SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
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 March 31, 2002 or
__ Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from to
---------
Commission file number 0-21917
--------
Point.360
(Exact Name of Registrant as Specified in its Charter)
California
-----------------------------------------------------
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
------- -------
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 March 31, 2002 in order to reflect and describe the restatement of
its financial statements for the three-month period ended March 31, 2002. See
Note 3. Except as otherwise expressly described herein, this Amendment continues
to present information as of May 15, 2002, 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, March 31,
2001 2002
---- ----
(unaudited)
(as restated)
Current assets:
Cash and cash equivalents $ 3,758,000 $ 5,161,000
Accounts receivable, net of allowances for doubtful
accounts of $681,000 and $779,000, respectively 12,119,000 12,661,000
Notes receivable from officers 928,000 773,000
Income tax receivable 1,399,000 1,132,000
Inventories 820,000 833,000
Prepaid expenses and other current assets 554,000 722,000
Deferred income taxes 884,000 924,000
------------ ------------
Total current assets 20,462,000 22,206,000
Property and equipment, net 23,232,000 22,007,000
Other assets, net 833,000 804,000
Goodwill and other intangibles, net 26,320,000 26,445,000
------------ ------------
Total assets $ 70,847,000 $ 71,462,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,675,000 $ 3,645,000
Accrued expenses 2,715,000 3,632,000
Current portion of notes payable 28,999,000 6,750,000
Current portion of capital lease obligations 79,000 71,000
------------ ------------
Total current liabilities 36,468,000 14,098,000
------------ ------------
Deferred income taxes 2,635,000 2,910,000
Notes payable, less current portion - 22,249,000
Capital lease obligations, less current portion 78,000 71,000
Derivative valuation liability 888,000 686,000
Shareholders' equity
Preferred stock - no par value; 5,000,000 authorized;
none outstanding
Common stock - no par value; 50,000,000 authorized; 8,992,806
and 9,011,324 shares issued and outstanding, respectively 17,336,000 17,340,000
Additional paid-in capital 439,000 439,000
Accumulated other comprehensive income (150,000) (135,000)
Retained earnings 13,153,000 13,804,000
------------ ------------
Total shareholders' equity 30,778,000 31,448,000
------------ ------------
Total liabilities and shareholders' equity $ 70,847,000 $ 71,462,000
============ ============
See accompanying notes to consolidated financial statements.
2
POINT.360
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
---------
2000 2001
---- ----
(as restated)
Revenues $ 19,108,000 $ 16,846,000
Cost of goods sold (12,607,000) (10,594,000)
------------ ------------
Gross profit 6,501,000 6,252,000
Selling, general and administrative expense (5,499,000) (4,607,000)
------------ ------------
Operating income 967,000 1,645,000
Interest expense, net (785,000) (678,000)
Derivative fair value change (322,000) 176,000
------------ ------------
Income (loss) before income taxes (140,000) 1,143,000
(Provision for) benefit from income taxes 78,000 (492,000)
------------ ------------
Net income (loss) $ (62,000) $ 651,000
============ ============
Other comprehensive income:
Derivative fair value change $ (120,000) $ (15,000)
------------ ------------
Comprehensive income (loss) $ (182,000) $ 636,000
============ ============
Earnings (loss) per share:
Basic $ (0.01) $ 0.07
Weighted average number of shares 9,136,559 9,011,324
============ ============
Diluted $ (0.01) $ 0.07
Weighted average number of shares including
the dilutive effect of stock options 9,136,559 9,069,172
============ ============
See accompanying notes to consolidated financial statements.
3
POINT.360
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
---------
2000 2001
---- ----
(as restated)
Cash flows from operating activities:
Net income (loss) $ (62,000) $ 651,000
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 1,648,000 1,507,000
Provision for doubtful accounts 143,000 169,000
Deferred income taxes (202,000) 235,000
Other non cash item 508,000 (187,000)
Write-off of note receivable - 148,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 736,000 (711,000)
(Increase) in inventories (85,000) (13,000)
(Increase) in prepaid expenses and
other current assets (29,000) (177,000)
Decrease in other assets 8,000 29,000
Decrease in accounts payable (1,174,000) (1,010,000)
Increase in accrued expenses 967,000 775,000
(Decrease) increase in income taxes (60,000) 267,000
------------ ------------
Net cash provided by operating activities 2,398,000 1,683,000
------------ ------------
Cash used in investing activities:
Capital expenditures (1,325,000) (287,000)
Proceeds from sale of equipment - 27,000
Net cash paid for acquisitions (333,000) (5,000)
Net cash used in investing activities (1,658,000) (265,000)
------------ ------------
Cash flows used in financing activities:
Repurchase of common stock (300,000) -
Repayment of capital lease obligations (29,000) (15,000)
------------ ------------
Net cash used in financing activities (329,000) (15,000)
------------ ------------
Net increase in cash 411,000 1,403,000
Cash and cash equivalents at beginning of period 769,000 3,758,000
------------ ------------
Cash and cash equivalents at end of period $ 1,180,000 5,161,000
============ ============
Supplemental disclosure of cash flow information -
Cash paid for:
Interest $ 565,000 663,000
============ ============
Income tax $ 37,000 $ -
============ ============
See accompanying notes to consolidated financial statements.
4
POINT.360
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
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 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 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 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 statements and footnotes. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three
month period ended March 31, 2002 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2002. 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, 2001.
NOTE 2 - ACCOUNTING PRONOUNCEMENTS
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.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
FAS Nos. 141 and 142, "Business Combinations" and "Goodwill and Other Intangible
Assets," respectively. FAS 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. FAS No.
142 changes the accounting for goodwill and other intangible assets with
indefinite useful lives ("goodwill") from an amortization method to an
5
impairment-only approach. Under FAS No. 142, goodwill will be tested annually
and whenever events or circumstances occur indicating that goodwill might be
impaired. FAS No. 141 and FAS No. 142 are effective for all business
combinations completed after June 30, 2001. Upon adoption of FAS No. 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 implemented FAS No. 142 in the first
quarter of fiscal 2002 which required no goodwill impairment.
In August 2001, the FASB issued FAS No. 143, "Accounting for Asset
Retirement Obligations," which requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset. FAS No. 143 is effective for fiscal years beginning after June 15, 2002.
The Company does not have asset retirement obligations and, therefore, believes
there will be no impact upon adoption of FAS No. 143.
In October 2001, the FASB issued FAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The FASB's
new rules on asset impairment supersede FAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
and portions of APB Opinion No. 30, "Reporting the Results of Operations." FAS
No. 144 provides a single accounting model for long-lived assets to be disposed
of and significantly changes the criteria that would have to be met to classify
an asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. FAS No. 144 also requires expected future
operating losses from discontinued operations to be displayed in the period(s)
in which the losses are incurred, rather than as of the measurement date as
presently required. The Company is in the process of evaluating the impact of
adopting FAS No. 144.
NOTE 3 - RESTATEMENT OF FINANCIAL STATEMENTS
During 2002, the Company restated 2002 quarterly financial statements to
correct the required subsequent amortization of the cumulative effect adjustment
(see Note 6) into earnings resulting from the adoption of FAS 133 for an
interest rate swap contract. These adjustments for the period ended March 31,
2002 are as follows:
Increase (Decrease) Net Income
Adjustments to previously issued Three Months Ended
financial statements: March 31, 2002
To correct FAS 133 interest rate swap
contract amortization $ (41,000)
To revise tax provision related to
above adjustments 17,000
---------------
Total $ (24,000)
===============
Reduction in previously reported net income
and effect on earnings per share:
Reduction in net income: $ (24,000)
===============
Basic earnings per share: $ -
Diluted earnings per share: $ -
===============
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 March 31, 2002, the Company had repurchased
860,766 shares of the Company's common stock in connection with this program.
6
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. Deferred financing costs related to the term loan of
approximately $232,000, net of $168,000 tax benefit, were concurrently written
off and treated as an extraordinary item during the quarter ended September 30,
2000.
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 provided
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. 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 contained 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 a restructuring fee of $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, the amount
outstanding under the credit facility became immediately due and payable.
In May 2002, the Company and the banks entered into a restructured loan
agreement changing the revolving credit facility to a term loan, with all
existing defaults being waived. The term loan has a maturity date of December
31, 2004. Pursuant to the agreement, the Company made a $2 million principal
payment and will make additional principal payments of $3.5 million, $5.0
million and $18.5 million in 2002, 2003 and 2004, respectively. The agreement
provides for interest at the banks' reference rate plus 1.25% and requires the
Company to maintain certain financial covenant ratios. The term loan is secured
by substantially all of the Company's assets.
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. By the end of the interest
rate swap contract, the initial cumulative-effect type adjustment and any
amounts recognized as income or expense will reverse to zero as the contract
will then have no further theoretical value. Other than the economic impact of
fixing the interest rate, the amount of income and expense required by
application of FAS 133 does not impact the Company's cash flow. The effect of
adopting FAS 133 was to record during the first quarter of 2001 an initial
cumulative-effect balance sheet adjustment by charging Accumulated Other
Comprehensive Income (a component of shareholders' equity) $139,000 (net of
$170,000 tax benefit), crediting Derivative Valuation Liability by the $309,000
gross cumulative-effect adjustment and charging Deferred Income Taxes $170,000.
The following adjustments were recorded to reflect changes during the three
months ended March 31, 2001and 2002:
Increase (Decrease) Income
For the three months Derivative (Provision for) Benefit Net Derivative
ended March 31, 2001: Fair Value Change from Income Taxes Fair Value Change
- -------------------- ----------------- ----------------- -----------------
Amortization of
cumulative-effect
type adjustment $ (43,000) $ 24,000 $ (19,000)
Difference in the
derivative fair value
between the beginning
and end of the quarter (279,000) 153,000 (126,000)
----------- ------------ -----------
$ (322,000) $ 177,000 $ (145,000)
=========== ============ ===========
For the three months
ended March 31, 2002:
Amortization of
cumulative-effect
adjustment type $ (26,000) $ 11,000 $ (15,000)
Difference in the
derivative fair value
between the beginning
and end of the quarter 202,000 (87,000) 115,000
----------- ------------ -----------
$ 176,000 $ (76,000) $ 100,000
=========== ============ ===========
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 MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001.
REVENUES. Revenues decreased by $2.3 million or 12% to $16.8 million for
the three-month period ended March 31, 2002, compared to $19.1 million for the
three-month period ended March 31, 2001 due to a decline in studio post
production sales as some work was brought in-house. Studios have traditionally
maintained in-house capacity and several customers utilized that capacity in
2002 to a greater extent thereby affecting our sales.
GROSS PROFIT. Gross profit decreased $0.2 million or 4% to $6.3 million
for the three-month period ended March 31, 2002, compared to $6.5 million for
the three-month period ended March 31, 2001. As a percent of revenues, gross
profit increased from 34% to 37%. The increase in gross profit as a percentage
of revenues was principally due to lower wages and benefits as headcount was
reduced 13% since March 31, 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative ("SG&A") expense decreased $0.9 million, or 16% to $4.6 million
for the three-month period ended March 31, 2002, compared to $5.5 million for
the three-month period ended March 31, 2001. As a percentage of revenues, SG&A
decreased to 27% for the three-month period ended March 31, 2002, compared to
29% for the three-month period ended March 31, 2001. Excluding amortization of
goodwill in 2001, SG&A expenses were $5.1 million, or 27% of sales in the 2001
first quarter. The decrease in 2002 was due principally to lower wage costs.
OPERATING INCOME. Operating income increased $0.7 million to $1.6
million for the three-month period ended March 31, 2002, compared to $1.0
million for the three-month period ended March 31, 2001.
INTEREST EXPENSE. Interest expense for the three-month period ended
March 31, 2002 was $0.7 million, a decrease of $0.1 million from the three-month
period ended March 31, 2001 due to a lower average level of debt outstanding
partially offset by a 2% default rate of interest premium charged by the
Company's banks.
Adoption of FAS 133 and Derivative Fair Value Change. On January 1,
2001, the Company adopted FAS 133. During the quarter's ended March 31, 2001 and
March 31, 2002, 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 periods, or $0.3 million (expense) and $0.2 million (income) in 2001 and
2002, respectively, and amortization of the cumulative-effect adjustment.
INCOME TAXES. The Company's effective tax rate was 43% for the first
quarter of 2002 and 56% for the first quarter of 2001. The decrease in effective
tax rate is the result of the Company's periodic assessment of the relationship
of book/tax timing differences to total expected annual pre-tax results and the
elimination of goodwill expense for financial statement purposes. The effective
tax rate percentage may change from period to period depending on the difference
in the timing of the recognition of revenues and expenses for book and tax
purposes and the effect of permanent differences.
NET INCOME (LOSS). The net income (loss) for the three-month period
ended March 31, 2002 was $0.6 million, an increase of $0.7 million compared to a
loss of $62,000 for the three-month period ended March 31, 2001.
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, 2001.
On March 31, 2002, the Company's cash and cash equivalents aggregated
$5.2 million. The Company's operating activities provided cash of $1.7 million
for the three months ended March 31, 2002.
9
The Company's investing activities used cash of $0.3 million in the
three months ended March 31, 2002. The Company spent approximately $0.3 million
for the addition and replacement of capital equipment and management information
systems which we believe is a reasonable capital expenditure level given the
current revenue volume. In the prior year, the Company's capital expenditures
were greater than a normal recurring amount partially due to the investment of
approximately $0.3 million in high definition television equipment. 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.
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 provided the Company with
funding for capital expenditures, working capital needs and support for its
acquisition strategies.
Due to lower sales levels in the second and third quarters of Fiscal
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.
In May 2002, the Company and the banks entered into a restructured loan
agreement changing the revolving credit facility to a term loan, with all
existing defaults being waived. The term loan has a maturity date of December
31, 2004. Pursuant to the agreement, the Company made a $2 million principal
payment and will make additional principal payments of $3.5 million, $5.0
million and $18.5 million in 2002, 2003 and 2004, respectively. The agreement
provides for interest at the banks' reference rate plus 1.25% and requires the
Company to maintain certain financial covenant ratios. The term loan is secured
by substantially all of the Company's assets. We believe that cash on hand plus
that generated from operations will be sufficient to meet debt service and
operational requirements for the next twelve months.
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:
10
o Recent history of losses
o Prior breach of credit agreement covenants and new principal payment
requirements.
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. The Company has reported losses for each of the four
fiscal quarters ended September 30, 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 two fiscal
quarters ending March 31, 2002, there can be no assurance as to future
profitability on a quarterly or annual basis.
PRIOR BREACH OF CREDIT AGREEMENT COVENANTS AND NEW PRINCIPAL PAYMENT
REQUIREMENTS. 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 made a
principal payment of $2.0 million. The Company also agreed to make additional
principal payments of $3.5 million, $5.0 million and $18.5 million in 2002,
2003, and 2004, respectively. Based upon the Company's financial forecast, the
Company will have to refinance the facility by 2004 to satisfy the final payment
requirement.
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 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 and the possibility that customers may
utilize in-house capabilities to a greater extent 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.
11
CUSTOMER AND INDUSTRY CONCENTRATION. Although we have an active client list of
over 2,500 customers, seven motion picture studios accounted for approximately
34% of the Company's revenues during the year ended December 31, 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 five 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 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.
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 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.
12
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, 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. 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.
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 President and Chief Executive Officer,
R. Luke Stefanko, beneficially owned approximately 18.4% of the outstanding
common stock as of February 28, 2002. Mr. Stefanko's ex-spouse owned
approximately 25.2% of the common stock on that date. Together, they owned
approximately 43.6%. 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. The Company's Chairman of the
Board, Haig Bagerdjian, beneficially owned approximately 6.7% of the common
stock on February 28, 2002. By virtue of their stock ownership, Messrs. Stefanko
and 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
13
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 had borrowings of $28,999,000 at March 31, 2002
under a credit agreement. Amounts outstanding under the credit agreement now
bear interest at the bank's reference rate plus 1.25%.
The Company's market risk exposure with respect to financial instruments
is to changes in the London Interbank Offering Rate ("LIBOR"). 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% less the
applicable LIBOR rate, plus 1.25% over prime rate.
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 balance sheet adjustment by charging Accumulated
Other Comprehensive Income (a component of shareholders' equity) of $247,000
(net of $62,000 tax benefit), and an expense of $700,000 ($560,000 net of tax
benefit) for the derivative fair value change of an interest rate swap contract.
During the quarter ended March 31, 2002, the Company recorded income of $100,000
(net of $76,000 tax expense) for the derivative fair value change and
amortization of the cumulative effect type adjustment.
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
For a discussion of the May 2002 agreement in which the Company's
defaults under its bank borrowings were waived, see Note 5 to the Financial
Statements that are included in Part I, Item 1 of this Report on Form 10-Q.
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Third Amendment and Restated Credit Agreement dated May 2, 2002,
among the Company, Union Bank of California, N.A., United
California Bank, and U.S. Bank National Association (1)
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 May 14,
2002 as an exhibit to the Company's Form 10-Q and incorporated
herein by reference.
(b) Reports On Form 8-K
None.
14
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 R. Steel
-----------------------------
Alan R. Steel
Executive Vice President,
Finance and Administration
(duly authorized officer and
principal financial officer)
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;
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;
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 &
Chief Financial Officer
15
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 March 31, 2002, 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
16
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 March 31, 2002, 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
17