, 2009, the total
compensation costs related to non-vested awards yet to be expensed was
approximately $0.6 million to be amortized over the next four
years.
The
weighted average exercise prices for options granted and exercisable and the
weighted average remaining contractual life for options outstanding as of
September 30, 2009 were as follows:
Number of
Shares
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining
Contractual Life
(Years)
|
Intrinsic
Value
|
|||||||||||||
As of September 30,
2009
|
||||||||||||||||
Employees
– Outstanding
|
1,183,300 | $ | 1.65 | 3.61 | $ | - | ||||||||||
Employees
– Expected to Vest
|
1,074,195 | $ | 1.65 | 3.61 | $ | - | ||||||||||
Employees
– Exercisable
|
228,150 | $ | 1.79 | 3.38 | $ | - | ||||||||||
Non-Employees
– Outstanding
|
130,000 | $ | 1.69 | 3.55 | $ | - | ||||||||||
Non-Employees
– Vested
|
55,000 | $ | 1.56 | 3.78 | $ | - | ||||||||||
Non-Employees
– Exercisable
|
55,000 | $ | 1.56 | 3.78 | $ | - |
Additional information with respect to
outstanding options as of September 30, 2009 is as follows (shares in
thousands):
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||
Options Exercise
Price Range
|
Number of
Shares
|
Weighted
Average
Remaining
Contractual Life
|
Weighted
Average
Exercise Price
|
Number of
Shares
|
Weighted
Average Exercise
Price
|
|||||||||||||||
$ | 1.79 | 1,006 |
3.4
Years
|
$ | 1.79 | 253 | $ | 1.79 | ||||||||||||
$ | 1.37 | 30 |
4.1
Years
|
$ | 1.37 | 30 | $ | 1.37 | ||||||||||||
$ | 1.20 | 277 |
4.4
Years
|
$ | 1.20 | - | $ | 1.20 |
NOTE
7- STOCK RIGHTS PLAN
In July
2007, the Company implemented a stock rights program. Pursuant to the
program, stockholders of record on August 7, 2007, received a dividend of one
right to purchase for $10 one one-hundredth of a share of a newly created Series
A Junior Participating Preferred Stock. The rights are attached to
the Company’s Common Stock and will also become attached to shares issued
subsequent to August 7, 2007. The rights will not be traded
separately and will not become exercisable until the occurrence of a triggering
event, defined as an accumulation by a single person or group of 20% or more of
the Company’s Common Stock. The rights will expire on August 6, 2017
and are redeemable at $0.0001 per right.
After a
triggering event, the rights will detach from the Common Stock. If
the Company is then merged into, or is acquired by, another corporation, the
Company has the opportunity to either (i) redeem the rights or (ii) permit the
rights holder to receive in the merger stock of the Company or the acquiring
company equal to two times the exercise price of the right (i.e.,
$20). In the latter instance, the rights attached to the acquirer’s
stock become null and void. The effect of the rights program is to
make a potential acquisition of the Company more expensive for the acquirer if,
in the opinion of the Company’s Board of Directors, the offer is
inadequate.
No
triggering events occurred in the quarter ended September 30,
2009.
10
NOTE
8- SHAREHOLDER’S EQUITY
The
following table analyzes the components of shareholders’ equity from June 30,
2009 to September 30, 20098 (in thousands):
Common
Stock
|
Paid-in
Capital
|
Retained
Earnings
|
Shareholders’
Equity
|
|||||||||||||
Balance,
June 30, 2009
|
$ | 21,025 | $ | 9,547 | $ | (12,563 | ) | $ | 18,009 | |||||||
FAS
123R option expense
|
- | 57 | - | 57 | ||||||||||||
Net
income (loss)
|
- | - | (1,972 | ) | (1,972 | ) | ||||||||||
Stock
Issuance
|
500 | - | - | 500 | ||||||||||||
Balance,
September 30, 2009
|
$ | 21,525 | $ | 9,604 | $ | (14,535 | ) | $ | 16,594 |
NOTE
9- STOCK REPURCHASE PLAN
In
February 2008, the Company’s Board of Directors authorized a stock repurchase
program. Under the stock repurchase program, the Company may purchase
outstanding shares of its common stock on the open market at such times and
prices determined in the sole discretion of management. No
shares were acquired pursuant to the repurchase program during the quarter ended
September 30, 2009.
NOTE
10- ACQUISITION
On
September 29, 2009, the Company acquired the assets of Kiosk Concepts, a general
partnership for a purchase price of approximately $500,000 through the issuance
of 342,466 shares of its common stock. The purchase price included $0.3 million
of property and equipment and $0.2 million of deposits acquired. Substantially
all of the assets purchased were new and had not been placed in service as of
the acquisition date. No liabilities were assumed. The acquisition
will enable to the Company to expand its service offerings by using the assets
to develop and commercialize “automated” stores to rent and sell digital video
discs (DVDs). The DVD stores will contain up to 10,000 DVDs for rent or
sale via software-controlled automated dispensers contained in 1,000 to 1,500
square feet of retail space for each store.
The Kiosk
acquisition was accounted for as a business combination. On the date of
acquisition, the transaction was not material to the Company’s financial
position. Accordingly, pro forma financial amounts are not
presented. The allocation of the purchase price to the tangible assets
acquired is based on the replacement cost and estimates from management to
calculate fair value.
The
Company expects to spend $1 million to $2 million prior to April 1, 2010 to
create three “proof of concept” locations. The Company expects to seek
expansion capital to increase the number of stores depending on the success of
the “test” stores. The new stores will provide consumers with an
alternative to renting or acquiring DVDs from big box stores (e.g.,
Blockbuster), on-line vendors (e.g., Netflix), and stand-alone kiosks (e.g.,
Redbox).
During
the quarter ended September 30, 2009, the Company incurred $109,000 of costs
associated with the acquisition, consisting of transaction expenses ($33,000)
and project consulting costs ($76,000) associated with the automated
stores. These expenses are reflected as research and development
expenses in the Consolidated Statements of Income (Loss).
NOTE
I1- SUBSEQUENT EVENTS
Management
evaluated all activity of the Company through November 13, 2009 (the issue date
of these Consolidated Financial Statements) and concluded that no subsequent
events have occurred that would require recognition in the Consolidated
Financial Statements or disclosure in Notes to Consolidated Financial
Statements.
11
POINT.360
MANAGEMENT’S
DISCUSSION AND ANALYSIS
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Except
for the historical information contained herein, certain statements in this
annual report are "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995, which involve certain risks and
uncertainties, which could cause actual results to differ materially from those
discussed herein, including but not limited to competition, customer and
industry concentration, depending on technological developments, risks related
to expansion, dependence on key personnel, fluctuating results and seasonality
and control by management. See the relevant portions of the Company's
documents filed with the Securities and Exchange Commission and Risk Factors in
Item 1A of Part II of this Form 10-Q, for a further discussion of these and
other risks and uncertainties applicable to the Company's business.
Overview
Point.360
is one of the largest providers of video and film asset management services to
owners, producers and distributors of entertainment content. We provide
the services necessary to edit, master, reformat and archive our clients’ film
and video content, including television programming, feature films and movie
trailers using electronic and physical means. Clients include major motion
picture studios and independent producers.
We
operate in a highly competitive environment in which customers desire a broad
range of services at a reasonable price. There are many competitors
offering some or all of the services provided by us. Additionally, some of
our customers are large studios, which also have in-house capabilities that may
influence the amount of work outsourced to companies like Point.360. We attract
and retain customers by maintaining a high service level at reasonable
prices.
The
market for our services is primarily dependent on our customers’ desire and
ability to monetize their entertainment content. The major studios
derive revenues from re-releases and/or syndication of motion pictures and
television content. While the size of this market is not
quantifiable, we believe studios will continue to repurpose library content to
augment uncertain revenues from new releases. The current uncertain
economic environment and entertainment industry labor unrest have negatively
impacted the ability and willingness of independent producers to create new
content.
The
demand for entertainment content should continue to expand through web-based
applications. We believe long and short form content will be sought
by users of personal computers, hand held devices and home entertainment
technology. Additionally, changing formats from standard definition,
to high definition, to Blu Ray and perhaps to 3D will continue to give us the
opportunity to provide new services with respect to library
content.
To meet
these needs, we must be prepared to invest in technology and equipment, and
attract the talent needed to serve our client needs. Labor, facility
and depreciation expenses constitute approximately 75% of our cost of
sales. Our goals include maximizing facility and labor usage, and
maintaining sufficient cash flow for capital expenditures and acquisitions of
complementary businesses to enhance our service offerings.
We
continue to look for opportunities to solidify our businesses. During
the fiscal year ended June 30, 2009 and the three months ended September 30,
2009, we have completed the following:
|
·
|
We
purchased the 32,000 square foot Burbank facility to enhance future cash
flow
|
and
secure that operational capability for the future.
|
·
|
We
purchased the assets of Video Box Studios and consolidated its operations
into our West
|
Los
Angeles location.
|
·
|
We
purchased the assets of MI Post providing the Company with an East Coast
presence.
|
|
·
|
We
purchased an 18,300 square foot building in Hollywood into which we will
move operations that have previously occupied 37,000 square feet of rented
space.
|
|
·
|
We
purchased assets and hired personnel to test a content distribution
business model.
|
We have
an opportunity to expand our business by establishing closer relationships with
our customers through excellent service at a competitive price and adding to our
service offering. Our success is also dependent on attracting and
maintaining employees capable of maintaining such relationships. Also,
growth can be achieved by acquiring similar businesses (for example, the
acquisitions of IVC in July 2004, Eden FX in March 2007 and those described
above) that can increase revenues by adding new customers, or expanding current
services to existing customers.
12
Our
business generally involves the immediate servicing needs of our
customers. Most orders are fulfilled within several days, with occasional
larger orders spanning weeks or months. At any particular time, we have
little firm backlog.
We
believe that our interconnected facilities provide the ability to better service
customers than single-location competitors. We will look to expand both
our service offering and geographical presence through acquisition of other
businesses or opening additional facilities.
Three
Months Ended September 30, 2009 Compared to Three Months Ended September 30,
2008
Revenues. Revenues
were $9.4 million for the quarter ended June 30, 2009, compared to $11.6 million
for the quarter ended June 30, 2008. Revenues from one major studio
client declined $0.8 million due to the timing of projects. Revenues
may come under some downward pressure in the future if major studios reduce
output due to current difficult financial conditions and other competitors
reduce prices to compete for our business. Additionally, revenues for
the first quarter of fiscal 2010 were lower than prior quarters by approximately
$0.6 million due to the move of the operations to one of our Hollywood
facilities (“Highland”) to two of our other locations as we renovate the Vine
Property to house both Highland and Eden FX. We expect the negative
effect on revenues to continue as we consolidate approximately 37,000 square
feet of operating space into approximately 20,000 square feet by January
2010. We are continuing to invest in high definition capabilities
where demand is expected to grow. We believe our high definition service
platform will attract additional business in the future.
Cost of Services. Costs of
services consist principally of wages and benefits, facility costs and
depreciation of physical assets. During the quarter ended September
30, 2009, total costs of services were 78.1% of sales compared to 66.2% in the
prior year. Material (tape stock) and delivery costs
declined $0.3 million due to lower volume. Offsetting the reductions
was an increase in the cost of equipment rental and farmed out work of $94,000
due to unusually fast turnaround requirements for several projects (we
occasionally farm out certain tasks for which we have insufficient production
capacity). While outsourcing generally involves lower margins, it
allows us to better meet infrequent unusually fast delivery time requirements of
our clients. Other costs remained consistent with the prior year
period due to the fixed nature of our service infrastructure.
Gross Profit. In
2009, gross margin was 21.9% of sales, compared to 33.8% for the same period
last year. The decrease in gross profit percentage is due to the factors cited
above. From time to time, we will increase staff capabilities to
satisfy potential customer demand. If the expected demand does not materialize,
we will adjust personnel levels. We expect gross margins to fluctuate
in the future as the sales mix changes.
Selling, General and Administrative
Expense. SG&A expense was $3.8 million (40.1% of sales) in
2009 as compared to $3.7 million (32.1% of sales) in
2008. Administrative personnel costs declined $146,000, offset by an
increase in professional fees associated with managing and upgrading our
information technology.
Research and Development
Expense. During the quarter ended September 30, 2009, the
Company undertook a research and development project to evaluate, develop and
commercialize “automated” stores to rent and sell digital video discs
(DVDs). The DVD stores will contain up to 10,000 DVDs for rent or
sale via software-controlled automated dispensers contained in 1,000 to 1,500
square feet of retail space for each store. Expenses associated with
R&D activities were $109,000 for the quarter.
Operating Income (Loss).
Operating loss was $1.8 million in 2009 compared to income of $0.2
million in 2008.
Interest Expense. Net
Interest expense for 2009 was $0.2 million, an increase of $0.1 million from
2008. The increase was due to a mortgage related to real estate purchased in
June 2009.
Other Income. Other income
represents sublease income beginning in September 2008.
Net Income (Loss). Net loss
for 2009 was $2.0 million compared to an income of $0.1 million in
2008.
LIQUIDITY
AND CAPITAL RESOURCES
This
discussion should be read in conjunction with the notes to the financial
statements and the corresponding information more fully described elsewhere in
this Form 10-Q.
13
On
December 30, 2005, Old Point.360 entered a $10 million term loan agreement. The
term loan provides for interest at LIBOR (0.67% at September 30, 2009) plus
3.15% (7.84% on that date) and is secured by the Company’s equipment. The term
loan will be repaid in 60 equal principal payments plus interest.
On March
30, 2007, Old Point.360 entered into an additional $2.5 million term loan
agreement. The loan provides for interest at 8.35% per annum and is secured by
the Company’s equipment. The loan is being repaid in 45 equal monthly
installments of principal and interest.
In August
2009, the Company entered into a new credit agreement which provides up to $5
million of revolving credit based on 80% of acceptable accounts receivables, as
defined. The agreement provides for interest of either (i) prime (3.25% at June
30, 2009) minus .5% - to plus .5% or (ii) LIBOR plus 2.0% - 3.00% depending on
the level of the Company’s ratio of outstanding debt to fixed charges (as
defined), or 3.75% or 3.68%, respectively, at September 30, 2009. The
facility is secured by all of the Company’s accounts receivable.
In March
2006, Old Point.360 entered into a sale and leaseback transaction with respect
to its Media Center vaulting real estate. The real estate was sold for
$13,946,000 resulting in a $1.3 million after tax gain. Additionally, Old
Point.360 received $500,000 from the purchaser for improvements. In
accordance with the Accounting Standards Codification (ASC) 840-25, the gain and
the improvement allowance will be amortized over the initial 15-year lease term
as reduced rent.
In July
2008, the Company entered into a Promissory Note with a bank (the “Note”) in
order to purchase land and a building that has been occupied by the Company
since 1998 (the total purchase price was approximately $8.1
million). Pursuant to the Note, the company borrowed $6,000,000
payable in monthly installments of principal and interest on a fully amortized
basis over 30 years at an initial five-year interest rate of 7.1% and thereafter
at a variable rate equal to LIBOR plus 3.6% (4.27% as of September 30,
2009).
In June
2009, the Company entered into a $3,562,500 million Purchase Money Promissory
Note secured by a Deed of Trust for the purchase of land and a building (“Vine
Property”). The note bears interest at 7% fixed for ten
years. The principal amount of the note is payable on June 12,
2019. The note is secured by the property.
The
following table summarizes the September 30, 2009 amounts outstanding under our
revolving line of credit, and term (including capital lease obligations) and
mortgage loans:
Revolving
credit
|
$ | - | ||
Current
portion of term loan and mortgages
|
2,106,000 | |||
Long-term
portion of term loan and mortgages
|
10,313,000 | |||
Total
|
$ | 12,419,000 |
Monthly
and annual principal and interest payments due under the term debt and mortgages
are approximately $244,000 and $2.9 million, respectively, assuming no change in
interest rates.
Our bank
revolving credit agreement requires us to maintain a minimum “leverage ratio”
and “fixed charge coverage ratio.” The leverage ratio compares tangible assets
to total liabilities (excluding the deferred real estate gain. Our
fixed charge coverage ratio compares, on a rolling twelve-month basis, (i)
EBITDA plus rent expense and non-cash charges less income tax payments, to (ii)
interest expense plus rent expense, the current portion of long term debt and
maintenance capital expenditures. As of September 30, 2009, the
leverage ratio was 2.13 compared to a minimum requirement of 1.75, and the fixed
charge coverage ratio was 1.04 as compared to a minimum requirement of
1.10. As of September 30, 2009, the Company was not in compliance
with the fixed charge ratio and received a forbearance from the bank. The
forbearance period extends to January 31, 2010, during which time the amount
available under the credit agreement will be limited to $1 million. As of June
30, 2009 and September 30, 2009, the Company had secured a $500,000 standby
letter of credit related to a building lease which reduces the amount available
under the credit agreement. No other amounts were outstanding under
the credit agreement on that date.
We expect
that amounts available under the revolving credit arrangement (approximately
$0.5 million at September 30, 2009), the availability of bank or institutional
credit from new sources and cash generated from operations will be sufficient to
fund debt service, operating needs and about $2.0 – $3.0 million of capital
expenditures for the next twelve months including approximately $1.5 million to
complete the renovation of the Vine Property.
14
In March
2007, we acquired substantially all the assets of Eden FX for approximately $2.2
million in cash. The purchase agreement requires additional payments of $0.7
million, $0.9 million and $1.2 million in March of 2008, 2009 and 2010,
respectively, if earnings during the three years after acquisition meet certain
predetermined levels. The earnings levels for calendar 2007 and 2008
were not met; therefore, the 2008 and 2009 payments were not made.
The
Company’s cash balance decreased from $5,235,000 on July 1, 2009 to $4,378,000
at September 30, 2009, principally due to the following:
Balance
July 1, 2009
|
$ | 5,235,000 | ||
Capital
expenditures for equipment
|
(471,000 | ) | ||
Debt
principal and interest payments
|
(719,000 | ) | ||
Other
cash activities
|
333,000 | |||
Balance
September 30, 2009
|
$ | 4,378,000 |
Cash
generated by operating activities is directly dependent upon sales levels and
gross margins achieved. We generally receive payments from customers in 50-90
days after services are performed. The larger payroll component of cost of sales
must be paid currently. Payment terms of other liabilities vary by
vendor and type. Income taxes must be paid quarterly. Fluctuations in sales
levels will generally affect cash flow negatively or positively in early periods
of growth or contraction, respectively, because of operating cash
receipt/payment timing. Other investing and financing cash flows also
affect cash availability.
In recent
quarters, the underlying drivers of operating cash flows (sales, receivable
collections, the timing of vender payments, facility costs and employment
levels) have been consistent, except that days sales outstanding in accounts
receivable have risen from approximately 49 days to 61 days within the last 12
months. Major studios have generally delayed payments in response to
the general economic slowdown. However, we do not expect days sales
outstanding to materially increase in the future.
As of
September 30, 2009, our facility costs consisted of building rent, maintenance
and communication expenses. In July 2008, rents were reduced by the
purchase of our Hollywood Way facility in Burbank, CA, eliminating approximately
$625,000 of annual rent expense. The real estate purchase involved a
down payment of $2.1 million and $6 million of mortgage debt. The
mortgage payments are approximately $488,000 per year.
In March
2009, the lease on one of our facilities in Hollywood, CA (“Highland”) expired
and the Company became a holdover tenant. The landlord issued a
Notice to Quit which required us to move out of the facility. The
Highland operations have been temporarily housed at several other of our
facilities.
The
Company purchased the Vine Property in June 2009. The purchase price
of the Vine Property was $4.75 million, $1.2 million of which was paid in cash
with the balance being financed by the seller over ten years, interest only at
7% for the entire term, with the principal amount being due at the end of the
term. Building renovations will cost about $1.5
million. After renovation, we expect to move our Eden FX and Highland
operations into the Vine Property by January 2010.
When
Highland and Eden FX are moved into the Vine Property, annual cash outlays for
the two operations will be reduced from $1.1 million of rent payments to about
$250,000 of interest payments. While we will spend about $2.7 million
for the down payment and renovation of the Vine Property, annual cash flow will
improve by approximately $600,000 (rent payments less interest and other
incremental operating costs).
We
believe our current cash position and a difficult economy may provide us with
the opportunity to invest in facility assets that will not only help fix our
operating costs, but give us the potential to own appreciating real estate
assets. We will continue to evaluate opportunities to reduce facility
costs.
The
mortgage payments are approximately $488,000 per year. We believe our
current cash position and a difficult economy may provide us with the
opportunity to invest in facility assets that will not only help fix our
operating costs, but give us the potential to own appreciating real estate
assets. We will continue to evaluate opportunities to reduce facility
costs.
15
The
following table summarizes contractual obligations as of September 30, 2009 due
in the future:
Payment due by Period
|
||||||||||||||||||||
Contractual Obligations
|
Total
|
Less than 1 Year
|
Years
2 and 3
|
Years
4 and 5
|
Thereafter
|
|||||||||||||||
Long
Term Debt Principal Obligations
|
$ | 11,877,000 | $ | 1,946,000 | $ | 636,000 | $ | 173,000 | $ | 9,122,000 | ||||||||||
Long
Term Debt Interest Obligations (1)
|
9,962,000 | 772,000 | 1,340,000 | 1,272,000 | 6,578,000 | |||||||||||||||
Capital
Lease Obligations
|
542,000 | 160,000 | 325,000 | 57,000 | - | |||||||||||||||
Capital
Lease Interest Obligations
|
64,000 | 32,000 | 31,000 | 1,000 | - | |||||||||||||||
Operating
Lease Obligations
|
21,433,000 | 3,112,000 | 5,699,000 | 4,950,000 | 7,672,000 | |||||||||||||||
Total
|
$ | 43,878,000 | $ | 6,022,000 | $ | 8,031,000 | $ | 6,453,000 | $ | 23,372,000 |
(1) Interest on variable rate debt has
been computed using the rate on the latest balance sheet
date.
As
described in the Notes to Consolidated Financial Statements in this Form 10-Q,
the Company began a research and development project in Fiscal 2010 to create
“proof of concept” stores to distribute digital video discs (DVDs) to
consumers. The Company hopes to capture a portion of the DVD rental
market being vacated by the closure of many larger distribution vendors (e.g.,
Blockbuster and Hollywood Video) locations. The Company initially
issued stock for assets and intellectual property, and will spend $1 to $2
million in the second and third quarters of Fiscal 2010 to test the
concept.
During
the past year, the Company has generated sufficient cash to meet operating,
capital expenditure and debt service needs and obligations, as well as to
provide sufficient cash reserves to address contingencies. When
preparing estimates of future cash flows, we consider historical performance,
technological changes, market factors, industry trends and other
criteria. In our opinion, the Company will continue to be able to
fund its needs for the foreseeable future.
We will
continue to consider the acquisition of businesses which compliment our current
operations and possible real estate transactions. Consummation of any
acquisition, real estate or other expansion transaction by the Company may be
subject to the Company securing additional financing, perhaps at a cost higher
than our existing term loans. In the current economic climate,
additional financing may not be available. Additionally, our current
bank line of credit might not be renewed upon its November 2010 expiration due
to recent changes in the bank lending environment. Future earnings
and cash flow may be negatively impacted to the extent that any acquired
entities do not generate sufficient earnings and cash flow to offset the
increased financing costs.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates and
judgments, including those related to allowance for doubtful accounts, valuation
of long-lived assets, and accounting for income taxes. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions and conditions. We believe the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial
statements.
Critical
accounting policies are those that are important to the portrayal of the
Company’s financial condition and results, and which require management to make
difficult, subjective and/or complex judgments. Critical accounting policies
cover accounting matters that are inherently uncertain because the future
resolution of such matters is unknown. We have made critical
estimates in the following areas:
Revenues. We perform a multitude of
services for our clients, including film-to-tape transfer, video and audio
editing, standards conversions, adding special effects, duplication,
distribution, etc. A customer orders one or more of these services with respect
to an element (commercial spot, movie, trailer, electronic press kit, etc.). The
sum total of services performed on a particular element (a “package”) becomes
the deliverable (i.e., the customer will pay for the services ordered in total
when the entire job is completed). Occasionally, a major studio will request
that package services be performed on multiple elements. Each element
creates a separate revenue stream which is recognized only when all requested
services have been performed on that element. At the end of an
accounting period, revenue is accrued for un-invoiced but shipped
work.
Certain
jobs specify that many discrete tasks must be performed which require up to four
months to complete. In such cases, we use the proportional
performance method for recognizing revenue. Under the proportional
performance method, revenue is recognized based on the value of each stand-alone
service completed.
16
In some
instances, a client will request that we store (or “vault”) an element for a
period ranging from a day to indefinitely. The Company attempts to
bill customers a nominal amount for storage, but some customers, especially
major movie studios, will not pay for this service. In the latter
instance, storage is an accommodation to foster additional business with respect
to the related element. It is impossible to estimate (i) the length
of time we may house the element, or (ii) the amount of additional services we
may be called upon to perform on an element. Because these
variables are not reasonably estimable and revenues from vaulting are not
material (billed vaulting revenues are approximately 3% of sales), we do not
treat vaulting as a separate deliverable in those instances in which the
customer does not pay.
The
Company records all revenues when all of the following criteria are met: (i)
there is persuasive evidence that an arrangement exists; (ii) delivery has
occurred or the services have been rendered; (iii) the Company’s price to the
customer is fixed or determinable; and (iv) collectability is reasonably
assured. Additionally, in instances where package services are
performed on multiple elements or where the proportional performance method is
applied, revenue is recognized based on the value of each stand-alone service
completed.
Allowance for doubtful
accounts. We are required to make judgments, based on
historical experience and future expectations, as to the collectability of
accounts receivable. The allowances for doubtful accounts and sales
returns represent allowances for customer trade accounts receivable that are
estimated to be partially or entirely uncollectible. These allowances
are used to reduce gross trade receivables to their net realizable value. The
Company records these allowances as a charge to selling, general and
administrative expenses based on estimates related to the following factors: (i)
customer specific allowance; (ii) amounts based upon an aging schedule and (iii)
an estimated amount, based on the Company’s historical experience, for issues
not yet identified.
Valuation of long-lived and intangible
assets. Long-lived assets, consisting primarily of
property, plant and equipment and intangibles (consisting principally of
goodwill), comprise a significant portion of the Company’s total assets.
Long-lived assets, including goodwill are reviewed for impairment whenever
events or changes in circumstances have indicated that their carrying amounts
may not be recoverable. Recoverability of assets is measured by
comparing the carrying amount of an asset to its fair value in a current
transaction between willing parties, other than in a forced liquidation
sale.
Factors
we consider important which could trigger an impairment review include the
following:
|
·
|
Significant
underperformance relative to expected historical or projected future
operating results;
|
|
·
|
Significant
changes in the manner of our use of the acquired assets or the strategy of
our overall business;
|
|
·
|
Significant
negative industry or economic
trends;
|
|
·
|
Significant
decline in our stock price for a sustained period;
and
|
|
·
|
Our
market capitalization relative to net book
value.
|
When we determine that the carrying
value of intangibles, long-lived assets and related goodwill and
enterprise level goodwill may not be recoverable based upon the existence of one
or more of the above indicators of impairment, we measure any impairment based
on comparing the carrying amount of the asset to its fair value in a current
transaction between willing parties or, in the absence of such measurement, on a
projected discounted cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in
our current business model. Any amount of impairment so determined would be
written off as a charge to the income statement, together with an equal
reduction of the related asset. Net long-lived assets amounted to approximately
$20.2 million as of September 30, 2009.
In accounting for goodwill, the Company
has historically performed an annual impairment review. On August 14, 2007, the
Company was formed by a spin-off transaction, and a certain portion of Old
Point.360’s goodwill was assigned to the Company. In the 2009 test
performed as of June 30, 2009, the discounted cash flow method was used to
evaluate goodwill impairment and included cash flow estimates for fiscal 2010
and subsequent years. As a result, the Company recorded a goodwill
impairment charge of $10 million as of June 30, 2009.
Research and
Development. Research and development costs include
expenditures for planned search and investigation aimed at discovery of new
knowledge to be used to develop new services or processes or significantly
enhance existing processes. Research and development costs also
include the implementation of the new knowledge through design, testing of
service alternatives, or construction of prototypes. The cost of materials and
equipment or facilities that are acquired or constructed for research and
development activities and that have alternative future uses are capitalized as
tangible assets when acquired or constructed. All other research and
development costs are expensed as incurred.
17
Accounting for income
taxes. As part of the process of preparing our
consolidated financial statements, we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process
involves us estimating our actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as
deferred revenue, for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included within our
consolidated balance sheet. We must then assess the likelihood that
our deferred tax assets will be recovered from future taxable income and to the
extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision in
the statement of operations.
Significant management judgment is
required in determining our provision for income taxes, our deferred tax assets
and liabilities and any valuation allowance recorded against our net deferred
tax assets. The net deferred tax assets as of June 30, 2009 were $0.0
million.
The Company assumed all liability for
income taxes of Old Point.360 related to operations prior to the Spin-off and
Merger. The Company files income tax returns in the U.S. federal
jurisdiction, and various state jurisdictions. With few exceptions, the Company
is no longer subject to U.S. federal state or local income tax examinations by
tax authorities for years before 2002. The Company has analyzed its filing
positions in all of the federal and state jurisdictions where it is required to
file income tax returns. Old Point.360, and consequently, the Company, was last
audited by New York taxing authorities for the years 2002 through 2004 resulting
in no change. Old Point.360, and consequently, the Company, was previously
notified by the U.S. Internal Revenue Service of its intent to audit the
calendar 2005 tax return. The audit has since been cancelled by the IRS without
change; however, the audit could be reopened at the IRS’
discretion.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market Risk. The Company had
borrowings of $12.4 million on September 30, 2009 under term loan and mortgage
agreements. One term loan was subject to variable interest
rates. The weighted average interest rate paid during the first three
months of fiscal 2010 was 6.76%. For variable rate debt outstanding
at September 30, 2009, a .25% increase in interest rates will increase annual
interest expense by approximately $7,000. Amounts that may become
outstanding under the revolving credit facility provide for interest at the
banks’ prime rate minus .5% to plus .5% or LIBOR plus 2.0% to 3.0% and LIBOR
plus 3.15% for the variable rate term loan. The Company’s market risk
exposure with respect to financial instruments is to changes in prime or LIBOR
rates.
ITEM
4.T CONTROLS AND PROCEDURES
Disclosure
Controls
Pursuant to Rules 13a-15(b) and
15d-15(b) under the Exchange Act, an evaluation was performed under the
supervision and with the participation of the Company’s management, including
the Chief Executive Officer and President and the Chief Financial Officer, of
the effectiveness of the design and operation of the Company’s disclosure
controls and procedures as of the end of the period covered by this
report. Based on the evaluation, the Chief Executive Officer and
President and the Chief Financial Officer, concluded that the Company’s
disclosure controls and procedures were effective as of the end of the period
covered by the report.
Changes
in Internal Control over Financial Reporting
The Chief Executive Officer and
President and the Chief Financial Officer conducted an evaluation of our
internal control over financial reporting (as defined in Exchange Act Rule
13a-15(f) to determine whether any changes in internal control over financial
reporting occurred during the quarter ended September 30, 2009 that have
materially affected or which are reasonably likely to materially affect internal
control over financial reporting. Based on the evaluation, no such
change occurred during such period.
Internal control over financial
reporting refers to a process designed by, or under the supervision of, our
Chief Executive Officer and Chief Financial Officer and effected by our board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures
that:
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
the preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and
members of our board of directors;
and
|
18
|
·
|
Provide
reasonable assurance regarding the prevention or timely detection of
unauthorized acquisition, use, or disposition of our assets that could
have a material effect on our financial
statements.
|
Remediation
of Previously Disclosed Material Weakness
Management
previously concluded as of June 30, 2009, that we did not maintain effective
controls regarding the timing of revenue recognition under the proportional
performance method. This control deficiency resulted in the restatement of our
interim consolidated financial statements for the three months ended September
30, 2008, the six months ended December 31, 2008 and he nine months ended March
31, 2009. Accordingly, management determined that this control
deficiency constituted a material weakness in internal control over financial
reporting as of June 30, 2009.
We
have since reviewed and documented the controls regarding the proportional
performance method and have trained personnel involved in such
controls. The material weakness has also been remediated by an
additional level of review by senior personnel at the Company. We tested the
newly implemented controls and found them to be effective and have concluded as
of September 30, 2009, this material weakness has been remediated.
Limitations
on Internal Control over Financial Reporting
Internal control over financial
reporting cannot provide absolute assurance of achieving financial reporting
objectives because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence and compliance
and is subject to lapses in judgment and breakdowns resulting from human
failures. Internal control over financial reporting also can be
circumvented by collusion or improper override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known features of
the financial reporting process, and it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
19
PART
II – OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
In July,
2008, the Company was served with a complaint filed in the Superior court of the
State of California for the County of Los Angeles by Aryana Farshad and Aryana
F. Productions, Inc. (“Farshad”). The complaint alleges
that Point.360 and its janitorial cleaning company failed to exercise reasonable
care for the protection and preservation of Farshad’s film footage which was
lost. As a result of the defendant’s negligence, Farshad claims to
have suffered damages in excess of $2 million and additional unquantified
general and special damages. While the outcome of this claim cannot
be predicted with certainty, management does not believe that the outcome will
have a material effect on the financial condition or results of operation of the
Company.
On May 1,
2009 the Company was served with a Verified Unlawful Detainer Complaint” by 1220
Highland, LLC, the landlord of the facility in Hollywood, CA that had been
rented by the Company for many years. The Company’s lease on the
facility expired in March 2009. The Complaint seeks possession of the
property, damages for each day of the Company’s possession from May 1, 2009, and
other damages and legal fees. While the outcome of the claim cannot
be predicted with certainty, management does not believe that the outcome will
have a material effect on the financial condition of the Company, especially
since full rent was paid until the property was returned to the landlord on June
30, 2009.
On
October 6, 2009, DG FastChannel, Inc. (“DGFC”) filed a claim in the United
States District Court Central District of California, alleging that the Company
violated certain provisions of agreements governing transactions related to the
August 13, 2007 sale of the Company’s advertising distribution business to
DGFC. DGFC alleges that (i) the Company did not fulfill its
obligation to restrict a former employee from competing against DGFC subsequent
to the transaction and, therefore, DGFC, does not owe the Company $500,000
related to that portion of the transaction; (ii) the Company violated the
noncompetition agreement between DGFC and the Company by distributing
advertising content after the transaction; (iii) due to the violation of the
noncompetition agreement, the post production services agreement that required
DGFC to continue to vault its customers’ physical elements at the Company’s
Media Center became null and void; and (iv) the company must return all of
DGFC’s vaulted material to DGFC. DGFC also seeks unspecified monetary
damages.
If DGFC
is successful in its claims, the possibility exists that the Company must return
the DGFC vaulted elements which will result in a future decline in annual
revenues of approximately $0.7 million, partially offset in the first year by
“pull” charges. The Company believes it has adequate defenses against the
claims.
From time to time the Company may
become a party to other legal actions and complaints arising in the ordinary
course of business, although it is not currently involved in any such material
legal proceedings.
ITEM
1A. RISK FACTORS
In our
capacity as Company management, we may from time to time make written or oral
forward-looking statements with respect to our long-term objectives or
expectations which may be included in our filings with the Securities and
Exchange Commission (the “SEC”), reports to stockholders and information
provided on our web site.
The words
or phrases “will likely,” “are expected to,” “is anticipated,” “is predicted,”
“forecast,” “estimate,” “project,” “plans to continue,” “believes,” or similar
expressions identify “forward-looking statements.” Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. We wish to caution you not
to place undue reliance on any such forward-looking statements, which speak only
as of the date made. We are calling to your attention important
factors that could affect our financial performance and could cause actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.
The
following list of important factors may not be all-inclusive, and we
specifically decline to undertake an obligation to publicly revise any
forward-looking statements that have been made to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. Among the factors that could
have an impact on our ability to achieve expected operating results and growth
plan goals and/or affect the market price of our stock are:
·
|
Recent
history of losses.
|
·
|
Prior
breach and changes in credit agreements and ongoing
liquidity.
|
·
|
Our
highly competitive marketplace.
|
·
|
The
risks associated with dependence upon significant
customers.
|
·
|
Our
ability to execute our expansion
strategy.
|
·
|
The
uncertain ability to manage in a changing
environment.
|
20
·
|
Our
dependence upon and our ability to adapt to technological
developments.
|
·
|
Dependence
on key personnel.
|
·
|
Our
ability to maintain and improve service
quality.
|
·
|
Fluctuation
in quarterly operating results and seasonality in certain of our
markets.
|
·
|
Possible
significant influence over corporate affairs by significant
shareholders.
|
·
|
Our
ability to operate effectively as a stand-alone, publicly traded
company.
|
·
|
The
cost associated with becoming compliant with the Sarbanes-Oxley Act of
2002, and the consequences of failing to implement effective internal
controls over financial reporting as required by Section 404 of the
Sarbanes-Oxley Act of 2002 by the date that we must comply with that
section of the Sarbanes-Oxley
Act.
|
Other
factors not identified above, including the risk factors described in the “Risk
Factors” section of the Company’s June 30, 2009, Form 10-K filed with the
Securities and Exchange Commission, may also cause actual results to differ
materially from those projected by our forward-looking
statements. Most of these factors are difficult to anticipate and are
generally beyond our control. You should consider these areas of risk
in connection with considering any forward-looking statements that may be made
in this Form 10-Q and elsewhere by us and our business
generally. Except to the extent of any obligation to disclose
material information under the federal securities laws or the rules of the
NASDAQ Global Market, we undertake no obligation to release publicly any
revisions to any forward-looking statements, to report events or to report the
occurrence of unanticipated events.
ITEM 6. EXHIBITS
(a)
|
Exhibits
|
31.1
|
Certification
of Chief Executive Officer Pursuant to 15 U.S.C. § 7241, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
31.2
|
Certification
of Chief Financial Officer Pursuant to 15 U.S.C. § 7241, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. § 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements 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.
POINT.360
|
||
DATE: November
13, 2009
|
BY:
|
/s/ Alan R.
Steel
|
Alan
R. Steel
|
||
Executive
Vice President,
|
||
Finance
and Administration
|
||
(duly
authorized officer and principal financial
officer)
|
21