|
|
 | | | |
- close
- close
- close
- close
Point.360 10-K 2009 Documents found in this filing:UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K/A
For the
fiscal year ended June 30, 2008
For
the transition period from _________________ to
_________________
Commission
File Number 001-33468
POINT.360
(Exact
name of registrant as specified in its charter)
Registrant's
telephone number, including area code (818) 565-1400
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ¨ No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
¨
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No
x
The aggregate market value of the
voting common equity held by non-affiliates of the registrant as of the last
business day of the registrant’s most recently completed second fiscal quarter
(December 31, 2007) was approximately $16 million. As of March 31,
2009, there were 10,225,300 shares of Common Stock outstanding.
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. x
EXPLANATORY
NOTE
The purpose of this amendment is to
include the city and state in the signature blocks of the Report and Consent of
Independent Registered Public Accounting Firm and to conform the date in the
body of the Consent to the related signature date in the Company’s Form 10-K
originally filed on September 19, 2008. Additionally, a sentence
inadvertently included in the sixth paragraph of Note 12 of the Notes to
Consolidated Financial Statements has been removed. Except as otherwise
expressly set forth in this amendment, no portion of the Form 10-K filed on
September 19, 2008 is being amended or updated by this amendment and this
amendment does not reflect events that occurred after September 19,
2008.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Schedules
other than those listed above have been omitted since they are either not
required, are not applicable or the
required information is shown in the financial statements or the related
notes.
3
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Shareholders
of Point.360
Burbank,
California
We have
audited the consolidated balance sheets of Point.360 (formerly New 360) and its
subsidiary (collectively the “Company”) as of June 30, 2008, June 30, 2007
(restated), and December 31, 2006 (restated) and the related consolidated
statements of income (loss), invested and shareholders equity and cash flows for
the year ended June 30, 2008, for the six months ended June 30, 2007 (restated)
(the transition period 2007), and for each of the two years in the two-year
period ended December 31, 2006 (restated). Our audits also
included the financial statement schedule of Point.360 listed in Item
15(a). These financial statements and financial statement schedule
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Point.360 and its
subsidiaries as of June 30, 2008, 2007(restated), and December 31, 2006
(restated) and the results of their operations and their cash flows for the year
ended June 30, 2008, for the six months ended June 30, 2007 (the transition
period 2007), and for each of the two years in the two-year period ended
December 31, 2006, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We were
not engaged to examine management’s assertion about the effectiveness of Point.
360’s internal control over financial reporting as of June 30, 2008 discussed in
the accompanying Item 9A Controls and Procedures and, accordingly, we do
not express an opinion thereon.
As
discussed in Note 7 to the consolidated financial statements, the Company has
adopted the provisions of Statement of Financial Accounting Standards
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB Statement No. 109” on July 1,
2007.
As
described in Notes 1, 13 and 14 to the financial statements, the Company has
restated its financial statements for each of the two years ended December 31,
2006 and for the six-month period ending June 30, 2007 for correction of an
error in the calculation of deferred tax liability.
SingerLewak
LLP, (signed)
Los
Angeles, California
September
18, 2008 4
Point.360
Consolidated
Balance Sheets
(in
thousands)
The
accompanying notes are an integral part of these consolidated financial
statements. 5
Point.360
Consolidated
Statements of Income (Loss)
(in
thousands, except per share amounts)
The
accompanying notes are an integral part of these consolidated financial
statements. 6
Point.360
Consolidated
Statements of Invested and Shareholders’ Equity
(in
thousands)
The
accompanying notes are an integral part of these consolidated financial
statements. 7
Point.360
Consolidated
Statements of Cash Flows
(in
thousands)
The
accompanying notes are an integral part of these consolidated financial
statements. 8
Point.
360
Notes
to Consolidated Financial Statements
The
Company provides high definition and standard definition digital mastering, data
conversion, video and film asset management and sophisticated computer graphics
services to owners, producers and distributors of entertainment and advertising
content. The Company provides the services necessary to edit, master,
reformat, convert, archive and ultimately distribute its clients’ film and video
content, including television programming feature films and movie
trailers. The Company’s interconnected facilities provide service
coverage to all major U.S. media centers.
On August 14, 2007, pursuant to the
terms of an Agreement and Plan of Merger and Reorganization among DG
FastChannel, Inc. (“DG FastChannel”), Point.360 (“Old Point.360”) and New 360
(“the Company”), a wholly owned subsidiary of Old Point.360, (the
“Merger Agreement”), Old Point.360 was merged into DG FastChannel,
with DG FastChannel continuing as the surviving corporation (the
“Merger”). Subsequent to the Merger, the Company changed its name
back to Point.360. See Note 12.
On August 13, 2007, prior to
the completion of the Merger, (1) Old Point.360 contributed to the
Company (the “Contribution”) all of the assets used by Old Point.360 in its
post-production business and all other assets owned, licensed, or leased by Old
Point.360 that were not used exclusively in connection with the business of Old
Point.360 representing advertising agencies, advertisers, brands, and other
media companies which require services for short-form media content (the “ADS
Business”), with the Company assuming certain liabilities of Old Point.360 and
(2) Old Point.360 distributed to its shareholders on a pro rata basis all of the
outstanding common stock of the Company (the
“Spin-off”).
In the Spin-off, each Old Point.360
shareholder received one share of Company common stock (and a related preferred
share purchase right) for each share of Old Point.360 common stock
held by the shareholder as of the record date of August 7, 2007. As a
result of the Contribution and the Spin-off, the assets and liabilities of Old
Point.360 acquired by DG FastChannel in the Merger consisted only of those
assets and liabilities exclusively related to the ADS
Business. Immediately after the completion of the Spin-off, DG
FastChannel contributed to the Company shares of the Company common stock that
it received in the Spin-off as a shareholder of Old Point.360. As a
result of the Spin-off, the Company became a publicly held company whose common
stock is traded on the NASDAQ Global Market and is registered under Section 12
of the Securities Exchange Act of 1934.
The accompanying Consolidated Financial
Statements include the accounts and transactions of the Company, including those
of the Company’s only subsidiary, International Video Conversions, Inc.
(“IVC”). The accompanying Consolidated Financial Statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. All intercompany balances and transactions
have been eliminated in the consolidated Financial Statements.
The Company’s consolidated results of
operations, financial position and cash flow may not be indicative of its future
performance and do not necessarily reflect what the consolidated results of
operations, financial position and cash flows would have been had the Company
operated as a separate, stand-alone entity during the periods presented,
including changes in its operations and capitalization as a result of the
separation and distribution form Old Point.360.
For periods prior to the Spin-off,
certain corporate and general and administrative expenses, including those
related to executive management, tax, accounting, legal and treasury services,
have been allocated by Old Point.360 to the Company based on the ratio of the
Company’s revenues to Old Point.360’s total revenues. Additionally,
balance sheet amounts shown as “Due to parent company” and “Due to parent
company, less current portion” have been allocated by Old Point.360 to the
Company based on the ratio of the Company’s working capital and net fixed assets
to total Old Point.360 working capital and net fixed assets,
respectively. Management believes such allocations represent a
reasonable estimate of such expenses that would have been incurred by the
Company on a stand-alone basis. However, the associated balance sheet
amounts and expenses recorded by the Company in the accompanying Consolidated
Financial Statements may not be indicative of the actual balance or expenses
that would have been recorded or incurred had the Company been operating as a
separate, stand-alone public company for the periods
presented. Following the separation and distribution from Old
Point.360, the Company has performed administrative functions using internal
resources or purchased services.
9
The
process of segregating the post production business and the ads business
required the following:
Invested
equity at December 31, 2005 and 2006 and June 30, 2007 reflects the application
of estimating techniques described above on those dates. Changes in invested
equity from year to year are due to the income or loss of the Company and the
net effect of the changes in balance sheet accounts determined by such
estimating techniques.
In
presenting the Consolidated Financial Statements, management makes estimates and
assumptions that affect the amounts reported and related disclosures. Estimates,
by their nature, are based on judgment and available information. Accordingly,
actual results could differ from those estimates.
Restatement
of Prior Year Financial Statements
The financial statements include
restatements of Deferred Income Taxes and Invested Equity as of December 31,
2004, 2005 and 2006 and June 30, 2007 to reflect the correction of an accounting
error described in Note 13 to these consolidated financial
statements. Additionally, certain footnote data related to these
amounts has been restated. See Note 14 to these financial statements
for restatement of these amounts in the unaudited consolidated balance sheets
and certain related footnotes contained in the Company’s Forms 10-Q for the
quarters ended September 30, 2007, December 31, 2007 and March 31,
2008.
Business
Description
The
Company provides high definition and standard definition digital mastering, data
conversion, video and film asset management and sophisticated computer graphics
services to owners, producers and distributors of entertainment and advertising
content. The Company provides the services necessary to edit, master,
reformat, convert, archive and ultimately distribute its clients’ film and video
content, including television programming feature films and movie trailers. The
Company’s interconnected facilities provide service coverage to all major U.S.
media centers. Clients include major motion picture studios, advertising
agencies and corporations.
The
Company operates in a single business segment from six
locations. Each location is electronically tied to the others and
serves the same customer base. Depending on the location size, the
production equipment consists of tape duplication, feature movie and commercial
ad editing, encoding, standards conversion, and other machinery. Each
location employs personnel with the skills required to efficiently run the
equipment and handle customer requirements. While all locations are
not exactly the same, an order received at one location may be fulfilled at one
or more “sister” facilities to use resources in the most efficient
manner.
Typically,
a feature film or television show will be submitted to a facility by a motion
picture studio, independent producer, advertising agency, or corporation for
processing and distribution. A common sales force markets the
Company’s capability for all facilities. Once an order is received,
the local customer service representative determines the most cost-effective way
to perform the services considering geographical logistics and facility
capabilities.
The
Company does not have the systems to adequately segregate revenues for each
product and service as orders can be for multiple services performed at several
facilities. Providing information contemplated by paragraph 37 of FAS
131 is impracticable. 10
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
Cash
equivalents represent highly liquid short-term investments with original
maturities of less than three months.
Revenues
and Receivables
The
Company records revenues when the services have been
completed. Although sales and receivables are concentrated in the
entertainment industry, credit risk due to financial insolvency is limited
because of the financial stability of the customer base (i.e., large
studios).
Concentration
of Credit Risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents, and accounts
receivable. The Company maintains its cash and cash equivalents with
high credit quality financial institutions; at times, such balances with any one
financial institution may exceed FDIC insured limits.
Credit
risk with respect to trade receivables is concentrated due to the large number
of orders with major entertainment studios in any particular reporting
period. Our five largest studio customers represented 72%, 55% and
53% of accounts receivable at December 31, 2006 and June 30, 2007 and 2008
respectively. The Company reviews credit evaluations of its customers
but does not require collateral or other security to support customer
receivables.
The five
largest studio customers accounted for 52%, 58%,
56% and 52% of net sales for the years ended December 31, 2005 and 2006, the six
months ended June 30, 2007 and the year ended June 30, 2008,
respectively. Twentieth Century Fox (and affiliates) was the only
customer, which accounted for more than 10% of net sales in any of these
periods, or 26%, 33%, 34% and 26% in 2005, 2006, the six months ended June 30,
2007 and the year ended June 30, 2008, respectively.
Inventories
Inventories
comprise raw materials, principally tape stock, and are stated at the lower of
cost or market. Cost is determined using the average cost
method.
Property
and Equipment
Property
and equipment are stated at cost. Expenditures for additions and
major improvements are capitalized. Depreciation is computed using
the straight-line method over the estimated useful lives of the related
assets. Amortization of leasehold improvements is computed using the
straight-line method over the lesser of the estimated useful lives of the
improvements or the remaining lease term.
Goodwill
Prior to
the January 1, 2002 implementation of Statement of Financial Accounting
Standards (“SFAS”) No. 142, “Goodwill and Other Intangible
Assets” (“SFAS 142”), goodwill was amortized on a straight-line basis
over 5 - 20 years. Since that date, goodwill has been subject to
periodic impairment tests in accordance with SFAS 142.
The
Company identifies and records impairment losses on long-lived assets, including
goodwill that is not identified with an impaired asset, when events and
circumstances indicate that such assets might be impaired. Events and
circumstances that may indicate that an asset is impaired include significant
decreases in the market value of an asset, a change in the operating model or
strategy and competitive forces. 11
The
Company evaluates its goodwill on an annual basis and when events and
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the independent appraisal or other indicator of value
of the asset or the expected undiscounted future cash flow attributable to the
asset is less than the carrying amount of the asset, an impairment loss equal to
the excess of the asset’s carrying value over its fair value is
recorded. In 2007, fair value was determined using an independent
appraisal, which was then compared to the carrying amount of the Company
including goodwill. In 2008, the discounted cash flow method was used
to evaluate goodwill impairment and included cash flow estimates for 2009 and
subsequent years. If actual cash flow performance does not meet these
expectations due to factor cited above, any resulting potential impairment could
adversely affect reported goodwill asset values and earnings. To date, no such
impairment has been recorded.
Amounts
shown as Goodwill in the accompanying balance sheets represent the amounts of
Old Point.360’s goodwill allocable to the Company (see Note 3 for the allocation
method). Certain disclosures in the footnotes include a discussion of Old
Point.360’s goodwill (as opposed to only that allocable to the Company) to
provide an explanation of the total goodwill to be allocated.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS
109”). SFAS 109 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts for financial reporting purposes and the tax basis
of assets and liabilities. A valuation allowance is recorded for that
portion of deferred tax assets for which it is more likely than not that the
assets will not be realized.
In July
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS No. 109, “Accounting for Income Taxes”
(“FAS 109”). This interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition of tax benefits, classification on the
balance sheet, interest and penalties, accounting in interim periods,
disclosure, and transition. We adopted FIN 48 effective July 1, 2007. As a
result of the implementation of Interpretation No. 48, we did not recognize
any increase in the liability for unrecognized tax benefits. In addition, we did
not record a cumulative effect adjustment related to the adoption of FIN
48.
Advertising
Costs
Advertising
costs are not significant to the Company’s operations and are expensed as
incurred.
Fair
Value of Financial Instruments
To meet the reporting requirements of
SFAS No. 107, “Disclosures About
Fair Value of Financial Instruments” (“SFAS 107”), the Company calculates
the fair value of financial instruments and includes this additional information
in the notes to financial statements when the fair value is different than the
book value of those financial instruments. When the fair value is
equal to the book value, no additional disclosure is made. The
Company uses quoted market prices whenever available to calculate these fair
values.
Pro
Forma Earnings (Loss) Per Share
Old
Point.360 has historically followed SFAS No. 128, “Earnings per Share” (“SFAS
128”), and related interpretations for reporting earnings per
share. SFAS 128 requires dual presentation of basic earnings per
share (“Basic EPS”) and diluted earnings per share (“Diluted
EPS”). Basic EPS excludes dilution and is computed by dividing net
income (loss) by the weighted average number of common shares outstanding during
the reported period. Diluted EPS reflects the potential dilution that
could occur if a company had a stock option plan and stock options were
exercised using the treasury stock method. While the Company will be subject to
FAS 128, pro forma earnings per share in the accompanying Consolidated
Statements of Income (Loss) have been calculated based on the actual number of
the Company’s shares outstanding upon separation. 12
Supplemental
Cash Flow Information
Selected
cash payments and non-cash activities were as follows (in
thousands):
Recent
Accounting Pronouncements
In December 2007, the FASB issued SFAS
No. 141R, “Business
Combinations” (“SFAS 141R”), which requires most identifiable assets,
liabilities, non-controlling interests, and goodwill acquired in a business
combination to be recorded at “full fair value.” SFAS 141R applies to all
business combinations, including combinations among mutual entities and
combinations by contract alone. Under Statement 141R, all business combinations
will be accounted for by applying the acquisition method. Statement 141R is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. SFAS 141R will affect further acquisitions by
the Company.
In December 2007, the FASB issued
SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements” (“SFAS
160”). SFAS 160 requires the ownership interests in subsidiaries held
by parties other than the parent to be treated as a separate component of equity
and be clearly identified, labeled, and presented in the consolidated financial
statements. SFAS 160 is effective for periods beginning on or after
December 15, 2008. Earlier adoption is prohibited. SFAS 160 has
not yet affected the Company’s financial statements.
In January 2008, the SEC issued Staff
Accounting Bulletin No. 110, “Certain Assumptions Used in
Valuation Methods” (“SAB 100”) which amends Staff Accounting Bulletin No.
107, “Share-Based
Payment” (“SAB 107”). SAB 110 allows for the continued use,
under certain circumstances, of the “simplified” method in developing an
estimate of expected term of so-called “plain vanilla” stock options accounted
for under FAS 123R. SAB 110 amends SAB 107 to permit the use of the
“simplified” method beyond December 31, 2007. The adoption of SAB 110
did not have a significant effect on the Company’s consolidated financial
statements.
In March 2008, the FASB issued SFAS No.
161. “Disclosures about
Derivative Instruments and Hedging Activities – an amendment of FASB Statement No,
133” (“FAS 161”). The standard requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative
instruments, and disclosures about credit-risk related contingent features in
derivative agreements. FAS 161 is effective for financial statements
issued after November 15, 2008. The adoption of FAS 161 will not have
a significant effect on the Company’s consolidated financial
statements.
3. ACQUISITIONS:
During
1997 to 2007, Old Point.360 acquired eleven businesses. These
acquisitions were accounted for as purchases, with the excess of the purchase
price over the fair value of the net assets acquired allocated to
goodwill. The contingent portion of the purchase prices, to the
extent earned was recorded as an increase to goodwill. As of June 30,
2008, additional purchase price earn-out payments are as described
below. The consolidated financial statements of the Company reflect
the operations of the acquired post production companies since their respective
acquisition dates.
13
Old
Point.360’s goodwill and other intangibles, net, as of December 31, 2006 and
June 30, 2007 consist of the following:
Old
Point.360 ceased amortizing goodwill on January 1, 2002 with the adoption of
SFAS 142. The covenant not to compete was fully amortized in
2003.
Old
Point.360 operated in a single business segment due to the combination of
facility assets, sales forces and management subsequent to the acquisitions, and
the integration of branding and communications efforts. The goodwill acquired,
therefore, is common to all Old Point.360 facilities. As of December 31, 2006
and June 30, 2007, the goodwill assignable to the Company was
$9,253,000 and $9,868,000, respectively, determined by comparing the
value of the Company determined by an independent appraiser to the value of the
advertising distribution business of Old Point.360 as evidenced by the market
value of consideration to be paid by DG FastChannel for the advertising
distribution business.
During
2006, the amount of goodwill, net, increased from $29,474,000 to $31,474,000 due
to the $2,000,000 earn-out payment accrued for the IVC
acquisition. During the six months ended June 30, 2007, the amount of
goodwill, net, increased from $31,474,000 to $33,568,000 due to the acquisition
of Eden FX. As described above, a portion of Old Point.360’s goodwill, including
goodwill from the IVC transaction has been allocated to the
Company.
In the
fiscal year ended June 30, 2008, the amount of goodwill did not
change.
4. PROPERTY
AND EQUIPMENT:
In March
2006, Old Point.360 entered into a sale and leaseback transaction with respect
to its Media Center vaulting real estate. The real estate was sold
for approximately $14.0 million resulting in a $1.3 million after tax
gain. Additionally, Old Point.360 received $0.5 million from the
purchaser for improvements. In accordance with SFAS No. 28, “Accounting for Sales with
Leasebacks,” the gain will be amortized over the initial 15-year lease
term as reduced rent. Net proceeds at the closing of the sale and the
improvement advance (approximately $13.8 million) were used to pay off the
mortgage and other outstanding debt.
The lease
is treated as an operating lease for financial reporting purposes. After the
initial lease term, the Company has four five-year options to extend the lease.
Minimum annual rent payments for the initial five years of the lease are
$1,111,000 and increasing annually thereafter based on the consumer price index
change from year to year. 14
Property
and equipment consist of the following:
Depreciation
is expensed over the estimated lives of machinery and equipment (7 years),
computer equipment (5 years) and leasehold improvements (2 to 10 years depending
on the remaining term of the respective leases or estimated useful life of the
improvement). Depreciation expense totaled $ 5,096,000, $ 4,653,000, $2,359,000
and $4,700,000 for the years ended December 31, 2005 and
2006, the six months ended June 30, 2007 and the year ended June 30,
2008, respectively. Accumulated amortization on capital
leases amounted to $ 254,000, $264,000 and $281,000 as of December 31, 2006,
June 30, 2007 and 2008, respectively.
In July
2008, the Company purchased land and a building. See Note 14 -
Subsequent Events.
5. 401(K)
PLAN:
The
Company has a 401(K) plan, which covers substantially all
employees. Each participant is permitted to make voluntary
contributions not to exceed the lesser of 20% of his or her respective
compensation or the applicable statutory limitation, and is immediately 100%
vested. The Company matches one-fourth of the first 4% contributed by
the employee. Contributions to the plan related to employees of the
Company were, $92,000, $84,000, $53,000 and $96,000 in the years ended December
31, 2005 and 2006, the six months ended June 30, 2007 and the year ended June
30, 2008, respectively.
6. LONG
TERM DEBT AND NOTES PAYABLE:
On
December 30, 2005, Old Point.360 entered into a $10 million term loan
agreement. The term loan provides for interest at LIBOR (5.38% as of
June 30, 2007) plus 3.15% and is secured by Old Point.360’s equipment. In March
2006, Old Point.360 prepaid $4 million of the principal with proceeds of a
sale/leaseback transaction. The term loan will be repaid in 60 equal monthly
principal payments plus interest. Proceeds of the term loan were used
to repay the previously existing term loan.
On March
30, 2007, Old Point.360 entered into an additional $2.5 million term loan
agreement. The loan provides for interest at 8.35% per annum and is
secured by the Company’s equipment. The loan will be repaid in 45
equal monthly installments of principal and interest.
The
Company assumed both term loan agreements upon Spin-off.
In August
2007 the Company entered into a new credit agreement which provides up to $8
million of revolving credit based on 80% of acceptable accounts receivables, as
defined. The two-year agreement provides for interest of either (1)
prime (5.00% at June 30, 2008) minus 0%-1.00% or (2) LIBOR plus 1.50%
- 2.50% depending on the level of the Company’s ratio of outstanding debt to
fixed charges (as defined), or 4.50% or 4.91%, respectively, on June 30,
2008. The facility is secured by all of the Company’s assets, except
for equipment securing new term loans as described above. 15
Annual
maturities for debt under bank term note obligations as of June 30, 2008, are as
follows:
In the
accompanying Consolidated Balance Sheets, the current and long-term “Due to
Parent Company” amounts reflect the portion of Old Point.360’s revolving credit
and term loan debt assigned to the Company based on the proportion of the
Company’s net working capital and property and equipment, net, to Old
Point.360’s total net working capital and property and equipment, net,
respectively.
Debt
obligations allocable to the Company are included as amounts “Due to Parent
Company” in the accompanying balance sheet as follows:
The
differences in the amounts in the preceding table are shown as negative cash
flows from financing activities in the Consolidated Statements of Cash
Flows.
In July
2008, the Company entered into a $6,000,000 Promissory Note with a bank for the
purchase of land and a building. See Note 14 – Subsequent
Events.
In June 2006, the Financial Accounting
Standards Board (FASB) issued Interpretation No.48, “Accounting for Uncertainty
in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with Statement of Financial Accounting Standards No. 109, “Accounting for Income
Taxes” (“FAS 109”). This interpretation prescribes a recognition and measurement
of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition of tax benefits, classification on the
balance sheet, interest and penalties, accounting in interim periods,
disclosure, and transition.
The Company assumed all liability for
income taxes of Old Point.360 related to operations prior to the Spin-off and
Merger. Effectively, the Company therefore adopted FIN 48, effective
January 1, 2007. The Company or one of its subsidiaries files income tax returns
in the U.S. federal jurisdiction, and various state jurisdictions. With few
exceptions, the Company is no longer subject to U.S. federal state or local
income tax examinations by tax authorities for years before 2002. The Company
has analyzed its filing positions in all of the federal and state jurisdictions
where it is required to file income tax returns. Old Point.360, and
consequently, the Company, was last audited by New York taxing authorities for
the years 2002 through 2004 resulting in no change. Old Point.360, and
consequently, the Company, was previously notified by the U.S. Internal Revenue
Service of its intent to audit the calendar 2005 tax return. The audit has since
been cancelled by the IRS without change; however, the audit could be reopened
at the IRS’ discretion. Upon the implementation of FIN 48, the Company did not
recognize any increase in the liability for unrecognized tax benefits. In
addition, the Company did not record a cumulative effect adjustment related to
the adoption of FIN 48.
The
Company’s provision for, or benefit from, income taxes has been determined as if
the Company filed income tax returns on a stand-alone basis. 16
The
Company’s provision for (benefit from) income taxes for the years ended December
31, 2005 and 2006, the six months ended June 30, 2007 and
the year ended June 30, 2008 consists of the following (in
thousands):
The composition of the deferred tax
assets (liabilities) at December 31, 2006 and June 30, 2007 and 2008
are
listed below:
At the
end of each fiscal year, the Company updates its reconciliation of book and tax
differences based on the tax return of the previous fiscal year filed with the
Internal Revenue Service in the third quarter of the current fiscal
year. Any resulting adjustments are reflected in the table above in
the fiscal year in which the adjustments were determined. During the
fiscal year ended June 30, 2008, a $503,000 reduction of deferred tax liability
was credited to common stock as an adjustment of invested equity in New 360 in
the Consolidated Statements of Invested and Shareholders’
Equity. 17
The
amounts in the above table have been restated to reflect the adjustment to the
non-current deferred tax liability related to Goodwill and other intangibles a
follows (in thousands):
18
The
provision for (benefit from) income taxes differs from the amount of income tax
determined by applying the applicable U.S. Statutory income taxes rates to
income before taxes as a result of the following differences:
8. COMMITMENTS
AND CONTINGENCIES:
Operating
Leases
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||