UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-Q
(Mark One)
x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934.
For the quarterly period ended September 30, 2004 or
o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934.
For the transition period from ____________________to______________________
Commission file number 0-21917
Point.360
(Exact Name of Registrant as Specified in Its Charter)
California (State of or other jurisdiction ofincorporation or organization) | 95-4272619 (I.R.S. Employer Identification No.) |
7083 Hollywood Boulevard, Suite 200, Hollywood, CA (Address of principal executive offices) | 90028 (Zip Code) |
(323) 957-7990
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o Nox
As of September 30, 2004, there were 9,213,932 shares of the registrant’s common stock outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POINT.360
CONSOLIDATED BALANCE SHEETS
ASSETS | |||||||
December 31, 2003 | September 30, 2004 | ||||||
(unaudited) | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 7,206,000 | $ | - | |||
Accounts receivable, net of allowances for doubtful accounts of $735,000 and $602,000 (unaudited), respectively | 9,490,000 | 10,976,000 | |||||
Inventories | 794,000 | 906,000 | |||||
Prepaid expenses and other current assets | 895,000 | 1,047,000 | |||||
Deferred income taxes | 1,414,000 | 1,414,000 | |||||
Total current assets | 19,799,000 | 14,343,000 | |||||
Property and equipment, net | 15,751,000 | 29,200,000 | |||||
Other assets, net | 1,348,000 | 740,000 | |||||
Goodwill and other intangibles, net | 27,046,000 | 27,046,000 | |||||
Rights to purchase property and equipment | 800,000 | - | |||||
Total assets | $ | 64,744,000 | $ | 71,329,000 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Bank overdraft | $ | - | $ | 558,000 | |||
Accounts payable | 3,460,000 | 4,138,000 | |||||
Accrued wages and benefits | 1,773,000 | 1,566,000 | |||||
Other accrued expenses | 1,350,000 | 1,408,000 | |||||
Accrued settlement | - | 575,000 | |||||
Income taxes payable | 296,000 | 705,000 | |||||
Borrowings under revolving line of credit | - | 2,318,000 | |||||
Current portion of borrowings under notes payable | 9,199,000 | 2,850,000 | |||||
Current portion of capital lease and other obligations | 58,000 | 77,000 | |||||
Total current liabilities | 16,136,000 | 14,195,000 | |||||
Deferred income taxes | 3,678,000 | 3,678,000 | |||||
Bank notes payable, less current portion | 6,667,000 | 15,200,000 | |||||
Capital lease and other obligations, less current portion | 95,000 | 158,000 | |||||
Obligation to purchase property and equipment | 800,000 | - | |||||
Total long-term liabilities | 11,240,000 | 19,036,000 | |||||
Total liabilities | 27,376,000 | 33,231,000 | |||||
Contingencies (Note 4 and 8) | - | - | |||||
Shareholders’ equity | |||||||
Preferred stock - no par value; 5,000,000 authorized; none outstanding | - | - | |||||
Common stock - no par value; 50,000,000 authorized; 9,134,559 | |||||||
and 9,213,932 (unaudited) shares issued and outstanding, respectively | 17,625,000 | 17,869,000 | |||||
Additional paid-in capital | 624,000 | 624,000 | |||||
Retained earnings | 19,119,000 | 19,605,000 | |||||
Total shareholders’ equity | 37,368,000 | 38,098,000 | |||||
Total liabilities and shareholders’ equity | $ | 64,744,000 | $ | 71,329,000 |
See accompanying notes to consolidated financial statements.
2 | ||
POINT.360
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2003 | 2004 | 2003 | 2004 | ||||||||||
Revenues | $ | 16,709,000 | $ | 16,465,000 | $ | 49,775,000 | $ | 45,846,000 | |||||
Cost of goods sold | (9,716,000 | ) | (10,729,000 | ) | (30,479,000 | ) | (29,657,000 | ) | |||||
Gross profit | 6,993,000 | 5,736,000 | 19,296,000 | 16,189,000 | |||||||||
Selling, general and administrative expense | (4,745,000 | ) | (4,689,000 | ) | (13,122,000 | ) | (13,785,000 | ) | |||||
Write-off of deferred acquisition,financing and settlement costs | (41,000 | ) | (988,000 | ) | (1,043,000 | ) | (1,050,000 | ) | |||||
Operating income | 2,207,000 | 59,000 | 5,131,000 | 1,354,000 | |||||||||
Interest expense, net | (533,000 | ) | (196,000 | ) | (1,628,000 | ) | (530,000 | ) | |||||
Derivative fair value change | 181,000 | - | 492,000 | - | |||||||||
Income (loss) before income taxes | 1,855,000 | (137,000 | ) | 3,995,000 | 824,000 | ||||||||
(Provision for) benefit from income taxes | (780,000 | ) | 56,000 | (1,658,000 | ) | (338,000 | ) | ||||||
Net income (loss) | $ | 1,075,000 | $ | (81,000 | ) | $ | 2,337,000 | $ | 486,000 | ||||
Other comprehensive income: | |||||||||||||
Derivative fair value change | $ | (15,000 | ) | $ | - | $ | (46,000 | ) | $ | - | |||
Comprehensive income (loss) | $ | 1,060,000 | $ | - | $ | 2,291,000 | $ | - | |||||
Earnings per share: | |||||||||||||
Basic: | |||||||||||||
Net income (loss) | $ | 0.12 | $ | (0.01 | ) | $ | 0.26 | $ | 0.05 | ||||
Weighted average number of shares | 9,073,361 | 9,211,321 | 9,052,634 | 9,188,095 | |||||||||
Diluted: | |||||||||||||
Net income (loss) | $ | 0.11 | $ | (0.01 | ) | $ | 0.25 | $ | 0.05 | ||||
Weighted average number of shares including the dilutive effect of stock options | 9,491,394 | 9,510,338 | 9,426,201 | 9,655,834 |
See accompanying notes to consolidated financial statements.
3 | ||
POINT.360
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, | |||||||
2003 | 2004 | ||||||
Cash flows from operating activities: | |||||||
Net income (loss) | $ | 2,337,000 | $ | 486,000 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 4,046,000 | 4,138,000 | |||||
Provision for doubtful accounts | 170,000 | (48,000 | ) | ||||
Deferred income taxes | 400,000 | - | |||||
Other non cash item | (451,000 | ) | 181,000 | ||||
Write-off of acquisition costs | 1,002,000 | - | |||||
Changes in assets and liabilities: | |||||||
Decrease in accounts receivable | 1,813,000 | (417,000 | ) | ||||
Decrease in inventories | 57,000 | (9,000 | ) | ||||
(Increase) decrease in prepaid expenses andother current assets | (15,000 | ) | 209,000 | ||||
(Increase) decrease in other assets | (614,000 | ) | 619,000 | ||||
(Decrease) increase in accounts payable | (154,000 | ) | 315,000 | ||||
Increase in accrued settlement | - | 575,000 | |||||
(Decrease) in accrued expenses | (74,000 | ) | (1,131,000 | ) | |||
Increase in income taxes | 398,000 | 24,000 | |||||
Net cash provided by operating activities | 8,905,000 | 5,745,000 | |||||
Cash used in investing activities: | |||||||
Capital expenditures | (983,000 | ) | (4,083,000 | ) | |||
Proceeds from sale of equipment | - | 40,000 | |||||
Net cash paid for acquisitions | (8,000 | ) | (3,159,000 | ) | |||
Net cash used in investing activities | (991,000 | ) | (7,202,000 | ) | |||
Cash flows used in financing activities: | |||||||
Exercise of stock options | 99,000 | 244,000 | |||||
Change in revolving credit agreement | - | 2,876,000 | |||||
Proceeds from bank note | - | 8,000,000 | |||||
Change in note payable | - | 163,000 | |||||
Repayment of notes payable | (5,782,000 | ) | (16,951,000 | ) | |||
Repayment of capital lease obligations | (55,000 | ) | (81,000 | ) | |||
Contract settlement | (90,000 | ) | - | ||||
Net cash used in financing activities | (5,828,000 | ) | (5,749,000 | ) | |||
Net increase (decrease) in cash | 2,096,000 | (7,206,000 | ) | ||||
Cash and cash equivalents at beginning of period | 5,372,000 | 7,206,000 | |||||
Cash and cash equivalents at end of period | $ | 7,468,000 | $ | 0 | |||
Supplemental disclosure of cash flow information - Cash paid for: | |||||||
Interest | $ | 1,491,000 | $ | 418,000 | |||
Income tax | $ | 1,727,000 | $ | 362,000 |
See accompanying notes to consolidated financial statements.
4 | ||
POINT.360
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2004
NOTE 1 - THE COMPANY
Point.360 (“Point.360” or the “Company”) provides video and film asset management services to owners, producers and distributors of entertainment and advertising content. The Company provides the services necessary to edit, master, reformat, archive and distribute its clients’ video content, including television programming, spot advertising and movie trailers. The Company provides worldwide electronic distribution, using fiber optics and satellites. The Company delivers commercials, movie trailers, electronic press kits, infomercials and syndicated programming, by both physical and electronic means, to thousands of broadcast outlets worldwide. The Company operates in one reportable segment.
The Company seeks to capitalize on growth in demand for the services related to the distribution of entertainment content, without assuming the production or ownership risk of any specific television program, feature film or other form of content. The primary users of the Company’s services are entertainment studios and advertising agencies that choose to outsource such services due to the sporadic demand of any single customer for such services and the fixed costs of maintaining a high-volume physical plant.
Since January 1, 1997, the Company has successfully completed nine acquisitions of companies providing similar services. The Company will continue to evaluate acquisition opportunities to enhance its operations and profitability. As a result of these acquisitions, the Company believes it is one of the largest and most diversified providers of technical and distribution services to the entertainment and advertising industries, and is therefore able to offer its customers a single source for such services at prices that reflect the Company’s scale economies.
The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles and the Securities and Exchange Commission’s rules and regulations for reporting interim financial statements and footnotes. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three- and nine-month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s Form 10-K for the year ended December 31, 2003.
NOTE 2 - ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) Nos. 141 and 142, “Business Combinations” and “Goodwill and Other Intangible Assets,” respectively. SFAS No. 141 replaces Accounting Principles Board (“APB”) Opinion No. 16. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. SFAS No. 142 changes the accounting for goodwill and other intangible assets with indefinite useful lives (“goodwill”) from an amortization method to an impairment-only approach. Under SFAS No. 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. The Company also tested goodwill as of September 30, 2003 with no impairment indicated, and will complete the September 30, 2004 test by December 31, 2004.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," an amendment of SFAS No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. This statement is effective for financial statements for fiscal years ending after December 15, 2002. Other than supplemental footnote disclosures, SFAS No. 148 will not have any impact on the Company's financial statements as management does not have any intention to change to the fair value method.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting and reporting for derivative instruments and hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for derivative instruments and hedging activities entered into or modified after June 30, 2003, except for certain forward purchase and sale securities. For these forward purchase and sale securities, SFAS No. 149 is effective for both new and existing securities after June 30, 2003. The adoption of SFAS No. 149 does not have a material impact on the Company’s statements of earnings, financial position, or cash flows.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS No. 150 will be effective for financial instruments entered into or modified after May 31, 2003 and otherwise will be effective at the beginning of the first interim period beginning after June 15, 2003. This statement does not affect the Company at this time.
5 | ||
NOTE 3 - LONG TERM DEBT AND NOTES PAYABLE
In May 2002, the Company and its banks entered into a term loan agreement amending a previous credit arrangement and having a maturity date of December 31, 2004. Pursuant to the agreement, the Company made a $2 million principal payment and made additional principal payments of $3.5 million and $7.0 million in 2002 and 2003, respectively. The agreement provided for interest at the banks’ reference rate plus 1.25% and required the Company to maintain certain financial covenant ratios. The term loan was secured by substantially all of the Company’s assets. Certain legal and other costs associated with the new term loan, including fees of $50,000 and $250,000 paid in May 2002 and June 2003, respectively, were capitalized to be amortized over the remaining life of the loan.
As of March 31, 2003, the Company believed that the acquisition described in Note 4 below would be completed, as well as a complete refinancing of the term loan. In accordance with SFAS No. 5, “Accounting for Contingencies”, the Company expensed the then-remaining deferred costs associated with the term loan, $114,000. In June 2003, acquisition and refinancing discussions were terminated, the $114,000 write-off was reversed and the $250,000 fee was paid June 30, 2003. The Company simultaneously resumed amortization of the deferred costs based on the December 31, 2004 due date of the term loan.
On March 12, 2004, the Company entered into a new credit agreement which provides up to $10 million of revolving credit availability for two years and a five-year $8 million term loan. For the first two years of the term loan, the Company can re-borrow all principal payments to finance up to 80% of capital equipment purchases. The agreement provides for interest at the banks’ prime rate or LIBOR plus 2.25% for the revolver, prime rate plus 0.25% or LIBOR plus 2.50% for the term loan, and requires the Company to maintain certain financial covenant ratios. The facilities are secured by all of the Company’s assets. The term loan requires principal payments of $1.6 million annually. The $15,866,000 outstanding term loan as of December 31, 2003 was repaid by $1,000,000 of scheduled principal payments made in January and February 2004 and, on March 12, 2004, by new term loan borrowings of $8,000,000 and cash payment of $6,866,000. For financial statement purposes, as of December 31, 2003, an amount representing the portion of the new term loan due after December 31, 2004 ($6,667,000) was classified as “long-term”.
In July and August 2004, the term loan and revolving portions of the Company’s bank facility were increased by $4.7 million and $1.9 million, respectively
In August 2004, the Company entered into a Standing Loan Agreement and Swap Commitment with a bank (the “Mortgage”) in order to purchase land and a building (see Note 7). Pursuant to the Mortgage, the Company borrowed $6,435,000 payable in monthly installments of principal and interest on a fully amortized basis over 15 years. The mortgage debt is secured by the land and building.
In connection with the Mortgage, the Company entered into a one-year interest rate swap contract to economically hedge the Mortgage debt. Under the terms of the swap agreement, the amount hedged was $6,435,000 at a fixed 4.35% interest rate for the first year. Prior to the end of the first year, in August 2005, the Company is obligated to “fix” the interest rate with respect to the remaining 14 years of the Mortgage debt term based on a fixed rate quoted by the banks or LIBOR plus 1.85% for that period.
NOTE 4 - ISSUANCE OF WARRANT, POSSIBLE ACQUISITION AND WRITE-OFF OF DEFERRED COSTS, RELATED LEGAL ACTIONS AND SETTLEMENT
In July 2002, the Company acquired an option to purchase three subsidiaries (the “Subsidiaries”) of Alliance Atlantis Communications Inc. (“Alliance”) engaged in businesses directly related to those of the Company. In consideration for the option, the Company issued to Alliance a warrant to acquire 500,000 shares of the Company’s common stock at $2.00 per share. The warrant was to expire five years from the closing date of the transaction, or July 3, 2005 if the Company did not purchase the Subsidiaries. In connection therewith, the Company capitalized the fair value of the warrant ($619,000 determined by using the Black-Scholes valuation model) as an other asset on the balance sheet.
In December 2002, the option was extended to March 10, 2003. In connection with the extension, the Company made a $300,000 deposit toward the purchase price of the Subsidiaries, which deposit was nonrefundable except in very limited circumstances. The deposit was capitalized as an other asset. Additionally, the Company capitalized approximately $700,000 of due diligence and other expenses associated with the proposed acquisition during the six months ended June 30, 2003.
The Company did not exercise its option to purchase the Subsidiaries by the March 10, 2003 termination date; however, Alliance agreed to continue negotiations with the Company to complete the transaction.
6 | ||
In connection with the possible acquisition of the Subsidiaries, the Company entered discussions with several possible lenders to provide financing for the purchase of the Subsidiaries and to pay off the Company’s then existing term loan with a group of banks. A provision in the Company’s term loan agreement prohibited acquisitions unless approved by the banks, which permission had been denied.
In June 2003, discussions with Alliance and the new lenders were terminated. As a result, the Company wrote off the above mentioned deposit, due diligence costs and approximately $400,000 of legal and other costs associated with the proposed new financing. The $619,000 value of the warrant was reversed against Additional Paid-in Capital because, in management’s opinion, Alliance had breached certain provisions of the option agreement resulting in a termination event according to the provisions of the warrant. In July 2003, Alliance filed a complaint in the United States District Court, Central District of California, seeking a judicial determination that Alliance has full right of legal ownership to the warrant as well as the $300,000 deposit. If the Company was not successful in this defense, the warrant value would have to be expensed.
On July 18, 2003, Alliance filed a complaint against the Company in the Superior Court of Justice, Ontario, Canada, alleging that the Company breached a non-disclosure agreement between Alliance and the Company by issuing a press release with respect to termination of negotiations to purchase the Subsidiaries without obtaining the required prior written consent of Alliance. Alliance maintained that the press release impaired its ability to extract value from the Subsidiaries and negatively affected its ability to sell the Subsidiaries to a third party. The complaint sought breach of contract and punitive damages of approximately $4.4 million, expenses and a permanent order enjoining further such statements by the Company.
On August 11, 2003, the Company filed a counterclaim in the United States District Court, Central District of California against Alliance for, among other things, misrepresentation and breach of contract seeking cancellation of the warrant and general damages of at least $1.2 million.
Pursuant to a Settlement and Mutual Release Agreement executed in November 2004, Alliance and the Company agreed to settle all claims. Pursuant to the agreement, the Company paid Alliance $575,000 in cash in November 2004. The settlement amount was recorded as an expense and an accrued settlement on the balance sheet as of September 30, 2004.
NOTE 5 - DERIVATIVE AND HEDGING ACTIVITIES
In November 2000, the Company entered into an interest rate swap contract to economically hedge its floating debt rate. Under the terms of the contract, the notional amount was $15,000,000, whereby the Company received LIBOR and paid a fixed 6.5% rate of interest for three years. SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” required that the swap contract be recorded at fair value upon adoption of SFAS 133 and quarterly by recording (i) a cumulative-effect type adjustment at January 1, 2001 equal to the fair value of the swap contract on that date, (ii) amortizing the cumulative-effect type adjustment quarterly over the life of the derivative contract, and (iii) a charge or credit to income in the amount of the difference between the fair value of the swap contract at the beginning and end of such quarter. The interest rate swap contract terminated in November 2003. The following adjustments were recorded to reflect changes during the three- and nine-month periods ended September 30, 2003:
Increase(Decrease) Income | ||||||||||
Derivative Fair Value Change | (Provision for) Benefit from Income Taxes | Net Derivative Fair Value Change | ||||||||
For the three months ended September 30, 2003: | ||||||||||
Amortization of cumulative-effect type adjustment | $ | (26,000 | ) | $ | 11,000 | $ | (15,000 | ) | ||
Difference in the derivative fair value between the beginning and end of the quarter | 207,000 | (86,000 | ) | 121,000 | ||||||
$ | 181,000 | $ | (75,000 | ) | $ | 106,000 | ||||
For the nine months ended September 30, 2003: | ||||||||||
Amortization of cumulative-effect type adjustment | $ | (78,000 | ) | $ | 32,000 | $ | (46,000 | ) | ||
Difference in the derivative fair value between the beginning and end of the period | 570,000 | (234,000 | ) | 336,000 | ||||||
$ | 492,000 | $ | (202,000 | ) | $ | 290,000 |
In August 2004, the Company entered into a one-year interest rate swap contract to economically hedge Mortgage debt. Under the terms of the swap agreement, the amount hedged was $6,435,000 at a fixed 4.35% interest rate for the first year. Prior to the end of the first year, in August 2005, the Company is obligated to “fix” the interest rate with respect to the remaining 14 years of the Mortgage debt term based on a fixed rate quoted by the bank or LIBOR plus 1.85% for that period.
7 | ||
The objective of the hedge is to eliminate the variability of cash flows in the interest payments for the variable-rate Mortgage debt, the sole source of which is due to changes in the LIBOR benchmark interest rate. Changes in the cash flows of the interest rate swap are expected to exactly offset the changes in cash flows (i.e. changes in interest rate payments) attributable to fluctuations in the LIBOR on the mortgage debt.
Both at hedge inception and on an ongoing basis, the market values of the hedge instrument and the hypothetical transaction are expected to be highly correlated. Also, cash receipts under the hedge instrument will offset changes in LIBOR on the hedged item.
The hypothetical derivative is a $6,435,000 notional amount, receive-variable and pay-fixed interest rate swap, with reset dates and a variable rate index that match those of the Mortgage, and which has a zero fair market value at inception of the hedge relationship. Hedge effectiveness will be assessed on a quarterly basis.
NOTE 6 - STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for its stock option plans. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123 established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. Pro forma net income and earnings per share disclosures, as if the Company recorded compensation expense based on the fair value for stock-based awards, have been presented in accordance with the provisions of SFAS No. 148 and are as follows for the three- and nine-month periods ended September 30, 2004 and 2003 (in thousands, except per share amounts).
Three months ended September 30 | Nine months ended September 30 | ||||||||||||
2003 | 2004 | 2003 | 2004 | ||||||||||
Net income (loss): | |||||||||||||
As reported | $ | 1,075,000 | $ | (81,000 | ) | $ | 2,337,000 | $ | 486,000 | ||||
Deduct: Total stock-based employeecompensation expense determinedunder fair value based method forall awards, net of related tax effects | (103,000 | ) | (75,000 | ) | (262,000 | ) | (204,000 | ) | |||||
Pro forma | 972,000 | (156,000 | ) | 2,075,000 | 282,000 | ||||||||
Basic earnings (loss) per share of common stock: | |||||||||||||
As reported | $ | 0.12 | $ | ( 0.01 | ) | $ | 0.26 | $ | 0.05 | ||||
Pro forma | $ | 0.11 | $ | (0.02 | ) | $ | 0.23 | $ | 0.03 | ||||
Diluted earnings (loss)per share of common stock: | |||||||||||||
As reported | $ | 0.11 | $ | ( 0.01 | ) | $ | 0.25 | $ | 0.05 | ||||
Pro forma | $ | 0.10 | $ | (0.02 | ) | $ | 0.22 | $ | 0.03 |
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:
Three months ended September 30 | Nine months ended September 30 | ||||||||||||
2003 | 2004 | 2003 | 2004 | ||||||||||
Risk-free interest rate | 1.04 | % | 1.51 | % | 1.05 | % | 1.18 | % | |||||
Expected term (years) | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | |||||
Volatility | 76 | % | 44 | % | 76 | % | 44 | % | |||||
Expected annual dividends | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % |
NOTE 7 - CONSOLIDATION OF CERTAIN FACILITIES
In November 2003, the Company leased a new 64,600 square foot building in Los Angeles, California, for the purpose of consolidating four vault locations then occupying approximately 71,000 square feet. After the initial build-out of the new facility and termination of the existing leases during 2004, the resulting annual lease and operating expense levels are expected to be favorable to the Company.
8 | ||
As part of the transaction, the Company paid $600,000 for an option to purchase the facility for $8,571,500. Additionally, the landlord, General Electric Capital Business Asset Funding Corporation (“General Electric”), committed to finance approximately $6,500,000 of the purchase price at a fixed interest rate of 7.75% over 15 years. The Company was not obligated to purchase the building or, if the option was exercised, borrow any portion of the purchase price from General Electric. The cost of the option was included in other assets on the balance sheet as of December 31, 2003, to be capitalized as a cost of the building or written off when the Company exercised the purchase option or does not exercise the option, respectively.
Pursuant to the lease, General Electric also advanced the Company $800,000 to pay for improvements to the building. Any portion of the $800,000 not spent by November 25, 2004 was to have been returned to General Electric. As of December 31, 2003, the $800,000 was reflected as an obligation to purchase property and equipment as a long-term asset with an offsetting liability on the balance sheet. In 2004, the Company reduced the right and the obligation to purchase property and equipment by $800,000 expended for improvements to the building.
In August 2004, the Company purchased the facility (see Note 3).
NOTE 8 - CONTINGENCIES
In addition to the legal proceedings the Company has with Alliance (see Note 4) from time to time the Company may become a party to various legal actions and complaints arising in the ordinary course of business, although it is not currently involved in any such material legal proceedings.
NOTE 9 - SHAREHOLDERS’ EQUITY
During the nine months ended September 30, 2004, the number of outstanding shares of the Company’s common stock increased by 79,373 shares due to the exercise of employee stock options for $244,000 in cash.
NOTE 10 - ACQUISITION
On July 1, 2004, the Company acquired all of the outstanding stock of International Video Conversions, Inc. (“IVC”) for $7 million in cash. The purchase agreement requires possible additional payments of $1 million, $2 million and $2 million in 2005, 2006 and 2007, respectively, if earnings before interest, taxes, depreciation and amortization during the 30 months after the acquisition reach certain predetermined levels. As part of the transaction, the Company entered into employment and/or non competition agreements with four senior officers of IVC which fix responsibilities, salaries and other benefits and set forth limitations on the individuals’ ability to compete with the Company for the term of the earn-out period (30 months). IVC is a high definition and standard definition digital mastering and data conversion entity serving the motion picture/television production industry. In connection with the acquisition, the term loan portion of the Company’s bank facility (see Note 3) was increased by $4.7 million. To pay for the acquisition, the Company used $2.3 million of cash on hand and borrowed $4.7 million under the term loan portion of the facility.
The total purchase consideration has been allocated to the assets and liabilities acquired based on their respective estimated fair values as summarized below. The purchase price allocation is subject to change and will be finalized upon review and refinement of certain estimates and completion of valuation and appraisals.
Cash and cash equivalents | $ | 1,205,000 | ||
Inventories | 120,000 | |||
Other current assets | 1,000 | |||
Accounts Receivable | 2,036,000 | |||
Property, plant and equipment | 4,255,000 | |||
Total assets acquired | 7,617,000 | |||
Current and other liabilities assumed | (617,000 | ) | ||
Net assets acquired over liabilities, | ||||
and purchase price | $ | 7,000,000 |
9 | ||
The following table presents unaudited pro forma results of the combined operations for the nine months ended September 30, 2004 and 2003, respectively, as if the acquisition had occurred as of the beginning of such periods rather than as of the acquisition date. The pro forma information presented below is for illustrative purposes only and is not indicative of results that would have been achieved or results which may be achieved in the future:
Three months ended September 30 | Nine months ended September 30 | ||||||||||||
2003 | 2004 | 2003 | 2004 | ||||||||||
Revenue | $ | 19,568,000 | $ | 16,465,000 | $ | 58,966,000 | $ | 51,534,000 | |||||
Operating Income | 2,325,000 | 57,000 | 6,504,000 | 1,816,000 | |||||||||
Net income (loss) | 595,000 | (81,000 | ) | 2,430,000 | 695,000 | ||||||||
Basic earnings per share | 0.07 | (0.01 | ) | 0.27 | 0.08 | ||||||||
Diluted earnings per share | 0.06 | (0.01 | ) | 0.26 | 0.07 |
10 | ||
POINT.360
MANAGEMENT’S DISCUSSION AND ANALYSIS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes and contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those indicated in the forward-looking statements as a result of various factors.
We are one of the largest providers of video and film asset management services to owners, producers and distributors of entertainment and advertising content. We provide the services necessary to edit, master, reformat, archive and ultimately distribute our clients’ film and video content, including television programming, spot advertising, feature films and movie trailers using electronic and physical means. We deliver commercials, movie trailers, electronic press kits, infomercials and syndicated programming to hundreds of broadcast outlets worldwide. Our interconnected facilities in Los Angeles, New York, Chicago, Dallas and San Francisco provide service coverage in each of the major U.S. media centers. Clients include major motion picture studios, advertising agencies and corporations.
We operate in a highly competitive environment in which customers desire a broad range of service at a reasonable price. There are many competitors offering some or all of the services provided by the Company. 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.
In recent years, electronic delivery services have grown while physical duplication and delivery have been declining. We expect this trend to continue over a long term (i.e. the next 10 years). All of our electronic, fiber optics, satellite and Internet deliveries are made using third party vendors, which eliminates our need to invest in such capability. However, the use of others to deliver our services poses the risk that costs may rise in certain situations that cannot be passed on to customers, thereby lowering gross margins. There is also the risk that third party vendors who directly compete with us will succeed in taking away business.
The Company has an opportunity to expand its business by establishing closer relationships with our customers through excellent service at a competitive price. 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 acquisition of International Video Conversions, Inc. (“IVC”) in July 2004) which can increase revenues by adding new customers, or expanding services provided to existing customers.
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 nationwide interconnected facilities provide the ability to better service national 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.
During 2004, we completed the acquisition of International Video Conversions, Inc. (“IVC”) and settled all disputes related to a proposed acquisition of three subsidiaries of Alliance Atlantis Communications, Inc. (“Alliance”). The financial statement comparisons below highlight the effects of these transactions.
Statistical Analysis
The table below summarizes pro forma results for the three- and nine-month periods ended September 30, 2003 and 2004, without the effects of (1) IVC’s results of operations and (2) the write-off of deferred Alliance acquisition, financing and settlement costs in 2003 and 2004. IVC was purchased on July 1, 2004. The Alliance write-off represents the costs of due diligence, legal, financing and the settlement of all matters related to the proposed acquisition of three subsidiaries of Alliance, which matters were finalized in 2004 (in thousands except per share amounts):
11 | ||
Quarter Ended | ||||||||||||||||||||||
September 30, 2003 | September 30, 2004 | |||||||||||||||||||||
Pro forma | (2) | GAAP | Pro forma | (1) | (2) | GAAP | ||||||||||||||||
Revenues | $ | 16,709 | $ | - | $ | 16,709 | $ | 13,122 | $ | 3,343 | $ | - | $ | 16,465 | ||||||||
Cost of goods sold | (9,716 | ) | - | (9,716 | ) | (8,907 | ) | (1,822 | ) | - | (10,729 | ) | ||||||||||
Gross profit | 6,993 | - | 6,993 | 4,215 | 1,521 | - | 5,736 | |||||||||||||||
Selling, general andadministrative expense(3) | (4,745 | ) | - | (4,745 | ) | (4,008 | ) | (681 | ) | - | (4,689 | ) | ||||||||||
Write-off of deferredacquisition, financingand settlement costs(3) | - | (41 | ) | (41 | ) | - | - | (988 | ) | (988 | ) | |||||||||||
Operating income (loss) | 2,248 | (41 | ) | 2,207 | 207 | 840 | (988 | ) | 59 | |||||||||||||
Interest expense, net | (533 | ) | - | (533 | ) | (118 | ) | (78 | ) | - | (196 | ) | ||||||||||
Derivative fair valuechange | 181 | - | 181 | - | - | - | - | |||||||||||||||
Income (loss) beforeincome taxes | 1,896 | (41 | ) | 1,855 | 89 | 762 | (988 | ) | (137 | ) | ||||||||||||
(Provision for) benefit from income taxes | (797 | ) | 17 | (780 | ) | (37 | ) | (312 | ) | 405 | 56 | |||||||||||
Net income (loss) | 1,099 | (24 | ) | $ | 1,075 | 52 | 450 | (583 | ) | (81 | ) | |||||||||||
Earnings (loss) per share: | ||||||||||||||||||||||
Basic: | $ | 0.12 | $ | - | $ | 0.12 | $ | 0.00 | $ | 0.05 | $ | (0.06 | ) | $ | (0.01 | ) | ||||||
Diluted: | $ | 0.12 | $ | (0.01 | ) | $ | 0.11 | $ | 0.00 | $ | 0.05 | $ | (0.06 | ) | $ | (0.01 | ) |
Nine Months Ended | ||||||||||||||||||||||
September 30, 2003 | September 30, 2004 | |||||||||||||||||||||
Pro forma | (2) | GAAP | Pro forma | (1) | (2) | GAAP | ||||||||||||||||
Revenues | $ | 49,775 | $ | - | $ | 49,775 | $ | 42,503 | $ | 3,343 | $ | - | $ | 45,846 | ||||||||
Cost of goods sold | (30,479 | ) | - | (30,479 | ) | (27,835 | ) | (1,822 | ) | - | 29,657 | |||||||||||
Gross profit | 19,296 | - | 19,296 | 14,668 | 1,521 | - | 16,189 | |||||||||||||||
Selling, general and administrative expense(3) | (13,122 | ) | - | (13,122 | ) | (13,116 | ) | (681 | ) | - | (13,797 | ) | ||||||||||
Write-off of deferredacquisition, financingand settlement costs(3) | - | (1,043 | ) | (1,043 | ) | - | - | (1,050 | ) | (1,050 | ) | |||||||||||
Operating income (loss) | 6,174 | (1,043 | ) | 5,131 | 1,552 | 840 | (1,050 | ) | 1,342 | |||||||||||||
Interest expense, net | (1,628 | ) | - | (1,628 | ) | (452 | ) | (78 | ) | - | (530 | ) | ||||||||||
Derivative fair value change | 492 | - | 492 | - | - | - | - | |||||||||||||||
Income (loss) beforeincome taxes | 5,038 | (1,043 | ) | 3,995 | 1,112 | 762 | (1,050 | ) | 824 | |||||||||||||
(Provision for) benefitfrom income taxes | (2,096 | ) | 438 | (1,658 | ) | (457 | ) | (312 | ) | 431 | (338 | ) | ||||||||||
Net income (loss) | $ | 2,942 | $ | (605 | ) | $ | 2,337 | $ | 655 | $ | 450 | $ | (619 | ) | $ | 486 | ||||||
Earnings (loss) per share: | ||||||||||||||||||||||
Basic: | $ | 0.32 | $ | (0.06 | ) | $ | 0.26 | $ | 0.06 | $ | 0.05 | $ | (0.06 | ) | $ | 0.05 | ||||||
Diluted: | $ | 0.32 | $ | (0.07 | ) | $ | 0.25 | $ | 0.06 | $ | 0.05 | $ | (0.06 | ) | $ | 0.05 |
(1) | Contribution of IVC. |
(2) | Write-off of deferred acquisition, financing and settlement costs. |
(3) | Previously reported amounts have been adjusted to segregate Alliance-related expenses from Selling, General and Administrative expense for consistency of presentation among periods. |
12 | ||
While the above presentation of pro forma income statements and adjustments do not represent the results of operations in accordance with generally accepted accounting principles (“GAAP”), we believe that this disclosure provides useful information for readers of the financial statements in analyzing the causes of operating difference from period to period. Additional comparative data is set forth below.
Three Months Ended September 30, 2004 Compared To Three Months Ended September 30, 2003.
Revenues. Revenues were $16.5 million for the three-month period ended September 30, 2004, compared to $16.7 million for the three-month period ended September 30, 2003. The addition of IVC as of July 1, 2004 contributed $3.3 million of revenues in the 2004 period, without which sales would have declined 21% to 13.2 million when compared to the 2003 quarter. The decline is due to fewer syndicated television shows, electronic press kits and movie advertising spots being distributed by the Company resulting from an ordering slowdown from some customers as well as some business lost due to price competition.
Gross Profit. In the third quarter of 2004, gross margin was 35% of sales, compared to 42% for quarter ended September 30, 2003. The decline is due principally to lower sales at facilities other than IVC.
Selling, General And Administrative Expense. Selling, general and administrative (“SG&A”) expense was $4.7 million in each of the quarters ended September 30, 2004 and 2003. In the third quarter of 2003 and 2004, we wrote off $41,000 and $988,000, respectively, of deferred acquisition and financing and settlement costs related to the termination of the potential acquisition of three subsidiaries of Alliance.
Interest Expense. Interest expense for the three-month period ended September 30, 2004 was $0.2 million, a decrease of $0.3 million from the three-month period ended September 30, 2003 because of lower debt levels due to principal payments made during the last twelve months and the November 2003 termination of an interest rate hedge contract, offset partially by interest on debt incurred for the acquisition of IVC and real property.
Nine Months Ended September 30, 2004 Compared To Nine Months Ended September 30, 2003.
Revenues. Revenues decreased by $3.9 million to $45.8 million for the nine-month period ended September 30, 2004, compared to $49.8 million for the nine-month period ended September 30, 2003. The addition of IVC as of July 1, 2004 contributed $3.3 million of revenues in the 2004 period, without which sales would have declined 15% to $42.5 million when compared to the 2003 period. This decline is due to fewer syndicated television shows, electronic press kits and movie advertising spots being distributed by the Company and the early 2003 completion of a large film re-mastering project which contributed to higher 2003 sales. In addition, we experienced an ordering slowdown from some customers in 2004, and some business was lost to competitors.
Gross Profit. In the nine months of 2004, gross margin was 35% of sales compared to 39% in the same period in 2003. The decline is due principally to lower sales at facilities other than IVC.
Selling, General And Administrative Expense. Selling, general and administrative (“SG&A”) expense increased $0.7 million, or 6% to $13.8 million for the nine-month period ended September 30, 2004, compared to $13.1 million for the nine-month period ended September 30, 2003 due to the addition of IVC. In the first nine months of 2003 and 2004, we wrote off $1.0 and $1.1 million, respectively, of deferred acquisition and financing and settlement costs related to the termination of the potential acquisition of three subsidiaries of Alliance.
Interest Expense. Interest expense for the nine-month period ended September 30, 2004 was $0.5 million, a decrease of $1.1 million from the nine-month period ended September 30, 2003 because of lower debt levels due to principal payments made during the last twelve months and the November 2003 termination of an interest rate hedge contract offset partially by interest on debt incurred for the acquisition of IVC and real property.
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 in the Company’s Form 10-K for the year ended December 31, 2003.
Cash flows for the period ended September 30, 2004 were affected by approximately $3.2 million of capital expenditures related to the vault consolidation project. A portion of the vault expenditures were covered by cash previously advanced by the building landlord and reflected as accrued expenses on the December 31, 2003 balance sheet (about $0.8 million). All advanced amounts have been either paid out or reclassified as accounts payable as of September 30, 2004. Other principal changes in cash flows related to financing activities and are described below.
In May 2002, the Company and its banks entered into a term loan agreement with a maturity date of December 31, 2004. In January and February 2004, the Company made $1 million of scheduled principal payments under the term loan. In March 2004, the Company paid off the remaining $14.9 million prior term loan principal balance with $6.9 of cash and proceeds from the new $8 million term loan pursuant to a new credit agreement. The new agreement provided up to $10 million of revolving credit availability for two years and a five-year $8 million five-year term loan. The agreement was subsequently amended to increase the revolving credit and term loan availability by $1.9 million and $4.7 million, respectively. For the first two years of the term loan, the Company can re-borrow all principal payments on $8 million of the term loan to finance up to 80% of capital equipment purchases. The agreement provides for interest at the banks’ prime rate or LIBOR plus 2.25% for the revolver, prime rate plus 0.25% or LIBOR plus 2.50% for the term loan, and requires the Company to maintain certain financial covenant ratios. The term loan requires principal payments of approximately $2.5 million annually.
13 | ||
In November 2003, the Company leased a new 64,600 square foot building in Los Angeles, California, for the purpose of consolidating four vault locations then occupying approximately 71, 000 square feet in four locations. After the initial build-out of the new facility and termination of the existing leases during 2004, the resulting annual lease and operating expense levels are expected to be favorable to the Company. A provision of the lease provided that in May 2005, the Company had an option to purchase the building for approximately $8,572,000. We purchased the building in August 2004 by paying $2,137,000 in cash and borrowing the $6,435,000 million balance under a mortgage term loan payable over 15 years. We also spent approximately $3.1 million for improvements to the building during 2004.
The acquisition of International Video Conversions, Inc. (“IVC”) was completed in July 2004. We paid $2.3 million in cash and borrowed the $4.7 million. The IVC purchase agreement will also require payments of $1 million, $2 million and $2 million in 2005, 2006 and 2007, respectively, if certain predetermined earnings levels (as defined) are met.
In November 2004, we paid $575,000 to Alliance in full settlement of all disputes related to the previously proposed acquisition and financing of three Alliance subsidiaries.
The following table summarizes the September 30, 2004 status of our revolving line of credit and term loans:
Balance at September 30, 2004 | ||||
Revolving credit (including cash overdraft) | $ | 2,876,000 | ||
Current portion of term loans | 2,850,000 | |||
Long-term portion of term loans | 15,200,000 | |||
Total | $ | 20,926,000 |
Monthly and annual principal and interest payments due under the term debt are approximately $250,000 and $3,000,000, respectively, assuming no change in interest rates. Monthly and annual principal and interest payments due under the mortgage debt are approximately $50,000 and $600,000, respectively. We expect that remaining amounts available under the revolving credit and term-loan re-borrowing arrangements (approximately $5 million as of September 30, 2004) and cash generated from operations will be sufficient to fund debt service, operating needs and about $2.5 - 3.5 million of capital expenditures for the next twelve months.
We will continue to consider the acquisition of businesses complementary to its current operations. Consummation of any such acquisition or other expansion of the business conducted by the Company may be subject to the Company securing additional financing, perhaps at a cost higher than our existing term loans. 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 or conditions. Management believes 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 judgements. 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 effects, duplication, distribution, etc. A customer orders one or more of these services with respect to an element (commercial spot, movie, trailer, electronic press kit, etc.). The sum total of services performed on a particular element (a “package”) becomes the deliverable (i.e., the customer will pay for the services ordered in total when the entire job is completed). Occasionally, a major studio will request that package services be performed on multiple elements. Each element creates a separate revenue stream which is recognized only when all requested services have been performed on that element.
14 | ||
Allowance for doubtful accounts. We are required to make judgments, based on historical experience and future expectations, as to the collectibility 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 allowances; ii) amounts based upon an aging schedule and iii) an estimated amount, based on the Company's historical experience, for issues not yet identified.
Valuation of long-lived and intangible assets.Long-lived assets, consisting primarily of property, plant and equipment and intangibles, comprise a significant portion of the Company's total assets. Long-lived assets, including goodwill and intangibles 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 a comparison of the carrying amount of an asset to future net cash flows expected to be generated by that asset. The cash flow projections are based on historical experience, management’s view of growth rates within the industry and the anticipated future economic environment.
Factors we consider important which could trigger an impairment review include the following:
l | significant underperformance relative to expected historical or projected future operating results; |
l | significant changes in the manner of our use of the acquired assets or the strategy for our overall business; |
l | significant negative industry or economic trends; |
l | significant decline in our stock price for a sustained period; and |
l | our market capitalization relative to net book value. |
When we determine that the carrying value of intangibles, long-lived assets and related goodwill and enterprise level goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Any amount of impairment so determined would be written off as a charge to the income statement, together with an equal reduction of the related asset. Net intangible assets, long-lived assets, and goodwill amounted to approximately $56 million as ofSeptember 30, 2004.
In 2002, Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) became effective and as a result, we ceased to amortize approximately $26.3 million of goodwill beginning in 2002. We had recorded approximately $2.0 million of amortization on these amounts during the year ended December 31, 2001. In lieu of amortization, we were required to perform an initial impairment review of our goodwill in 2002 and an annual impairment review thereafter. The initial test on January 1, 2002, and the Fiscal 2002, 2003 and 2004 tests performed as of September 30, 2002, 2003 and 2004, respectively, required no goodwill impairment. The discounted cash flow method used to evaluate goodwill impairment included cash flow estimates for 2005 and subsequent years. If actual cash flow performance does not meet these expectations due to factors cited above, any resulting potential impairment could adversely affect reported goodwill asset values and earnings.
Accounting for income taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. The net deferred tax liability as of September 30, 2004 was $3.7 million. The Company did not record a valuation allowance against its deferred tax assets as of September 30, 2004.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS Nos. 141 and 142, “Business Combinations” and “Goodwill and Other Intangible Assets,” respectively. SFAS No. 141 replaces Accounting Principles Board (“APB”) Opinion No. 16. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. SFAS No. 142 changes the accounting for goodwill and other intangible assets with indefinite useful lives (“goodwill”) from an amortization method to an impairment-only approach. Under SFAS No. 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. The Company implemented SFAS No. 142 in the first quarter of fiscal 2002 which required no goodwill impairment. The Company also tested goodwill as of September 30, 2003 with no impairment indicated and will complete the September 30, 2004 test by December 31, 2004.
15 | ||
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," an amendment of SFAS No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. This statement is effective for financial statements for fiscal years ending after December 15, 2002. Other than supplemental footnote disclosures, SFAS No. 148 did not have any impact on the Company's financial statements as management does not have any intention to change to the fair value method.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting and reporting for derivative instruments and hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for derivative instruments and hedging activities entered into or modified after June 30, 2003, except for certain forward purchase and sale securities. For these forward purchase and sale securities, SFAS No. 149 is effective for both new and existing securities after June 30, 2003. SFAS No. 149 does not have a material impact on the Company’s statements of earnings, financial position, or cash flows.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS No. 150 will be effective for financial instruments entered into or modified after May 31, 2003 and otherwise will be effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 does not have a material impact on the Company’s financial statements.
CAUTIONARY STATEMENTS AND RISK FACTORS
In our capacity as Company management, we may from time to time make written or oral forward-looking statements with respect to our long-term objectives or expectations which may be included in our filings with the Securities and Exchange Commission (the “SEC”), reports to stockholders and information provided inour 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” within the meaning of the Private Securities Litigation Reform Act of 1995. 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. In connection with the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995, 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:
l | Recent history of losses |
l | Prior breach and changes in credit agreements. |
l | Our highly competitive marketplace. |
l | The risks associated with dependence upon significant customers. |
l | Our ability to execute our expansion strategy. |
l | The uncertain ability to manage growth. |
l | Our dependence upon and our ability to adapt to technological developments. |
l | Dependence on key personnel. |
l | Our ability to maintain and improve service quality. |
l | Fluctuation in quarterly operating results and seasonality in certain of our markets. |
l | Possible significant influence over corporate affairs by significant shareholders. |
These risk factors are discussed further below.
Recent History of Losses. The Company reported losses for each of the five fiscal quarters ended December 31, 2001 due, in part, to lower gross margins and lower sales levels and a number of unusual charges. Although we achieved profitability in Fiscal 2000 and prior years, as well as in the eleven fiscal quarters ended September 30, 2004, there can be no assurance as to future profitability on a quarterly or annual basis.
16 | ||
Prior Breach and Changes in Credit Agreements. Due to lower operating cash amounts resulting from reduced sales levels in 2001 and the consequential net losses, the Company breached certain covenants of its credit facility. The breaches were temporarily cured based on amendments and forbearance agreements among the Company and the banks which called for, among other provisions, scheduled payments to reduce amounts owed to the banks to the permitted borrowing base. In August 2001, the Company failed to meet the principal repayment schedule and was once again in breach of the credit facility. The banks ended their formal commitment to the Company in December 2001.
In May 2002, we entered into an agreement with the banks to restructure the credit facility to a term loan maturing on December 31, 2004. As part of this restructuring, the banks waived all existing defaults and the Company was required to make principal payments of $5.5 million, $5.0 million and $18.5 million in 2002, 2003, and 2004, respectively.
In March 2004, we entered into a revised agreement with the banks providing revolving and term loan facilities. Annual principal payments for the term loan are $1.6 million each for five years. Any principal outstanding under the revolver will be due in March 2006.
In July and August 2004, the credit agreement was amended in connection with the acquisition of another company (see Note 10) to increase the amounts that can be borrowed under the revolving and term loan portions of the arrangement. Approximately $4.7 million was borrowed to consummate the transaction. Also in August 2004, we borrowed $6,435,000 to purchase land and a building to house our Los Angeles area vault storage facilities. While we believe operating cash flows are sufficient to service increased total debt levels, reduced future sales levels, if they occur, could possibly result in a breach of the financial covenants contained in the credit agreements.
In November 2004, we began discussion with the banks to amend certain financial covenants contained in our credit agreement to more closely track our changing business environment which has contributed to lower sales and profits in recent quarters. We cannot be sure that we will be successful in achieving such changes and, if we are not successful, there is a risk that we will be in default of certain financial covenants in future quarters. If a default condition exists in the future, all amounts outstanding under the credit agreement will be due and payable which could materially and adversely affect our business.
Competition. Our post production, duplication and distribution 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, duplication and distribution firms, some of which have a national presence, and to a lesser extent, the in-house post production and distribution operations of our major motion picture studio and advertising agency customers. Some of these firms, and all of the studios, have greater financial, distribution and marketing resources and have achieved a higher level of brand recognition than the Company. 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 which could offer similar or superior services to those offered by the Company. 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.
Customer and Industry Concentration. Although we have an active client list of over 2,500 customers, seven motion picture studios accounted for approximately 29% of the Company’s revenues during the year ended December 31, 2003. If one or more of these companies were to stop using our services, our business could be adversely affected. Because we derive substantially all of our revenue from clients in the entertainment and advertising industries, the financial condition, results of operations and prospects of the Company could also be adversely affected by an adverse change in conditions which impact those industries.
Expansion Strategy. Our growth strategy involves both internal development and expansion through acquisitions. We currently have no agreements or commitments to acquire any company or business. Even though we have completed nine acquisitions in the last seven fiscal years, the most recent of which was in July 2004, 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 into the Company without substantial costs, delays or other problems.
17 | ||
Certain of the businesses previously acquired by the Company reported net losses for their most recent fiscal years prior to being acquired, and our future financial performance will be in part dependent on our ability to implement operational improvements in, or exploit potential synergies with, these acquired businesses.
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 the Company’s 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 the Company’s customers may result in increased demand for services in certain regions where it currently does not have post production, duplication and distribution 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.
In July 2002, the Company issued a warrant to purchase 500,000 shares of the Company’s common stock to Alliance Atlantis Communications, Inc. (“Alliance”) in consideration of an option to purchase three post-production facilities (the “Subsidiaries”) owned by Alliance. In connection therewith, the Company capitalized the fair value of the warrant ($619,000, determined by using the Black-Scholes valuation model). In December 2002, the option was extended by mutual agreement and we deposited $300,000 toward the ultimate purchase price, which was negotiated downward. Additionally, the Company capitalized approximately $360,000 of due diligence costs associated with the proposed acquisition and approximately $342,000 of costs associated with a related new financing arrangement.
In June 2003, discussions with Alliance and the new lenders were terminated. As a result, the Company wrote off the above-mentioned deposit, due diligence costs and costs associated with the proposed new financing. The $619,000 value of the warrant was charged to Additional Paid-in Capital because, in management’s opinion, Alliance had breached certain provisions of the option agreement resulting in a termination event according to the provisions of the warrant. In July 2003, Alliance filed a complaint seeking a judicial determination that Alliance has full right of legal ownership to the warrant as well as the $300,000 deposit.
On July 18, 2003, Alliance filed a complaint against the Company in the Superior Court of Justice, Ontario, Canada. The complaint alleged that the Company breached a non-disclosure agreement between Alliance and the Company by issuing a press release with respect to termination of negotiations to purchase the Subsidiaries without obtaining the required prior written consent of Alliance. Alliance maintained that the press release impaired its ability to extract value from the Subsidiaries and negatively affected its ability to sell the Subsidiaries to a third party. The complaint sought breach of contract and punitive damages of approximately $4.4 million, expenses and a permanent order enjoining further such statements by the Company.
On August 11, 2003, the Company filed a counterclaim in the United States District Court, Central District of California against Alliance for, among other things, misrepresentation and breach of contract seeking cancellation of the warrant and general damages of at least $1.2 million. In November 2004, the Company and Alliance signed a Settlement and Mutual Release Agreement, and the Company paid Alliance $575,000 to settle all matters between the parties.
If we acquire any entities, we may have to finance a large portion of the anticipated purchase price and/or refinance our existing credit agreement. The cost of any new financing may be higher than our existing credit facility. 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.
Management of Growth. In prior years, we experienced rapid growth that 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 this growth, 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 the Company’s 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.
Dependence on Technological Developments. Although we intend to utilize the most efficient and cost-effective technologies available for telecine, high definition formatting, editing, coloration and delivery of video content, including digital satellite transmission, 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, including the Company’s significant investment in high definition technology in 2000 and 2001. 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 the needs of the Company and its customers. Any material interruption in the supply of such services could materially and adversely affect the Company’s financial condition, results of operations and prospects.
18 | ||
Dependence on Key Personnel. The Company is dependent on the efforts and abilities of certain of its 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 25% of the Company’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 the Company. 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.
Ability to Maintain and Improve Service Quality. 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 or that dissatisfied customers would refuse to make further deliveries through the Company in the event of a significant occurrence of lost deliveries, 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 the Company 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 make deliveries 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 or satellite service providers.
Fluctuating Results, Seasonality. Our operating results have varied in the past, and may vary in the future, depending on factors such as the volume of advertising in response 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, general economic factors and other factors. 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. For example, 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. In addition, as our business from advertising agencies tends to be seasonal, our operating results may be subject to increased seasonality as the percentage of business from advertising agencies increases. In any period our revenues are subject to variation based on changes in the volume and mix of services performed during the period. It is possible that in some future quarter the Company’s operating results will be below the expectations of equity research analysts and investors. In such event, the price of the Company’s Common Stock would likely be materially adversely affected. Fluctuations in sales due to seasonality may become more pronounced if the growth rate of the Company’s sales slows.
Control by Principal Shareholder; Potential Issuance of Preferred Stock; Anti-Takeover Provisions.The Company’s Chairman, President and Chief Executive Officer, Haig S. Bagerdjian, beneficially owned approximately 25% of the outstanding common stock as of December 31, 2003. The ex-spouse of R. Luke Stefanko, the Company’s former President and Chief Executive Officer, owned approximately 20% of the common stock on that date. Together, they owned approximately 45%. By virtue of their stock ownership, Ms. Stefanko and Mr. Bagerdjian individually or together may be able to significantly influence the outcome of matters required to be submitted to a vote of shareholders, including (i) the election of the board of directors, (ii) amendments to the Company’s Restated Articles of Incorporation and (iii) 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. Our Board of Directors also has the authority to issue up to 5,000,000 shares of preferred stock without par value (the “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 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. Furthermore, certain provisions of the Company’s Restated Articles of Incorporation and By-Laws and of California law also could have the effect of discouraging, delaying or preventing a change in control of the Company.
19 | ||
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk. The Company had borrowings of $14.0 million at September 30, 2004 under a term loan and revolving credit agreement, and $6.4 million outstanding under a Mortgage. Amounts outstanding under the term loan and revolving credit facility and the mortgage debt provide for interest at the banks’ prime rate or LIBOR plus 2.25% for the revolver, prime plus 0.25% or LIBOR plus 2.50% for the term loan and LIBOR plus a variable amount for the mortgage debt. The Company’s market risk exposure with respect to financial instruments is to changes in prime or LIBOR rates.
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The standard, as amended by Statement of Financial Accounting Standards No. 137, “Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement No. 133,” and Statement of Financial Accounting Standards No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133” (referred to hereafter as “FAS 133”), is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or in other comprehensive income, depending on whether a derivative is designated as part of a hedging relationship and, if it is, depending on the type of hedging relationship. During 2001, the Company recorded a cumulative effect type adjustment of $247,000 (net of $62,000 tax benefit) as a charge to Accumulated Other Comprehensive Income, a component of Shareholders’ Equity, and an expense of $700,000 ($560,000 net of tax benefit) for the derivative fair value change of an interest rate swap contract and amortization of the cumulative effect adjustment. During the quarter and nine-month periods ended September 30, 2003, the Company recorded income of $181,000 ($106,000 net of tax provision) and $492,000 ($290,000 net of tax benefit), respectively, for the derivative fair value change and amortization of the cumulative effect type adjustment. The interest rate-swap contract terminated in November 2003.
In August 2004, the Company entered into a one-year interest rate swap contract to economically hedge the mortgage debt. Under the terms of the swap agreement, the amount hedged was $6,435,000 at a fixed 4.35% interest rate for the first year. Prior to the end of the first year, in August 2005, the Company is obligated to “fix” the interest rate with respect to the remaining 14 years of the mortgage debt term based on a fixed rate quoted by the banks or LIBOR plus 1.85% for that period.
ITEM 4. 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 are effective in ensuring that information required to be disclosed in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. No change in the Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 7, 2003, Alliance filed a complaint against the Company in the United States District Court, Central District of California. The complaint sought a declaration of the court that Alliance has full right of legal ownership of (i) the warrant issued by the Company in July 2003 in consideration of an option to purchase the Subsidiaries and (ii) the $300,000 paid to Alliance in December 2002 to extend the option. The complaint alleged that the Company made false and misleading statements in its press release announcing the termination of negotiations with Alliance, asking for undetermined damages.
On July 18, 2003, Alliance filed a complaint against the Company in the Superior Court of Justice, Ontario, Canada. The complaint alleged that the Company breached a non-disclosure agreement between Alliance and the Company by issuing a press release with respect to termination of negotiations to purchase the Subsidiaries without obtaining the required prior written consent of Alliance. Alliance maintained that the press release impaired its ability to extract value from the Subsidiaries and negatively affected its ability to sell the Subsidiaries to a third party. The complaint sought breach of contract and punitive damages of approximately $4.4 million, expenses and a permanent order enjoining further such statements by the Company.
20 | ||
On August 11, 2003, the Company filed a counterclaim in the United States District Court, Central District of California against Alliance for, among other things, misrepresentation and breach of contract seeking cancellation of the warrant and general damages of at least $1.2 million. In November 2004, the Company and Alliance signed a Settlement and Mutual Release Agreement, and the Company paid Alliance $575,000 to settle all matters between the parties.
In addition to the above, from time to time, the Company may become a party to various legal actions and complaints arising in the ordinary course of business, although it is not currently involved in any such material legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 | Option Agreement dated July 3, 2002 between the Company and Alliance Atlantis Communications Inc. (1) |
10.2 | Amended and Restated Option Agreement dated December 30, 2002 between the Company and Alliance Atlantis Communications Inc. (2) |
10.3 | Lease Agreement dated November 26, 2003 between the Company and General Electric Capital Business Asset Funding Corporation. (3) |
10.4 | Credit Agreement dated March 12, 2004 among the Company, Union Bank of California, N.A. and U.S. National Bank Association. (3) |
10.5 | Stock Purchase Agreement dated June 23, 2004 among the Company, International Video Conversions, Inc. (“IVC”) and the Stockholders of IVC. (4) |
10.6 | First Amendment to Credit Agreement dated July 1, 2004 among the Company, Union Bank of California, N.A. and U.S. National Bank Association. (4) |
10.7 | Second Amendment to Credit Agreement dated August 13, 2004 among the Company, Union Bank of California, N.A. and U.S. National Bank Association. (5) |
10.8 | Standing Loan Agreement and Swap Commitment dated August 18, 2004 between the Company and Bank of America, N.A. (6) |
10.9 | Settlement and Mutual Release Agreement executed November 9, 2004 between the Company and Alliance Atlantis Communications, Inc. |
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. |
_____________
(1) Filed as an exhibit to Form 8-K with the Commission on July 15, 2002.
(2) Filed as exhibit to Form 8-K with the Commission on January 8, 2003.
(3) Filed as an exhibit to Form 8-K with the Commission on March 16, 2004.
(4) Filed as an exhibit to Form 8-K with the Commission on July 1, 2004.
(5) Filed as an exhibit to Form 8-K with the Commission on August 20, 2004.
(6) Filed as an exhibit to Form 8-K with the Commission on August 26, 2004.
21 | ||
(b) Reports On Form 8-K
The Company filed a Form 8-K dated July 1, 2004, related to its acquisition of IVC and an amended credit arrangement.
The Company filed a Form 8-K dated August 12, 2004 related to its earnings release for the quarter ended June 30, 2004.
The Company filed a Form 8-K dated August 20, 2004 related to an amended credit agreement.
The Company filed a Form 8-K dated August 25, 2004 regarding a building purchase and related mortgage financing.
The Company filed a Form 8-K dated November 10, 2004 related to its earnings release for the quarter ended September 30, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
POINT.360 | ||
| | |
DATE: November 12, 2004 | By: | /s/ Alan R. Steel |
Alan R. Steel | ||
Executive Vice President, Finance and Administration (duly authorized officer and principal financial officer) |
22 | ||