Attached files
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EX-32.1 - Point.360 | v197433_ex32-1.htm |
EX-21.1 - Point.360 | v197433_ex21-1.htm |
EX-32.2 - Point.360 | v197433_ex32-2.htm |
EX-23.1 - Point.360 | v197433_ex23-1.htm |
EX-31.1 - Point.360 | v197433_ex31-1.htm |
EX-10.17 - Point.360 | v197433_ex10-17.htm |
EX-31.2 - Point.360 | v197433_ex31-2.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For the
fiscal year ended June 30, 2010
¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the transition period from _________________ to
_________________
Commission
File Number 001-33468
POINT.360
(Exact
name of registrant as specified in its charter)
California
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01-0893376
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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2777
North Ontario Street, Burbank, CA
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91504
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code (818) 565-1400
Securities
registered pursuant to Section 12(b) of the Act:
Name
of each exchange
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||
Title
of each class
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on
which registered
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Common
Stock, no par value
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NASDAQ
Global
Market
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ¨ No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
¨
Indicate by check mark 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 during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files).
Yes ¨ No
¨
Indicate
by check mark 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 Form 10-K or any amendment to this
Form 10-K. x
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 ¨
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Accelerated
Filer ¨
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Non-accelerated
filer ¨
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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).
Yes ¨ No
x
The aggregate market value of the
voting common equity held by non-affiliates of the registrant as of the last
business day of the registrant’s most recently completed second fiscal quarter
(December 31, 2009) was approximately $6.0 million. As of August 31,
2010, there were 10,513,166 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
Portions of the registrant’s Proxy
Statement (to be filed by October 28, 2010) relating to its 2010 annual meeting
of shareholders are incorporated by reference into Part III of this Form
10-K.
CAUTIONARY
STATEMENT
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 in 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:
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·
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our
recent history of losses;
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·
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Point.360’s
prior breach of credit agreements;
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·
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our
highly competitive marketplace;
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·
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the
risks associated with dependence upon significant
customers;
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·
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our
ability to execute our expansion
strategy;
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·
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the
uncertain ability to manage in a changing
environment;
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·
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our
dependence upon, and our ability to adapt to, technological
developments;
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·
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dependence
on key personnel;
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·
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our
ability to maintain and improve service
quality;
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·
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fluctuation
in quarterly operating results and seasonality in certain of our
markets;
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·
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possible
significant influence over corporate affairs by significant
shareholders;
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·
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our
ability to operate effectively as a stand-alone, publicly traded company;
and
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·
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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.
|
Other
factors not identified above, including the risk factors described in the “Risk
Factors” section of this Form 10-K, 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 the areas of risk described above, as well as those set forth
under the heading “Risk Factors” below, in connection with considering any
forward-looking statements that may be made in this Form 10-K and elsewhere by
us and our businesses generally. Except to the extent of 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.
2
PART
1
ITEM 1.
BUSINESS
The
Company was formed as a wholly-owned subsidiary (named “New 360”) of Point.360
(“Parent Company”) in April 2007. The post production assets of the Parent
Company were contributed to New 360 on August 14, 2007, after which all
New 360 common stock was distributed to the Parent Company’s
shareholders. New 360 subsequently changed its name to Point.360 after the
merger of the Parent Company with DG FastChannel, Inc. (“DG FastChannel”).
The Parent Company is hereinafter referred to as Old Point.360.
Point.360
(“Point.360” or the “Company”) is a leading integrated media management services
company providing film, video and audio post-production, archival, duplication,
computer graphics and data distribution services to motion picture studios,
television networks, independent production companies and multinational
companies. We provide the services necessary to edit, master, reformat and
archive our clients’ audio, video, and film content, which includes television
programming, feature films, and movie trailers. The Company also
rents and sells DVDs and video games directly to consumers through its
Movie>Q retail stores.
The
Company, previously part of Old Point.360, was spun off to Old Point.360’s
shareholders on August 14, 2007. References to the activities of the
Company prior to the spin-off refer to those of Old Point.360’s post production
business which constitutes the continuing operations of the
Company.
We seek
to capitalize on growth in demand for the services related to the manipulation
and distribution of rich media content without assuming the production or
ownership risk of any specific television program, feature film, advertising or
other form of content. The primary users of our services are entertainment
studios that generally choose to outsource such services due to the sporadic
demand and the fixed costs of maintaining a high-volume physical
plant. We also plan to serve the DVD and video game rental market
which is currently being abandoned by the closedown of Movie Gallery/Hollywood
Video and Blockbuster video rental stores.
Since
January 1, 1997, Old Point.360 successfully completed acquisitions of companies
providing similar services. We will continue to evaluate acquisition
opportunities to enhance our operations and profitability. In 2004, Old
Point.360 acquired International Video Conversions, Inc. (“IVC”), a leading
digital intermediate and digital mastering facility. In 2005, Old Point.360
acquired Visual Sound, a provider of captioning services. In 2007, Old Point.360
purchased the business of Eden FX, a producer of sophisticated visual effects
and graphics for feature films, television programming and commercials. In
November 2008, the Company purchased the assets and business of Video Box
Studios. In April 2009, the Company purchased the assets of and
business of MI Post. In September and November 2009, we purchased assets and
intellectual property to form the foundations of our Movie>Q
initiative. As a result of these acquisitions, we are one of
the largest and most diversified providers of technical and distribution
services in our markets, and therefore are able to offer our customers a single
source for such services at prices that reflect our scale
economies.
Markets
We derive
revenues primarily from the entertainment industry, consisting of major and
independent motion picture and television studios, cable television program
suppliers, television program syndicators, and advertising agencies. On a more
limited basis, we also service national television networks, local television
stations, corporate or instructional video providers, infomercial advertisers
and educational institutions. Movie>Q provides consumers with a
DVD and game rental alternative to the “big box” rental retail chain stores who
are abandoning the space.
The
entertainment industry creates motion pictures, television programming, and
interactive multimedia content for distribution through theatrical exhibition,
home video, pay and basic cable television, direct-to-home, private cable,
broadcast television, on-line services and video games. Content is
released into a "first-run" distribution channel, and later into one or more
additional channels or media. In addition to newly produced content, film
and television libraries may be released repeatedly into distribution.
Entertainment content produced in the United States is exported and is in
increasingly high demand internationally. We believe that several trends
in the entertainment industry have and will continue to have a positive impact
on our business. These trends include growth in worldwide demand for
original entertainment content, the development of new markets for existing
content libraries, increased demand for innovation and creative quality in
domestic and foreign markets and wider application of digital technologies for
content manipulation and distribution, including the emergence of new
distribution channels.
3
Value-Added
Services
Point.360
maintains video and audio post-production and editing facilities as components
of its full service, value-added approach to its customers. The following
summarizes the value-added post-production services that we provide to our
customers:
Visual Effects. We
provide premiere visual effects for feature films, television programs and
commercial advertising content. Content creation across all media is in
continual need of highly realistic, imaginative and intriguing visual effects.
Due to the lower costs of digital content as compared to the cost of live
production, more heightened “realism” has been made possible by today’s highly
skilled artists using sophisticated software. This offers producers of films, TV
programs and commercials more production flexibility and time
savings.
Video and Data
Editing. Digital editing services are located in
Hollywood, Burbank and West Los Angeles, California. The editing suites are
equipped with state-of-the-art digital editing equipment, including the Film
Master Nucoda and Avid® Symphony Nitris which provides precise and repeatable
electronic transfer of data, video and/or audio information from one or more
sources to a new master and production switchers to effect complex transitions
from source to source while simultaneously inserting titles and/or digital
effects over background video. Video is edited into completed programs such as
television shows, DVD compression masters, infomercials, commercials, movie
trailers, electronic press kits, specials, and corporate and educational
presentations.
Graphics and
Animation. We offer creative services for television main
title creation. Innovative artists work in conjunction with producers
on concepts for new television series. Through computer graphics
interface, we create animated characters or other animated
concepts.
Digital Color Correction.
Substantially all film content ultimately is distributed to the home
video, broadcast, cable or pay-per-view television markets, requiring that film
images be transferred electronically to a digital video format. Each frame
must be color corrected and adapted to the size and aspect ratio of a television
screen in order to ensure the highest level of conformity to the original film
version. We transfer film and data to digital formats using
Spirit, 4k Telecine equipment, daVinci® 2k,and Digital Vision Film
Master color correction systems. The re-mastering of studio film and
television libraries to the HDTV broadcast standard has become a growing portion
of our film transfer business, as well as affiliated services such as foreign
language mastering, duplication and distribution.
Picture Restoration.
Digital picture restoration occurs in all titles targeted for Blu-ray and
standard definition DVD distribution as well as cable markets. Flaws in the
picture such as dirt, scratches, splice bumps and excessive grain can be removed
using our vast array of technologies and expertise. Tools incorporated in this
process are daVinci Revival®, MTI Film DRS, Diamant Imagica XE Advanced wetgate
scanner, and our proprietary Advanced Restoration Tools (A.R.T.). Once the
picture elements are restored, new film negatives can also be derived from these
polished digital elements.
Audio
Post-Production. We digitally mix television shows, commercials, and
independent features. We edit and create sound effects, assist in replacing
dialog and re-record audio elements for integration with film and video
elements. We design sound effects to give life to the visual images with a
library of sound effects. Dialog replacement is sometimes required to
improve quality, replace lost dialog or eliminate extraneous noise from the
original recording. Re-recording combines sound effects, dialog, music and
laughter or applause to complete the final product. In addition, the
re-recording process allows the enhancement of the listening experience by
adding specialized sound treatments, such as stereo, Dolby Digital®, SDDS®, THX®
and Surround Sound®.
Audio Restoration and
Layback. Audio layback is the process of creating duplicate
videotape masters with sound tracks that are different from the original
recorded master sound track. Content owners selling their assets in
foreign markets require the replacement of dialog with voices speaking local
languages. In some cases, all of the audio elements, including dialog, sound
effects, music and laughs, must be recreated, remixed and synchronized with the
original videotape. Audio sources are premixed foreign language tracks or
tracks that contain music and effects only. The latter is used to make a
final videotape product that will be sent to a foreign country to permit
addition of a foreign dialogue track to the existing music and effects
track.
Closed Captioning and Subtitling.
All broadcast material requires closed captioning. We are able to create
closed captioning formatted for high definition and standard definition markets
and DVD markets when requested. Subtitling is offered in over twenty foreign
languages.
Foreign Language
Mastering. Programming designed for distribution in markets other
than those for which it was originally produced is prepared for export through
language translation and either subtitling or voice dubbing. We provide
dubbed language recording and versioning followed by an audio layback and
conform service that supports various audio, data and videotape formats to
create an international language-specific master videotape. We also create music
and effects tracks from programming shot before an audience to prepare
television sitcoms for dialog recording and international
distribution.
4
Standards Conversion.
Throughout the world there are several different broadcasting "standards" in
use. To permit a program recorded in one standard to be broadcast in another, it
is necessary for the recorded program to be converted to the applicable
standard. This process involves changing the number of video lines per frame,
the number of frames per second, and the color system. We are able to convert
video between all international formats, including NTSC, PAL high definition and
standard definition. Our competitive advantages in this service line
include our state-of-the-art systems and our detailed knowledge of the
international markets with respect to quality-control requirements and technical
specifications.
Broadcast Encoding. We
provide encoding services for tracking global broadcast verification and
intelligence service. Using processes which include high definition and
standard definition Teletrax, V-chip, AFD, AMOL, and SIGMA encoding, a code is
placed within the video portion of an advertisement or an electronic press kit.
Such codes can be monitored from television broadcasts to determine which
advertisements or portions of electronic press kits are shown on or during
specific television programs, providing customers direct feedback on allotted
airtime. We provide encoding services for a number of our motion picture studio
clients to enable them to customize their promotional material.
Global Distribution and
Syndication. We offer a broad range of technical services to
domestic and international programmers. We service the basic and premium
cable, broadcast syndication and direct-to-home market segments by providing the
facilities and services necessary to assemble and distribute programming via
high definition and standard definition satellite as well as fiber feeds to
viewers in the United States, Canada and Europe. We provide facilities and
services for the delivery of syndicated television programming in the United
States and Canada. Our customer base consists of the major studios and
independent distributors offering network programming, world-wide independent
content owners offering niche market programming, and pay-per-view services
marketing movies and special events to the cable industry and direct-to-home
viewers.
Archival Services. We
currently store approximately 700,000 videotape, audio and film elements in a
protected environment. The storage and handling of videotape, audio and
film elements require specialized security and environmental control
procedures. We perform secure management archival services in all of our
operating facilities and our state-of-the-art Media Center in Los Angeles.
We offer on-line access to archival information for advertising clients, and may
offer this service to other clients in the future.
New
Markets
We
believe that the development of value-added services will provide us with the
opportunity to enter or increase our presence in several new or expanding
markets.
International.
Point.360 currently provides electronic and physical duplication and
distribution services for rich media content providers. Furthermore, we believe
that available electronic distribution methods will facilitate further expansion
into the international distribution arena as such technologies become
standardized and cost-effective. In addition, we believe that the growth in the
distribution of domestic content into international markets will create
increased demand for value-added services currently provided by us such as
standards conversion and audio and digital mastering.
Picture
Preservation. Our patent pending Visionary Archive process can
archive color images to single strip 35mm black-and-white film. This
revolutionary process encodes full color motion picture images onto a single
reel of 35mm black-and-white Panchromatic stock using two-thirds less film stock
than traditional color separations. It will eliminate registration,
stabilization, warping, luminance and color fading issues. This
process can be used for digital migration as well as preservation.
High Definition Television
(“HDTV”). We are
capitalizing on opportunities created by emerging industry trends such as the
emergence of digital television and its more advanced variant, high-definition
television. HDTV has quickly become the mastering standard for domestic content
providers. We believe that the aggressive timetable associated with such
conversion, which has resulted both from mandates by the Federal Communications
Commission for digital television and high-definition television as well as
competitive forces in the marketplace, is likely to accelerate the rate of
increase in the demand for these services. We maintain a state-of-the-art
HDTV capability.
3D. 3D
convergence and subtitling is moving rapidly into the marketplace. We
are equipped to meet these emerging broadcast standards utilizing our editorial
and subtitling expertise.
5
DVD and Video Game Rental and
Sales - Movie>Q. In
fiscal 2010, we purchased assets and intellectual property for a research and
development project to address the viability of the DVD and video game rental
business being abandoned by the closure of Movie Gallery/Hollywood Video and
Blockbuster stores. The DVD rental market consists principally of
online service (Netflix), vending machines (Redbox) and large video
stores. We estimate that the size of the market being abandoned is $2
to $3 billion.
As of
June 30, 2010, we have opened three Movie>Q “proof-of-concept” stores in
Southern California. The stores employ an automated inventory
management (“AIM”) system in a 1,200-1,600 square foot facility. By
saving space and personnel costs which caused the big box stores to be
uncompetitive with lower priced online and vending machine rental
alternatives, Movie>Q offers 10,000-15,000 unit selections to
customers at competitive low rental rates. Movie>Q provides online
reservations, an in-store destination experience, first run movie and game
titles and a large unit selection (as opposed to 400-700 for a Redbox vending
machine).
Based on
the success of the proof-of-concept, we may seek to rapidly expand the number of
Movie>Q stores while further streamlining the design and production of the
AIM system. Movie>Q provides the Company with a content
distribution industry service offering.
Sales
and Marketing
We market
our services through a combination of industry referrals, formal advertising,
trade show participation, special client events, and our Internet website. While
we rely primarily on our reputation and business contacts within the industry
for the marketing of our services, we also maintain a direct sales force to
communicate the capabilities and competitive advantages of our services to
potential new customers. Our marketing programs are directed toward
communicating our unique capabilities and establishing us as the predominant
value-added partner for entertainment, advertising and corporate
customers.
In
addition to our traditional sales efforts directed at those individuals
responsible for placing orders with our facilities, we also strive to negotiate
“preferred vendor” relationships with our major customers. Through this
process, we negotiate discounted rates with large volume clients in return for
being promoted within the client’s organization as an established and accepted
vendor. This selection process tends to favor larger service providers
such as Point.360 that (1) offer lower prices through scale economies, (2) have
the capacity to handle large orders without outsourcing to other vendors, and
(3) can offer a strategic partnership on technological and other
industry-specific issues. We negotiate such agreements periodically with
major entertainment studios and national broadcast networks.
Customers
Point.360
has added customers through acquisitions and by delivering a favorable mix of
reliability, timeliness, quality, service and price. The integration of
our facilities has given our customers a time advantage in the ability to
deliver broadcast quality material. We market our services to major and
independent motion picture and television production companies, television
program suppliers and, on a more limited basis, national television networks,
infomercial providers, local television stations, television program
syndicators, corporations and educational institutions. Our motion picture
clients include Disney, Sony Pictures Entertainment, Twentieth Century Fox, NBC
Universal, Warner Bros., Metro-Goldwyn-Mayer and Paramount
Pictures.
We
solicit the motion picture and television industries to generate revenues.
In the fiscal years ended June 30, 2008, 2009 and 2010, five major motion
picture studios accounted for approximately 52%, 48% and 58% of Point.360’s
revenues, respectively. Sales to Twentieth Century Fox and affiliates
comprised 26%, 21% and 23% of revenues in those periods, respectively, and
sales to Deluxe Media were 14% of sales in 2010. Sales to Twentieth
Century Fox and affiliates were made to approximately 50 individual customers
within the group.
We
generally do not have exclusive service agreements with our clients. Because
clients generally do not make arrangements with us until shortly before our
facilities and services are required, we usually do not have any significant
backlog of service orders. Our services are generally offered on an hourly or
per unit basis based on volume.
Customer
Service
We
believe we have built a strong reputation in the market with a commitment to
customer service. We receive customer orders via courier services,
telephone, telecopier and the Internet. Our sales and customer service
staff develops strong relationships with clients within the studios and is
trained to emphasize our ability to confirm delivery, interpret supplied
technical specifications, and meet difficult delivery time frames and provide
reliable and cost-effective service. Several studios are customers because
of our ability to meet often changing or rush delivery
schedules.
6
We have a
sales and customer service staff of approximately 46 people, and we provide
services 24 hours per day. This staff serves as a single point of
problem resolution and supports not only our customers but also the television
stations and cable systems to which we deliver content.
Competition
The manipulation, duplication and
distribution of rich media assets and DVD rentals are highly competitive service
oriented businesses. Certain competitors (both independent companies and
divisions of large companies) provide all or most of the services provided by
us, while others specialize in one or several of these services. Substantially
all of our competitors have a presence in the Los Angeles area, which is
currently the largest market for our services. Due to the current and
anticipated future demand for video and distribution services in the Los Angeles
area, we believe that both existing and new competitors may expand or establish
video service facilities in this area.
Employees
The Company had approximately 287
full-time employees as of June 30, 2010. The Company’s employees are
not represented by any collective bargaining organization, and the Company has
never experienced a work stoppage. The Company believes that its
relations with its employees are good.
ITEM
1A. RISK FACTORS
You
should carefully consider each of the following risk factors and all of the
other information set forth in this Form 10-K. The risk factors have been
separated into two groups: (1) risks relating to our business, and
(2) risks relating to our common stock. Based on the information currently
known to us, we believe that the following information identifies the most
significant risk factors affecting our company in each of these categories of
risks. Past financial performance may not be a reliable indicator of
future performance, and historical trends should not be used to anticipate
results or trends in future periods.
If any of the following risks and
uncertainties develops into actual events, these events could have a material
adverse effect on our business, financial condition or results of operations. In
such case, the trading price of our common stock could
decline.
Risks
Relating to Point.360’s Business
We
have a history of losses, and we may incur losses in the future.
Point.360
had losses in each of the five fiscal years ended June 30, 2010 due, in part, to
increased price competition, the cost of being a publicly traded company and a
number of unusual charges. There is no assurance as to future
profitability on a quarterly or annual basis.
Point.360
previously breached its credit agreements, and we may do so in the
future.
Due to
lower operating cash amounts resulting from reduced sales levels and the
consequential net losses, Point.360 breached certain covenants of its credit
facility. The breaches were temporarily cured based on amendments and
forbearance agreements among Point.360 and the banks.
Although
we were in a cash positive position as of June 30, 2010 and expect to be for the
foreseeable future, if we continue to incur losses in the future, there is a
risk that we will default under financial covenants contained in any new credit
agreements and/or will not be able to pay off revolving or term loans when
due. If a default condition exists in future banking arrangements,
all amounts that may be outstanding under the new agreements will be due and
payable which could materially and adversely affect our business.
We
may be unable to compete effectively in a highly competitive
marketplace.
The
post-production industry is a highly competitive, service-oriented
business. In general, we do not have long-term or exclusive service
agreements with our customers. Business is acquired on a
purchase order basis and is based primarily on customer satisfaction with
reliability, timeliness, quality and price.
7
We
compete with a variety of post-production firms, some of which have a national
presence and, to a lesser extent, the in-house post-production operations of our
major motion picture studio customers. Some of these firms, and all
of the studios, have greater financial marketing resources and have achieved a
higher level of brand recognition than we have. In the future, we may
not be able to compete effectively against these competitors merely on the basis
of reliability, timeliness, quality and price or otherwise.
We may
also face competition from companies in related markets that could offer similar
or superior services to those offered by us. We believe that an
increasingly competitive environment as evidenced by recent price pressure and
some related loss of work and the possibility that customers may utilize
in-house capabilities to a greater extent could lead to a loss of market share
or additional price reductions, which could have a material adverse effect on
our financial condition, results of operations and prospects.
We
would be adversely affected by the loss of key customers.
Although
we have an active client list of approximately 1,500 customers, five motion
picture studios and and/or their affiliates accounted for approximately 52%, 48%
and 58% of our revenues in the fiscal years ended June 30, 2008, 2009 and
2010, respectively. Twentieth Century Fox (and affiliates)
accounted for 26%, 21% and 23% in the fiscal years ended June 30, 2008, 2009 and
2010, respectively. Deluxe Media accounted for 14% of sales in the
year ended June 30, 2010. If one or more of these companies were to
stop using our services, our business could be adversely
affected. Because we derive substantially all of our revenue from
clients in the entertainment industry, our financial condition, results of
operations and prospects could also be adversely affected by an adverse change
in conditions which impact those industries.
Our
expansion strategy may fail.
Our
growth strategy involves both internal development, expansion through
acquisitions and development of our Movie>Q business. We currently
have no agreements or commitments to acquire any company or
business. Even though Point.360 completed a number of acquisitions in
the past, the most recent of which was in November 2009, we cannot be sure
additional acceptable acquisitions will be available or that we will be able to
reach mutually agreeable terms to purchase acquisition targets, or that we will
be able to profitably manage additional businesses or successfully integrate
such additional businesses without substantial costs, delays or other
problems.
Acquisitions
may involve a number of special risks including: adverse effects on our reported
operating results (including the amortization of acquired intangible assets),
diversion of management’s attention and unanticipated problems or legal
liabilities. In addition, we may require additional funding to
finance future acquisitions. We cannot be sure that we will be able
to secure acquisition financing on acceptable terms or at all. We may
also use working capital or equity, or raise financing through equity offerings
or the incurrence of debt, in connection with the funding of any
acquisition. Some or all of these risks could negatively affect our
financial condition, results of operations and prospects or could result in
dilution to our shareholders. In addition, to the extent that
consolidation becomes more prevalent in the industry, the prices for attractive
acquisition candidates could increase substantially. We may not be
able to effect any such transactions. Additionally, if we are able to
complete such transactions they may prove to be unprofitable.
The
geographic expansion of our customers may result in increased demand for
services in certain regions where we currently do not have post-production
facilities. To meet this demand, we may
subcontract. However, we have not entered into any formal
negotiations or definitive agreements for this purpose. Furthermore,
we cannot assure you that we will be able to effect such transactions or that
any such transactions will prove to be profitable.
If we
acquire any entities, we may have to finance a large portion of the anticipated
purchase price and/or refinance then existing credit agreements. The
cost of any new financing may be higher than our then-existing credit
facilities. Future earnings and cash flow may be negatively impacted
if any acquired entity does not generate sufficient earnings and cash flow to
offset the increased costs.
Through
June 30, 2010, we have spent approximately $3.7 million ($0.5 million in stock
and $3.2 million in cash) to develop the Movie>Q concept and open three
proof-of-concept stores. A rapid roll out of stores is contemplated
based on the success of the proof-of-concept. We will require
significant financing to implement a roll out, which financing may not be
available on reasonable terms, if at all. While we believe the
Movie>Q alternative provides an attractive alternative for consumers in the
DVD and video game rental market, there can be no assurance of
success.
8
We
are operating in a changing environment that may adversely affect our
business.
In prior
years, we experienced industry consolidation, changing technologies and
increased regulation, all of which resulted in new and increased
responsibilities for management personnel and placed, and continues to place,
increased demands on our management, operational and financial systems and
resources. To accommodate these circumstances, compete effectively,
and manage future growth, we will be required to continue to implement and
improve our operational, financial and management information systems, and to
expand, train, motivate and manage our work force. We cannot be sure
that our personnel, systems, procedures and controls will be adequate to support
our future operations. Any failure to do so could have a material
adverse effect on our financial condition, results of operations and
prospects.
We
may be unable to adapt our business to changing technological
requirements.
Although
we intend to utilize the most efficient and cost-effective technologies
available for telecine, high definition formatting, editing, coloration and
delivery of audio and video content as they develop, we cannot be sure that we
will be able to adapt to such standards in a timely fashion or at
all. We believe our future growth will depend in part on our ability
to add to these services and to add customers in a timely and cost-effective
manner. We cannot be sure we will be successful in offering such
services to existing customers or in obtaining new customers for these
services. We intend to rely on third-party vendors for the
development of these technologies, and there is no assurance that such vendors
will be able to develop such technologies in a manner that meets our needs and
the needs of our customers.
The
loss of key personnel would adversely affect our business.
We are
dependent on the efforts and abilities of certain senior management,
particularly those of Haig S. Bagerdjian, Chairman, President and Chief
Executive Officer. The loss or interruption of the services of key
members of management could have a material adverse effect on our financial
condition, results of operations and prospects if a suitable replacement is not
promptly obtained. Mr. Bagerdjian beneficially owns approximately 51%
of Point.360’s outstanding stock. Although we have severance
agreements with Mr. Bagerdjian and certain key executives, we cannot be sure
that either Mr. Bagerdjian or other executives will remain with
Point.360. In addition, our success depends to a significant degree
upon the continuing contributions of, and on our ability to attract and retain,
qualified management, sales, operations, marketing, and technical
personnel. The competition for qualified personnel is intense, and
the loss of any such persons, as well as the failure to recruit additional key
personnel in a timely manner, could have a material adverse effect on our
financial condition, results of operations and prospects. There is no
assurance that we will be able to continue to attract and retain qualified
management and other personnel for the development of our business.
We
may be unable to meet the demands of our customers.
Our
business is dependent on our ability to meet the current and future demands of
our customers, which demands include reliability, timeliness, quality and
price. Any failure to do so, whether or not caused by factors within
our control, could result in losses to such clients. Although we
disclaim any liability for such losses, there is no assurance that claims would
not be asserted and dissatisfied customers may refuse to place further orders
with the Company in the event of a significant occurrence of lost elements,
either of which could have a material adverse effect on our financial condition,
results of operations and prospects. Although we maintain insurance
against business interruption, such insurance may not be adequate to protect us
from significant loss in these circumstances and there is no assurance that a
major catastrophe (such as an earthquake or other natural disaster) would not
result in a prolonged interruption of our business. In addition, our
ability to deliver services within the time periods requested by customers
depends on a number of factors, some of which are outside of our control,
including equipment failure, work stoppages by package delivery vendors or
interruption in services by telephone, internet or satellite service
providers.
Our
quarterly operating results have fluctuated significantly in the past and may
fluctuate in the future.
Our
operating results have varied in the past, and may vary in the future, depending
on factors such as sales volume fluctuations due to seasonal buying patterns,
the timing of new product and service introductions, the timing of revenue
recognition upon the completion of longer term projects, increased competition,
timing of acquisitions, the ability of our customers to finance projects,
general economic factors and other factors. In fiscal 2009, we
impaired goodwill in full. As a result, we believe that
period-to-period comparisons of our results of operations are not necessarily
meaningful and should not be relied upon as an indication of future
performance. Our operating results have historically been
significantly influenced by the volume of business from the motion picture
industry, which is an industry that is subject to seasonal and cyclical
downturns, and, occasionally, work stoppages by actors, writers and
others. For example, the 12,000-member Writer’s Guild of America
began a strike on November 5, 2007 which affected portions of our business,
which strike was not settled until February 12, 2008. In any
period, our revenues are subject to variation based on changes in the volume and
mix of services performed. It is possible that in a future quarter
our operating results will be below the expectations of equity research analysts
and investors. In such event, the price of our common stock would
likely be materially adversely affected.
9
We determined that there were material
weaknesses in our internal controls over financial reporting and that our
internal controls were not effective as of June 30, 2008 and 2009. In
the event a material weakness occurs again in the future, our financial
statements and results of operations could be harmed and you may not be
justified in relying on those financial statements.
For the
years ended June 30, 2008 and 2009, we determined that our internal controls
over financial reporting were not effective. We identified a
material weakness in our internal controls over financial reporting related to
certain deficiencies in the controls surrounding monitoring and oversight of
accounting and financial reporting related to the calculation of deferred tax
liability in 2008, and in the application of the proportional performance method
of recognizing revenues in 2009. In the event that this or any other
material weakness occurs in the future, our financial statements and results of
operations could be harmed and you may not be justified in relying on those
financial statements, either of which could result in a decrease in our stock
price.
Risks
Relating to the Company’s Common Stock
A
trading market that will provide adequate liquidity for our common stock may not
develop. In addition, the market price of our shares may
fluctuate widely.
Our
common stock began public trading on August 14, 2007. There is no
assurance that an active trading market will be sustained in the
future.
We cannot
predict the prices at which our common stock may trade. The market price of our
common stock may fluctuate widely, depending upon many factors, some of which
may be beyond our control, including:
|
·
|
our
business profile and market capitalization may not fit the investment
objectives of our shareholders and, as a result, our shareholders may sell
our shares;
|
|
·
|
a
shift in our investor base;
|
|
·
|
our
quarterly or annual earnings, or those of other companies in our
industry;
|
|
·
|
actual
or anticipated fluctuations in our operating results due to the
seasonality of our business and other factors related to our
business;
|
|
·
|
changes
in accounting standards, policies, guidance, interpretations or
principles;
|
|
·
|
announcements
by us or our competitors of significant acquisitions or
dispositions;
|
|
·
|
our
ability to meet earnings estimates of
shareholders;
|
|
·
|
the
operating and stock price performance of other comparable
companies;
|
|
·
|
overall
market fluctuations, and;
|
|
·
|
general
economic conditions.
|
Stock
markets in general have experienced volatility that has often been unrelated to
the operating performance of a particular company. These broad market
fluctuations may adversely affect the trading price of our common
stock.
Investors
may be unable to accurately value our common stock.
Investors
often value companies based on the stock prices and results of operations of
other comparable companies. Currently, no public post-production company exists
that is directly comparable to our size, scale and service offerings. As such,
investors may find it difficult to accurately value our common stock, which may
cause our common stock price to trade below our true value.
10
Your
percentage ownership in the Company may be diluted in the future.
Your
percentage ownership in the Company may be diluted in the future because of
equity awards that have been, or may be, granted to our directors, officers and
employees. We have adopted the 2007 Equity Incentive Plan, which
provides for the grant of equity based awards, including restricted stock,
restricted stock units, stock options, stock appreciation rights and other
equity-based awards to our directors, officers and other employees, advisors and
consultants.
Our
shareholder rights agreement and ability to issue preferred stock may
discourage, delay or prevent a change in control of the Company that would
benefit our shareholders.
Our Board
of Directors has the authority to issue up to 5,000,000 shares of preferred
stock and to determine the price, rights, preferences, privileges and
restrictions thereof, including voting rights, without any further vote or
action by the Company’s shareholders. Although we have no current
plans to issue any other shares of preferred stock, the rights of the holders of
common stock would be subject to, and may be adversely affected by, the rights
of the holders of any preferred stock that may be issued in the
future. Issuance of preferred stock could have the effect of
discouraging, delaying, or preventing a change in control of the Company that
would be beneficial to our shareholders.
On the
date that the Company’s shares were distributed to Old Point.360 shareholders,
each shareholder also received one preferred share purchase right for each share
of our common stock received by the shareholder. The rights will be
attached to the common stock and will trade separately and be exercisable only
in the event that a person or group acquires or announces the intent to acquire
20% or more of our common stock. Each right will entitle shareholders
to buy one one-hundredth of a share of a new series of junior participating
preferred stock at an exercise price of $10. If we are acquired in a
merger or other business combination transaction after a person has acquired 20%
or more of our outstanding common stock, each right will entitle its holder to
purchase, at the right’s then-current exercise price, a number of the acquiring
company’s common shares having a market value of twice such price. In
addition, if a person or group acquires 20% or more of our outstanding common
stock, each right will entitle its holder (other than such person or members of
such group) to purchase, at the right’s then-current exercise price, a number of
Point.360 common shares having a market value of twice such
price. Before a person or group acquires beneficial ownership of 20%
or more of our common stock, the rights are redeemable for $.0001 per right at
the option of the Board of Directors.
Although
our shareholder rights agreement is intended to encourage anyone seeking to
acquire the Company to negotiate with the Board prior to attempting a takeover,
the rights agreement may have the effect of discouraging, delaying or preventing
a change in control of the Company that would be beneficial to our
shareholders.
We
do not expect to pay dividends.
We do not
believe that we will have the financial strength to pay dividends in the
foreseeable future. If we do not pay dividends, the price of our common stock
must appreciate for you to receive a gain on your investment in the Company.
This appreciation may not occur.
Our
controlling shareholders may cause the Company to be operated in a manner that
is not in the best interests of other shareholders.
Our
Chairman, President and Chief Executive Officer, Haig S. Bagerdjian,
beneficially owns approximately 51% of our common stock. By virtue of
his stock ownership, Mr. Bagerdjian may be able to significantly influence the
outcome of matters required to be submitted to a vote of shareholders, including
(1) the election of the Board of Directors, (2) amendments to our Articles of
Incorporation and (3) approval of mergers and other significant corporate
transactions. The foregoing may have the effect of discouraging,
delaying or preventing certain types of transactions involving an actual or
potential change of control of the Company, including transactions in which the
holders of common stock might otherwise receive a premium for their shares over
current market prices.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not applicable
11
ITEM
2. PROPERTIES
The
Company currently owns or leases 10 facilities which all have production
capabilities and/or sales activities. The terms of leases for leased facilities
expire at various dates from 2011 to 2021. The following table sets
forth the location and approximate square footage of the Company's
properties:
Square
Footage
|
||||
Hollywood,
CA (owned)
|
18,300 | |||
Hollywood,
CA (leased)
|
6,000 | |||
Burbank,
CA (owned)
|
32,000 | |||
Burbank,
CA (leased)
|
45,500 | |||
Los
Angeles, CA (leased)
|
64,600 | |||
Los
Angeles, CA (leased)
|
13,400 | |||
New
York, NY (leased)
|
11,000 | |||
Westminster,
CA (leased)
|
1,300 | |||
Costa
Mesa, CA (leased)
|
1,200 | |||
La
Mirada, CA (leased)
|
1,600 |
ITEM
3. 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 defendants’ negligence, Farshad claims to
have suffered damages in excess of $2 million and additional unquantified
general and special damages. 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 sought possession of
the property, damages for each day of the Company’s possession from May 1, 2009,
and other damages and legal fees. The matter was settled in February
2010 for $93,000.
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 $412,500
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 sought unspecified
monetary damages.
In
September 2010, a settlement between the parties included the
following: (1) The Company will be subject to a permanent injunction
(until August 13, 2012) from competing in the commercial spot
advertising business (as defined), (2) the Company will deliver to
DGFC vaulted elements which will result in an annual reduction of vaulting
revenues of approximately $0.9 million, (3) the Company will not be entitled to
$412,500 (relating to the working capital reconciliation), (4) the Company will
issue 250,000 shares of common stock to DGFC and (5) the parties will enter into
full mutual releases and will dismiss their respective claims with
prejudice. In connection with the settlement, the Company has
indemnified a related party against possible losses related to the stock
issuance. As of June 30, 2010 the Company has accrued approximately
$1.0 million of estimated future legal, vault removal and other costs associated
with the settlement.
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 except as described above.
12
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to the Company’s shareholders for a vote during the
fourth quarter of the fiscal year ended June 30, 2010.
PART
II
ITEM 5.
|
MARKET
FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Market
Information
The
Company's Common Stock is traded on the NASDAQ Global Market under the symbol
PTSX. The following table sets forth, the high and low closing price per share
for the Common Stock for each quarter of the fiscal years ended June 30, 2009
and 2010.
Common Stock
|
||||||||
Low
|
High
|
|||||||
Year
Ended June 30, 2009
|
||||||||
First
Quarter
|
$ | 1.39 | $ | 1.74 | ||||
Second
Quarter
|
$ | 1.10 | $ | 1.63 | ||||
Third
Quarter
|
$ | 1.12 | $ | 1.38 | ||||
Fourth
Quarter
|
$ | 1.16 | $ | 1.45 | ||||
Year
Ended June 30, 2010
|
||||||||
First
Quarter
|
$ | 1.16 | $ | 1.55 | ||||
Second
Quarter
|
$ | 1.05 | $ | 1.53 | ||||
Third
Quarter
|
$ | 1.24 | $ | 1.54 | ||||
Fourth
Quarter
|
$ | 1.54 | $ | 2.29 |
On August 31, 2010, the closing sale
price of the Common Stock as reported on the NASDAQ Global Market $1.25 per
share. On that date, there were approximately 1,000 holders of record of the
Common Stock.
Dividends
Neither
the Company nor Old Point.360 have paid dividends on its Common
Stock. The Company’s ability to pay dividends depends upon
limitations under applicable law and covenants under its bank
agreements. The Company currently does not intend to pay any
dividends on its Common Stock in the foreseeable future (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations —
Liquidity and Capital Resources”).
ITEM
6. SELECTED FINANCIAL DATA
The
following data, insofar as they relate to each of the calendar years 2005 to
2006, and the fiscal years ended June 30, 2007 to 2010 have been derived from
the Company’s annual financial statements. This information should be
read in conjunction with the Financial Statements and Notes thereto
(particularly Note 1 with respect to the Spin-off of the Company from Old
Point.360 on August 14, 2007) and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere
herein. All amounts are shown in thousands, except per share
data.
13
Year Ended
December 31,
|
Six Months Ended
June 30,
|
Year Ended
June 30,
|
||||||||||||||||||||||||||||||
Statement of Operations Data
|
2005
|
2006
|
2006
|
2007
|
2007
|
2008
|
2009
|
2010
|
||||||||||||||||||||||||
(unaudited)
|
(unaudited)
|
|||||||||||||||||||||||||||||||
Revenues
|
$ | 43,059 | $ | 43,533 | $ | 21,692 | $ | 20,850 | $ | 42,691 | $ | 45,150 | $ | 45,619 | $ | 39,735 | ||||||||||||||||
Cost
of services sold
|
(29,472 | ) | (29,976 | ) | (14,948 | ) | (15,760 | ) | (30,788 | ) | (31,156 | ) | (31,023 | ) | (28,461 | ) | ||||||||||||||||
Gross
profit
|
13,587 | 13,557 | 6,744 | 5,090 | 11,903 | 13,994 | 14,596 | 11,274 | ||||||||||||||||||||||||
Selling,
general and administrative expense
|
(14,972 | ) | (13,554 | ) | (6,995 | ) | (7,071 | ) | (13,631 | ) | (14,611 | ) | (16,500 | ) | (15,981 | ) | ||||||||||||||||
Research
and development costs
|
- | - | - | - | - | - | - | (1,115 | ) | |||||||||||||||||||||||
Restructuring
costs
|
- | - | - | - | - | (513 | ) | - | (745 | ) | ||||||||||||||||||||||
Impairment
charges
|
- | - | - | - | - | - | (9,961 | ) | - | |||||||||||||||||||||||
Operating
income (loss)
|
(1,385 | ) | 3 | (251 | ) | (1,981 | ) | (1,728 | ) | (1,130 | ) | (11,865 | ) | (6,567 | ) | |||||||||||||||||
Interest
expense, net
|
(1,280 | ) | (659 | ) | (448 | ) | (263 | ) | (473 | ) | (205 | ) | (628 | ) | (927 | ) | ||||||||||||||||
Other
income
|
- | - | - | - | - | 100 | 396 | 537 | ||||||||||||||||||||||||
(Provision
for) benefit from income tax
|
1,045 | 342 | 280 | 607 | 668 | 292 | (363 | ) | - | |||||||||||||||||||||||
Net
(loss)
|
$ | (1,620 | ) | $ | (314 | ) | $ | (419 | ) | $ | (1,637 | ) | $ | (1,533 | ) | $ | (943 | ) | $ | (12,460 | ) | $ | (6,957 | ) | ||||||||
Pro
forma (loss) per share
|
$ | (0.03 | ) | $ | (0.04 | ) | $ | (0.16 | ) | $ | (0.15 | ) | $ | (0.09 | ) | $ | (1.20 | ) | $ | (0.67 | ) | |||||||||||
Pro
forma weighted average common share outstanding
|
10,554 | 10,554 | 10,554 | 10,554 | 10,554 | 10,358 | 10,405 |
Year Ended December 31,
|
Year Ended June 30,
|
|||||||||||||||||||||||
Other Data
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
||||||||||||||||||
Capital
expenditures
|
$ | 2 ,317 | $ | 2,064 | $ | 839 | $ | 1,925 | $ | 16,586 | (3) | $ | 2,189 | |||||||||||
Selected
Balance Sheet Data
|
||||||||||||||||||||||||
Cash
and cash equivalents
|
$ | 595 | $ | — | $ | 7,302 | $ | 13,056 | $ | 5,235 | $ | 249 | ||||||||||||
Working
capital (deficit)
|
(234 | ) | 1,325 | 9,814 | 16,497 | 10,048 | 2,445 | |||||||||||||||||
Property
and equipment, net
|
26,474 | 12,850 | (1) | 11,330 | 8,667 | 20,417 | 20,157 | |||||||||||||||||
Total
assets
|
47,229 | 33,482 | (1) | 38,103 | 42,358 | 37,394 | 31,144 | |||||||||||||||||
Due
to parent company
|
17,416 | 5,690 | (1) | 5,871 | - | - | - | |||||||||||||||||
Invested
or shareholders’ equity
|
19,757 | (2) | 17,424 | (2) | 24,035 | (2) | 30,800 | 18,009 | 11,830 |
(1)
|
On
March 29, 2006, Old Point.360 sold and leased back its Media Center
facility. Proceeds were used to repay debt. See Note 4 of the notes to
consolidated financial statements included elsewhere
herein.
|
(2)
|
Represents
Old Point.360’s invested equity in the
Company.
|
(3)
|
Includes
$12,939,000 for the purchase of real
estate
|
14
In
presenting the financial data above in conformity with generally accepted
accounting principles, we are required to make estimates and assumptions that
affect the amounts reported. See “Critical Accounting Policies” included
elsewhere herein for a detailed discussion of the accounting policies that we
believe require subjective and complex judgments that could potentially affect
reported results.
Between
July 1, 2008 and June 30, 2010, Point.360 completed a number of acquisitions,
the results of operations and financial position of which have been included
from their acquisition dates forward. See Note 3 to our consolidated financial
statements for a discussion of the acquisitions.
ITEM 7.
|
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, 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 this Form 10-K, 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. The Company also rents and
sells DVDs and video games directly to consumers through its Movie>Q retail
stores.
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 has 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. We also believe that a potentially large consumer market
exists for the rental of DVDs and video games, which market is being abandoned
by “big box” DVD rental stores.
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 57% of our
revenues. 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 and expand our
businesses. During the fiscal year ending June 30, 2010, we have
completed the following:
|
·
|
We
consolidated our former Hollywood Facility into other Company locations
upon the expiration of the Hollywood building
lease.
|
15
|
·
|
We
purchased assets and intellectual property in conjunction with a research
and development project to create three “proof-of-concept” Movie>Q
stores.
|
|
·
|
We
developed the Movie>Q automated inventory
system.
|
|
·
|
We
closed down our New York facility due to continuing economic uncertainty
in that market.
|
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 others) that can
increase revenues by adding new customers, or expanding current services to
existing customers. Additionally, we are looking to capitalize on the Movie>Q
retail opportunity.
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.
In
conjunction with the merger of Old Point.360 into DG FastChannel, we changed our
fiscal year end from December 31 to June 30, a date closer to the transaction.
The following table sets forth the amount and percentage relationship to
revenues of certain items included within our Consolidated Statements of
Operations for the twelve month periods ended June 30, 2008, 2009 and 2010. The
commentary below is based on these financial statements (in
thousands).
Twelve Months Ended June 30,
|
||||||||||||||||||||||||
2008
|
2009
|
2010
|
||||||||||||||||||||||
Amount
|
Percent of
Revenues
|
Amount
|
Percent of
Revenues
|
Amount
|
Percent of
Revenues
|
|||||||||||||||||||
Revenues
|
$ | 45,150 | 100.0 | $ | 45,619 | 100.0 | $ | 39,735 | 100.0 | |||||||||||||||
Costs
of services sold
|
(31,156 | ) | ( 69.0 | ) | (31,023 | ) | (68.0 | ) | (28,461 | ) | (71.6 | ) | ||||||||||||
Gross
profit
|
13,994 | 31.0 | 14,596 | 32.0 | 11,274 | 28.4 | ||||||||||||||||||
Selling,
general and administrative expense
|
(14,491 | ) | (32.1 | ) | (16,500 | ) | (36.2 | ) | (15,981 | ) | (40.2 | ) | ||||||||||||
Research
and development costs
|
- | - | - | - | (1,115 | ) | (2.8 | ) | ||||||||||||||||
Restructuring
costs
|
(513 | ) | (1.1 | ) | - | - | ( 745 | ) | (1.9 | ) | ||||||||||||||
Impairment
charges
|
- | - | (9,961 | ) | (21.8 | ) | - | - | ||||||||||||||||
Allocation
of Old Point.360 corporate expenses
|
(120 | ) | (0.3 | ) | - | - | - | - | ||||||||||||||||
Operating
(loss)
|
(1,130 | ) | (2.5 | ) | (11,865 | ) | (26.0 | ) | (6,567 | ) | (16.5 | ) | ||||||||||||
Interest
expense, net
|
(205 | ) | (0.2 | ) | (628 | ) | (1.3 | ) | (927 | ) | (2.3 | ) | ||||||||||||
Other
income
|
100 | - | 396 | 0.8 | 537 | 1.3 | ||||||||||||||||||
Benefit
from income taxes
|
292 | 0.6 | (363 | ) | (0.8 | ) | - | - | ||||||||||||||||
Net
(loss)
|
$ | (943 | ) | (2.1 | ) | $ | (12,460 | ) | (27.3 | ) | $ | (6,957 | ) | (17.5 | ) |
Twelve
Months Ended June 30, 2010 Compared to Twelve Months Ended June 30,
2009
Revenues. Revenues
were $39.7 million for the year ended June 30, 2010, compared to $45.6 million
for the year ended June 30, 2009. Revenues from major studio and
other customers declined approximately $2.4 million due to reduced ordering of
our services resulting from current difficult financial
conditions. Additionally, $3.1 million of the decline in revenues for
fiscal 2010 were due to the move of the operations of one of our Hollywood
facilities (“Highland”) to other Company locations as we renovate the Vine
Property. We expect the negative effect on revenues to continue
as we further consolidate post production facilities to maximize space
utilization and reduce overhead. As of June 30, 2010, we decided to
close down our New York facility which generated $1.1 million of revenue in
fiscal 2010. Although physical moves may adversely affect
revenues in the short term, we will continue to search for operating
efficiencies to increase income. We expect revenues from our vaulting
activities to decline approximately $0.9 million in fiscal 2011 due to removal
of content by one major customer. We are continuing to invest in high
definition and digital capabilities where demand is expected to grow. We believe
our high definition and digital service platform will attract additional
business in the future.
16
Cost of Services. Costs of
services consist principally of wages and benefits, facility costs and
depreciation of physical assets. During the year ended June 30, 2010
total costs of services were 71.6% of sales compared to 68.0% in the prior
year. Our Hollywood operational costs were reduced by $2.0
million due to the move, offset by an increase in costs associated with the
addition of our New York space in April 2009 (approximately $1.4
million). Other costs remained consistent with the prior year period
due to the fixed nature of our service infrastructure.
Gross Profit. In
2010, gross margin was 28.4% of sales, compared to 32.0% 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 $16.0 million (40.2% of sales)
in 2010 as compared to $16.5 million (36.2% of sales) in 2009. In the
fiscal 2010 period, the Company incurred $2.2 million of expenses associated
with the prosecution, defense and settlement of legal actions. In
fiscal 2009, the Company incurred approximately $0.4 million of costs associated
with documentation of its internal control processes in anticipation of
performing its first management assessment of internal controls for the fiscal
year ended June 30, 2009. The Company also spent approximately $0.3
million in consulting fees to improve its information technology infrastructure
and $0.4 million associated with the shutdown of the Highland
Facility. Excluding these costs, SG&A expenses for the
years ended June 30, 2010 and 2009 were $13.8 million, or 34.7% of sales and
$15.5 million or 34.0% of sales, respectively.
Research and Development
Expense. During the year ended June 30, 2010, the Company
undertook a research and development project to evaluate, develop and
commercialize “automated” stores to rent and sell digital video discs
(DVDs). The Movie>Q stores will contain 10,000-15,000 DVDs for
rent or sale via a software-controlled automated inventory management
system contained in 1,200 to 1,600 square feet of retail space for
each store. Expenses associated with R&D activities were $1.1
million for the year ended June 30, 2010.
Restructuring
Costs. As of June 30, 2010, we decided to close our New
York facility due to effects of the general economic slowdown. The
costs of terminating the lease, moving equipment to other Company locations and
closing the facility (approximately $0.7 million) were treated as restructuring
costs.
Impairment
Charge. As part of the Company’s annual assessment of goodwill
impairment required by the Accounting Standards Codification at June 30, 2009,
the Company determined that goodwill was fully impaired, and recorded an
impairment charge of $10 million.
Operating Income (Loss).
Operating loss was $6.6 million in 2010 compared to $11.9 million in
2009. Unusual SG&A, restructuring and impairment costs and
R&D expenses contributed $4.0 and $11.0 million to the 2010 and 2009 losses,
respectively.
Interest
Expense. Net interest expense for 2010 was $0.9 million,
an increase of $0.3 million from 2009. The increase was due to a mortgage
related to real estate purchased in June 2009.
Other Income. Other income
represents principally sublease income and gain on sale of fixed
assets.
Net Income (Loss). Net loss
for 2010 was $7.0 million compared to $12.5 million in 2009
Twelve
Months Ended June 30, 2009 Compared to Twelve Months Ended June 30,
2008
Revenues. Revenues
were $45.6 million for the year ended June 30, 2009, compared to $45.2 million
for the year ended June 30, 2008. We expect revenues to 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 last quarter
of fiscal 2009 were lower than prior quarters by approximately $0.4 million due
to the move of the operations to one of our Hollywood facilities (“Highland”) to
two of our other locations.
17
Cost of Services.
Costs of services consist principally of wages and benefits, facility costs and
depreciation of physical assets. During the year ended June 30, 2009,
total costs of services were 68.0% of sales compared to 69.0% in the prior
year. Depreciation costs were consistent between
periods. Wages and benefits declined $241,000 due to personnel
reductions following the August 2007 divestiture of the ADS Business, offset by
increases with the addition of personnel with the purchases of Video Box Studios
and MI Post. Personnel costs will be reduced during the first half of
fiscal 2010 due to layoffs associated with relocation of the Highland
operation. Facility expenses declined $335,000 due to elimination of
rent for one of our Burbank facilities which we purchased in July
2008. Offsetting the reductions was an increase in the cost of
outsourced work of $253,000 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.
Gross Profit. In
2009, gross margin was 32.0% of sales, compared to 31.0% for the same period
last year. The increase 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. Gross margins fluctuate as the sales
mix changes.
Selling, General and Administrative
Expense. SG&A expense was $16.5 million (36.2% of
sales) in 2009 as compared to $14.5 million (32.1% of sales) in
2008. During 2009, the Company incurred approximately $0.4 million of
costs associated with documentation of its internal control processes in
anticipation of performing its first management assessment of internal controls
for the fiscal year ended June 30, 2009. Additionally, the Company
spent approximately $279,000 in consulting fees to improve its information
technology infrastructure. Moving and other costs associated with the
move of the Highland operation were approximately $357,000. Excluding these
costs, SG&A expenses for 2009 were $15.5 million, or 34.0% of
sales.
Restructuring
Costs. In the fiscal year ended June 30, 2008, in
conjunction with the completion of the Merger and Spin-off transactions, we
decided to close down one of our post production facilities. Future
costs associated with the facility lease and certain severance payments were
treated as restructuring costs.
Impairment
Charge. As part of the Company’s annual assessment of goodwill
impairment, at June 30 2009, the Company determined that goodwill was fully
impaired, and recorded an impairment charge of $10 million.
Operating Income
(Loss). Operating loss was $11.9 million in 2009
compared to a loss of $1.1 million in 2008. Unusual SG&A and
restructuring costs and the impairment charge contributed $11.0 and $0.5 million
to the 2009 and 2008 losses, respectively.
Interest
Expense. Net interest expense for 2009 was $0.6 million, an
increase of $0.4 million from 2008. The increase was due to a mortgage related
to real estate purchased in July 2008.
Other
Income. During the 2009 period, the Company realized $0.2
million of income from the sale of equipment, and $0.2 million of sublease
income.
Net Income
(Loss). Net loss for 2009 was $12.5 million compared to a loss
of $0.9 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-K.
On
December 30, 2005, Old Point.360 entered into a $10 million term loan agreement.
The term loan provides for interest at LIBOR (0.75% at June 30, 2010) plus 3.15%
(3.90% 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. Both loans are scheduled to
be repaid fully by December 31, 2010.
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 “Accounting For
Leases”, the gain and the improvement allowance will be amortized over the
initial 15-year lease term as reduced rent.
18
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% (4.35% as of June 30,
2010).
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.
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.
In August
2009, the Company entered into a credit agreement which provided up to $5
million of revolving credit based on 80% of acceptable accounts receivables, as
defined. The agreement provided for interest of either (i) prime (3.25% at June
30, 2010) 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 3.75%, respectively, at June 30, 2010. The
facility is secured by the Company’s accounts receivable and
inventory.
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 June 30, 2010, the leverage
ratio was 1.79 compared to a minimum requirement of 1.75, and the fixed charge
coverage ratio was 0.23 as compared to a minimum requirement of
1.10. As of June 30, 2010, the Company was not in compliance with the
fixed charge ratio and received forbearance from the bank. The forbearance
period extends to September 30, 2010, during which time the amount available
under the credit agreement will be limited to the $0.5 million standby letter of
credit related to building lease. As of September 30, 2010, the revolving credit
agreement will terminate, and the Company must either replace or fully
collateralize the letter of credit. Thereafter, no amounts will be
available under the revolving credit agreement. No other amounts were
outstanding under the credit agreement on June 30, 2010. In August
2010, the letter of credit was drawn down by the holder. The Company
must pay the $500,000 or obtain a replacement standby letter of credit by
September 30, 2010.
The
following table summarizes the June 30, 2010 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
|
1,197,000 | |||
Long-term
portion of term loan and mortgages
|
9,646,000 | |||
Total
|
$ | 10,843,000 |
We expect
that 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 $1.5 - $2.0 million of capital expenditures for the next twelve
months.
The
Company’s cash balance decreased from $5,235,000 on July 1, 2009 to $249,000 at
June 30, 2010, due to the following:
Balance
July 1, 2009
|
$ | 5,235,000 | ||
Capital
expenditures for equipment
|
(2,189,000 | ) | ||
Acquisitions
|
(650,000 | ) | ||
Debt
principal and interest payments
|
(3,024,000 | ) | ||
Research
and development costs
|
(1,115,000 | ) | ||
Changes
in other assets and liabilities
|
1,992,000 | |||
Balance
June 30, 2010
|
$ | 249,000 |
19
Cash
generated by operating activities is directly dependent upon sales levels and
gross margins achieved. We generally receive payments from customers in 60-90
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 fiscal
2010, the underlying drivers of operating cash flows (sales, receivable
collections, the timing of vendor payments, facility costs and employment
levels) have been consistent. Sales outstanding in accounts
receivable have increased from approximately 61 days to 71 days within the last
12 months, indicating major studios may delay payments in response to the
general economic slowdown. However, we do not expect days sales
outstanding to materially fluctuate in the future.
As of
June 30, 2010, 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 $489,000 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 other Company
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 in 2011.
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).
The
mortgage payments are approximately $738,000 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.
The
following table summarizes contractual obligations as of June 30, 2010 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
|
$ | 10,421,000 | $ | 1,038,000 | $ | 148,000 | $ | 189,000 | $ | 9,046,000 | ||||||||||
Long
Term Debt Interest Obligations (1)
|
9,369,000 | 685,000 | 1,328,000 | 1,233,000 | 6,123,000 | |||||||||||||||
Capital
Lease Obligations
|
422,000 | 159,000 | 263,000 | - | - | |||||||||||||||
Capital
Lease Interest Obligations
|
39,000 | 24,000 | 15,000 | - | - | |||||||||||||||
Operating
Lease Obligations
|
18,943,000 | 3,169,000 | 3,979,000 | 3,115,000 | 8,680,000 | |||||||||||||||
Total
|
$ | 39,194,000 | $ | 5,075,000 | $ | 5,733,000 | $ | 4,537,000 | $ | 23,849,000 |
(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-K, 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 has initially issued stock (valued at
$500,000) and cash for assets and intellectual property, and has spent $3.7
million in Fiscal 2010 to test the concept. We expect to spend an
additional $1.5 to $2.0 million in Fiscal 2011 to finalize a five-store
proof-of-concept.
20
During the past year, the Company has
generated sufficient cash to meet operating, capital expenditure and debt
service needs and most of its other obligations. The Company also
received in July 2010, a refund of $1.5 million in federal income taxes for the
tax year 2006. 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. Currently, we do not have
a bank line of credit but believe similar financing is
available. 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 (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.
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, 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.
21
Valuation of long-lived and
intangible assets. Long-lived assets, consisting
primarily of property, plant and equipment and intangibles, 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 June 30, 2010.
In accounting for goodwill, the Company
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.
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.
At June 30, 2010, the Company has
no uncertain tax positions. 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, 2010 were $0.0
million.
22
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 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 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 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.
23
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 non-forfeitable 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.
In
October 2009, the FASB issued guidance for arrangements with multiple
deliverables. Specifically, the updated accounting standard requires an entity
to allocate arrangement consideration at the inception of an arrangement to all
of its deliverables based on their relative selling prices. The
guidance also eliminates the residual method of allocation and requires use of
the relative-selling-price method in all circumstances in which an entity
recognizes revenue for an arrangement with multiple deliverables. The
guidance is effective as of January 2011 with early adoption permitted. We
intend to adopt the provisions of the guidance as of January 1, 2011 which is
not expected to impact our financial statements.
In
January 2010, the FASB issued Accounting Standards Update 2010-06, “Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements.” This guidance amends the disclosure
requirements related to recurring and nonrecurring fair value measurements and
requires new disclosures on the transfers of assets and liabilities between
Level 1 (quoted prices in active market for identical assets or liabilities) and
Level 2 (significant other observable inputs) of the fair value measurement
hierarchy, including the reasons and the timing of the transfers. Additionally,
the guidance requires a roll forward of activities on purchases, sales, issuance
and settlements of the assets and liabilities measured using significant
unobservable inputs (Level 3 fair value measurements). The guidance became
effective for the reporting period beginning January 1, 2010, except for the
disclosure on the roll forward activities for Level 3 fair value measurements,
which will become effective for the reporting period beginning January 1, 2011.
Other than requiring additional disclosures, adoption of this new guidance will
not have a material impact on our financial statements.
In
February 2010, the FASB issued updated guidance related to subsequent
events. As a result of this updated guidance, public filers must
still evaluate subsequent events through the issuance date of their financial
statements; however, they are not required to disclose the date in which
subsequent events were evaluated in their financial statements
disclosures. This amended guidance became effective upon its issuance
on February 24, 2010 at which time the Company adopted this updated
guidance.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market
Risk. The Company had borrowings of $10.8 million on
June 30, 2010 under term loan and mortgage agreements. One term loan
was subject to variable interest rates. The weighted average interest
rate paid during the fiscal 2010 was 6.7%. For variable rate debt
outstanding at June 30, 2010, a .25% increase in interest rates will increase
annual interest expense by approximately $1,000. 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.
24
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
26
|
|
Financial
Statements:
|
||
Consolidated
Balance Sheets –
June
30, 2009 and 2010
|
27
|
|
Consolidated
Statements of Operations –
Fiscal
years ended June 30, 2008, 2009 and 2010
|
28
|
|
Consolidated
Statements of Invested and Shareholders’ Equity –
Fiscal
years ended June 30, 2008, 2009 and 2010
|
29
|
|
Consolidated
Statements of Cash Flows –
Fiscal
years ended June 30, 2008, 2009 and 2010
|
30
|
|
Notes
to Consolidated Financial Statements
|
31
|
|
Financial
Statement Schedule:
|
||
Schedule
II – Valuation and Qualifying Accounts
|
50
|
Schedules
other than those listed above have been omitted since they are either not
required, are not applicable or the
required information is shown in the financial statements or the related
notes.
25
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders
Point.360
Burbank,
California
We have
audited the accompanying consolidated balance sheets of Point.360 (formerly New
360) and its subsidiaries (collectively the “Company”) as of June 30, 2010 and
2009, and the related consolidated statements of operations, invested and
shareholders’ equity, and cash flows for each of the three years in the period
ended June 30, 2010. Our audits also included the financial statement schedule
of Point.360 listed in Item 15(a). These financial statements and financial
statement schedule 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 the standards of the Public Company
Accounting Oversight Board (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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Point.360 and subsidiaries
as of June 30, 2010 and 2009, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 2010, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
We were
not engaged to examine management’s assessment of the effectiveness of Point.360
and subsidiaries’ internal control over financial reporting as of June 30, 2010,
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting and, accordingly, we do not express an opinion
thereon.
SingerLewak
LLP (signed)
Los
Angeles, California
September 24,
2010
26
Point.360
Consolidated
Balance Sheets
(in
thousands)
June 30,
|
||||||||
2009
|
2010
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 5,235 | $ | 249 | ||||
Accounts
receivable, net of allowances for doubtful accounts of $537 and
$393, respectively
|
8,347 | 7,581 | ||||||
Inventories,
net
|
401 | 548 | ||||||
Prepaid
expenses and other current assets
|
524 | 437 | ||||||
Prepaid
income taxes
|
1,877 | 1,565 | ||||||
Total
current assets
|
16,384 | 10,380 | ||||||
Property
and equipment, net
|
20,417 | 20,157 | ||||||
Other
assets, net
|
593 | 607 | ||||||
Total
assets
|
$ | 37,394 | $ | 31,144 | ||||
Liabilities and Shareholders’
Equity
|
||||||||
Current
liabilities:
|
||||||||
Current
portion of notes payable
|
$ | 1,930 | $ | 1,038 | ||||
Current
portion of capital lease obligations
|
156 | 159 | ||||||
Accounts
payable
|
1,708 | 2,828 | ||||||
Accrued
wages and benefits
|
1,438 | 1,432 | ||||||
Other
accrued expenses
|
1,220 | 2,300 | ||||||
Current
portion of deferred gain on sale of real estate
|
178 | 178 | ||||||
Total
current liabilities
|
6,630 | 7,935 | ||||||
Notes
payable, less current portion
|
10,423 | 9,383 | ||||||
Capital
lease obligations, less current portion
|
421 | 263 | ||||||
Deferred
gain on sale of real estate, less current portion
|
1,911 | 1,733 | ||||||
Total
long-term liabilities
|
12,755 | 11,379 | ||||||
Total
liabilities
|
19,385 | 19,314 | ||||||
Commitments
and contingencies
|
- | - | ||||||
Shareholders’
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
10,513,166 shares issued and outstanding on June 30, 2009 and 2010,
respectively
|
21,025 | 21,542 | ||||||
Additional
paid-in capital
|
9,547 | 9,808 | ||||||
Retained
(deficit)
|
(12,563 | ) | (19,520 | ) | ||||
Total
shareholders’ equity
|
18,009 | 11,830 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 37,394 | $ | 31,144 |
The
accompanying notes are an integral part of these consolidated financial
statements.
27
Point.360
Consolidated
Statements of Operations
(in
thousands, except per share amounts)
Year Ended
June 30,
|
||||||||||||
2008
|
2009
|
2010
|
||||||||||
Revenues
|
$ | 45,150 | $ | 45,619 | $ | 39,735 | ||||||
Cost
of services sold
|
(31,156 | ) | (31,023 | ) | (28,461 | ) | ||||||
Gross
profit
|
13,994 | 14,596 | 11,274 | |||||||||
Selling,
general and administrative expense
|
(14,491 | ) | (16,500 | ) | (15,981 | ) | ||||||
Allocation
of Point.360 corporate expenses (Note 1)
|
(120 | ) | - | - | ||||||||
Research
and development expense
|
- | - | (1,115 | ) | ||||||||
Impairment
charges
|
- | (9,961 | ) | - | ||||||||
Restructuring
costs
|
(513 | ) | - | (745 | ) | |||||||
Operating
income (loss)
|
(1,130 | ) | (11,865 | ) | (6,567 | ) | ||||||
Interest
expense
|
(553 | ) | (675 | ) | (937 | ) | ||||||
Interest
income
|
348 | 47 | 10 | |||||||||
Other
income (expense)
|
100 | 396 | 537 | |||||||||
Loss
before income taxes
|
(1,235 | ) | (12,097 | ) | (6,957 | ) | ||||||
(Provision
for) benefit from income taxes
|
292 | (363 | ) | - | ||||||||
Net
loss
|
$ | (943 | ) | $ | (12,460 | ) | $ | (6,957 | ) | |||
Pro
forma basic and diluted (loss) per share
|
$ | (0.09 | ) | |||||||||
Pro
forma weighted average number of shares
|
10,554 | |||||||||||
Basic
and diluted (loss) per share
|
$ | (1.20 | ) | $ | (0.67 | ) | ||||||
Weighted
average number of shares
|
10,358 | 10,405 |
The
accompanying notes are an integral part of these consolidated financial
statements.
28
Point.360
Consolidated
Statements of Invested and Shareholders’ Equity
(in
thousands)
Invested
|
Common Stock
|
Paid-in
|
Retained
|
Shareholders’
|
||||||||||||||||||||
Equity
|
Shares
|
Dollars
|
Capital
|
Earnings
|
Equity
|
|||||||||||||||||||
Balance
on June 30, 2007
|
$ | 24,035 | $ | $ | $ | $ | ||||||||||||||||||
Net
(loss)
|
- | - | - | - | (841 | ) | (841 | ) | ||||||||||||||||
Balance
on August 13, 2007
|
24,035 | - | - | - | (841 | ) | 23,194 | |||||||||||||||||
Formation
of New 360
|
(24,035 | ) | 10,554 | 21,080 | 2,114 | 841 | - | |||||||||||||||||
Recognition
of New 360 book/tax differences
|
- | - | 503 | - | - | 503 | ||||||||||||||||||
Payments
by DGFC, net of transaction expenses
|
- | - | 7,131 | - | 7,131 | |||||||||||||||||||
Additional
transaction expenses
|
- | - | (2 | ) | - | (2 | ) | |||||||||||||||||
Share
based compensation expense
|
- | - | 77 | - | 77 | |||||||||||||||||||
Net
(loss)
|
- | - | - | - | (103 | ) | (103 | ) | ||||||||||||||||
Balance
on June 30, 2008
|
$ | - | 10,554 | $ | 21,583 | $ | 9,320 | $ | (103 | ) | $ | 30,800 | ||||||||||||
Purchases
of common stock
|
(405 | ) | (558 | ) | - | - | (558 | ) | ||||||||||||||||
Share
based compensation expense
|
227 | 227 | ||||||||||||||||||||||
Net
(loss)
|
- | - | - | - | (12,460 | ) | (12,460 | ) | ||||||||||||||||
Balance
on June 30, 2009
|
$ | - | 10,149 | $ | 21,025 | $ | 9,547 | $ | (12,563 | ) | $ | 18,009 | ||||||||||||
Acquisition
of assets
|
- | 342 | 500 | - | - | 500 | ||||||||||||||||||
Share
issuance
|
- | 10 | - | - | - | - | ||||||||||||||||||
Exercise
of stock options
|
- | 12 | 17 | - | - | 17 | ||||||||||||||||||
Share
based compensation expense
|
261 | 261 | ||||||||||||||||||||||
Net
(loss)
|
- | - | - | - | (6,957 | ) | (6,957 | ) | ||||||||||||||||
Balance
on June 30, 2010
|
$ | - | 10,513 | $ | 21,542 | $ | 9,808 |
$ __ (19,520)
|
$ | 11,830 |
The
accompanying notes are an integral part of these consolidated financial
statements.
29
Point.360
Consolidated
Statements of Cash Flows
(in
thousands)
Year Ended
June 30,
|
||||||||||||
2008
|
2009
|
2010
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
loss
|
$ | (943 | ) | $ | (12,460 | ) | $ | (6,957 | ) | |||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||||||
(Gain)/Loss
on sale of fixed assets
|
(119 | ) | (152 | ) | (234 | ) | ||||||
Impairment
loss
|
48 | 9,842 | - | |||||||||
Depreciation
and amortization
|
4,700 | 4,964 | 3,598 | |||||||||
Amortization
of deferred gain on real estate
|
(178 | ) | (178 | ) | (178 | ) | ||||||
Provision
for (recovery of) doubtful accounts
|
51 | (4 | ) | (144 | ) | |||||||
Stock
compensation expense
|
- | 227 | 261 | |||||||||
Changes
in operating assets and liabilities (net of acquisitions):
|
||||||||||||
(Increase)
decrease in accounts receivable
|
(769 | ) | (1,372 | ) | 911 | |||||||
(Increase)
decrease in inventories
|
53 | 100 | (147 | ) | ||||||||
(Increase)
decrease in prepaid expenses and other current assets
|
295 | (587 | ) | 87 | ||||||||
(Increase)
decrease in prepaid income taxes
|
94 | (436 | ) | 312 | ||||||||
(Increase)
decrease in other assets
|
(305 | ) | 674 | (14 | ) | |||||||
(Decrease)
increase in accounts payable
|
(780 | ) | (8 | ) | 1,120 | |||||||
Increase
(decrease) in accrued wages and benefits
|
(107 | ) | (671 | ) | (6 | ) | ||||||
Increase
(decrease) in other accrued expenses
|
90 | 404 | 1,080 | |||||||||
(Increase)
decrease in deferred tax asset
|
(936 | ) | 700 | - | ||||||||
Net
cash and cash equivalents provided by (used in) operating
activities
|
1,194 | 1,043 | (311 | ) | ||||||||
Cash
flows from investing activities:
|
||||||||||||
Capital
expenditures
|
(1,925 | ) | (16,586 | ) | (2,189 | ) | ||||||
Proceeds
from sale of equipment or real estate
|
- | - | 234 | |||||||||
Investments
in acquisitions
|
- | - | (650 | ) | ||||||||
Net
cash and cash equivalents provided by (used in) investing
activities
|
(1,925 | ) | (16,586 | ) | (2,605 | ) | ||||||
Cash
flows from financing activities:
|
||||||||||||
Repurchase
of common stock
|
- | (557 | ) | - | ||||||||
Exercise
of stock options
|
- | - | 17 | |||||||||
(Increase)
decrease in invested equity
|
7,707 | - | - | |||||||||
(Repayment)
proceeds from of notes payable
|
(1,217 | ) | 7,702 | (1,930 | ) | |||||||
(Repayment)
proceeds from of capital lease obligations
|
(5 | ) | 577 | (157 | ) | |||||||
Net
cash (used in) provided by financing activities
|
6,485 | 7,722 | (2,070 | ) | ||||||||
Net
increase (decrease) in cash and cash equivalents
|
5,754 | (7,821 | ) | (4,986 | ) | |||||||
Cash
and cash equivalents at beginning of year
|
7,302 | 13,056 | 5,235 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 13,056 | $ | 5,235 | $ | 249 |
The
accompanying notes are an integral part of these consolidated financial
statements.
30
Point.360
Notes
to Consolidated Financial Statements
1.
|
BASIS
OF PRESENTATION:
|
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 also rents and sells DVDs and video games
directly to consumers through its Movie>Q retail stores.
On August 14, 2007, pursuant to the
terms of an Agreement and Plan of Merger and Reorganization among DG
FastChannel, Inc. (“DG FastChannel”), Point.360 (“Old Point.360”) and New 360
(“the Company”), a wholly owned subsidiary of Old Point.360, (the
“Merger Agreement”), Old Point.360 was merged into DG FastChannel,
with DG FastChannel continuing as the surviving corporation (the
“Merger”). Subsequent to the Merger, the Company changed its name
back to Point.360. See Note 12.
On August 13, 2007, prior to
the completion of the Merger, (1) Old Point.360 contributed to the
Company (the “Contribution”) all of the assets used by Old Point.360 in its
post-production business and all other assets owned, licensed, or leased by Old
Point.360 that were not used exclusively in connection with the business of Old
Point.360 representing advertising agencies, advertisers, brands, and other
media companies which require services for short-form media content (the “ADS
Business”), with the Company assuming certain liabilities of Old Point.360 and
(2) Old Point.360 distributed to its shareholders on a pro rata basis all of the
outstanding common stock of the Company (the
“Spin-off”).
In the Spin-off, each Old Point.360
shareholder received one share of Company common stock (and a related preferred
share purchase right) for each share of Old Point.360 common stock
held by the shareholder as of the record date of August 7, 2007. As a
result of the Contribution and the Spin-off, the assets and liabilities of Old
Point.360 acquired by DG FastChannel in the Merger consisted only of those
assets and liabilities exclusively related to the ADS
Business. Immediately after the completion of the Spin-off, DG
FastChannel contributed to the Company shares of the Company common stock that
it received in the Spin-off as a shareholder of Old Point.360. As a
result of the Spin-off, the Company became a publicly held company whose common
stock is traded on the NASDAQ Global Market and is registered under Section 12
of the Securities Exchange Act of 1934.
The accompanying Consolidated Financial
Statements include the accounts and transactions of the Company, including those
of the Company’s two subsidiaries, International Video Conversions, Inc. (“IVC”)
and DVDs On The Run, Inc. 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 Company’s consolidated statements
of operations, balance sheet and cash flows may not be indicative of its future
performance and do not necessarily reflect what the consolidated statements of
operations, balance sheet and cash flows would have been had the Company
operated as a separate, stand-alone entity during the periods presented,
including changes in its operations and capitalization as a result of the
separation and distribution form Old Point.360.
For periods prior to the Spin-off,
certain corporate and general and administrative expenses, including those
related to executive management, tax, accounting, legal and treasury services,
have been allocated by Old Point.360 to the Company based on the ratio of the
Company’s revenues to Old Point.360’s total revenues. Management
believes such allocations represent a reasonable estimate of such expenses that
would have been incurred by the Company on a stand-alone
basis. However, the associated balance sheet amounts and expenses
recorded by the Company in the accompanying Consolidated Financial Statements
may not be indicative of the actual balance or expenses that would have been
recorded or incurred had the Company been operating as a separate, stand-alone
public company for the periods presented. Following the separation
and distribution from Old Point.360, the Company has performed administrative
functions using internal resources or purchased services.
31
The
process of segregating the post production business and the ads business
required the following:
|
·
|
Separation
of sales, cost of sales, facility rents, personnel and other costs
specifically related to each
business.
|
|
·
|
Allocation
of costs shared by all Old Point.360 businesses such as accounting, sales
and information technology, based on either specific criteria or an
allocation based on sales, asset levels or another appropriate
means. For example, interest expense related to Old Point.360
term and revolving credit loans was allocated based on property and
equipment and accounts receivable balances of the post production and ads
businesses, respectively. Accounting (billing, credit and
collection, etc.) was allocated based on
sales.
|
|
·
|
Assets
and liabilities related to each business were identified and assigned to
post production or ads businesses.
|
|
·
|
Virtually
all of the ads business was performed in five isolated
facilities.
|
Invested
equity at June 30, 2007 reflects the application of estimating techniques
described above on those dates. Changes in invested equity from year to year are
due to the income or loss of the Company and the net effect of the changes in
balance sheet accounts determined by such estimating techniques.
In
presenting the Consolidated Financial Statements, management makes estimates and
assumptions that affect the amounts reported and related disclosures. Estimates,
by their nature, are based on judgment and available information. Accordingly,
actual results could differ from those estimates.
Business
Description
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. Clients include major motion picture studios, advertising
agencies and corporations. The Company also rents and sells DVDs and
video games directly to consumers through its Movie>Q retail
stores.
The
Company operates in a single business segment from six post production and three
Movie>Q locations. Each post production location is electronically
tied to the others and serves the same customer base. Depending on
the location size, the production equipment consists of tape duplication,
feature movie and commercial ad editing, encoding, standards conversion, and
other machinery. Each location employs personnel with the skills
required to efficiently run the equipment and handle customer
requirements. While all locations are not exactly the same, an order
received at one location may be fulfilled at one or more “sister” facilities to
use resources in the most efficient manner.
Typically,
a feature film or television show will be submitted to a facility by a motion
picture studio, independent producer, advertising agency, or corporation for
processing and distribution. A common sales force markets the
Company’s capability for all facilities. Once an order is received,
the local customer service representative determines the most cost-effective way
to perform the services considering geographical logistics and facility
capabilities.
In fiscal
2010, the Company purchased assets and intellectual property for a research and
development project to address the viability of the DVD and video game rental
business being abandoned by the closure of Movie Gallery/Hollywood Video and
Blockbuster stores. The DVD rental market consists principally of
online services (Netflix), vending machines (Redbox) and large video
stores.
As of
June 30, 2010, the Company had opened three Movie>Q “proof-of-concept” stores
in Southern California. The stores employ an automated inventory
management (“AIM”) system in a 1,200-1,600 square foot facility. By
saving space and personnel costs which caused the big box stores to be
uncompetitive with lower priced online and vending machine rental alternatives,
Movie>Q offers 10,000-15,000 unit selections to a customer at competitive
rental rates. Movie>Q provides online reservations, an in-store
destination experience, first run movie and game titles and a large unit
selection (as opposed to 400-700 for a Redbox vending machine).
32
Based on
the success of the proof-of-concept, the Company may seek to rapidly expand the
number of Movie>Q stores while further streamlining the design and production
of the AIM system. Movie>Q provides the Company with a content
distribution capability complimentary to the Company’s post production
business.
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
Use
of Estimates in the Preparation of Financial Statements
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
Cash
equivalents represent highly liquid short-term investments with original
maturities of less than three months.
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 (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.
The
Company does not have the systems to adequately segregate revenues for each
product and service as orders can be for multiple services performed at several
facilities. Providing information contemplated by the Accounting
Standards Codification is impracticable.
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.
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, 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.
33
Valuation
of long-lived and intangible assets
Long-lived
assets, consisting primarily of property, plant and equipment and intangibles,
comprise a significant portion of the Company’s total assets. Long-lived assets,
including fixed assets and amortizable intangible assets 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 and long-lived assets 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 June
30, 2010. No impairment was recorded during fiscal 2010.
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.
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.
At June 30, 2010, the Company has no
uncertain tax positions. 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 and June 30,
2010 were $0.0 million and $0.0 million, respectively.
Concentration
of Credit Risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents, and accounts
receivable. The Company maintains its cash and cash equivalents with
high credit quality financial institutions; at times, such balances with any one
financial institution may exceed FDIC insured limits.
34
Credit
risk with respect to trade receivables is concentrated due to the large number
of orders with major entertainment studios in any particular reporting
period. Our five largest studio customers represented 53%, 47% and
69% of accounts receivable at June 30, 2008, 2009 and 2010
respectively. Twentieth Century Fox (and affiliates) accounted for
27%, 22% and 23% of accounts receivable in the years ended June 30, 2008, 2009,
and 2010, respectively. Deluxe Media accounted for 4%, 12%, and 35%
of accounts receivable in the years ended June 30, 2008, 2009, and 2010,
respectively. The Company reviews credit evaluations of its customers
but does not require collateral or other security to support customer
receivables.
The five
largest studio customers accounted for 52%, 48%
and 58% of net sales for the years ended June 30, 2008, 2009 and 2010,
respectively. Twentieth Century Fox (and affiliates) accounted for
26%, 21%, and 23% of sales in the years ended June 30, 2008, 2009 and 2010,
respectively. Deluxe Media accounted for 2%, 5%, and 14% of sales in
the years ended June 30, 2008, 2009 and 2010, respectively.
Inventories
Inventories
comprise raw materials, principally tape stock, DVD’s, and games, and are stated
at the lower of cost or market. Cost is determined using the average
cost method.
Property
and Equipment
Property
and equipment are stated at cost. Expenditures for additions and
major improvements are capitalized. Depreciation is computed using
the straight-line method over the estimated useful lives of the related
assets. Amortization of leasehold improvements is computed using the
straight-line method over the lesser of the estimated useful lives of the
improvements or the remaining lease term.
Goodwill
Prior to
the January 1, 2002 implementation of Accounting Standards Codification (“ASC”)
No. 350, “Goodwill and Other
Intangible Assets” (“ASC 350”), goodwill was amortized on a straight-line
basis over 5 - 20 years. Since that date, goodwill has been subject
to periodic impairment tests in accordance with ASC 350.
The
Company identifies and records impairment losses on long-lived assets, including
goodwill that is not identified with an impaired asset, when events and
circumstances indicate that such assets might be impaired. Events and
circumstances that may indicate that an asset is impaired include significant
decreases in the market value of an asset, a change in the operating model or
strategy and competitive forces.
The
Company evaluates its goodwill on an annual basis and when events and
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the independent appraisal or other indicator of value
of the asset or the expected undiscounted future cash flow attributable to the
asset is less than the carrying amount of the asset, an impairment loss equal to
the excess of the asset’s carrying value over its fair value is
recorded. In 2007, fair value was determined using an independent
appraisal, which was then compared to the carrying amount of the Company
including goodwill. In 2008 and 2009, the discounted cash flow method
was used to evaluate goodwill impairment and included cash flow estimates for
those and subsequent years. As a result of the 2009 evaluation, the
Company impaired its goodwill in full and recorded a charge of $10 million as of
June 30, 2009.
Advertising
Costs
Advertising
costs are not significant to the Company’s operations and are expensed as
incurred.
Fair
Value Measurement
The
Company follows a framework for consistently measuring fair value under
generally accepted accounting principles, and the disclosures of fair value
measurements. The framework provides a fair value hierarchy to classify the
source of the information.
The fair
value hierarchy is based on three levels of inputs, of which the first two are
considered observable and the last unobservable, that may be used to measure
fair value and include the following:
Level 1 –
Quoted prices in active markets for identical assets or
liabilities.
Level 2 –
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.
35
Level 3 –
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
Cash, the only Level 1 input applicable
to the Company (there are no Level 2 or 3 inputs), is stated on the Consolidated
Balance Sheet at fair value.
As of June 30, 2010 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.
Pro
Forma Earnings (Loss) Per Share
Old
Point.360 has historically followed ASC 260, “Earnings per Share” (“ASC 260”),
and related interpretations for reporting earnings per share. ASC 260
requires dual presentation of basic earnings per share (“Basic EPS”) and diluted
earnings per share (“Diluted EPS”). Basic EPS excludes dilution and
is computed by dividing net income (loss) by the weighted average number of
common shares outstanding during the reported period. Diluted EPS
reflects the potential dilution that could occur if a company had a stock option
plan and stock options were exercised using the treasury stock method. While the
Company is subject to ASC 260, pro forma earnings per share in the accompanying
Consolidated Statements of Operations for periods prior to the separation have
been calculated based on the actual number of the Company’s shares outstanding
upon separation.
A
reconciliation of the denominator of the basic EPS computation to the
denominator of the diluted EPS computation is as follows (in
thousands):
Year Ended
June 30,
|
||||||||||||
2008
|
2009
|
2010
|
||||||||||
Weighted
average number of common shares outstanding used in computation of basic
EPS
|
10,554 | 10,358 | 10,405 | |||||||||
Dilutive
effect of outstanding stock options
|
- | - | - | |||||||||
Weighted
average number of common and potential common shares outstanding used in
computation of Diluted EPS
|
10,554 | 10,358 | 10,405 | |||||||||
Effect
of dilutive options excluded in the computation of
diluted EPS due to net loss
|
- | 13 | 97 |
36
The number of anti-dilutive shares were
0, 279,050 and 639,475 as of June 30, 2008, 2009 and 2010,
respectively.
Supplemental
Cash Flow Information
Selected
cash payments and non-cash activities were as follows (in
thousands):
Year Ended
June 30,
|
||||||||||||
2008
|
2009
|
2010
|
||||||||||
Cash
payments for income taxes (net of refunds)
|
$ | 15 | $ | 97 | $ | (312 | ) | |||||
Cash
payments for interest
|
$ | 435 | $ | 603 | $ | 816 | ||||||
Fixed
assets purchased for stock
|
$ | - | $ | - | $ | 500 |
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 financial statements.
On
June 30, 2009, the Company adopted updates issued by the FASB to account
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 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 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.
37
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.
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 non-forfeitable 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.
In
October 2009, the FASB issued guidance for arrangements with multiple
deliverables. Specifically, the updated accounting standard requires an entity
to allocate arrangement consideration at the inception of an arrangement to all
of its deliverables based on their relative selling prices. The
guidance also eliminates the residual method of allocation and requires use of
the relative-selling-price method in all circumstances in which an entity
recognizes revenue for an arrangement with multiple deliverables. The
guidance is effective as of January 2011 with early adoption permitted. We
intend to adopt the provisions of the guidance as of January 1, 2011 which is
not expected to impact our financial statements.
In
January 2010, the FASB issued Accounting Standards Update 2010-06, “Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements.” This guidance amends the disclosure
requirements related to recurring and nonrecurring fair value measurements and
requires new disclosures on the transfers of assets and liabilities between
Level 1 (quoted prices in active market for identical assets or liabilities) and
Level 2 (significant other observable inputs) of the fair value measurement
hierarchy, including the reasons and the timing of the transfers. Additionally,
the guidance requires a roll forward of activities on purchases, sales, issuance
and settlements of the assets and liabilities measured using significant
unobservable inputs (Level 3 fair value measurements). The guidance became
effective for the reporting period beginning January 1, 2010, except for the
disclosure on the roll forward activities for Level 3 fair value measurements,
which will become effective for the reporting period beginning January 1, 2011.
Other than requiring additional disclosures, adoption of this new guidance will
not have a material impact on our financial statements.
In
February 2010, the FASB issued updated guidance related to subsequent
events. As a result of this updated guidance, public filers must
still evaluate subsequent events through the issuance date of their financial
statements; however, they are not required to disclose the date in which
subsequent events were evaluated in their financial statements
disclosures. This amended guidance became effective upon its issuance
on February 24, 2010 at which time the Company adopted this updated
guidance.
38
3. ACQUISITIONS:
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 10,000-15,000 DVDs for rent or sale via
software-controlled automated dispensers contained approximately 1,200 to 1,600
square feet of retail space for each store.
The
Company has spent $3.7 million as of June 30, 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).
In a separate transaction, on November
15, 2009, the Company purchased the stock of DVDs On the Run, Inc. (“DOR”) for
$650,000 ($200,000 paid at closing and $450,000 placed in escrow pending
completion of certain services). The assets of DOR consisted of
intellectual property (“IP”) related to mechanical receipt, storage and
dispensing of DVDs. The purchased IP will be modified pursuant to a
related Services Agreement. The software and certain physical
mechanical design goals were achieved in June 2010, and the seller received the
$450,000 placed in escrow on the transaction date. The enhanced
software and mechanical designs are intended to form the backbone of the
automated store DVD system. The entire $650,000 purchase price of DOR
stock was assigned to IP, the estimated fair value.
These
acquisitions were accounted for as business combinations. 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.
During the year ended June 30, 2010,
the Company incurred $1,115,000 of costs associated with the acquisitions of
Kiosk Concepts and DOR, consisting of transaction expenses ($55,000 in the
twelve-month period) and project consulting costs ($1,060,000) associated with
the automated stores. These expenses are reflected as research and
development expenses in the Consolidated Statements of Operations.
Point.360
has operated in a single post production business segment due to the combination
of facility assets, sales forces and the integration of branding and
communications efforts. The operations of Movie>Q as of June 30, 2010 were
not material to the financial statements taken as a whole.
4. PROPERTY
AND EQUIPMENT:
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 approximately $14.0 million resulting in a $1.3 million after tax
gain. Additionally, Old Point.360 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 the improvement advance (approximately $13.8 million) were used to pay off
the mortgage and other outstanding debt.
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 and increasing annually there after based on the consumer price index
change from year to year.
39
Property
and equipment consist of the following:
June 30,
|
||||||||
2009
|
2010
|
|||||||
Land
|
$ | 3,866,000 | $ | 3,985,000 | ||||
Building
|
9,152,000 | 9,239,000 | ||||||
Machinery
and equipment
|
35,887,000 | 36,023,000 | ||||||
Leasehold
improvements
|
6,383,000 | 6,716,000 | ||||||
Computer
equipment
|
6,398,000 | 7,206,000 | ||||||
Equipment
under capital lease
|
770,000 | 671,000 | ||||||
Office
equipment, CIP
|
448,000 | 1,716,000 | ||||||
Less
accumulated depreciation and amortization
|
(42,487,000 | ) | (45,399,000 | ) | ||||
Property
and equipment, net
|
$ | 20,417,000 | $ | 20,157,000 |
Depreciation
is expensed over the estimated lives of buildings (39 years), machinery and
equipment (7 years), computer equipment (5 years) and leasehold improvements (2
to 10 years depending on the remaining term of the respective leases or
estimated useful life of the improvement). Depreciation expense totaled
$4,700,000, $4,964,000 and $3,598,000 for the years ended June 30, 2008, 2009
and 2010, respectively. Machinery and equipment includes leased
property under capital leases with a cost of $770,000 (with a net book value of
$488,000) and $671,000 (with a net book value of $213,000) as of June 30, 2009
and 2010, respectively.
5. 401(K)
PLAN:
The
Company has a 401(K) plan, which covers substantially all
employees. Each participant is permitted to make voluntary
contributions not to exceed the lesser of 20% of his or her respective
compensation or the applicable statutory limitation, and is immediately 100%
vested. The Company matches one-fourth of the first 4% contributed by
the employee. Contributions to the plan related to employees of the
Company were, $96,000, $99,000 and $94,000 in the years ended June 30, 2008,
2009 and 2010, respectively.
6. 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 June 30, 2010) 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 3.75%, respectively, on June 30,
2010. The facility is secured by all of the Company’s accounts
receivable and inventory. As of June 30, 2010, 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.
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 June 30, 2010, the leverage
ratio was 1.79 compared to a minimum requirement of 1.75, and the fixed charge
coverage ratio was 0.23 as compared to a minimum requirement of
1.10. As of June 30, 2010, the Company was not in compliance with the
fixed charge ratio and received a forbearance from the bank. The
forbearance period extends to September 30, 2010, during which time the amount
available under the credit agreement will be limited to the $0.5 million letter
of credit. In August 2010, the letter of credit was drawn down by the
holder. The Company must pay $500,000 or obtain a replacement standby
letter of credit by September 30, 2010.
In July
2008, the Company entered into a Promissory Note with a bank (the “note”) in
order to purchase land and a building that had 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.
40
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.
On
December 30, 2005, the Company entered into a $10 million term loan
agreement. The term loan provides for interest at LIBOR (0.75% as of
June 30, 2010) plus 3.15%, or 3.90% on that date, and is secured by
equipment. The term loan will be repaid in 60 equal monthly principal
payments plus interest. In March 2006, $4 million of the term loan
was prepaid. Monthly principal payments were subsequently reduced pro
rata. On March 30, 2007, the Company entered into an additional $2.5
million term loan agreement. The Loan provides for interest at 8.35%
per annum and is secured by equipment. The loan will be repaid in 45
equal monthly installments of principal and interest. The term loans
are scheduled to be repaid completely by December 31, 2010.
Annual
maturities for debt under term note and mortgage obligations as of June 30, 2010
are as follows:
2011
|
$ | 1,197,000 | ||
2012
|
241,000 | |||
2013
|
170,000 | |||
2014
|
90,000 | |||
2015
|
99,000 | |||
Thereafter
|
9,046,000 | |||
$ | 10,843,000 |
7.
INCOME
TAXES:
The Accounting Standards Codification
provides guidance on derecognition of tax benefits, classification on the
balance sheet, interest and penalties, accounting in interim periods,
disclosure, and transition.
The Company reviewed its tax
documentation for the periods through June 30, 2010 to ascertain if any changes
should be made with respect to tax positions previously taken. In addition, the
Company reviewed its income tax reporting through June 30,
2010. Based on Company’s review of its tax positions as of June 30,
2009 and June 30, 2010, no new uncertain tax positions have been determined; nor
has new information become available that would change management’s judgment
with respect to tax positions previously taken.
As of June 30, 2010, the Company's net
deferred tax assets were nil. No tax benefit was recorded during the year
ended June 30, 2010 because future realizability of such benefit was not
considered to be more likely than not. At June 30, 2010, the Company had a
gross deferred tax asset of $7.6 million, and a corresponding valuation
allowance of $7.6 million.
The Accounting Standards Codification
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 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. The Company was last audited by
New York taxing authorities for the years 2002 through 2004 resulting in no
change. 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.
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.
The Company was notified by the IRS in
November 2009 of its intent to audit the federal tax return for the fiscal ended
June 30, 2008. The audit was subsequently withdrawn.
During fiscal 2010, the Company
received a federal tax refund of approximately $0.4 million related to refunds
due for tax year 2005. In July 2010, the Company received a refund of
$1.5 million related to tax year 2006.
41
The
Company’s provision for, or benefit from, income taxes has been determined as if
the Company filed income tax returns on a stand-alone basis.
The
Company’s provision for (benefit from) income taxes for the years ended June 30,
2008, 2009 and 2010 consists of the following (in thousands):
Year Ended
June 30,
|
||||||||||||
2008
|
2009
|
2010
|
||||||||||
Current
tax (benefit) expense:
|
||||||||||||
Federal
|
$ | 28 | $ | (283 | ) | $ | - | |||||
State
|
95 | (55 | ) | - | ||||||||
Total
current
|
123 | (338 | ) | - | ||||||||
Deferred tax
(benefit) expense:
|
||||||||||||
Federal
|
(314 | ) | (3,516 | ) | (2,119 | ) | ||||||
State
|
333 | (1,008 | ) | (534 | ) | |||||||
Valuation
allowance
|
(434 | ) | 5,224 | 2,653 | ||||||||
Total
deferred
|
(415 | ) | 700 | - | ||||||||
Total
provision for (benefit from) for income taxes
|
$ | (292 | ) | $ | 362 | $ | - |
The
composition of the deferred tax assets (liabilities) at and June 30, 2008, 2009
and 2010 are listed below:
2008
|
2009
|
2010
|
||||||||||
Accrued
liabilities
|
$ | 253,000 | $ | 327,000 | $ | 855,000 | ||||||
Allowance
for doubtful accounts
|
232,000 | 230,000 | 169,000 | |||||||||
Other
|
5,000 | 14,000 | 12,000 | |||||||||
Total
current deferred tax assets
|
490,000 | 571,000 | 1,036,000 | |||||||||
Property
and equipment
|
(221,000 | ) | 511,000 | (92,000 | ) | |||||||
Goodwill
and other intangibles
|
- | 3,103,000 | 2,466,000 | |||||||||
State
net operating loss carry forward
|
- | 485,000 | 3,860,000 | |||||||||
Other
|
431,000 | 554,000 | 349,000 | |||||||||
Valuation
allowance
|
- | (5,224,000 | ) | (7,619,000 | ) | |||||||
Total
non-current deferred tax liabilities
|
210,000 | (571,000 | ) | (1,036,000 | ) | |||||||
Net
deferred tax liability
|
$ | 700,000 | $ | - | $ | - |
42
At the
end of each fiscal year, the Company updates its reconciliation of book and tax
differences based on the tax return of the previous fiscal year filed with the
Internal Revenue Service in the third quarter of the current fiscal
year. Any resulting adjustments are reflected in the table above in
the fiscal year in which the adjustments were determined. During the
fiscal year ended June 30, 2008, a $503,000 reduction of deferred tax liability
was credited to common stock as an adjustment of invested equity in New 360 in
the Consolidated Statements of Invested and Shareholders’ Equity.
The
provision for (benefit from) income taxes differs from the amount of income tax
determined by applying the applicable U.S. Statutory income taxes rates to
income before taxes as a result of the following differences:
Year
Ended
June
30,
|
||||||||||||
2008
|
2009
|
2010
|
||||||||||
Federal
tax computed at statutory rate
|
34 | % | 34 | % | 34 | % | ||||||
State
taxes, net of federal benefit and net operating loss
limitation
|
6 | % | 6 | % | 6 | % | ||||||
Valuation
allowance
|
(14 | )% | (46 | )% | (40 | )% | ||||||
Other
(meals and entertainment)
|
(2 | )% | 3 | % | 0 | % | ||||||
Tax
provision (benefit from)
|
24 | % | (3 | )% | 0 | % |
8. COMMITMENTS
AND CONTINGENCIES:
Operating
Leases
The
Company leases office and production facilities, vehicles and data processing
equipment in California and New York under various operating leases. Approximate
minimum rental payments under these non-cancelable operating leases as of June
30, 2010 are as follows for the indicated fiscal years ended June
30:
2011
|
$ | 3,169,000 | ||
2012
|
2,341,000 | |||
2013
|
1,638,000 | |||
2014
|
1,544,000 | |||
2015
|
1,571,000 | |||
Thereafter
|
8,680,000 | |||
Total
minimum payments required
|
$ | 18,943,000 |
*Minimum
payments have not been reduced by minimum sublease rentals for $3,434,000 due in
the future under noncancelable subleases.
43
The
following schedule shows the composition of total rental expense for all
operating leases except those with terms of a month or less that were not
renewed:
Year Ended
June, 30,
|
||||||||||||
2008
|
2009
|
2010
|
||||||||||
Minimum
rentals:
|
$ | 3,661,000 | $ | 3,437,000 | $ | 3,613,000 | ||||||
Less:
Sublease rentals
|
(53,000 | ) | (318,000 | ) | (350,000 | ) | ||||||
$ | 3,608,000 | $ | 3,119,000 | $ | 3,263,000 |
As of
June 30, 2010, the Company leased eight of its ten facilities under operating
leases. Other than one facility which is leased on a month-to-month
basis, the operating leases expire on dates ranging from 2011 to
2021. Except for the New York office lease which expires in 2011 (see
Note 11), the leases contain options to extend the primary term ranging from 3
to 20 years at either a stated or the then fair rental value. The
Company subleases approximately 16,000 square feet of space at its Media Center
facility to an outside party (under terms and conditions similar to the
Company’s primary lease) at a rental rate of $25,000 monthly, which expires in
2021. Sublease income is included in other income in the consolidated
statements of operations.
The
Company’s vehicle and data processing equipment operating leases expire during
the next three years. In most cases, management expects that in the
normal course of business, leases will be renewed or replaced by other
leases.
Total
rental expense was approximately, $3,608,000, $3,119,000 and $3,263,000 for the
years ended June 30, 2008, 2009 and 2010, respectively.
Severance
Agreements
On
September 30, 2003 Old Point.360 entered into severance agreements with its
Chief Executive Officer and Chief Financial Officer which continue in effect
through December 31, 2010, and are renewed automatically on an annual basis
thereafter unless notice is received terminating the agreement by
September 30 of the preceding year. The severance agreements contain
a “Golden Parachute” provision. The Company assumed these severance
agreements.
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 defendants’ negligence, Farshad claims to
have suffered damages in excess of $2 million and additional unquantified
general and special damages. 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 sought possession of
the property, damages for each day of the Company’s possession from May 1, 2009,
and other damages and legal fees. The matter was settled in February
2010 for $93,000.
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 $412,500
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 sought unspecified
monetary damages.
In
September 2010, a settlement between the parties included the
following: (1) The Company will be subject to a permanent injunction
(until August 13, 2012) from competing in the commercial spot
advertising business (as defined), (2) the Company will deliver to
DGFC vaulted elements which will result in an annual reduction of vaulting
revenues of approximately $0.9 million, (3) the Company will not be entitled to
$412,500 (relating to the working capital reconciliation), (4) the Company will
issued 250,000 shares of common stock to DGFC and (5) the parties will enter
into full mutual releases and will dismiss their respective claims with
prejudice. In connection with the settlement, the Company has
indemnified a related party against possible losses related to the stock
issuance. As of June 30, 2010 the Company has accrued approximately
$1.0 million of estimated legal, vault removal and other costs associated with
the settlement.
44
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 except as described above.
9. 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 four 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 Operations.
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
Operations. Stock-based compensation expense recognized in the
Consolidated Statements of Operations for the three years ended June 30, 2010
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 Consolidated Statements of Operations for the periods
reported in this Form 10-K 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-K, expected forfeitures are immaterial. The Company
will re-assess 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 years ended June 30, 2008, 2009 and
2010 were $0, $227,000 and $261,000, 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 fiscal years ended June 30, 2008, 2009 and 2010, the Company granted awards
of stock options as follows:
2008
|
2009
|
2010
|
||||||||||
Stock
option awards
|
1,045,600 | 309,450 | 356,500 | |||||||||
Weighted
average Exercise price
|
$ | 1.79 | $ | 1.21 | $ | 1.29 |
As of June 30, 2010, there were options
outstanding to acquire 1,631,075 shares at an average exercise price of $1.58
per share. The estimated fair value of all awards granted during the
years ended June 30, 2008, 2009 and 2010 were $884,000, $129,000 and $210,000,
respectively. The fair value of each option was estimated on
the date of grant using the Black-Scholes option–pricing model with the
following weighted average assumptions:
45
2008
|
2009
|
2010
|
||||||||||
Risk-free
interest rate
|
3.02 | % | 2.39 | % | 2.26 | % | ||||||
Expected
term (years)
|
5.0 | 5.0 | 5.0 | |||||||||
Volatility
|
51 | % | 48 | % | 65 | % | ||||||
Expected
annual dividends
|
- | - | - |
The following table summarizes the
status of the 2007 Plan as of June 30, 2010:
Options
originally available
|
2,000,000 | |||
Stock
options outstanding
|
1,631,075 | |||
Options
available for grant
|
356,925 |
Transactions involving stock options
are summarized as follows:
Number
of Shares
|
Weighted
Average
Exercise Price
|
|||||||
Balance
at June 30, 2007
|
- | - | ||||||
Granted
|
1,045,600 | $ | 1.79 | |||||
Exercised
|
- | - | ||||||
Cancelled
|
- | - | ||||||
Balance
at June 30, 2008
|
1,045,600 | $ | 1.79 | |||||
Granted
|
309,450 | 1.21 | ||||||
Exercised
|
- | - | ||||||
Cancelled
|
(33,025 | ) | 1.78 | |||||
Balance
at June 30, 2009
|
1,322,025 | $ | 1.66 | |||||
Granted
|
356,500 | $ | 1.29 | |||||
Exercised
|
(12,000 | ) | 1.40 | |||||
Cancelled
|
(35,450 | ) | 1.66 | |||||
Balance
at June 30, 2010
|
1,631,075 | $ | 1.58 |
As of June 30, 2010, the total
compensation costs related to non-vested awards yet to be expensed was
approximately $0.5 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 June 30, 2008, 2009 and 2010 were
as follows:
As of June 30, 2008
|
Number of
Shares
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining
Contractual Life
(Years)
|
Intrinsic
Value
|
||||||||||||
Employees
– Outstanding
|
945,600 | $ | 1.79 | 4.63 | $ | - | ||||||||||
Employees
– Expected to Vest
|
851,040 | $ | 1.79 | 4.63 | $ | - | ||||||||||
Employees
– Exercisable
|
- | $ | - | - | $ | - | ||||||||||
Non-Employees-Outstanding
|
100,000 | $ | 1.79 | 4.63 | $ | - | ||||||||||
Non-Employees-Vested
|
- | $ | - | 4.63 | $ | - | ||||||||||
Non-Employees-Exercisable
|
- | $ | - | - | $ | - |
46
As of June 30, 2009
|
||||||||||||||||
Employees
– Outstanding
|
1,192,045 | $ | 1.65 | 3.86 | $ | - | ||||||||||
Employees
– Expected to Vest
|
1,074,195 | $ | 1.65 | 3.86 | $ | - | ||||||||||
Employees
– Exercisable
|
228,525 | $ | 1.79 | 3.63 | $ | - | ||||||||||
Non-Employees
– Outstanding
|
130,000 | $ | 1.69 | 3.80 | $ | - | ||||||||||
Non-Employees
– Vested
|
55,000 | $ | 1.56 | 4.03 | $ | - | ||||||||||
Non-Employees
– Exercisable
|
55,000 | $ | 1.56 | 4.03 | $ | - |
As of June 30, 2010
|
||||||||||||||||
Employees
– Outstanding
|
1,461,075 | $ | 1.58 | 3.24 | $ | 204,000 | ||||||||||
Employees
– Expected to Vest
|
1,376,000 | $ | 1.58 | 3.21 | $ | 184,000 | ||||||||||
Employees
– Exercisable
|
499,000 | $ | 1.72 | 2.75 | $ | 24,000 | ||||||||||
Non-Employees
– Outstanding
|
170,000 | $ | 1.61 | 3.20 | $ | 23,000 | ||||||||||
Non-Employees
– Vested
|
110,000 | $ | 1.47 | 3.31 | $ | 23,000 | ||||||||||
Non-Employees
– Exercisable
|
110,000 | $ | 1.47 | 3.31 | $ | 23,000 |
The aggregate intrinsic value in the
table above is the sum of the amounts by which the quoted market price of our
common stock exceeded the exercise price of the options at June 30, 2010, for
those options for which the quoted market price was in excess of the exercise
price.
Additional information with respect to
outstanding options as of June 30, 2010 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
|
|||||||||||||||
$ | 2.15 | 10 |
4.9 Years
|
$ | 2.15 | - | $ | 2.15 | ||||||||||||
$ | 1.79 | 982 |
2.6
Years
|
$ | 1.79 | 489 | $ | 1.79 | ||||||||||||
$ | 1.37 | 30 |
3.4
Years
|
$ | 1.37 | 30 | $ | 1.37 | ||||||||||||
$ | 1.29 | 314 |
4.6
Years
|
$ | 1.29 | - | $ | 1.29 | ||||||||||||
$ | 1.20 | 265 |
3.6
Years
|
$ | 1.20 | 60 | $ | 1.20 | ||||||||||||
$ | 1.05 | 30 |
4.4
Years
|
$ | 1.05 | 30 | $ | 1.05 |
In addition to the above option plan,
the Company issued 10,000 shares of restricted stock during fiscal
2010.
We have elected to adopt the detailed
method provided in ASC 718 for calculating the beginning balance of the
additional paid-in capital pool (APIC pool) related to the tax effects of
employee stock-based compensation, and to determine the subsequent impact on the
APIC pool and Consolidated Statements of Cash Flows of the tax effects of
employee stock-based compensation awards that are outstanding upon adoption of
ASC 718.
10. 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.
47
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
year ended June 30, 2010.
11. RESTRUCTURING
CHARGES
In the first quarter of fiscal 2008, in
conjunction with the completion of the Merger and Spin-off transactions, we
decided to close down one of our post production facilities. Future
costs associated with the facility lease and certain severance payments totaling
$513,000 were treated as restructuring costs. All matters related to
the restructuring were finalized during fiscal 2008 at a cost approximating the
restructuring charge.
In the fourth quarter of fiscal 2010,
we ceased operation in our New York facility due to economic
factors. Certain costs associated with terminating the lease,
severance and other associated expenses totaling $745,000 were treated as
restructuring costs. All matters related to this decision are
expected to be completed by March 31, 2011.
12. SALE
OF ADS DISTRIBUTION BUSINESS
On April
16, 2007, Old Point.360, the Company, a newly formed California corporation and
wholly owned subsidiary of Old Point.360 and DG FastChannel, Inc. (“DG
FastChannel”), entered into an Agreement and Plan of Merger and Reorganization
(the “Merger Agreement”), as amended by an instrument executed by the parties as
of June 19, 2007.
Under the
terms of the Merger Agreement, DG FastChannel agreed to make an exchange offer
(the “Exchange Offer”) for all outstanding shares of Old Point.360 common stock,
no par value per share, including the associated preferred stock purchase rights
(collectively, the “Old Point.360 Shares”), in which Exchange Offer each Old
Point.360 Share tendered and accepted by DG FastChannel would be exchanged for a
number of shares of common stock, par value $0.001 per share, of DG FastChannel
(the “DG Common Stock”) equal to the quotient obtained by dividing (x) 2,000,000
by (y) the number of Old Point.360 Shares (excluding Old Point.360 Shares owned
by DG or Point.360) issued and outstanding immediately prior to the completion
of the Exchange Offer (such amount of shares of DG Common Stock paid per Old
Point.360 Share pursuant to the Exchange Offer is referred to herein as the
“Exchange Offer Consideration”).
In
addition, on April 16, 2007, Old Point.360, DG FastChannel, and the Company
entered into a Contribution Agreement (the “Contribution Agreement”), as amended
by an instrument executed by the parties as of June 19,
2007. Pursuant to the Contribution Agreement, prior to the completion
of the Exchange Offer, Old Point.360 contributed (the “Contribution”) to the
Company all of the assets owned, licensed, or leased by Old Point.360 that were
not used exclusively in connection with the business of Old Point.360
representing advertising agencies, advertisers, brands, and other media
companies which require services for short-form media content (the “ADS
Business”), and the Company assumed certain liabilities of Old
Point.360. Immediately following the Contribution but prior to the
completion of the Exchange Offer, Old Point.360 distributed (the “Spin-off”) to
its shareholders on a pro rata basis all of the capital stock then outstanding
of the Company.
On July
13, 2007, the Company filed a Registration Statement on Form S-1 (the “Form
S-1”) with the Securities and Exchange Commission for the purpose of registering
the Spin-off under the Securities Act of 1933, as amended. Among
other things, the Form S-1 contained: (1) a detailed description of
the Contribution and the Spin-off; (2) a description of Old Point.360’s
post-production business that was to be transferred to the Company pursuant to
the Contribution; (3) risk factors relating to the Company business, the
Contribution and Spin-Off and the Company’s common stock; (4) a valuation of the
Company by Old Point.360’s financial advisor; (5) management’s discussion and
analysis of the Company’s financial condition and results of operations for each
of the three years in the period ended December 31, 2006; (6) unaudited pro
forma financial statements of the Company as of December 31, 2006, and for the
year then ended, giving effect to the Contribution and Spin-off; (7) audited
financial statements for New 360 as of December 31, 2006 and 2005 and for each
of the three years in the period ended December 31, 2006; and (8) a description
of New 360’s proposed management and executive compensation
policies. The contribution and Spin-off were completed on August 14,
2007.
48
The
Company’s common stock was approved for listing on the NASDAQ Global
Market. As a result of the Contribution and the Spin-Off, at the
completion of the Exchange Offer, the assets and liabilities of Old Point.360
consisted only of those assets and liabilities exclusively related to the ADS
Business.
Following
the completion of the Exchange Offer, DG FastChannel effected the merger of Old
Point.360 with and into DG FastChannel (the “Merger”), with DG FastChannel
continuing as the surviving corporation. Upon the completion of the
Merger, each Old Point.360 Share not purchased in the Exchange Offer was
converted into the right to receive the Exchange Offer Consideration, without
interest. DG FastChannel also paid to the Company as part of the
merger consideration cash of (i) $7 million in lieu of prepayment of the
Company’s outstanding debt, (ii) $0.3 million for reimbursement of merger
expenses and (iii) a $0.4 million prepayment for working capital of the ADS
Business. The resulting invested equity in the Company was
$24,035,000.
13. STOCK
REPURCHASE PLAN
In May 2008, the Company announced that
its Board of Directors authorized a stock purchase plan. The board
authorized the open market purchase at such times and prices determined at the
discretion of management. In fiscal 2009, the Company purchased
404,710 shares for $558,000. In fiscal 2010, the Company did not
purchase shares.
49
Point.360
Schedule
II- Valuation and Qualifying Accounts
Allowance for Doubtful Accounts
|
Balance at
Beginning of
Year
|
Charged to
Costs and
Expenses
|
Other
|
Deductions/
Write-Offs
|
Balance at
End of
Year
|
|||||||||||||||
Year
ended June 30, 2008
|
$ | 490,000 | $ | 61,000 | $ | — | $ | (10,000 | ) | $ | 541,000 | |||||||||
Year
ended June 30, 2009
|
$ | 541,000 | $ | 48,000 | $ | — | $ | (52,000 | ) | $ | 537,000 | |||||||||
Year
ended June 30, 2010
|
$ | 537,000 | $ | 41,000 | $ | — | $ | (185,000 | ) | $ | 393,000 |
50
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM 9A(T). CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
Pursuant
to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange
Act”), the Company’s management, with the participation of the Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the
Company’s disclosure controls and procedures as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective as of June 30, 2010.
Management’s
Report on Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management,
with the participation of the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of the Company’s internal
control over financial reporting, as of June 30, 2010, based on Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Based on that evaluation,
management concluded that, as of June 30, 2010, the Company’s internal control
over financial reporting was effective.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to the rules of Securities and Exchange Commission that permit the
Company to provide only management’s report in this annual report.
The
Company’s Form 10-K report for the year ended June 30, 2008 did not include a
report of management’s assessment regarding internal control over financial
reporting, due to management’s belief that a transition period established by
rules of the Securities Exchange Commission for newly public companies
occurred. The Company was formed in a Spin-off transaction on August
14, 2007, and began trading as a public entity on that date.
In a
letter commenting on the Company’s Form 10-K for the fiscal year ended June 30,
2008, the SEC stated that management’s assessment of the effectiveness of
internal control over financial reporting was required in the 2008 Form 10-K
because the Company had previously filed a Form 10-K/T for the six
months ended June 30, 2007. The Company believed it was not required
to include such an assessment until it filed its Form 10-K for the fiscal year
ending June 30, 2009. Since management did not evaluate the
effectiveness of the Company’s internal control over financial reporting using
the COSO framework, management had no basis on which to judge the effectiveness
of such controls as of June 30, 2008. Therefore, internal control
over financial reporting was not effective as of June 30, 2008.
During
the preparation of the June 30, 2008 consolidated financial statements,
management discovered an error in the calculation of deferred income tax
liability. The resulting adjustment was to reduce the liability and
increase invested equity retroactively. The Company uses an
independent consultant to determine the income tax effects of its operations,
including deferred taxes. The clerical error giving rise to the
restatement was contained in the detailed analysis prepared by the
consultant.
While
management believed that sufficient internal controls existed regarding the
determination of deferred tax amounts through the use of qualified external
consultants, the fact that an error occurred was evidence of a breakdown in such
controls. The Company’s independent registered public accounting firm
characterized the error as a material weakness. We have since
reviewed existing disclosure controls and checks and balances with our external
consultants and independent registered public accounting firm to re-emphasize
and reinforce that adequate controls are in place. Specifically, the
internal control deficiency has been remediated by an additional review by
senior personnel at the Company, the independent consultant and on a quarterly
basis.
51
Remediation
of Previously Disclosed Material Weakness
Management
previously concluded that, as of June 30, 2009, 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 the 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 June 30, 2010, this material weakness has been remediated.
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 June 30, 2010 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
|
|
·
|
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.
|
ITEM
9B. OTHER INFORMATION
|
None.
|
52
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
On July
3, 2003 and May 30, 2007, Old Point.360 and the Company adopted a Code of Ethics
(the “Code”) applicable to the Company’s Chief Executive Officer, Chief
Financial Officer and all other employees. Among other provisions,
the Code sets forth standards for honest and ethical conduct, full and fair
disclosure in public filings and shareholder communications, compliance with
laws, rules and regulations, reporting of code violations and accountability for
adherence to the Code. The text of the Code has been posted on the
Company’s website (www.point360.com). A
copy of the Code can be obtained free-of-charge upon written request
to:
Corporate Secretary
Point.360
2777 North Ontario Street
Burbank, CA 91504
If the
Company makes any amendment to, or grant any waivers of, a provision of the Code
that applies to our principal executive officer or principal financial officer
and that requires disclosure under applicable SEC rules, we intend to disclose
such amendment or waiver and the reasons for the amendment or waiver on our
website.
Other
information called for by Item 10 of Form 10-K will be set forth in the
Company’s Proxy Statement to be filed by October 29, 2010.
ITEM
11. EXECUTIVE COMPENSATION
Information
called for by Item 11 of Form 10-K will be set forth in the Company’s Proxy
Statement to be filed by October 29, 2010.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information
called for by Item 12 of Form 10-K will be set forth in the Company’s Form Proxy
Statement to be filed by October 29, 2010.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information
called for by Item 13 of Form 10-K will be set forth in the Company’s Proxy
Statement to be filed by October 29, 2010
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information called for by Item 14 of
Form 10-K will be set forth in the Company’s Proxy Statement to be filed by
October 29, 2010.
53
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
|
Documents
Filed as Part of this Report:
|
(1,
2)
|
Financial
Statements and Schedules.
|
The
following financial documents of Point.360 are filed as part of this report
under Item 8:
|
Consolidated
Balance Sheets – June 30, 2009 and June 30,
2010
|
|
Consolidated
Statements of Operations – Fiscal Years Ended December June 30, 2008, 2009
and 2010
|
|
Consolidated
Statements of Invested and Shareholders’ Equity –Fiscal Years Ended June
30, 2008, 2009 and 2010
|
|
Consolidated
Statements of Cash Flows –Fiscal Years Ended June 30, 2008, 2009 and
2010
|
|
Notes
to Consolidated Financial
Statements
|
|
Schedule
II – Valuation and Qualifying
Accounts
|
(3)
|
Exhibits:
|
Exhibit No.
|
Exhibit Description*
|
|
2.1
|
Agreement
and Plan of Merger and Reorganization, dated as of April 16, 2007, among
the Registrant, Old Point.360 and DG FastChannel, Inc. (incorporated by
reference to Exhibit 2.1 to the Registration Statement on Form 10 filed by
the Registrant on May 14, 2007)
|
|
2.2
|
Contribution
Agreement, dated as of April 16, 2007, among the Registrant, Old Point.360
and DG FastChannel, Inc. (incorporated by reference to Exhibit 2.2 to the
Registration Statement on Form 10 filed by the Registrant on May 14,
2007)
|
|
2.3
|
First
Amendment to Agreement and Plan of Merger and Reorganization, dated as of
June 22, 2007, among the Registrant, Old Point.360, and DG FastChannel,
Inc. (incorporated by reference to Exhibit 2.3 to Amendment No. 1 to the
Registration Statement on Form 10 filed by the Registrant on June 22,
2007)
|
|
2.4
|
First
Amendment to Contribution Agreement, dated as of June 22, 2007, among the
Registrant, Old Point.360, and DG FastChannel, Inc. (incorporated by
reference to Exhibit 2.4 to Amendment No. 1 to the Registration Statement
on Form 10 filed by the Registrant on June 22, 2007)
|
|
3.1
|
Articles
of Incorporation of the Registrant (incorporated by reference to Exhibit
3.1 to the Form 10-K/T filed by the Registrant on November 13,
2007)
|
|
3.2
|
Certificate
of Amendment to the Registrant’s Articles of Incorporation (incorporated
by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the
Registrant on August 22, 2007)
|
|
3.3
|
Bylaws
of the Registrant (incorporated by reference to Exhibit 2.1 to
the Registration Statement on Form 10 filed by the Registrant on May 14,
2007)
|
|
4.1
|
Form
of the Registrant’s Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form S-1, Registration No.
333-144547, filed by the Registrant on July 13, 2007)
|
|
4.2
|
Rights
Agreement dated July 25, 2007 between the Registrant and American Stock
Transfer & Trust
Company
|
54
4.3
|
Certificate
of Determination of Series A Junior Participating Preferred Stock of the
Registrant dated July 31, 2007
|
|
4.4
|
Form
of Right Certificate (incorporated by reference to Exhibit 4.2 to
Amendment No. 1 to the Registration Statement on Form S-1 filed by the
Registrant on July 26, 2007)
|
|
10.1
|
Noncompetition
Agreement dated August 13, 2007 between the Registrant and DG FastChannel,
Inc.
|
|
10.2
|
Post
Production Services Agreement dated August 13, 2007 between the Registrant
and DG FastChannel, Inc.
|
|
10.3
|
Working
Capital Reconciliation Agreement dated August 13, 2007 among the
Registrant, Old Point.360 and DG FastChannel, Inc.
|
|
10.4
|
Indemnification
and Tax Matters Agreement dated August 13, 2007 between the Registrant and
DG FastChannel, Inc.
|
|
10.5
|
Severance
Agreement, dated September 30, 2003 (assumed by the Registrant), between
Old Point.360 and Haig S. Bagerdjian (incorporated by reference to Exhibit
10.5 to the Registration Statement on Form 10 filed by the Registrant on
May 14, 2007)
|
|
10.6
|
Severance
Agreement, dated September 30, 2003 (assumed by the Registrant), between
Old Point.360 and Alan R. Steel (incorporated by reference to Exhibit 10.6
to the Registration Statement on Form 10 filed by the Registrant on May
14, 2007)
|
|
10.7
|
2007
Equity Incentive Plan of the Registrant (incorporated by reference to
Exhibit 10.7 to Amendment No. 1 to the Registration Statement on Form 10
filed by the Registrant on June 22, 2007)
|
|
10.8
|
Building
Lease (1133 Hollywood Way, Burbank Facility), dated June 11, 1998 (assumed
by the Registrant), between Old Point.360 and Hollywood Way Office
Ventures LLC (incorporated by reference to Exhibit 10.8 to the
Registration Statement on Form 10 filed by the Registrant on May 14,
2007)
|
|
10.9
|
Standard
Industrial / Commercial Single – Tenant Lease – Net (712 N. Seward St.,
Los Angeles facility), dated January 24, 1997 (assumed by the Registrant),
between Old Point.360 and Richard Hourizadeh, as amended in July 2002
(incorporated by reference to Exhibit 10.9 to the Registration Statement
on Form 10 filed by the Registrant on May 14, 2007)
|
|
10.10
|
Standard
Industrial / Commercial Multi-Tenant Lease-Net (West Los Angeles
facility), dated March 17, 2004 (assumed by the Registrant), between Old
Point.360 and Martin Shephard, as co-Trustee of the Shephard Family Trust
of 1988 (incorporated by reference to Exhibit 10.10 to Amendment No. 1 to
the Registration Statement on Form 10 filed by the Registrant on June 22,
2007)
|
|
10.11
|
Standard
Industrial Lease – Net (Highland facility), dated April 3, 1989 (assumed
by the Registrant), between Old Point.360 and Leon Vahn FBO for Leon Vahn
Living Trust, as amended (incorporated by reference to Exhibit 10.11 to
Amendment No. 1 to the Registration Statement on Form 10 filed by the
Registrant on June 22, 2007)
|
|
10.12
|
Standard
Industrial / Commercial Multi-Tenant Lease –Net (IVC facility), dated
March 1, 2002 (assumed by the Registrant), between Old Point.360 and 2777
LLC, as amended (incorporated by reference to Exhibit 10.12 to Amendment
No. 1 to the Registration Statement on Form 10 filed by the Registrant on
June 22, 2007)
|
55
10.13
|
Lease
Agreement (Media Center) dated March 29, 2006 (assumed by the Registrant),
between Old Point.360 and LEAFS Properties, LP (incorporated by reference
to Exhibit 10.13 to Amendment No. 1 to the Registration Statement on Form
10 filed by the Registrant on June 22, 2007)
|
|
10.14
|
Asset
Purchase Agreement, dated as of March 7, 2007 (assumed by the
Registrant), among Old Point.360, Eden FX, Mark Miller, and John Gross
(incorporated by reference to Exhibit 10.14 to the Registration Statement
on Form 10 filed by the Registrant on May 14, 2007)
|
|
10.15
|
Standard
Loan Agreement dated August 7, 2007 between the Registrant and Bank of
America N.A. (incorporated by reference to Exhibit 10.15 to the
Form 10-K/T filed by the Registrant on November 13,
2007)
|
|
10.16
|
Promissory
Note dated December 30, 2005 (assumed by the Registrant), between General
Electric Capital Corporation and Old Point.360 (incorporated by reference
to Exhibit 10.16 to the Form 10-K/T filed by the Registrant on November
13, 2007)
|
|
10.17
|
Promissory
Note dated March 30, 2007 (assumed by the Registrant), between General
Electric Capital Corporation and Old Point.360 (incorporated by reference
to Exhibit 10.17 to the Form 10-K/T filed by the Registrant on November
13, 2007)
|
|
10.18
|
Transfer
and Assumption Agreement dated August 8, 2007 between the Registrant and
Old Point.360 (incorporated by reference to Exhibit 10.18 to the Form
10-K/T filed by the Registrant on November 13, 2007)
|
|
10.19
|
Sale,
Purchase and Escrow Agreement (1133 Hollywood Way, Burbank Facility) dated
May 19, 2008 among Point.360, Hollywood Way Office Ventures, LLC and
Commonwealth Land Title Insurance Company (incorporated by reference to
Exhibit 10.1 to the Form 8-K filed by the company on July 7,
2008)
|
|
10.20
|
Promissory
Note dated July 1, 2008 between Point.360 and Lehman Brothers Bank FSB
(incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the
Company on July 7, 2008)
|
|
10.21
|
Settlement
Agreement and Release (712 N. Seaward St., Los Angeles facility) dated
June 19, 2008 among Point.360, Richard Hourizadeh, Vida Hourizadeh and
Travira Trust (incorporated by reference to Exhibit 10.21 to the Form 10-K
filed by the Company on September 19, 2008)
|
|
10.22
|
Assignment
and Assumption of Lease and Landlord Consent dated April 6, 2009 among
Point.360, Benita Holdings, LLC and Moving Images NY LLC (incorporated by
reference to Exhibit 10.1 to the Form 8-K filed by the Company on April
10, 2009)
|
|
10.23
|
Standard
Offer, Agreement and Escrow Instructions for the Purchase of Real Estate
dated April 9, 2009 between Point.360 and Michael James Lantry, Trustee of
the M.J. Lantry Trust dated June 15, 2000 (incorporated by reference to
Exhibit 10.1 to the Form 8-K filed by the Company on June 10,
2009)
|
|
10.24
|
Purchase
Money Promissory Note secured by Deed of Trust dated June 10, 2009 between
Point.360 and Michael James Lantry, Trustee of the M.I. Lantry trust dated
June 15, 2000 (incorporated by reference to Exhibit 10.2 to the Form 8-K
filed by the Company on June 10,
2009)
|
56
10.25
|
Standard
Loan Agreement dated August 25, 2009 between the Registrant and Bank of
America N.A. (incorporated by reference to Exhibit 10.1 to the Form 8-K
filed by the Registrant on August 28, 2009)
|
|
10.26
|
Amendment
No. 1 to 2007 Equity Incentive Plan of Point.360 dated February 10, 2010
(incorporated by reference to Exhibit 10.1 of the Form 10-Q filed by the
Company on February 12, 2010)
|
|
10.27
|
Settlement
Agreement dated September 21, 2010 between the Company and DG Fastchannel,
Inc.
|
|
21.1
|
Subsidiaries
of the Registrant
|
|
23.1
|
Consent
of SingerLewak LLP
|
|
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.
|
*
|
Prior
to August 21, 2007, Point.360 was named New 360. On August 21,
2007, New 360 changed its name to Point.360. In this Exhibit
Index, Point.360 (including New 360 for the period prior to August 21,
2007) is referred to as the “Registrant.”
|
|
References
in this Exhibit Index to “Old Point.360” are
intended to refer to the Registrant’s former parent corporation, named
Point.360, which was merged into DG FastChannel, Inc. on August 14, 2007,
with DG FastChannel, Inc. continuing in existence as the surviving
corporation.
|
57
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: September
24, 2010
Point.360
|
||
By:
|
/s/ Haig S. Bagerdjian
|
|
Haig
S. Bagerdjian
|
||
Chairman
of the Board of Directors,
|
||
President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/ Haig S. Bagerdjian
|
Chairman
of the Board of Directors,
|
|||
Haig
S. Bagerdjian
|
President
and Chief Executive Officer
|
|||
(Principal
Executive Officer)
|
September
24, 2010
|
|||
/s/ Alan R. Steel
|
Executive
Vice President,
|
|||
Alan
R. Steel
|
Finance
and Administration, Chief Financial Officer
|
|||
(Principal
Accounting and Financial Officer)
|
September
24, 2010
|
|||
/s/ Robert A.
Baker
|
Director
|
|||
Robert
A. Baker
|
September
24, 2010
|
|||
/s/ Greggory J.
Hutchins
|
Director
|
|||
Greggory
J. Hutchins
|
September
24, 2010
|
|||
/s/ Sam P. Bell
|
Director
|
|||
Sam
P. Bell
|
September
24, 2010
|
|||
/s/ G. Samuel
Oki
|
Director
|
|||
G.
Samuel Oki
|
September
24, 2010
|
58