XNAS:PTSX Point 360 Annual Report 10-K Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________

 

FORM 10-K

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended June 30, 2012

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________________ to _________________

 

Commission File Number 001-33468

___________

POINT.360

(Exact name of registrant as specified in its charter)

 

California

(State or other jurisdiction of

incorporation or organization)

 

01-0893376

(I.R.S. Employer Identification No.)

2701 Media Center Drive, Los Angeles, CA

(Address of principal executive offices)

90065

(Zip Code)

 

Registrant's telephone number, including area code (818) 565-1400

 

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

 

Title of each class   Name of each exchange
    on which registered
Common Stock, no par value   NASDAQ Capital Market

 

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 o 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 o 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 o

 

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 x No o

 

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 the 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 ¨ Accelerated Filer o
     
Non-accelerated filer ¨ 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 o 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, 2011) was approximately $4.8 million. As of August 15, 2012, 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, 2012) relating to its 2012 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:

 

·our recent history of losses;
·Point.360’s prior breach of credit agreements;
·our highly competitive marketplace;
·the risks associated with dependence upon significant customers;
·our ability to execute our expansion strategy;
·the uncertain ability to manage in a changing environment;
·our dependence upon, and our ability to adapt to, technological developments;
·dependence on key personnel;
·our ability to maintain and improve service quality;
·fluctuation in quarterly operating results and seasonality in certain of our markets;
·possible significant influence over corporate affairs by significant shareholders;
·our ability to operate effectively as a stand-alone, publicly traded company; and
·the cost associated with being 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 Capital 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.

 

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PART 1

 

ITEM 1. BUSINESS

 

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.

 

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 has been at least partially abandoned by the closedown of Movie Gallery/Hollywood Video and Blockbuster video rental stores.

 

Since January 1, 1997, Point.360 (and its predessor company) completed acquisitions of companies providing similar services. We will continue to evaluate acquisition opportunities to enhance our operations and profitability. In 2004, Point.360 acquired International Video Conversions, Inc. (“IVC”), a leading digital intermediate and digital mastering facility. In 2005, Point.360 acquired Visual Sound, a provider of captioning services. In 2007, 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 and television program syndicators. On a more limited basis, we also service national television networks, local television stations, corporate or instructional video providers, 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.

 

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 other 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 Burbank and 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, movie trailers, electronic press kits, specials, and corporate and educational presentations.

 

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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.

 

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.

 

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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 400,000 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.

 

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, 2012, we had opened three Movie>Q “proof-of-concept” stores in Southern California. Each store employs 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 can offer a 10,000 unit selection 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 existing stores, 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.

 

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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 our 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, television program syndicators, corporations and educational institutions. Our motion picture clients include Disney, Sony Pictures Entertainment, Twentieth Century Fox, NBC Universal, BBC, FremantleMedia and Paramount Pictures.

 

We solicit the motion picture and television industries to generate revenues.  In the fiscal years ended June 30, 2010, 2011 and 2012, five major motion picture studios accounted for approximately 58%, 63% and 67% of Point.360’s revenues, respectively. Sales to Twentieth Century Fox and affiliates comprised 23%, 27% and 25% of revenues in those periods, respectively, and sales to Deluxe Media were 14% of sales in 2010 and 13% of sales in 2011.  Sales to Disney were 13% of sales in 2011 and 27% of sales in 2012. 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.  Studios select Point.360 because of our ability to meet often changing or rush delivery schedules.

 

We have a sales and customer service staff of approximately 31 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.

 

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Employees

 

The Company had approximately 240 full-time employees as of June 30, 2012. 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 four fiscal years ended June 30, 2011 due, in part, to increased price competition, the cost of being a publicly traded company and a number of unusual charges. While the Company was profitable in fiscal 2012, 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 facilities in the past. 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, 2012 and expect to be for the foreseeable future, if we 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 may 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.

 

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, our five largest customers and and/or their affiliates accounted for approximately 58%, 63% and 67% of our revenues in the fiscal years ended June 30, 2010, 2011 and 2012, respectively. Twentieth Century Fox (and affiliates) accounted for 23%, 27% and 25% in the fiscal years ended June 30, 2010, 2011 and 2012, respectively. Sales to Deluxe Media were 14% of sales in the year ended June 30, 2010 and 13% of sales in the year ended June 30, 2011. Sales to Disney were 13% and 27% of sales in the fiscal years ended June 30, 2011 and 2012, respectively. If one or more of these companies were to stop using our services, or use their influence to adversely affect pricing, 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.

 

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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, 2012, we have spent approximately $4.7 million ($0.5 million in stock and $4.2 million in cash) to develop the Movie>Q concept and open three proof-of-concept stores. A roll out of additional 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.

 

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.

 

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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 60% 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, and in fiscal 2011, we impaired certain assets related to our Movie>Q business. 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.

 

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.

 

9
 

  

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 is publicly traded on the Nasdaq Capital Market. Due to the Company’s failure to maintain a stock price of $1.00, the Company was notified by Nasdaq that its stock would be delisted if the closing bid price of the stock fails to reach $1.00 per share for 10 consecutive trading days before September 24, 2012. 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 above or below our true value.

 

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 and the 2010 Incentive Plan, which provide 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.

 

10
 

  

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.

 

Under the rights agreement, each shareholder has also received one preferred share purchase right for each share of our common stock owned by the shareholder. The rights are 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 60% 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 nine facilities which all have production capabilities and/or sales activities. The terms of leases for leased facilities expire at various dates from 2013 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 
Burbank, CA (owned)   32,000 
Los Angeles, CA (leased)   64,600 
Los Angeles, CA (leased)   13,400 
Westminster, CA (leased)    1,300 
Costa Mesa, CA (leased)   1,200 
La Mirada, CA (leased)   1,600 
Norco, CA (leased)   1,200 
Murietta, CA (leased)   1,100 

  

ITEM 3. LEGAL PROCEEDINGS

 

From time to time, the Company may become a party to legal actions and complaints arising in the ordinary course of business, although it is not currently involved in any such material legal proceedings.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

PART II

 

ITEM 5.MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

During fiscal 2011 and 2012, the Company's Common Stock was traded on the NASDAQ Global and Capital Markets 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, 2011 and 2012.

 

   Common Stock 
   Low   High 
Year Ended June 30, 2011        
 First Quarter  $1.13   $1.80 
 Second Quarter  $0.82   $1.47 
 Third Quarter  $0.53   $0.95 
 Fourth Quarter  $0.47   $0.78 
           
Year Ended June 30, 2012          
 First Quarter  $0.57   $0.77 
 Second Quarter  $0.57   $1.20 
 Third Quarter  $0.75   $1.18 
 Fourth Quarter  $0.55   $0.83 

 

On August 15, 2012, the closing sale price of the Common Stock as reported on the Nasdaq Capital Market $0.58 per share. On that date, there were approximately 1,000 holders of record of the Common Stock.

 

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Dividends

 

The Company has paid no 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”).

 

Stock Repurchases

 

The Company did not repurchase any of its securities during the year ended June 30, 2012.

 

 

ITEM 6. SELECTED FINANCIAL DATA

 

The following data, insofar as they relate to the fiscal years ended June 30, 2008 to 2012 have been derived from the Company’s annual financial statements. This information should be read in conjunction with the Financial Statements and Notes 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.

 

   Year Ended
June 30,
 
Statement of Operations Data  2008   2009   2010   2011   2012 
Revenues  $45,150   $45,619   $39,735   $35,222   $34,960 
Cost of Services sold   (31,156)   (31,023)   (28,461)   (24,343)   (22,064)
Gross Profit   13,994    14,596    11,274    10,879    12,896 
Selling, general and administrative expense   (14,611)   (16,500)   (15,981)   (13,197)   (12,074)
Research and development costs   -    -    (1,115)   (352)   - 
Restructuring costs   (513)   -    (745)   -    - 
Impairment charges   -    (9,961)   -    (684)   - 
Operating income (loss)   (1,130)   (11,865)   (6,567)   (3,354)   822 
Interest expense, net   (205)   (628)   (927)   (804)   (814)
Other income   100    396    537    1,347    440 
(Provision for) benefit from income tax   292    (363)   -    -    - 
Net income (loss)  $(943)  $(12,460)  $(6,957)  $(2,811)  $448 
Pro forma income (loss) per share  $(0.09)  $(1.20)  $(0.67)  $(0.26)  $0.04 
Pro forma weighted average common share outstanding   10,554    10,358    10,405    10,647    10,513 

 

 

   

   Year Ended June 30, 
Other Data  2008   2009   2010   2011   2012 
Capital expenditures  $1,925   $16,586(1)  $2,189   $1,258   $3,271 
Selected Balance Sheet Data                         
Cash and cash equivalents  $13,056   $5,235   $249   $355   $1,219 
Working capital   16,497    10,048    2,445    2,885    4,261 
Property and equipment, net   8,667    20,417    20,157    17,153    17,475 
Total assets   42,358    37,394    31,144    25,395    25,971 
Shareholders' equity   30,800    18,009    11,830    9,489    10,231 

 

(1) Includes $12,939,000 for the purchase of real estate

 

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 acquisitions.

 

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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 post production 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 78% 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 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.

 

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     Twelve Months Ended June 30, 
     2010     2011     2012 
     Amount     Percent of
Revenues
     Amount     Percent of
Revenues
     Amount     Percent of
Revenues
 
                               
Revenues  $39,735    100.0   $35,222    100.0   $34,960    100.0 
Costs of services sold   (28,461)   (71.6)   (24,343)   (69.1)   (22,064)   (63.1)
Gross profit   11,274    28.4    10,879    30.9    12,896    36.9 
Selling, general and administrative expense   (15,981)   (40.2)   (13,197)   (37.5)   (12,074)   (34.5)
Research and development costs   (1,115)   (2.8)   (352)   (1.0)   -    - 
Restructuring costs   (745)   (1.9)   -    -    -    - 
Impairment charges   -    -    (684)   (1.9)   -    - 
Operating (loss)   (6,567)   (16.5)   (3,354)   (9.5)   822    2.4 
Interest expenses, net   (927)   (2.3)   (804)   (2.3)   (814)   (2.3)
Other income   537    1.3    1,347    3.8    440    1.3 
Income taxes   -    -    -    -    -    - 
Net income (loss)  $(6,957)   (17.5)  $(2,811)   (8.0)  $448    1.3 

    

Twelve Months Ended June 30, 2012 Compared to Twelve Months Ended June 30, 2011

 

Revenues. Revenues were $35.0 million for the twelve months ended June 30, 2012, compared to $35.2 million for the twelve months ended June 30, 2012. Service revenues remained consistent between the periods. We are continuing to invest in file-based capabilities where demand is expected to grow. We completed the move of one of our Burbank operations into newly renovated space in our Media Center facility in the third quarter of fiscal 2012, and revenues were not affected. We are evaluating re-entry into the commercial spot distribution business after the August 14, 2012 expiration of the five-year noncompetition agreement between the Company and Digital Generation, Inc. (formerly DG FastChannel, Inc.). We cannot currently estimate the impact on future revenues associated with possibly re-entering this market.

 

Cost of Services. Costs of services consist principally of wages and benefits, facility costs and depreciation of physical assets. During the twelve months ended June 30, 2012, total costs of services declined $2.3 million, and were 63% of sales compared to 69% in the prior year. The majority of the decrease was associated with wages and benefits and material costs. Wages and benefits declined due to the reorganization of functions associated with the shift from physical to file based processes. This also contributed to a lesser demand for tape stock material. Beginning in the fourth quarter of fiscal 2012, facility costs decreased by approximately $0.3 million per quarter due to the move of one of our Burbank locations to our Media Center facility, which savings is expected to continue.

 

Gross Profit. In the twelve months ended June 30, 2012, gross margin was 37% of sales, compared to 31% 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 or decrease staff capabilities to satisfy potential customer service demand. We expect gross margins to fluctuate in the future as the sales mix changes.

 

Selling, General and Administrative Expense. SG&A expense was $12.1 million (35% of sales) in the twelve months ended June 30, 2012 as compared to $13.2 million (38% of sales) in the same period last year. SG&A personnel costs, professional fees, and depreciation decreased $0.3 million, $0.4 million, and $0.3 million, respectively, in the current period when compared to last year’s period.

 

Research and Development Expense. During the fiscal 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 can contain up to 10,000 DVDs for rent or sale via a software-controlled automated inventory management (AIM) system contained in 1,200 to 1,600 square feet of retail space for each store. As of June 30, 2012, three Movie>Q stores were completed. Expenses associated with R&D activities were $0.4 million for the twelve months ended June 30, 2011.

 

Impairment of Long Lived Assets. During the period ended June 30, 2011, the Movie>Q R&D proof of concept was completed. With the selection of the AIM system as the operative DVD distribution method, we determined that the kiosk assets were impaired for accounting purposes, resulting in an impairment charge of $684,000.

 

15
 

  

Operating Income (Loss). Operating income was $0.8 million in the fiscal 2012 period, compared to a $3.4 million loss in the same period last year.

 

Interest Expense. Net interest expense was $0.8 million in both periods. We expect interest expense to decline in fiscal 2013 due to a refinancing of our revolving debt subsequent to June 30, 2012 at lower interest rates.

 

Other Income. Other income in both periods represents sublease income and gain on sale of fixed assets. In the 2012 twelve month period, other income also included a $0.1 million discount on debt repayment. In the prior year twelve-month period, the Company also received $1.0 million from the settlement of a claim. In the prior year twelve-month period, other income was partially offset by a put option expense of $0.2 million.

 

Net Income/Loss. Net income was $0.4 million in the fiscal 2012 period, compared to a net loss of $2.8 million in the 2011 period. Excluding the impairment charge and settlement income, the loss for the twelve months ended June 30, 2011 was $3.1 million.

 

Twelve Months Ended June 30, 2011 Compared to Twelve Months Ended June 30, 2010

 

Revenues. Revenues were $35.2 million for the twelve months ended June 30, 2011, compared to $39.7 million for the twelve months ended June 30, 2010. Approximately $3.3 million of the decline in revenues in fiscal 2011 was due to the move of the operations of one of our Hollywood facilities (“Highland”) to our West Los Angeles location. We expect to sustain the current revenue levels at the combined West Los Angeles location. Content storage revenues for fiscal 2011 were reduced by $1.0 million due to the settlement of a lawsuit, which reduction will be ongoing. As of June 30, 2010, we decided to close down our New York facility, which generated $1.1 million of revenue in the prior year period. These revenue shortfalls were offset by increased sales of $0.8 million at our Digital Film Labs operations. Although physical moves adversely affected revenues, we will continue to search for operating efficiencies to increase income. We are continuing to invest in high definition and digital capabilities where demand is expected to grow.

 

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, 2011, total costs of services were 69% of sales compared to 72% in the prior year. Our combined West Los Angeles cost of services was reduced by $2.3 million due to lower sales. Additional cost reductions of $1.8 million were realized in the current year with the closure of our New York facility in June 2010. Other costs remained consistent with the prior year period due to the fixed nature of our service infrastructure. In the foreseeable future, the cost of tape stock used in our operations may continue to be higher than prior year levels due to the March 2011 Japan earthquake. The resulting damage to our tape suppliers’ production facilities has caused a disruption in the supply of some tape types. We cannot predict how long the interruption will continue, or the impact on pricing or customer ordering patterns resulting from the disaster.

 

Gross Profit. In the twelve months ended June 30, 2011, gross margin was 31% of sales, compared to 28% 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. We expect gross margins to fluctuate in the future as the sales mix changes.

 

Selling, General and Administrative Expense. SG&A expense was $13.2 million (38% of sales) in the twelve months ended June 30, 2011 as compared to $16.0 million (40% of sales) in the same period last year. SG&A personnel costs decreased $1.3 million in the current period when compared to last year’s period.

 

Research and Development Expense. During the fiscal 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 up to 10,000 DVDs for rent or sale via a software-controlled automated inventory management (AIM) system contained in 1,200 to 1,600 square feet of retail space for each store. As of June 30, 2011, three Movie>Q stores were completed. Expenses associated with R&D activities were $1,115,000 and $352,000 for the years ended June 30 2010 and 2011, respectively.

 

Impairment of Long Lived Assets. During the fiscal year ended June 30, 2011, the Movie>Q R&D proof of concept was completed. With the selection of the AIM system as the operative DVD distribution method, we determined that certain kiosk assets were impaired for accounting purposes, resulting in an impairment charge of $684,000.

 

Operating (Loss). Operating losses were $3.4 million in the fiscal 2011 period compared to $6.6 million in the fiscal 2010 period.

 

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Interest Expense. Net interest expense was $0.8 million in the 2011 period, and $0.9 million in the 2010 period.

 

Other Income. Other income represents principally sublease income of $0.3 million, a one-time $1.0 million claim settlement, and a gain on sale of fixed assets of $0.2 million, offset by the change in fair value of $0.2 million relating to the put option agreement.

 

Net Loss. Net loss was $2.8 million in the fiscal 2011 period, compared to a net loss of $7.0 million in the 2010 period.

 

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.

 

In January 2011, the Company entered into a credit agreement which provides $1 million of credit based on 85% of acceptable accounts receivable, as defined. The loan and security agreement provides for interest at prime rate plus 2% with an interest floor of 5.25%. In addition, the Company paid a monthly “maintenance” fee of 0.6% of the outstanding daily loan balance (an equivalent annual fee of 7.2%), and an annual commitment fee of 1% of the amount of the credit facility. Amounts outstanding under the agreement are secured by all of the Company’s assets other than real estate and are payable on demand. In March 2011, the credit limit was increased to $3 million based on 80% of acceptable accounts receivable, as defined. In November 2011, the credit limit was reduced to 80% of acceptable accounts receivable less $300,000, the interest rate was reduced to prime plus 0.5% (currently 3.75%) with an interest floor of 3.75%, and the monthly maintenance fee was reduced to 0.4% (an equivalent annual fee of 4.8%). As of June 30, 2012, the Company owed $0.0 million under the credit agreement.

 

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% (6.4% as of the purchase date). The mortgage debt is secured by the land and building.

 

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.

 

In August 2012, the Company entered into new revolving credit and equipment financing agreements as follows:

 

Revolving Credit Facility. The revolving credit facility provides $5 million of credit based on 80% of eligible accounts receivable, as defined. The agreement provides for interest at (i) Libor plus 2.75% (2.99% as of June 30, 2012) or (ii) the bank’s alternative base rate plus 1.75% (5.0% as of June 30, 2012), plus 0.25% per annum assessed on the unused portion of the credit commitment. The maturity date is August 15, 2014 and is renewable for an additional year on each anniversary date upon mutual agreement of the parties.

 

Equipment Financing Facility. The equipment financing facility provides up to $1.25 million of financing for the cost of new and already-owned or leased equipment. The agreement provides for interest at the bank’s cost of funds plus 3% (6.25% as of June 30, 2012). The maturity date for each “schedule” of equipment is up to four years from the borrowing date. Amounts may be borrowed under the facility until August 14, 2013.

 

General Terms. All amounts due under the revolving credit and equipment financing facilities are secured by all personal property of the Company. While amounts are outstanding under the credit arrangements, the Company will be subject to financial covenants.

 

All obligations to the bank are cross collateralized and there are cross-default provisions among the bank and all other Company debt obligations. The agreements contain certain other terms and conditions common with such arrangements.

 

Amounts Borrowed. As of August 15, 2012, the Company had no outstanding borrowings under the revolving credit facility and equipment financing facilities. The Crestmark line of credit (no amounts outstanding at June 30, 2012) was terminated.

 

In connection with the termination of the Crestmark agreement, the Company paid a $30,000 break-up fee, which will be reflected in other income/expense in the quarter ended September 30, 2012.

 

17
 

  

The Company paid interest of $0.1 million during fiscal 2012 to Crestmark. On a pro forma basis, such interest would have been approximately $44,000 had the new revolving loan agreements been in effect throughout fiscal 2012.

 

The Company is also exploring the possibility of refinancing its two mortgages at today’s lower interest rates.

 

In November 2010, the Company converted approximately $1 million of accounts payable into a note secured by a lien of all the Company’s assets, which security interest was subordinated to that of the $3 million credit agreement and other term and mortgage debt. The note was due in 48 monthly installments of $20,000 plus interest at 3% per annum and could be prepaid at any time. The total amount due under the note was subject to a 12.5% or 6% discount if totally paid within 12 months or 18 months, respectively. In April 2011, the Company received $1 million in settlement of a claim, and prepaid $333,000 of the above $1 million note. The remaining amount due under the note was paid in October, 2011, at a 12.5% discount.

 

Monthly and annual principal and interest payments due under the term debt and mortgages are approximately $264,000 and $3.1 million, respectively, assuming no change in interest rates.

 

The following table summarizes the June 30, 2012 amounts outstanding under our line of credit, note payable, and term (including capital lease obligations) and mortgage loans:

 

Line of credit  $- 
Current portion of notes payable,
capital leases and mortgages
   172,000 
Long-term portion of notes payable,
capital leases and mortgages
   9,236,000 
Total  $9,408,000 

 

The Company’s cash balance increased from $355,000 on July 1, 2011 to $1,219,000 on June 30, 2012, due to the following:

   

Balance July 1, 2011  $355,000 
Decrease in accounts receivable   431,000 
Increase in accrued expenses   309,000 
Cash provided by other operating activities   3,672,000 
Capital expenditures for property and equipment   (3,271,000)
Decrease in notes payable   (840,000)
Line of credit repayment   (1,173,000)
Changes in other assets and liabilities (A)   1,736,000 
Balance June 30, 2012  $1,219,000 

 

(A) Includes changes in liabilities related to deferred lease incentive. 

 

Cash generated by operating activities is directly dependent upon sales levels and gross margins achieved. We generally receive payments from customers in 60-120 days after services are performed. The larger payroll and facilities components of our cost structure must be paid currently. Payment terms of other liabilities vary by vendor and type. 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 2012 and 2011, 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 decreased from approximately 69 days to 64 days within the last 12 months. We do not expect days sales outstanding to materially fluctuate in the future.

 

As of June 30, 2012, 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.

 

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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 housed at another Company facility. Our Eden FX facility was moved to our West Los Angeles location in September 2010.

 

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, which are currently being evaluated, will cost about $1.0-$1.5 million depending on the expected use of the space. One alternative will be to move our entire West Los Angeles operation to Vine by the May 2014 expiration of the West Los Angles lease if we decide not to exercise our option to extend the lease.

 

In June 2011, the Company entered into a lease amendment with respect to the Company’s Media Center facility. The amendment provides that the landlord would reimburse the Company for up to $2 million of improvements to be made to the premises. The amendment also provides that the Company’s monthly rent cost would increase approximately $14,000 on July 1, 2011, and an additional $13,000 to approximately $27,000 on April 1, 2012.

 

The Company incurred $2.1 million of costs for the Media Center construction, of which $2.0 million was reimbursed by the landlord. The Company completed the project and vacated one of its Burbank facilities on the February 28, 2012 expiration of the related lease and move to the Media Center space. Total annual savings beginning in April 2012 are expected to be approximately $1.2 million.

 

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, 2012 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  $9,313,000   $77,000   $190,000   $218,000   $8,828,000 

Long-Term Debt Interest Obligations (1)

   8,017,000    661,000    1,233,000    1,197,000    4,926,000 
Capital Lease Obligations   95,000    95,000    -    -    - 
Capital Lease Interest Obligations   2,000    2,000    -    -    - 
Operating Lease Obligations   16,572,000    1,943,000    3,724,000    3,839,000    7,066,000 
Line of Credit Obligations   -    -    -    -    - 
Total  $33,999,000   $2,778,000   $5,147,000   $5,254,000   $20,820,000 

 

  

(1)Interest on variable rate debt has been computed using the rate on the latest balance sheet date.

  

As described elsewhere 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 initially issued stock (valued at $500,000) and cash for assets and intellectual property, and spent $3.7 million in Fiscal 2010 and $1.0 million in Fiscal 2011 to test the concept. The plan was to open five test stores, three of which were completed at a cost of approximately $200,000 per store for the physical build-out and inventory. The remaining two of the leased facilities remain unimproved. We finalized the proof-of-concept in March 2011. In fiscal 2012, the quarterly negative cash flow (defined as earnings before interest, taxes, depreciation and amortization) for each of the three stores has averaged $15,000 on revenues of $46,000, including rent for the two vacant locations. We estimate that cash flow break even can be achieved on revenues of $60,000 per quarter per store, which level may be lower if administrative costs were spread over a larger number of stores. We are currently planning to test a 4,000-unit store configuration in the two empty stores at an estimated total cost of $75,000, scheduled for completion by October 2012. Further expansion of Movie>Q will depend on the performance of the additional stores and the availability of additional funding.

 

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During the past year, the Company had generated sufficient cash flow 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, and a $1 million settlement of a claim in April 2011. 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 line of credit and term loans. In the current economic climate, additional financing may not be 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. 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.

 

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Valuation of long-lived and intangible assets. Long-lived assets, consisting primarily of property, plant and equipment comprise a significant portion of the Company’s total assets. Long-lived 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 statement of operations, together with an equal reduction of the related asset. Net long-lived assets amounted to approximately $17.5 million as of June 30, 2012.

 

During the fiscal year ended June 30, 2011, the Company determined that certain unutilized assets related to our Movie>Q business segment were impaired, resulting in a write-off. We concluded that there were no other triggering events under ASC 360-10-35 and, accordingly, further impairment testing was not performed as of that date.

 

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, 2012, 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 deferred tax assets are fully reserved at June 30, 2012.

 

RECENT ACCOUNTING PRONOUNCEMENTS

  

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 July 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which became effective for the reporting period beginning July 1, 2011. Other than requiring additional disclosures, adoption of this new guidance does not have a material impact on our financial statements.

 

21
 

  

In May 2011, the FASB issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between U.S. GAAP and International Financial Reporting Standards. This guidance includes amendments that clarify the application of existing fair value measurement requirements, in addition to other amendments that change principles or requirements for measuring fair value and for disclosing information about fair value measurements. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In June 2011, the FASB issued new accounting guidance related to the presentation of comprehensive income that eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The adoption of this guidance will not impact the Company’s financial position, results of operations or cash flows and will only impact the presentation of other comprehensive income in the financial statements.

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market Risk. The Company had borrowings of $9.4 million on June 30, 2012 under line of credit, note payable and mortgage agreements. The line of credit and one mortgage loan were subject to variable interest rates. The weighted average interest rate paid during fiscal 2012 was 7.3%. For variable rate debt outstanding at June 30, 2012, a .25% increase in interest rates will increase annual interest expense by approximately $3,000. Amounts outstanding or that may become outstanding under the revolving credit facility provide for interest at the banks’ prime rate plus 5.3% (8.55% as of June 30, 2012). The Company’s market risk exposure with respect to financial instruments is to changes in the prime rate.

 

22
 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

  Page
   
Report of Independent Registered Public Accounting Firm 24
   
Financial Statements:  
   
Consolidated Balance Sheets –  
June 30, 2011 and 2012 25
   
Consolidated Statements of Operations –  
Fiscal years ended June 30, 2010, 2011 and 2012 26
   
Consolidated Statements of Invested and Shareholders’ Equity –  
Fiscal years ended June 30, 2010, 2011 and 2012 27
   
Consolidated Statements of Cash Flows –  
Fiscal years ended June 30, 2010, 2011 and 2012 28
   
Notes to Consolidated Financial Statements 29
   
Financial Statement Schedule:  
   
Schedule II – Valuation and Qualifying Accounts 46

 

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.

 

23
 

 

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 and subsidiaries (collectively the “Company”) as of June 30, 2011 and 2012, 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, 2012. Our audits also included the financial statement schedule of the Company 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. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 the Company as of June 30, 2011 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2012 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, presents fairly in all material respects the information set forth therein.

 

SingerLewak LLP

 

Los Angeles, California

September 12, 2012

 

24
 

   

Point.360

Consolidated Balance Sheets

(in thousands)

 

   June 30, 
Assets  2011   2012 
Current assets:          
Cash and cash equivalents  $355   $1,219 
Accounts receivable, net of allowances for doubtful accounts of  $351 and $330, respectively   6,347    5,916 
Inventories, net   517    272 
Prepaid expenses and other current assets   216    274 
Prepaid income taxes   68    70 
Total current assets   7,503    7,751 
           
Property and equipment, net   17,153    17,475 
Other assets, net   739    745 
Total assets  $25,395   $25,971 
           
Liabilities and Shareholders’ Equity          
Current liabilities:          
Current portion of notes payable  $1,473   $77 
Current portion of capital lease obligations   236    95 
Accounts payable   1,274    1,276 
Accrued wages and benefits   1,058    1,367 
Other accrued expenses   399    279 
Current portion of deferred gain on sale of real estate   178    178 
Current portion of deferred lease incentive   0    209 
Other current liabilities   0    9 
           
Total current liabilities   4,618    3,490 
           
Notes payable, less current portion   9,541    9,236 
Capital lease obligations, less current portion   170    0 
Deferred gain on sale of real estate, less current portion   1,554    1,382 
Deferred lease incentive, less current portion   0    1,618 
Other long term liabilities   23    14 
           
Total long-term liabilities   11,288    12,250 
           
Total liabilities   15,906    15,740 
           
Commitments and contingencies (Notes 6 and 8)   0    0 
           
Shareholders’ equity:          
Preferred stock – no par value; 5,000,000 shares authorized; none outstanding   0    0 
Common stock – no par value; 50,000,000 shares authorized; 10,513,166 shares issued and outstanding on June 30, 2011 and 2012   21,695    21,695 
Additional paid-in capital   10,125    10,419 
Accumulated deficit   (22,331)   (21,883)
Total shareholders’ equity   9,489    10,231 
           
Total liabilities and shareholders’ equity  $25,395   $25,971 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Point.360

Consolidated Statements of Operations

(in thousands, except per share amounts)

 

   Year Ended
June 30,
 
   2010   2011   2012 
Revenues  $39,735   $35,222   $34,960 
Cost of services sold   (28,461)   (24,343)   (22,064)
                
Gross profit   11,274    10,879    12,896 
                
Selling, general and administrative expense   (15,981)   (13,197)   (12,074)
Research and development expense   (1,115)   (352)   0 
Impairment charges   0    (684)   0 
Restructuring costs   (745)   0    0 
                
Operating loss   (6,567)   (3,354)   822 
                
Interest expense   (937)   (857)   (834)
Interest income   10    53    20 
Other income   537    1,347    440 
                
Income (loss) before income taxes   (6,957)   (2,811)   448 
                
Provision for income taxes   0    0    0 
                
Net income (loss)  $(6,957)  $(2,811)  $448 
                
Basic and diluted income (loss) per share  $(0.67)  $(0.26)  $0.04 
                
Weighted average number of shares   10,405    10,647    10,513 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

26
 

  

Point.360

Consolidated Statements of Invested and Shareholders’ Equity

(in thousands)

 

   Common Stock             
   Shares   Dollars   Paid-in Capital   Accumulated Deficit   Shareholders’ Equity 
Balance on June 30, 2009   10,149   $21,025   $9,547   $(12,563)  $18,009 
Acquisition of assets   342    500    0    0    500 
Share issuance   10    0    0    0    0 
Exercise of stock options   12    17    0    0    17 
Share based compensation expense             261         261 
Net loss   0    0    0    (6,957)   (6,957)
Balance on June 30, 2010   10,513   $21,542   $9,808   $(19,520)  $11,830 
Share issuance   250    315    0    0    315 
Share repurchase   (250)   (162)   0    0    (162)
Share based compensation expense   0    0    317    0    317 
Net loss   0    0    0    (2,811)   (2,811)
Balance on June 30, 2011   10,513   $21,695   $10,125   $(22,331)  $9,489 
Share based compensation expense             294         294 
Net income   0    0    0    448    448 
Balance on June 30, 2012   10,513   $21,695   $10,419   $(21,883)  $10,231 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

27
 

  

Point.360

Consolidated Statements of Cash Flows

(in thousands)

 

    Year Ended
June 30,
 
    2010     2011     2012  
                   
Cash flows from operating activities:                        
Net income (loss)   $ (6,957 )   $ (2,811 )   $ 448  
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                        
Gain on sale of fixed assets     (234 )     (181 )     11  
Impairment of long lived assets     0       684       0  
Depreciation and amortization     3,598       3,578       2,938  
Amortization of deferred gain on sale of real estate     (178 )     (178 )     (178 )
Amortization of deferred lease credit     0       0          
Provision for (recovery of) doubtful accounts     (144 )     (42 )     (21 )
Stock compensation expense     261       317       294  
Amortization of non-compete agreement                     4  
Changes in operating assets and liabilities (net of acquisitions):                        
Decrease in accounts receivable     911       1,276       452  
(Increase) decrease in inventories     (147 )     31       244  
(Increase) decrease in prepaid expenses and other current assets     87       222       (57 )
(Increase) decrease in prepaid income taxes     312       1,497       (2 )
(Increase) in other assets     (14 )     (132 )     (10 )
Increase in deferred lease incentive     0       0       1,827  
(Decrease) increase in accounts payable     1,120       (1,553 )     1  
Increase (decrease) in accrued wages and benefits     (6 )     (2,276 )     309  
Increase (decrease) in other accrued expenses and other long term liabilities     1,080       23       (113 )
Net cash and cash equivalents provided by (used in) operating activities     (311 )     455       6,147  
                         
Cash flows from investing activities:                        
Capital expenditures     (2,189 )     (1,258 )     (3,271 )
Proceeds from sale of equipment or real estate     234       181       0  
Investments in acquisitions     (650 )     0       0  
Net cash and cash equivalents used in investing activities     (2,605 )     (1,077 )     (3,271 )
                         
Cash flows from financing activities:                        
Issuance of common stock     0       153       0  
Exercise of stock options     17       0       0  
(Repayment of) proceeds from notes payable     (1,930 )     592       (1,701 )
(Repayment of) capital lease obligations     (157 )     (17 )     (311 )
Net cash provided by (used in) financing activities     (2,070 )     728       (2,012 )
Net increase (decrease) in cash and cash equivalents     (4,986 )     106       864  
Cash and cash equivalents at beginning of year     5,235       249       355  
Cash and cash equivalents at end of year   $ 249     $ 355     $ 1,219  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Point.360

Notes to Consolidated Financial Statements

 

1.THE COMPANY

 

The Company provides high definition and standard definition digital mastering, data conversion, video and film asset management and sophisticated computer graphics services to owners, producers and distributors of entertainment and advertising content. The Company provides the services necessary to edit, master, reformat, convert, archive and ultimately distribute its clients’ film and video content, including television programming feature films and movie trailers. The Company’s interconnected facilities provide service coverage to all major U.S. media centers. 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.

 

The Company operates in two business segments from four 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 or related material 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, 2012, 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 can offer up to 10,000 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).

 

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.

 

The accompanying Consolidated Financial Statements include the accounts and transactions of the Company, and those of the Company’s subsidiaries. The 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.

 

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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 when purchased.

 

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 services already completed on each specific element.

 

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. 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.

 

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.

 

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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, 2012, 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 deferred tax assets are fully reserved at June 30, 2012.

 

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.

 

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 69%, 75% and 65% of accounts receivable at June 30, 2010, 2011 and 2012 respectively. Twentieth Century Fox (and affiliates) accounted for 23%, 34% and 28% of accounts receivable as of June 30, 2010, 2011, and 2012, respectively. Deluxe Media accounted for 35%, 9%, and 0% of accounts receivable as of June 30, 2010, 2011, and 2012, respectively. Disney accounted for 11% and 30% of accounts receivable as of June 30, 2011 and 2012, 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 58%, 63% and 67% of net sales for the years ended June 30, 2010, 2011 and 2012, respectively. Twentieth Century Fox (and affiliates) accounted for 23%, 27% and 25% of sales in the years ended June 30, 2010, 2011 and 2012, respectively. Sales to Deluxe Media were 14% of sales in the year ended June 30, 2010 and 13% of sales in the year ended June 30, 2011, while sales to Disney were 13% and 27% of sales in the years ended June 30, 2011 and 2012, 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. The rental library for the Movie>Q stores consists of DVD’s and games available for rental by customers. Because of the relatively short useful lives of these products, we view these assets to be current assets. We utilize the accelerated method of amortization because it approximates the demand for the product. A nominal residual value is established. Movie>Q amortization expense totaled $51,000, $228,000 and $125,000 for the years ended June 30, 2010, 2011 and 2012, respectively.

 

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.

 

Operating Leases

 

Operating leases are accounted for in accordance with FASB Accounting Standard Codification Topic 840, “Accounting for Leases.” Rent expense under operating leases is recognized on a straight-line basis over the lease term. The difference between the rent expense and the rent payment is recorded as an increase or decrease in deferred rent liability. The Company accounts for tenant allowances in lease agreements as a deferred rent credit. The deferred credit is then amortized on a straight-line basis over the lease term as a reduction of rent expense. For operating leases that include rent free periods or escalation clauses over the term of the lease, the Company recognizes rent expense on a straight-line basis and the difference between expense and amounts paid is recorded as deferred rent in current and long-term liabilities.

 

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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.

  

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, 2011 and June 30, 2012, 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.

 

Impairment of long lived assets

 

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 statement of operations, together with an equal reduction of the related asset. Net long-lived assets amounted to approximately $17.5 million as of June 30, 2012.

 

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As of June 30, 2012, we compared the book value of our buildings and equipment to appraisals performed in conjunction with a new financing arrangement (see Note 15) which indicated no impairment. We then considered operating cash flows for the three years then ended together with a forecast for the fiscal year ended June 30, 2013. As indicated in the Consolidated Statement of Cash Flows, the Company reported the following “Net cash and cash equivalents provided by (used in) operating activities” for the last three fiscal years:

 

Year ended June 30, 2010  $(311,000)
Year ended June 30, 2011   455,000 
Year ended June 30, 2012   6,147,000 

 

In addition to the above, while not a GAAP measurement, Point.360 generated $2.6 million and $4.5 million of earnings before interest, taxes, depreciation and amortization and other non-cash charges (bad debt expense, stock based compensation and impairment charges) (“EBITDAN”) for the fiscal years ended June 30, 2011 and 2012, respectively. We also considered the Company’s closing stock price which ranged from $1.80 to $.47 per share over the two fiscal years ended June 30, 2012 ($0.60 as of June 30, 2012). While the stock price could be an indicator of impairment, we believe that it is not an appropriate measurement of value for Point.360 since market fluctuations (both increases and decreases) are often short term in nature, and the stock is thinly traded, can fluctuate widely on very low volume, and there is no significant institutional ownership. We believe the appraisals and cash flow are the more relevant indicators.

 

We have also considered the evolution of our past production work from physical to file-based formats. This trend is expected to continue, and we have taken and will continue to take, steps to consolidate facilities and realign capabilities which have enhanced operating cash flow. While this evolution will create uncertainties which may result in a material future impairment, we do not believe such impairment exists, and that further impairment testing is not required, as of June 30, 2012.

 

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 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.

 

In fiscal 2010, the Company acquired assets and technology from Kiosk Concepts, LLC and DVDs on the Run, Inc. for use in developing the Movie>Q proof of concept. The assets included (i) vending machine type kiosks and related machinery, and (ii) an automated DVD management system. The Movie>Q R&D project evaluated the capabilities and potential economics of both models. In 2010, the Company opened three Movie>Q stores incorporating the automated inventory management (AIM) system while further investigating potential uses of the kiosk assets. On March 31, 2011, the Company determined that the AIM system would be used exclusively for Movie>Q, and that the kiosk assets of the Movie>Q business segment were impaired for accounting purposes.

 

For purposes of impairment testing under ASC 360, we considered potential cash flows from the kiosk assets. Since the decision was made to use the AIM system, and because the kiosk assets were easily separable from both the AIM assets and the chosen Movie>Q business model, separate kiosk cash flow evaluation was deemed appropriate. The kiosks are specialty retail machines that could conceivably be employed by the Company or another entity to compete with the Redbox-type business, but the kiosks were significantly larger than the Redbox version, required software development to become functional, and would require potentially large expenditures to ship them to a buyer. Because of these factors and our inability to attract a buyer, we deemed the potential cash flow from the kiosks to be negligible to zero, and that the salvage value is zero.

 

Due to the specialized nature of the assets, management’s decision not to use the kiosk assets in Movie>Q, no perceived alternative use for the assets, and no indicated market value for the assets, management determined that the kiosk assets were fully impaired and recorded an impairment loss of $684,000 in the year ended June 30, 2011.

 

Pro Forma Earnings (Loss) Per Share

 

The Company has historically followed Accounting Standards Codification No. 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.

 

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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,
 
   2010   2011   2012 
Weighted average number of common shares outstanding used in computation of basic EPS   10,405    10,647    10,513 
Dilutive number of outstanding stock options   0    0    10 
Weighted average number of common and potential common shares outstanding used in computation of Diluted EPS    10,405    10,647    10,523 
Number of dilutive options excluded in the computation of diluted EPS due to net loss   97    2    0 

 

 

The weighted average number of common shares outstanding was the same amount for both basic and diluted income or loss per share in the 2010 and 2011 periods presented. The effect of potentially dilutive securities for the 2010 and 2011 periods was excluded from the computation of diluted earnings per share because the Company reported a net loss, and the effect of inclusion would be anti-dilutive (i.e., including such securities would result in a lower loss per share). Potentially dilutive securities in all periods consist of stock options for which the exercise price is less than the Company’s stock price. The number of anti-dilutive shares were 639,475, 0 and 0 as of June 30, 2010, 2011 and 2012, respectively.

Supplemental Cash Flow Information

 

Selected cash payments and non-cash activities were as follows (in thousands):

 

   Year Ended
June 30,
 
   2010   2011   2012 
Cash payments for income taxes (net of refunds)  $(312)  $(1,497)  $2 
Cash payments for interest  $816   $824   $783 
Fixed assets purchased for stock  $500   $0   $0 

 

Recent Accounting Pronouncements

 

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Testing Goodwill for Impairment” (ASU No. 2011-08), which is intended to simplify goodwill impairment testing. Entities will be allowed to perform a qualitative assessment on goodwill impairment to determine whether a quantitative assessment is necessary. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASC No. 2011-08 will not impact our financial position, results of operations, cash flows, or presentation thereof.

 

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” ("ASU No. 2011-04"), which amends ASC Topic 820, “Fair Value Measurement”. ASU No. 2011-04 does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP or International Financial Reporting Standards (“IFRSs”). ASU No. 2011-14 changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, ASU No. 2011-14 clarifies the FASB's intent about the application of existing fair value measurements. ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011, and is applied prospectively. We adopted this guidance at the beginning of our third quarter of fiscal year 2012. The adoption of ASU No. 2011-04 did not have a material impact on our financial position, results of operations or cash flows.

 

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 have the capacity of up to 10,000 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.

 

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The Company has spent $4.7 million as of June 30, 2012 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. The assets of DOR consisted of intellectual property (“IP”) related to mechanical receipt, storage and dispensing of DVDs. The software and mechanical designs formed 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 years ended June 30, 2010 and 2011, the Company incurred $1,115,000 and $352,000, respectively, 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. The Company incurred no research and development expense in fiscal year 2012.

 

4.PROPERTY AND EQUIPMENT

 

In March 2006, the Company entered into a sale and leaseback transaction with respect to its Media Center vaulting real estate. The real estate was sold for approximately $14.0 million resulting in a $1.3 million after tax gain. Additionally, Old Point.360 received $0.5 million from the purchaser for improvements. In accordance with the Accounting Standards Codification 840-40, 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. A $250,000 security deposit related to the lease has been recorded as a deposit in “other assets, net” in the Consolidated Balance Sheet as of June 30, 2011 and 2012.

 

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.

 

In June 2011, the Company entered into a lease amendment with respect to the Company’s Media Center facility. The amendment provides that the landlord would reimburse the Company up to $2 million for the leasehold improvements to be made by the Company to the premises. The leasehold improvements would be recorded as a fixed asset and amortized over the remaining term of the lease (until March 2021). Pursuant to the lease amendment, the Company’s monthly lease costs increased by approximately $14,000 on July 1, 2011, and by an additional $13,000 to approximately $27,000 on April 1, 2012. As of June 30, 2012, the Company had incurred $2.1 million of costs for construction, of which $2.0 million had been reimbursed by the landlord. A deferred lease incentive has been recorded for the total amount reimbursed by the landlord in accordance with ASC 840-20. The lease incentive is being amortized over the remaining lease term as an offset to rent.

 

The Company vacated one of its Burbank facilities on the February 28, 2012 expiration of the related lease and moved to the Media Center space, which will reduce monthly operating expenses by approximately $100,000. Total annual savings beginning in April 2012 are expected to be approximately $1.2 million.

 

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Property and equipment consist of the following:

 

    June 30,  
    2011     2012  
             
Land   $ 3,985,000     $ 3,985,000  
Buildings     9,254,000       9,268,000  
Machinery and equipment     36,891,000       37,503,000  
Leasehold improvements     6,843,000       9,052,000  
Computer equipment     7,459,000       7,752,000  
Equipment under capital lease     856,000       856,000  
Office equipment, CIP     602,000       605,000  
Less accumulated depreciation and amortization     (48,737,000 )     (51,546,000 )
Property and equipment, net   $ 17,153,000     $ 17,475,000  

 

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 $3,547,000, $3,357,000 and $2,938,000 for the years ended June 30, 2010, 2011 and 2012, respectively. Machinery and equipment includes leased property under capital leases with a cost of $819,000 (with a net book value of $223,000) and $856,000 (with a net book value of $215,000) as of June 30, 2011 and 2012, 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, $94,000, $81,000 and $81,000 in the years ended June 30, 2010, 2011 and 2012, respectively.

 

6.LONG TERM DEBT AND NOTES PAYABLE

 

In January 2011, the Company entered into a credit agreement which provides $1 million of credit based on 85% of acceptable accounts receivable, as defined. The loan and security agreement provided for interest at prime rate plus 2% with an interest floor of 5.25%. In addition, the Company paid a monthly “maintenance” fee of 0.6% of the outstanding daily loan balance (an equivalent annual fee of 7.2%), and an annual commitment fee of 1% of the amount of the credit facility. Amounts outstanding under the agreement are secured by all of the Company’s assets other than real estate and are payable on demand. In March 2011, the credit limit was increased to $3 million based on 80% of acceptable accounts receivable, as defined. In November 2011, the credit limit remained at $3 million, however the borrowing base was reduced to 80% of acceptable accounts receivable less $300,000, the interest rate was reduced to prime plus 0.5% (currently 3.75%) with an interest floor of 3.75%, and the monthly maintenance fee was reduced to 0.4% (an equivalent annual fee of 4.8%). As of June 30, 2012, the Company had no borrowings under the credit agreement.

 

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 which was 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.

 

In June 2009, the Company entered into a $3,562,500 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.

 

The Company entered into new credit agreements subsequent to June 30, 2012. Nee note 15.

 

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In November 2010, the Company converted approximately $1 million of accounts payable into a note secured by a lien of all the Company’s assets, which security interest was subordinated to that of the $3 million credit agreement and other term and mortgage debt. The note was due in 48 monthly installments of $20,000 plus interest at 3% per annum and could be prepaid at any time. The total amount due under the note was subject to a 12.5% or 6% discount if totally paid within 12 months or 18 months, respectively. In April 2011, the Company received $1 million in settlement of a claim, and prepaid $333,000 of the above $1 million note. The remaining amount due under the note was paid in October 2011, at a 12.5% discount.

 

Annual maturities for debt under term note and mortgage obligations as of June 30, 2012 are as follows:

 

2012  $172,000 
2013   91,000 
2014   99,000 
2015   105,000 
2016   113,000 
Thereafter   8,828,000 
   $9,408,000 

 

7.INCOME TAXES

 

The Company reviewed its ASC 740-10 tax documentation for the periods through June 30, 2012 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, 2012. Based on Company’s review of its tax positions as of June 30, 2011 and June 30, 2012, 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, 2012, the Company's net deferred tax assets were nil.  No tax benefit was recorded during the year ended June 30, 2012 because future realizability of such benefit was not considered to be more likely than not.  At June 30, 2011 and 2012, the Company had gross deferred tax assets of $9.1 million and $9.1 million, respectively, and corresponding valuation allowances of $9.1 million and $9.1 million, respectively.

 

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 examination was completed with no adjustments required.

 

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.

 

The Company was notified by the Franchise Tax Board in April 2011 of its intent to audit California tax returns for the fiscal years ended June 30, 2008 and 2009. The examination was completed with no adjustments required.

 

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.

 

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The Company’s provision for (benefit from) income taxes for the years ended June 30, 2010, 2011 and 2012 consists of the following (in thousands):

 

   Year Ended
June 30,
 
   2010   2011   2012 
Current tax (benefit) expense:               
Federal  $0   $0   $0 
State   0    0    0 
                
Total current   0    0    0 
                
Deferred  tax (benefit) expense:               
Federal   (2,119)   (1,155)   136 
State   (534)   (318)   (119)
Valuation allowance   2,653    1,473(17)     
Total deferred   0    0    0 
                
Total provision for (benefit from) for income taxes   $0   $0   $0 

 

The composition of the deferred tax assets (liabilities) at June 30, 2010, 2011 and 2012 are listed below:

 

   2010   2011   2012 
             
Accrued liabilities  $855,000   $189,000   $250,000 
Allowance for doubtful accounts   169,000    151,000    141,000 
Other   12,000    15,000    15,000 
Total current deferred tax assets   1,036,000    355,000    406,000 
                
Property and equipment   (92,000)   467,000    915,000 
Goodwill and other intangibles   2,466,000    1,828,000    1,268,000 
State net operating loss carry forward   3,860,000    6,108,000    6,115,000 
Other   349,000    334,000    370,000 
Valuation allowance   (7,619,000)   (9,092,000)   (9,074,000)
Total non-current deferred tax liabilities   (1,036,000)   (355,000)   (406,000)
                
Net deferred tax liability  $0   $0   $0 

 

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.

 

The provision for 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,
   2010  2011  2012
Federal tax computed at statutory rate  34%  34%  34%
State taxes, net of federal benefit and net operating loss limitation  6%  6%  6%
Permanent difference  (2%)  11%  (25%)
Excess tax benefit for goodwill  1%  2%  (11%)
Valuation allowance  (39%)  (51%)  (8%)
Other (meals and entertainment)  0%  (2%)  4%
          
Tax provision  0%  0%  0%

 

 

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8.COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company leases office and production facilities, vehicles and data processing equipment in California under various operating leases. Approximate minimum rental payments under these non-cancelable operating leases as of June 30, 2012 are as follows for the indicated fiscal years ended June 30:

 

2013  $1,943,000 
2014   1,846,000 
2015   1,878,000 
2016   1,915,000 
2017   1,924,000 
Thereafter   7,066,000 
Total minimum payments required  $16,572,000 

 

*Minimum payments have not been reduced by minimum sublease rentals for $2,875,000 due in the future under

noncancelable subleases.

 

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,
 
   2010   2011   2012 
Rent Expense:  $3,613,000   $2,514,000   $2,331,000 
Less: Sublease rentals   (350,000)   (299,000)   (299,000)
   $3,263,000   $2,215,000   $2,032,000 

 

As of June 30, 2012, the Company leased seven of its nine facilities under operating leases. The operating leases expire on dates ranging from 2013 to 2021. 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.

 

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, 2012, 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 alleged 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 claimed to have suffered damages in excess of $2 million and additional unquantified general and special damages. The lawsuit was settled in October 2010 for $120,000.

 

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 alleged 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 did 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.

 

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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. DGFC also received the right to sell the shares to the Company’s Chief Executive Officer for $500,000 on the six-month anniversary date of the agreement.

 

In connection with the settlement, the Company indemnified its Chief Executive Officer against possible losses should DGFC exercise its right to put the stock to the Chief Executive Officer, and there is a negative difference between the stated $500,000 value of the stock ($2.00 per share) and the market value on the date of the put. Alternatively, the Chief Executive Officer had the right to sell the 250,000 shares to the Company for $500,000. In April 2011, the Chief Executive Officer purchased from DGFC the put shares for $500,000, and the Company purchased from the Chief Executive Officer the 250,000 shares for $500,000 and immediately canceled the shares. In the fiscal year ended June 30, 2011, the put option expense was $152,000.

 

In November 2010, DGFC filed an ex parte application for enforcement of the settlement agreement and related stipulated injunction alleging that the Company violated the terms thereof and seeking an order enforcing the settlement agreement, an order to assess civil contempt charges and other remedies, and an order referring criminal allegations against the Company to the U.S. Attorney’s Office. In September 2011, the Court denied the ex parte application.

 

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.

 

In November 2010, the shareholders approved the 2010 Incentive Plan (the “2010 Plan”). The 2010 Plan provides for the award of options to purchase up to 4,000,000 shares of common stock, appreciation rights and restricted stock and performance awards.

 

Under the 2010 Plan, the stock option price per share for options granted is determined by the Board of Directors and is based on the market price of the Company’s common stock on the date of grant, and each option is exercisable within the period and in the increments as determined by the Board, except that no option can be exercised later than ten years from the grant date. The stock options generally vest in one to five years.

 

The Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. We also estimate the fair value of the award that is ultimately expected to vest to be recognized as expense over the requisite service periods in our Consolidated Statements of 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, 2012 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, 2010, 2011 and 2012 were $261,000, $317,000 and $294,000, respectively.

 

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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, 2010, 2011 and 2012, the Company granted awards of stock options as follows:

 

   2010   2011   2012 
Stock option awards   356,500    672,000    277,000 
Weighted average Exercise price  $1.29   $0.86   $0.96 

 

As of June 30, 2012, there were options outstanding to acquire 2,493,000 shares at an average exercise price of $1.32 per share. The estimated fair value of all awards granted during the years ended June 30, 2010, 2011 and 2012 were $210,000, $331,000 and $158,000, 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:

 

   2010  2011  2012
Risk-free interest rate  2.26%  1.87%  1.11%
Expected term (years)  5.0  5.0  5.0
Volatility  65%  64%  64%
Expected annual dividends  0  0  0

 

The following table summarizes the status of the 2007 and 2010 Plans as of June 30, 2012:

 

   2007 Plan   2010 Plan   Total 
Options originally available   2,000,000    4,000,000    6,000,000 
Stock options outstanding   1,953,625    539,500    2,493,125 
Options available for grant   34,375    3,460,500    3,494,875 

 

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Transactions involving stock options are summarized as follows:

 

    Number of Shares     Weighted Average Exercise Price     Weighted Average Grant Date Fair Value  
                   
Balance at June 30, 2009     1,322,025     $ 1.66     $ 0.75  
Granted     356,500     $ 1.29     $ 0.59  
Exercised     (12,000 )   $ 1.40     $ 0.85  
Cancelled     (35,450 )   $ 1.66     $ 0.76  
                         
Balance at June 30, 2010     1,631,075     $ 1.58     $ 0.71  
Granted     672,000     $ 0.86     $ 0.49  
Exercised     0     $ 0     $ 0  
Cancelled     (69,600 )   $ 1.60     $ 0.74  
                         
Balance at June 30, 2011     2,233,475     $ 1.36     $ 0.65  
Granted     277,000     $ 0.96     $ 0.57  
Exercised     0     $ 0     $ 0  
Cancelled     (17,350 )   $ 1.51     $ 0.70  
                         
Balance at June 30, 2012     2,493,125     $ 1.32     $ 0.64  

 

As of June 30, 2012, the total compensation costs related to non-vested awards yet to be expensed was approximately $0.4 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, 2010, 2011 and 2012 were as follows:

 

   Number of Shares   Weighted Average Exercise Price   Weighted Average Remaining Contractual Life (Years)   Intrinsic Value 
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 
                     
As of June 30, 2011                      
Employees – Outstanding   2,028,475   $1.35    2.98   $0 
Employees – Expected to Vest   825,628   $1.35    2.98   $0 
Employees – Exercisable   834,800   $1.66    1.73   $0 
                     
Non-Employees-Outstanding   205,000   $1.49    2.59   $0 
Non-Employees-Vested   165,000   $1.46    2.59   $0 
Non-Employees-Exercisable   165,000   $1.46    2.59   $0 
                     
As of June 30, 2012                    
Employees – Outstanding   2,258,125   $1.32    2.28   $0 
Employees – Expected to Vest   833,518   $1.32    2.28   $0 
Employees – Exercisable   1,331,994   $1.54    1.34   $0 
                     
Non-Employees – Outstanding   235,000   $1.30    1.95   $0 
Non-Employees – Vested   223,750   $1.44    1.88   $0 
Non-Employees – Exercisable   223,750   $1.44    1.88   $0 

 

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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, 2012, 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, 2012 is as follows (shares in thousands):

 

Options Outstanding  Options Exercisable 
Options Exercise Price Range   Number of Shares  Weighted Average Remaining Contractual Life  Weighted Average Exercise Price   Number of Shares  Weighted Average Exercise Price 
$1.79   938  0.6 Years  $1.79   938  $1.79 
$1.37   30  1.4 Years  $1.37   30  $1.37 
$1.29   304  2.6 Years  $1.29   152  $1.29 
$1.27   15  3.2 Years  $1.27   4  $1.27 
$1.20   249  1.6 Years  $1.20   187  $1.20 
$1.15   30  3.4 Years  $1.15   30  $1.15 
$1.07   30  4.4 Years  $1.07   30  $1.07 
$1.05   30  2.4 Years  $1.05   30  $1.05 
$0.95   247  4.7 Years  $0.95   0  $0.95 
$0.86   545  3.6 Years  $0.86   136  $0.86 
$0.75   75  3.9 Years  $0.75   19  $0.75 

 

In addition, the Company issued 10,000 shares of restricted stock from the 2007 Plan during fiscal year ended June 30, 2010 with a weighted average fair value of $0.58 per share.

 

We use 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.

 

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, 2012.

 

11.RESTRUCTURING CHARGES

 

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 were completed in fiscal 2011.

 

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12.STOCK REPURCHASE PLAN

 

In February 2008, the Company’s 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, 2011 and 2012, the Company did not purchase shares.

 

13. SEGMENT INFORMATION

 

In its operation of the business, management reviews certain financial information, including segmented internal profit and loss statements prepared on a basis consistent with U.S. generally accepted accounting principles. Our two segments are Point.360 and Movie>Q. The two segments discussed in this analysis are presented in the way we internally managed and monitored performance for 2010, 2011 and 2012. Allocations for internal resources were made for the three fiscal years ended June 30, 2012. The Movie>Q segment tracks certain assets separately, and all others are recorded in the Point.360 segment for internal reporting presentations. Cash was not segregated between the two segments but retained in the Point.360 segment.

 

The types of services provided by each segment are summarized below:

 

Point.360 – The Point.360 segment 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. Point.360 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 segment’s interconnected facilities provide service coverage to all major U.S. media centers. Clients include major motion picture studios and independent producers.

 

Movie>Q – The Movie>Q segment rents and sells DVDs and video games directly to consumers though its retail stores. 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 can offer up to 10,000 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.

 

Segment revenues, operating loss and total assets were as follows (in thousands):

 

Revenue   Year
Ended
June 30,
 
    2010     2011     2012  
Point.360   $ 39,668     $ 34,667     $ 34,408  
Movie>Q     67       555       552  
Consolidated revenue   $ 39,735     $ 35,222     $ 34,960  

 

Operating income (loss)(1)   Year
Ended
June 30,
 
    2010     2011     2012  
Point.360   $ (5,289 )   $ (1,503 )   $ 1,574  
Movie>Q     (1,278 )     (1,851 )     (752 )
Operating income (loss)   $ (6,567 )   $ (3,354 )   $ 822  

 

Total Assets   Year
Ended
June 30,
 
    2010     2011     2012  
Point.360   $ 28,413     $ 23,608     $ 24,536  
Movie>Q     2,731       1,787       1,435  
Consolidated assets   $ 31,144     $ 25,395     $ 25,971  

 

(1) Includes R&D expenses related to the Movie>Q project

 

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14.SETTLEMENT

 

In March 2011, the Company and HCVT, the Company’s tax advisors, entered into a Release and Settlement Agreement, pursuant to which the Company received $1 million for the Company’s complete release of any claim against HCVT concerning HCVT’s representation relating to a litigation matter. The settlement amount is included in Other Income in the Consolidated Statements of Operations for the year ended, June 30, 2011.

 

15.SUBSEQUENT EVENT

 

In August 2012, the Company entered into revolving credit and equipment financing agreements with Bank of the West (“BW”) as follows:

 

Revolving Credit Facility. The revolving credit facility provides up to $5 million of credit based on 80% of eligible accounts receivable, as defined. The agreement provides for interest at (i) Libor plus 2.75% (2.99% as of June 30, 2012) or (ii) BW’s alternative base rate plus 1.75% (5.0% as of June 30, 2012), plus 0.25% per annum assessed on the unused portion of the credit commitment. The maturity date is August 15, 2014 and is renewable for an additional year on each anniversary date upon mutual agreement of the parties.

 

Equipment Financing Facility. The equipment financing facility provides up to $1.25 million of financing for the cost of new and already-owned or leased equipment. The agreement provides for interest at BW’s cost of funds plus 3% (6.25% as of June 30, 2012). The maturity date for each “schedule” of equipment is up to four years from the borrowing date. Amounts may be borrowed under the facility until August 14, 2013.

 

General Terms. All amounts due under the revolving credit and equipment financing facilities are secured by all personal property of the Company. While amounts are outstanding under the credit arrangements, the Company will be subject to financial covenants as follows:

 

1.Minimum tangible net worth (TNW) of $8.5 million (the Company’s actual TNW was $10.2 million as of June 30, 2012).

 

2.Minimum quarterly EBITDA (as defined) of $750,000, provided that EBITDA may be $500,000 in any one quarter within four consecutive quarters (the Company’s EBITDA was $1.5 million in the quarter ended June 30, 2012).

 

3.Minimum quarterly fixed charge ratio (as defined) of 1.25 (the Company’s fixed charge ratio was 3.59 for the quarter ended June 30, 2012).

 

All obligations to BW are cross collateralized and there are cross-default provisions among BW and all other Company debt obligations. The agreements contain certain other terms and conditions common with such arrangements.

 

Amounts Borrowed. As of August 15, 2012, the Company had no outstanding borrowings under the revolving credit facility and equipment financing facilities. The Crestmark line of credit ($0.0 million outstanding at June 30, 2012) was terminated.

 

In connection with the termination of the Crestmark agreement, the Company paid a $30,000 break-up fee, which will be reflected in other income/expense in the quarter ended September 30, 2012.

 

The Company paid interest of $0.1 million during fiscal 2012 to Crestmark. On a pro forma basis, such interest would have been approximately $44,000 had the BW revolving credit agreement been in effect throughout fiscal 2012.

 

45
 

  

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, 2010   $ 537,000     $ 41,000     $ 0     $ (185,000 )   $ 393,000  
Year ended June 30, 2011   $ 393,000     $ 36,000     $ 0     $ (78,000 )   $ 351,000  
Year ended June 30, 2012   $ 351,000     $ 35,000     $ 0     $ (56,000 )   $ 330,000  

 

46
 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

ITEM 9A. 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, 2012.

 

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, 2012, 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, 2012, 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.

 

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 year ended June 30, 2012 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

 

Not applicable.

 

47
 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

On July 3, 2003 and May 30, 2007, 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

2701 Media Center Drive

Los Angeles, CA 90065

 

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, 2012.

 

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, 2012.

 

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, 2012.

 

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, 2012.

 

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, 2012.

 

48
 

  

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, 2011 and June 30, 2012

Consolidated Statements of Operations – Fiscal Years Ended December June 30, 2010, 2011 and 2012

Consolidated Statements of Invested and Shareholders’ Equity –Fiscal Years Ended June 30, 2010, 2011 and 2012

Consolidated Statements of Cash Flows –Fiscal Years Ended June 30, 2010, 2011 and 2012

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 (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)

  

49
 

 

4.3 Certificate of Determination of Series A Junior Participating Preferred Stock of the Registrant dated July 31, 2007 (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)
   
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. (incorporated by reference to Exhibit 10.1 to the Registration statement on Form 10 filed by the Registrant on May 14, 2007)
   
10.2 Post Production Services Agreement dated August 13, 2007 between the Registrant and DG FastChannel, Inc. (incorporated by reference to Exhibit 10.2 to the Registration statement on Form 10 filed by the Registrant on May 14, 2007)
   
10.3 Working Capital Reconciliation Agreement dated August 13, 2007 among the Registrant, Old Point.360 and DG FastChannel, Inc. (incorporated by reference to Exhibit 10.3 to the Registration statement on Form 10 filed by the Registrant on May 14, 2007)
   
10.4 Indemnification and Tax Matters Agreement dated August 13, 2007 between the Registrant and DG FastChannel, Inc. (incorporated by reference to Exhibit 10.4 to the Registration statement on Form 10 filed by the Registrant on May 14, 2007)
   
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 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)
   
10.10 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)
   
10.11 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)

 

50
 

 

10.12 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)
   
10.13 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)
   
10.14 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)
   
10.15 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)
   
10.16 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)
   
10.17 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)
   
10.18 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)
   
10.19 Settlement Agreement dated September 21, 2010 between the Company and DG Fastchannel, Inc. (incorporated by reference to Exhibit 10.3 of the form 10-Q filed by the Company on November 12, 2010).
   
10.20 2010 Incentive Plan of Point.360 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Company on November 18, 2010).
   
10.21 Loan and Security Agreement dated January 14, 2011 between the Company and Crestmark Bank (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Company on January 14, 2011).
   
10.22 Promissory Note dated January 14, 2011 of the Company to Crestmark Bank (incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the Company on January 14, 2011).
   
10.23 Amended and Restated Promissory Note dated March 7, 2011 of the Company to Crestmark Bank (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on March 8, 2011).
   
10.24 Amendment No. 1 to Schedule to Loan and Security Agreement dated March 7, 2011 between the Company and Crestmark Bank (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Registrant on March 8, 2011).
   
10.25 Second Amended and Restated Promissory Note dated November 15, 2011 of the Company to Crestmark Bank (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Registrant on November 16, 2011).

 

51
 

 

10.26 Amendment No. 2 to Schedule to Loan and Security Agreement dated November 15, 2011 between the Company and Crestmark Bank (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Registrant on November 16, 2011).
   
10.27 Release and Settlement Agreement dated March 8, 2011 between the Company and Holthouse, Carlin & Van Trigt LLP (incorporated by reference to Exhibit 10.6 of the Form 10-Q filed by the Company on May 13, 2011).
   
10.28 Third Amendment to Lease dated June 3, 2011 between the Company and LEAFS Properties, L.P. (incorporated by reference to Exhibit 10.1 of the File 8-K filed by the Company on June 9, 2011).
   
10.29

Loan and Security Agreement dated July 31, 2012 between the Company and Bank of the West (incorporated by reference to Exhibit 10.1 of the Form 8-K filed by the Company on August 16, 2012).

 

   
10.30

Accounts Receivable Line of Credit dated August 13, 2012 between the Company and Bank of the West (incorporated by reference to Exhibit 10.2 of the Form 8-K filed by the Company on August 16, 2012).

 

   
10.31

Master Equipment Financing Agreement dated August 14, 2012 between the Company and Bank of the West (incorporated by reference to Exhibit 10.3 of the Form 8-K filed by the Company on August 16, 2012).

 

   
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.
   
101 The following audited financial information from our Annual Report on Form 10-K for the year ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Balance Sheets as of June 30, 2012 and June 30, 2011; (2) Consolidated Statements of Operations for the three years ended June 30, 2012; (3) Consolidated Statements of Cash Flows for the three years ended June 30, 2012; and (4) Notes to Consolidated Financial Statements. (Pursuant to Rule 406T of Regulation S-T, the information in Exhibit 101 (a) is “furnished” and is not deemed to be “filed” or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, (b) is deemed not to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and (c) is not otherwise subject to liability under those sections)

___________________

 

*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.

 

52
 

   

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 12, 2012

 

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
Haig S. Bagerdjian

Chairman of the Board of Directors,
President and Chief Executive Officer

(Principal Executive Officer)

 

September 12, 2012

     

/s/ Alan R. Steel
Alan R. Steel

 

Executive Vice President,
Finance and Administration, Chief Financial Officer

(Principal Accounting and Financial Officer)

September 12, 2012
     
/s/ Robert A. Baker
Robert A. Baker
Director September 12, 2012
     
/s/ Greggory J. Hutchins
Greggory J. Hutchins
Director September 12, 2012
     
/s/ Sam P. Bell
Sam P. Bell
Director September 12, 2012
     
/s/ G. Samuel Oki
G. Samuel Oki
Director September 12, 2012

 

 

53

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