SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- Exchange Act of 1934.
For the quarterly period ended June 30, 2001 or
__ Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from to
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Commission file number 0-21917
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Point.360
(Exact Name of Registrant as Specified in its Charter)
California
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95-4272619
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification
Number)
California 95-4272619
(State of or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7083 Hollywood Boulevard, Suite 200, Hollywood, CA 90028
(Address of principal executive offices) (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 No
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As of September 20, 2002, there were 9,014,232 shares of the registrant's common
stock outstanding.
Point.360 is filing this Amendment to its Quarterly Report on Form 10-Q for the
period ending June 30, 2001 in order to reflect and describe the restatement of
its financial statements for the three and six-month periods ended June 30,
2001. See Note 3. Except as otherwise expressly described herein, this Amendment
continues to present information as of August 14, 2001, which is the date on
which we originally filed our Quarterly Report on Form 10-Q. We have not updated
the disclosures in this Amendment to present information as of a later date. All
information contained herein is subject to updating and supplementing as
provided in our periodic reports filed with the Securities and Exchange
Commission.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POINT.360
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
2000 2001
---- ----
(unaudited)
(as restated)
Current assets:
Cash and cash equivalents $ 769,000 $ 536,000
Accounts receivable, net of allowances for doubtful
accounts of $1,473,000 and $686,000, respectively 16,315,000 12,823,000
Notes receivable from officers 1,001,000 1,037,000
Income tax receivable 1,362,000 2,193,000
Inventories 1,031,000 1,102,000
Prepaid expenses and other current assets 2,066,000 2,012,000
Deferred income taxes 1,574,000 1,089,000
------------ ------------
Total current assets 24,118,000 20,792,000
Property and equipment, net 25,236,000 24,686,000
Other assets, net 920,000 914,000
Goodwill and other intangibles, net 27,387,000 26,943,000
------------ ------------
Total assets $ 77,661,000 $ 73,335,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,850,000 $ 5,275,000
Accrued expenses 2,513,000 3,342,000
Current portion of notes payable - 29,950,000
Current portion of capital lease obligations 54,000 46,000
------------ ------------
Total current liabilities 11,417,000 38,613,000
------------ ------------
Deferred income taxes 2,271,000 2,235,000
Notes payable, less current portion 31,024,000 -
Capital lease obligations, less current portion 30,000 40,000
Derivative valuation liability - 559,000
Shareholders' equity
Preferred stock - no par value; 5,000,000 authorized;
none outstanding - -
Common stock - no par value; 50,000,000 authorized; 9,162,670
and 9,046,004 shares issued and outstanding, respectively 18,272,000 18,082,000
Accumulated other comprehensive income - (125,000)
Retained earnings 14,647,000 13,931,000
------------ ------------
Total shareholders' equity 32,919,000 31,888,000
------------ ------------
Total liabilities and shareholders' equity $ 77,661,000 $ 73,335,000
============ ============
See accompanying notes to consolidated financial statements.
2
POINT.360
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 2001 2000 2001
---- ---- ---- ----
(as restated) (as restated)
Revenues $ 18,480,000 $ 16,446,000 $ 37,570,000 $ 35,554,000
Cost of goods sold (11,321,000) (11,261,000) (22,206,000) (23,868,000)
------------ ------------- ------------ ------------
Gross profit 7,159,000 5,185,000 15,364,000 11,686,000
Selling, general and administrative expense (5,005,000) (5,694,000) (10,340,000) (11,228,000)
------------ ------------ ------------ ------------
Operating income (loss) 2,154,000 (509,000) 5,024,000 458,000
Interest expense, net (703,000) (734,000) (1,388,000) (1,519,000)
Derivative fair value change (Note 5) - 3,000 - (319,000)
------------ ------------ ------------ ------------
Income (loss) before income taxes 1,451,000 (1,240,000) 3,636,000 (1,380,000)
(Provision for) benefit from income taxes (665,000) 586,000 (1,564,000) 664,000
------------ ------------ ------------ ------------
Income (loss) before adoption of SAB 101 786,000 (654,000) 2,072,000 (716,000)
Cumulative effect of adopting SAB 101 - - (322,000) -
------------ ------------ ------------ ------------
Net income (loss) $ 786,000 $ (654,000) $ 1,750,000 $ (716,000)
============ ============ ============ ============
Other comprehensive income:
Derivative fair value change $ - $ (5,000) $ - $ (125,000)
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 786,000 $ (659,000) $ 1,750,000 $ (841,000)
============ ============ ============ ============
Earnings per share:
Basic:
Income (loss) per share before adoption
of SAB 101 $ 0.09 $ (0.07) $ 0.22 $ (0.08)
Cumulative effect of adopting SAB 101 - - (0.03) -
------------ ------------ ------------ ------------
Net income (loss) $ 0.09 $ (0.07) $ 0.19 $ (0.08)
============ ============ ============ ============
Weighted average number of shares 9,238,843 9,046,004 9,226,825 9,090,387
Diluted:
Income (loss) per share before adoption
of SAB 101 $ 0.08 $ (0.07) $ 0.21 $ (0.08)
Cumulative effect of adopting SAB 101 - - (0.03) -
------------ ------------ ------------ ------------
Net income (loss) $ 0.08 $ (0.07) $ 0.18 $ (0.08)
============ ============ ============ ============
Weighted average number of shares including
the dilutive effect of stock options 9,472,899 9,046,004 9,660,947 9,090,387
See accompanying notes to consolidated financial statements.
3
POINT.360
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------
2000 2001
---- ----
(as restated)
Cash flows from operating activities:
Net income (loss) $ 1,750,000 $ (716,000)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 2,720,000 3,391,000
Provision for doubtful accounts 169,000 279,000
Deferred income taxes 112,000 449,000
Other non cash item - 544,000
Cumulative effect of adopting SAB 101 322,000 -
Changes in assets and liabilities:
Decrease in accounts receivable 2,415,000 3,213,000
Decrease (increase) in inventories 100,000 (71,000)
(Increase) decrease in prepaid expenses and
other current assets (759,000) 54,000
(Increase) in other assets (79,000) (30,000)
Increase (decrease) in accounts payable 470,000 (3,575,000)
(Decrease) increase in accrued expenses (93,000) 829,000
(Decrease) in income taxes payable (1,393,000) (831,000)
------------- -------------
Net cash provided by operating activities 5,734,000 3,536,000
------------- -------------
Cash used in investing activities:
Capital expenditures (5,228,000) (1,846,000)
Net cash paid for acquisitions (481,000) (508,000)
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Net cash used in investing activities (5,709,000) (2,354,000)
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Cash flows used in financing activities:
Change in revolving credit agreement 2,500,000 -
Repurchase of common stock - (300,000)
Proceeds from exercise of stock options 195,000 -
Repayment of notes payable (5,409,000) (1,074,000)
Repayment of capital lease obligations (108,000) (41,000)
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Net cash used in financing activities (2,822,000) (1,415,000)
------------- -------------
Net (decrease) in cash (2,797,000) (233,000)
Cash and cash equivalents at beginning of period 3,030,000 769,000
------------- -------------
Cash and cash equivalents at end of period $ 233,000 $ 536,000
============= =============
Supplemental disclosure of cash flow information -
Cash paid for:
Interest $ 1,066,000 $ 1,306,000
============= =============
Income tax $ 3,854,000 $ 52,000
============= =============
Non-financing activities:
Capital lease obligations incurred $ - $ 43,000
============= ==============
See accompanying notes to consolidated financial statements
4
POINT.360
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
NOTE 1 - THE COMPANY
Point.360 (the "COMPANY") is a leading provider of 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, digitize, archive and ultimately distribute its clients' video
content.
The Company provides physical and electronic delivery of commercials,
movie trailers, electronic press kits, infomercials and syndicated programming
to thousands of broadcast outlets worldwide. The Company operates in one
reportable segment. The Company provides worldwide electronic distribution,
using fiber optics and satellites. Additionally, the Company provides a broad
range of video services, including the duplication of video in all formats,
element storage, standards conversions, closed captioning and transcription
services and video encoding for air play verification purposes. The Company also
provides its customers value-added post production, editing and digital media
services.
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 generally 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 eight
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 restated and 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 footnotes required by generally accepted accounting principles for
complete financial statements. 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 six month
periods ended June 30, 2001 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2001. 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, 2000.
NOTE 2 - ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2000, the Company adopted Staff Accounting Bulletin
No. 101 ("SAB 101"), REVENUE RECOGNITION IN FINANCIAL STATEMENTS. The effect of
applying this Staff Accounting Bulletin has been accounted for as a change in
accounting principle, with a cumulative charge of $322,000, or $0.03 per share,
being recorded on that date. Previously, the Company had recognized revenues
from certain post production services as work was performed. Under SAB 101, the
Company now recognizes these revenues when all services have been completed. As
a result of adopting SAB 101, revenue recognized in the three and six month
periods ended June 30, 2000, which was included in the cumulative effect
adjustment, was $555,000.
5
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES ("FAS 133"). The standard, as amended, 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 other income. See Note 6
for further detail.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards Nos. 141 and 142, "BUSINESS
COMBINATIONS" and "GOODWILL AND OTHER INTANGIBLE ASSETS" ("FAS 141" and "FAS
142", respectively). FAS 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. FAS 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 FAS 142, goodwill will be tested annually and whenever events or
circumstances occur indicating that goodwill might be impaired. FAS 141 and FAS
142 are effective for all business combinations completed after June 30, 2001.
Upon adoption of FAS 142, amortization of goodwill recorded for business
combinations consummated prior to July 1, 2001 will cease, and intangible assets
acquired prior to July 1, 2001 that do not meet the criteria for recognition
under FAS No. 141 will be reclassified to goodwill. The Company will be required
to perform a transitional goodwill impairment assessment. The Company is in the
process of evaluating the impact of adopting FAS 141 and FAS 142.
NOTE 3 - RESTATEMENT OF FINANCIAL STATEMENTS
During 2002, the Company restated 2001 quarterly financial statements to
(i) allocate certain year-end adjustments to other than the fourth quarter of
2001, (ii) correct the quarterly amortization of other intangibles associated
with an acquired company and (iii) correct the transition adjustment and the
required subsequent amortization into earnings resulting from the adoption of
FAS 133 for an interest rate swap contract. These adjustments for the periods
ended June 30, 2001 are as follows:
Decrease (Increase) Net Loss
---------------------------------------------
Adjustments to previously issued Three Months Ended Six Months Ended
financial statements: June 30, 2001 June 30, 2001
- -------------------- ------------- -------------
To reduce depreciation expense (2) $ 118,000 $ 163,000
To correct amortization of other intangibles (3) (45,000) (89,000)
To properly state raw materials purchases (1) 131,000 131,000
To accrue estimated liability for two
abandoned leases (3) (154,000) (154,000)
To correct FAS 133 interest rate swap contract
amortization (41,000) (110,000)
To revise tax provision related to the
above adjustments 13,000 51,000
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Subtotal 22,000 (8,000)
Reversal of previous incorrect cumulative effect of
adopting FAS 133 charge, net of tax - 139,000
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Total $ 22,000 $ 131,000
============= =============
Reduction in previously reported net loss
and effect on earnings per share:
Reduction in net loss:
Adjustments $ 22,000 (8,000)
FAS 133 cumulative effect reversal - 139,000
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Total $ 22,000 $ 131,000
============= =============
Basic earnings per share:
Adjustments $ - $ -
FAS 133 cumulative effect reversal - 0.02
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Total $ - $ 0.02
============= =============
Diluted earnings per share:
Adjustments $ - $ -
FAS 133 cumulative effect reversal - 0.02
------------- -------------
Total $ - $ 0.02
============= =============
(1) Credited to cost of goods sold.
(2) Credited to cost of goods sold and selling, general and administrative
expense.
(3) Charged to selling, general and administrative expense.
6
NOTE 4 - STOCK REPURCHASE
In February 1999, the Company commenced a stock repurchase program. The
board of directors authorized the Company to allocate up to $4,000,000 to
purchase its common stock at suitable market prices. In September 2000, the
board of directors authorized the Company to allocate an additional $5,000,000
to purchase its common stock. As of June 30, 2001, the Company had repurchased
860,766 shares of the Company's common stock in connection with this program.
NOTE 5 - LONG TERM DEBT AND NOTES PAYABLE
In November 1998, the Company borrowed $29,000,000 on a term loan with a
bank, payable in 60 monthly installments of $483,000 plus interest. The term
loan was repaid in 2000 with the proceeds of a new borrowing arrangement with a
group of banks.
In September 2000, the Company entered into a credit agreement
("Agreement") with a group of banks providing a revolving credit facility of up
to $45,000,000. The purpose of the facility was to repay previously outstanding
amounts under a prior agreement with a bank, fund working capital and capital
expenditures and for general corporate purposes including up to $5,000,000 of
stock repurchases under the Company's repurchase program. The Agreement provides
for interest at the banks' reference rate, the federal funds effective rate plus
0.5%, or a LIBOR adjusted rate. Loans made under the Agreement are
collateralized by substantially all of the Company's assets. The borrowing base
under the Agreement is limited to 90% of eligible accounts receivable, 50% of
inventory and 100% of operating machinery and equipment, which percentages
decline after 2001 for receivables and equipment. The Agreement provided that
the aggregate commitment will decline by $5,000,000 on each December 31
beginning in 2002 until expiration of the entire commitment on December 31,
2005.
The Agreement also contains covenants requiring certain levels of annual
earnings before interest, taxes, depreciation and amortization (EBITDA) and net
worth, and limits the amount of capital expenditures. By December 31, 2000, the
Company had borrowed $31,024,000 under the Agreement and was not in compliance
with certain financial covenants due to adjustments recorded to prior years and
2000 results. The bank waived compliance with the covenants and amended the
Agreement in April 2001. In connection with the amendment, the Company paid the
banks $225,000 which was expensed in the second quarter of 2001.
As of April 30, May 31 and June 30, 2001, outstanding amounts under the
line of credit exceeded the borrowing base. On June 11 and July 20, 2001, the
Company entered into amendment and forbearance agreements with the banks which
required the Company to repay the amount of excess borrowings and amended the
Agreement to reduce the aggregate commitment from $45,000,000 to $30,050,000
until the expiration of the commitment on December 31, 2005. In August 2001, the
Company did not make required debt payments which created a breach of the
amendment and forbearance agreements. As a consequence of the breach, all
amounts outstanding under the credit facility are immediately due and payable
and , therefore, have been reclassified as a current liability as of June 30,
2001. The Company is negotiating with the banks for an additional forbearance.
7
NOTE 6 - 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 is $15,000,000, whereby the Company receives LIBOR
and pays a fixed 6.50% rate of interest for three years. FAS 133 requires that
the interest rate swap contract be recorded at fair value upon adoption of FAS
133 and quarterly by recording (i) a cumulative-effect type adjustment at
January 1, 2001 equal to the fair value of the interest rate 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 interest rate swap
contract at the beginning and end of such quarter. The effect of adopting FAS
133 was to record an initial cumulative-effect balance sheet adjustment by
charging Accumulated Other Comprehensive Income (a component of shareholders'
equity) $161,000 (net of $148,000 tax benefit), crediting Derivative Valuation
Liability by the $309,000 gross cumulative effect adjustment and charging
Deferred Income Taxes $148,000. The following adjustments were recorded to
reflect changes during the three- and six-month periods ended June 30, 2001:
Increase (Decrease) Income
---------------------------------------------------------------------
Derivative Fair (Provision for) Benefit Net Derivative
Value Change from Income Taxes Fair Value Change
------------ ----------------- -----------------
For the three months ended June 30, 2001:
- ----------------------------------------
Amortization of cumulative-effect type
adjustment $ (26,000) $ 12,000 $ (14,000)
Difference in the derivative fair value
between the beginning and end of the quarter 29,000 (14,000) 15,000
------------- ------------- -------------
$ 3,000 $ ( 2,000) $ (1,000)
============= ============= =============
For the six months ended June 30, 2001:
- --------------------------------------
Amortization of cumulative-effect type
adjustment (69,000) 33,000 (36,000)
Difference in the derivative fair value
between the beginning and end of the period (250,000) 120,000 (130,000)
------------- ------------- -------------
$ (319,000) $ 153,000 $ (166,000)
============= ============= =============
8
POINT.360
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000.
REVENUES. Revenues decreased by $2.0 million or 11% to $16.4 million for
the three-month period ended June 30, 2001, compared to $18.5 million for the
three-month period ended June 30, 2001 due to a decline in studio post
production sales.
GROSS PROFIT. Gross profit decreased $2.0 million or 27.6% to $5.2
million for the three-month period ended June 30, 2001, compared to $7.2 million
for the three-month period ended June 30, 2000. As a percent of revenues, gross
profit decreased from 38.7% to 31.5%. The decrease in gross profit as a
percentage of revenues was due to higher wages related to the digital television
services department, higher maintenance and equipment rental costs, and
increased depreciation associated with investments in high definition equipment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $0.7 million, or 13.8% to $5.7 million for the
three-month period ended June 30, 2001, compared to $5.0 million for the
three-month period ended June 30, 2000. As a percentage of revenues, selling,
general and administrative expense increased to 34.6% for the three-month period
ended June 30, 2001, compared to 27.1% for the three-month period ended June 30,
2000. This increase was due to $0.4 million of bank agreement restructuring
charges, and $0.3 million of employee benefit plan one-time expense, offset by
other cost reductions.
OPERATING INCOME. Operating income (loss) decreased $2.7 million to
$(0.5) million for the three-month period ended June 30, 2001, compared to $2.2
million for the three-month period ended June 30, 2000.
INTEREST EXPENSE. Interest expense for the three-month ended June 30,
2001 of $0.7 million was the same as that of the three-month period ended June
30, 2001 of $0.7 million.
ADOPTION OF FAS 133 AND DERIVATIVE FAIR VALUE CHANGE. During the quarter
ended June 30, 2001, the Company recorded the difference between the derivative
fair value of the Company's interest rate swap contract at the beginning and end
of the second quarter, or $29,000 ($15,000 net of tax benefit), and amortization
of the cumulative-effect adjustment during the quarter.
INCOME TAXES. The Company's effective tax rate was 47% for the second
quarter of 2001 and 46% for the second quarter of 2000.
NET INCOME (LOSS). The net income (loss) for the three-month period
ended June 30, 2001 was $(0.7) million, a decrease of $1.4 million compared to
$0.8 million for the three-month period ended June 30, 2000.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000.
REVENUES. Revenues decreased by $2.0 million or 5.4% to $35.6 million
for the six-month period ended June 30, 2001, compared to $37.6 million for the
six-month period ended June 30, 2000 due to a decline in studio post production
sales in the second quarter.
GROSS PROFIT. Gross profit decreased $3.7 million or 23.9% to $11.7
million for the six-month period ended June 30, 2001, compared to $15.4 million
for the six-month period ended June 30, 2000. As a percent of revenues, gross
profit decreased from 40.9% to 32.9%. The decrease in gross profit as a
percentage of revenues was due to higher wages related to the digital television
services department, higher maintenance and equipment rental costs, and
increased depreciation associated with investments in high definition equipment.
9
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $0.9 million, or 8.6% to $11.2 million for the
six-month period ended June 30, 2001, compared to $10.3 million for the
six-month period ended June 30, 2000. As a percentage of revenues, selling,
general and administrative expense increased to 31.6% for the six-month period
ended June 30, 2001, compared to 27.5% for the six-month period ended June 30,
2000. The fiscal 2000 period included $0.8 million of expenses associated with a
terminated merger. The 2001 period included $0.4 million of bank agreement
restructuring charges, $0.3 million of employee benefit plan one-time change
expense, $0.2 million of severance accruals, $0.3 million of consulting expense
associated with the Company's rebranding efforts and higher administrative
salary costs.
OPERATING INCOME. Operating income decreased $4.6 million or 90.9% to
$0.5 million for the six-month period ended June 30, 2001, compared to $5.0
million for the six-month period ended June 30, 2000.
INTEREST EXPENSE. Interest expense increased $0.1 million, or 9.4%, to
$1.5 million for the six-month period ended June 30, 2001, compared to $1.4
million for the six-month period ended June 30, 2000.
ADOPTION OF FAS 133 AND DERIVATIVE FAIR VALUE CHANGE. On January 1,
2001, the Company adopted FAS 133 by recording a cumulative effect adjustment to
shareholders' equity. During the six months ended June 30, 2001, the Company
recorded the difference between the derivative fair value of the Company's
interest rate swap contract at the beginning and end of the period, or $250,000
($130,000 net of tax benefit), and amortization of the cumulative-effect
adjustment during the quarter.
INCOME TAXES. The Company's effective tax rate was 48% for the first
half of 2001 and 43% for the first half of 2000. The higher tax rate is due to
the effect of permanent differences on a lower pre-tax income base.
CUMULATIVE EFFECT OF ADOPTING SAB 101. During Fiscal 2000, the Company
adopted SAB 101. The effect of applying this change in accounting principle is a
cumulative charge, after tax, of $322,000, or $0.03 per share. Previously, the
Company had recognized revenues from certain post-production processes as work
was performed. Under SAB 101, the Company now recognizes these revenues when the
entire project is completed.
NET INCOME (LOSS). The net income (loss) for the six-month period ended
June 30, 2001 was $(0.7) million, a decrease of $2.5 million compared to a
profit of $1.8 million for the six-month period ended June 30, 2000.
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, 2000.
On June 30, 2001, the Company's cash and cash equivalents aggregated
$0.5 million. The Company's operating activities provided cash of $3.5 million
for the six months ended June 30, 2001.
The Company's investing activities used cash of $2.4 million in the six
months ended June 30, 2001. The Company spent approximately $1.8 million for the
addition and replacement of capital equipment and management information
systems. The Company's business is equipment intensive, requiring periodic
expenditures of cash or the incurrence of additional debt to acquire additional
fixed assets in order to increase capacity or replace existing equipment. The
Company also made $0.5 million in acquisition earn-out payments in the six
months ended June 30, 2001.
In September 2000, the Company signed a $45 million revolving credit
facility agented by Union Bank of California. The amount of the commitment was
reduced to $30 million in July 2001. The facility provides the Company with
funding for capital expenditures, working capital needs and support for its
acquisition strategies. The facility expires on December 31, 2005. As of June
30, 2001, there was $30 million outstanding under the facility, which amount was
in excess of the permitted borrowing base by $1.0 million.
10
Due to lower sales levels in the quarter ended June 30, 2001, the
borrowing base (eligible accounts receivable, inventory and machinery and
equipment) securing the Company's bank line of credit was less than the amount
borrowed under the line. Consequently, the Company was in breach of certain
covenants. On June 11 and on July 20, 2001, the Company entered into amendment
and forbearance agreements with the banks and agreed to repay the overdraft
amount in weekly increments. In August 2001, the Company failed to meet the
repayment schedule and again entered discussions with the banks, which
discussions are ongoing.
The Company, from time to time, considers 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.
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, reports to stockholders and information
provided in our web site.
The words or phrases "will likely," "are expected to," "is anticipated,"
"is predicted," "forecast," "estimate," "project," "plans to continue,"
"believes," or similar expressions identify "forward-looking statements" 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:
o Recent history of losses and breach of credit agreement covenants.
o Our highly competitive marketplace.
o The risks associated with dependence upon significant customers.
o Our ability to execute our expansion strategy.
o The uncertain ability to manage growth.
o Our dependence upon and our ability to adapt to technological
developments.
o Dependence on key personnel.
o Our ability to maintain and improve service quality.
o Fluctuation in quarterly operating results and seasonality in certain of
our markets.
o Possible significant influence over corporate affairs by significant
shareholders.
These risk factors are discussed further below.
RECENT HISTORY OF LOSSES AND CASH CONSTRAINTS. The Company has reported losses
for each of the three fiscal quarters ended June 30, 2001 due, in part, to lower
gross margins and lower sales levels. These factors caused the Company to breach
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 repayment schedule and was once again in breach of the credit
facility. We cannot be sure a mutually satisfactory agreement with the banks
will be reached upon completion of current negotiations or, if successful, that
the Company will not again breach established covenants.
11
COMPETITION. Our broadcast video 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 major motion picture
studios and advertising agencies. 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. For example,
telecommunications providers could enter the market as competitors with
materially lower electronic delivery transportation costs. We believe that an
increasingly competitive environment could lead to a loss of market share or
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
35% of the Company's revenues during the six months ended June 30, 2001. 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 eight
acquisitions in the last four fiscal years, 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.
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 depend 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
goodwill), 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.
12
MANAGEMENT OF GROWTH. During the three years ended December 31, 1999, 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. 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.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts and
abilities of certain of its senior management, particularly those of R. Luke
Stefanko, Chairman of the Board of Directors 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. Although we have
employment agreements with Mr. Stefanko and certain of our other key executives
and technical personnel, we cannot be sure that such executives will remain with
the Company during or after the term of their employment agreements. 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 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 or 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.
13
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, R. Luke Stefanko, beneficially owned approximately 27% of the
outstanding common stock as of June 30, 2001. Mr. Stefanko's ex-spouse owned
approximately 25% of the common stock on that date. Together, they owned
approximately 53%. In August 2000 and May 2001, Mr. Stefanko was granted
one-time proxies to vote his ex-spouse's shares in connection with the election
of directors at the Company's annual meetings. By virtue of his stock ownership,
Mr. Stefanko 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK. The Company's market risk exposure with respect to
financial instruments is to changes in the London Interbank Offering Rate
("LIBOR"). The Company had borrowings of $30 million at June 30, 2001 under a
credit agreement. Amounts outstanding under the credit agreement bear interest
at the bank's reference rate plus a base rate margin not to exceed 1.00%, or, at
the Company's election, at LIBOR plus a LIBOR margin not to exceed 2.75%.
The Company entered into an interest rate swap transaction with a bank
on November 28, 2000. The swap transaction was for a notional amount of
$15,000,000 for three years and fixes the interest rate paid by the Company on
such amount at 6.50%, plus the applicable LIBOR margin, not to exceed 2.75%.
14
POINT.360
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 First Amendment to Second Amended and Restated Credit Agreement
and Waiver dated April 5, 2001 among the Company, the Lenders
party to the Credit Agreement and Union Bank of California, N.A.
as administrative agent for such Lenders. (1)
10.2 Second Amendment to Second Amended and Restated Credit Agreement
and Forbearance dated June 11, 2001 among the Company, the
Lenders party to the Credit Agreement and Union Bank of
California, N.A. as administrative agent for such Lenders. (2)
10.3 Third Amendment to Second Amended and Restated Credit Agreement
and Forbearance dated July 20, 2001 among the Company, the
Lenders party to the Credit Agreement and Union Bank of
California, N.A. as administrative agent for such Lenders. (2)
10.4 Employment Agreement dated June 7, 2001 between the Company and
R. Luke Stefanko. (2)
10.5 Employment Agreement dated June 7, 2001 between the Company and
Alan R. Steel. (2)
10.6 Employment Agreement dated June 7, 2001 between the Company and
Neil Nguyen (2)
99.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C.ss.1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C.ss.1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ----------------------------
(1) Filed with the Securities and Exchange Commission on April 11,
2001 as an exhibit to the Company's Form 10-K and incorporated
herein by reference.
(2) Filed with the Securities and Exchange Commission on August 14,
2001 as an exhibit to the Company's Form 10-Q and as
incorporated herein by reference.
(b) Reports On Form 8-K
None.
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 7, 2002 BY: /s/ Alan Steel
-----------------------------
Alan Steel
Executive Vice President,
Finance and Administration
(duly authorized officer and
principal financial officer)
15
CERTIFICATIONS
I, Haig S. Bagerdjian, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Point.360;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: November 7, 2002 /s/ Haig S. Bagerdjian
-----------------------
Haig S. Bagerdjian
Chairman of the Board of Directors,
President and Chief Executive Officer
I, Alan R. Steel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Point.360;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Date: November 7, 2002 /s/ Alan R. Steel
------------------------------------
Alan R. Steel
Executive Vice President
Finance and Administration and
Chief Financial Officer
16
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Point.360 ( the "Company") on Form
10-Q for the period ended June 30, 2001, as filed with the Securities and
Exchange Commission (the "Report"), I, Haig S. Bagerdjian, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13 (a) or 15
(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Haig S. Bagerdjian
- ----------------------------
Haig S. Bagerdjian
Chief Executive Officer
November 7, 2002
17
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Point.360 ( the "Company") on Form
10-Q for the period ended June 30, 2001, as filed with the Securities and
Exchange Commission (the "Report"), I, Alan R. Steel, Chief Financial Officer of
the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13 (a) or 15
(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Alan R. Steel
- ----------------------------
Alan R. Steel
Chief Financial Officer
November 7, 2002
18