| POINT 360 ITEM 1A RISK FACTORS We have a recent history of losses, and we may incur losses in the future |
| The Company reported losses in each of the five fiscal quarters ended December 31, 2001 and in several quarters thereafter 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 most fiscal quarters between March 31, 2002 and December 31, 2005, there can be no assurance as to future profitability on a quarterly or annual basis |
| We have previously breached our credit agreements and may do so in the future |
| Due to lower operating cash amounts resulting from reduced sales levels in 2001 and the consequential net losses, the Company breached certain covenants of its credit facility |
| The breaches were temporarily cured based on amendments and forbearance agreements among the Company and the banks which called for, among other provisions, scheduled payments to reduce amounts owed to the banks to the permitted borrowing base |
| In August 2001, the Company failed to meet the principal repayment schedule and was once again in breach of the credit facility |
| The banks ended their formal commitment to the Company in December 2001 |
| In May 2002, we entered into an agreement with the banks to restructure the credit facility to a term loan maturing on December 31, 2004 |
| As part of this restructuring, the banks waived all existing defaults and the Company was required to make principal payments of dlra5dtta5 million, dlra5dtta0 million and dlra18dtta5 million in 2002, 2003, and 2004, respectively |
| In March 2004, we entered into a revised agreement with the banks providing revolving and term loan facilities |
| Annual principal payments for the term loan were to be dlra1dtta6 million each for five years |
| Any principal outstanding under the revolver was to be due in March 2006 |
| In July and August 2004, the credit agreement was amended in connection with the acquisition of IVC to increase the amounts that can be borrowed under the revolving and term loan portions of the arrangement |
| Approximately dlra4dtta7 million was borrowed to consummate the transaction |
| Also, in August 2004, we borrowed dlra6cmam435cmam000 to purchase land and a building to house our Los Angeles area media storage capability |
| During the second quarter of 2005, we entered into discussions with the banks to amend certain financial covenants contained in our credit agreement to more closely track our changing business environment which has contributed to lower sales and profits in previous quarters |
| As of June 30, 2005, our credit agreement was changed to shorten the due date of the outstanding revolving loan from March 12, 2006 to January 31, 2006 (subsequently extended to March 31, 2006), eliminate a re-borrowing provision of the term loan, increase interest rates on the revolver and term loans by 0dtta5prca and revise certain financial covenants |
| As of December 30, 2005, the Company did not meet certain financial covenants contained in the credit facility and received a compliance waiver from the bank |
| The credit facility was paid in full in March 2006 |
| In December 2005, we entered a new five-year term loan, paying off the previously existing term loan with the proceeds there from |
| In March 2006, we entered a new revolving credit agreement providing for borrowing up to dlra10 million (based on qualified accounts receivable) for a two-year period |
| Additionally, we sold and leased back our Media Center facility which reduced mortgage debt by dlra6dtta0 million and generated approximately dlra8dtta0 million for other debt reduction and general corporate purposes |
| The resulting annual lease payments will be approximately dlra1cmam100cmam000 as compared to dlra687cmam000 of previously scheduled mortgage debt service (principal and interest) and approximately dlra600cmam000 of annual interest cost on other debt repaid with the sale proceeds |
| 6 _________________________________________________________________ If the Company incurs losses in the future, there is a risk that we will default under certain financial covenants contained in the new agreements and/or will not be able to pay off the revolving and term loans when due |
| If a default condition exists in the future, all amounts outstanding under the new agreements will be due and payable which could materially and adversely affect our business |
| We may be unable to compete effectively in a highly competitive marketplace |
| Our post production, duplication and distribution industry is a highly competitive, service-oriented business |
| In general, we do not have long-term or exclusive service agreements with our customers |
| Business is acquired on a purchase order basis and is based primarily on customer satisfaction with reliability, timeliness, quality and price |
| We compete with a variety of post production, duplication and distribution firms, some of which have a national presence, and to a lesser extent, t in-house post production and distribution operations of our major motion picture studio and advertising agency customers |
| Some of these firms, and all of the studios, have greater financial, distribution and marketing resources and have achieved a higher level of brand recognition than the Company |
| In the future, we may not be able to compete effectively against these competitors merely on the basis of reliability, timeliness, quality and price or otherwise |
| We may also face competition from companies in related markets which could offer similar or superior services to those offered by the Company |
| We believe that an increasingly competitive environment as evidenced by recent price pressure and some related loss of work and the possibility that customers may utilize in-house capabilities to a greater extent could lead to a loss of market share or additional price reductions, which could have a material adverse effect on our financial condition, results of operations and prospects |
| There is also the risk that third party vendors who directly compete with us will succeed in taking away business or curtailing services to us |
| We rely on such companies principally to electronically deliver commercial spots on behalf of our advertising clients |
| In June 2005, one such vendor notified us that its electronic distribution channel was no longer available to us except under certain circumstances |
| While curtailment of these services in this instance has not materially affected our ability to deliver commercial spots, any future interruption in the supply of such services could materially and adversely affect the Company’s financial condition, results of operations and prospects |
| We would be adversely affected by the loss of key customers |
| Although we have an active client list of over 2cmam500 customers, ten motion picture studios and advertising agencies and/or their affiliates accounted for approximately 47prca, 38prca and 29prca of the Company’s revenues in 2005, 2004 and 2003, respectively |
| 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 |
| Our expansion strategy may fail |
| 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 ten acquisitions in the last eight fiscal years, the most recent of which was in November 2005, 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 |
| 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 |
| 7 _________________________________________________________________ If we acquire any entities, we may have to finance a large portion of the anticipated purchase price and/or refinance our existing credit agreements |
| The cost of any new financing may be higher than our existing credit facilities |
| Future earnings and cash flow may be negatively impacted if any acquired entity does not generate sufficient earnings and cash flow to offset the increased costs |
| We are operating in a changing environment that may adversely affect our business |
| In prior years, we experienced rapid growth, industry consolidation, changing technologies and increased regulation, all of which resulted in new and increased responsibilities for management personnel and placed, and continues to place, increased demands on our management, operational and financial systems and resources |
| To accommodate these circumstances, compete effectively and manage future growth, we will be required to continue to implement and improve our operational, financial and management information systems, and to expand, train, motivate and manage our work force |
| We cannot be sure that 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 |
| We may be unable to adapt our business to changing technological requirements |
| Although we intend to utilize the most efficient and cost-effective technologies available for telecine, high definition formatting, editing, coloration and delivery of audio and video content, 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 |
| 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 |
| Additionally, in recent years, electronic delivery services have grown while physical duplication and delivery have been declining |
| We expect this trend to continue over a long term (ie the next 5 to 10 years) |
| All of our electronic, fiber optics, satellite and Internet deliveries are made using third party vendors, which eliminates our need to invest in such capability |
| The loss of key personnel would adversely affect our business |
| The Company is dependent on the efforts and abilities of certain of its senior management, particularly those of Haig S Bagerdjian, Chairman, President and Chief Executive Officer |
| The loss or interruption of the services of key members of management could have a material adverse effect on our financial condition, results of operations and prospects if a suitable replacement is not promptly obtained |
| Bagerdjian beneficially owns approximately 29prca of the Company’s outstanding stock |
| Although we have severance agreements with Mr |
| Bagerdjian and certain key executives, we cannot be sure that either Mr |
| Bagerdjian or other executives will remain with the Company |
| In addition, our success depends to a significant degree upon the continuing contributions of, and on our ability to attract and retain, qualified management, sales, operations, marketing and technical personnel |
| The competition for qualified personnel is intense and the loss of any such persons, as well as the failure to recruit additional key personnel in a timely manner, could have a material adverse effect on our financial condition, results of operations and prospects |
| There is no assurance that we will be able to continue to attract and retain qualified management and other personnel for the development of our business |
| Our business is dependent on our ability to meet the current and future demands of our customers, which demands include reliability, timeliness, quality and price |
| Any failure to do so, whether or not caused by factors within our control could result in losses to such clients |
| Although we disclaim any liability for such losses, there is no assurance that claims would not be asserted or that dissatisfied customers would refuse to make further deliveries through the Company in the event of a significant occurrence of lost deliveries, either of which could have a material adverse effect on our financial condition, results of operations and prospects |
| Although we maintain insurance against business interruption, such insurance may not be adequate to protect the Company from significant loss in these circumstances and there is no assurance that a major catastrophe (such as an earthquake or other natural disaster) would not result in a prolonged interruption of our business |
| In addition, our ability to make deliveries within the time periods requested by customers depends on a number of factors, some of which are outside of our control, including equipment failure, work stoppages by package delivery vendors or interruption in services by telephone or satellite service providers |
| Our quarterly operating results have fluctuated significantly in the past and may fluctuate in the future |
| Our operating results have varied in the past, and may vary in the future, depending on factors such as 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 if the percentage of business from advertising agencies increases |
| 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 |
| 8 _________________________________________________________________ Our controlling shareholders may cause our company to be operated in a manner that is not in the best interests of other shareholders |
| The Company’s Chairman, President and Chief Executive Officer, Haig S Bagerdjian, beneficially owned approximately 29prca of the outstanding common stock as of December 31, 2005 |
| The ex-spouse of R Luke Stefanko, the Company’s former President and Chief Executive Officer, owned approximately 19prca of the common stock on that date |
| Midwood Capital Partners, LP owned approximately 7prca of the common stock on that date |
| Together, they owned approximately 55prca of our outstanding common stock |
| Bagerdjian individually or together may be able to significantly influence the outcome of matters required to be submitted to a vote of shareholders, including (i) the election of the board of directors, (ii) amendments to the Company’s Restated Articles of Incorporation and (iii) approval of mergers and other significant corporate transactions |
| The foregoing may have the effect of discouraging, delaying or preventing certain types of transactions involving an actual or potential change of control of the Company, including transactions in which the holders of common stock might otherwise receive a premium for their shares over current market prices |
| Our shareholder rights plan and ability to issue preferred stock may discourage, delay or prevent a change in control of our company that would benefit our shareholders |
| Our Board of Directors has the authority to issue up to 5cmam000cmam000 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 |
| On November 17, 2004, the Company declared a dividend distribution of one Preferred Share Purchase Right on each outstanding share of its common stock |
| The Rights will be attached to the Company’s Common Stock and will trade separately and be exercisable only in the event that a person or group acquires or announces the intent to acquire 20prca or more of Point |
| 360’s Common Stock |
| Each Right will entitle shareholders to buy one one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of dlra10 |
| If the Company is acquired in a merger or other business combination transaction after a person has acquired 20prca or more of the Company’s outstanding Common Stock, each Right will entitle its holder to purchase, at the Right’s then-current exercise price, a number of the acquiring company’s common shares having a market value of twice such price |
| 360’s outstanding Common Stock, each Right will entitle its holder (other than such person or members of such group) to purchase, at the Right’s then-current exercise price, a number of the Company’s common shares having a market value of twice such price |
| Following an acquisition by a person or group of beneficial ownership of 20prca of more of the Company’s Common Stock and before an acquisition of 50prca or more of the Common Stock, Point |
| 360’s Board of Directors may exchange the Rights (other than Rights owned by such person or group), in whole or in part, at an exchange ratio of one one-hundredth of a share of the new series of junior participating preferred stock per Right |
| Before a person or group acquires beneficial ownership of 20prca or more of the Company’s Common Stock, the Rights are redeemable for $ |
| The Rights are intended to enable Point |
| 360’s shareholders to realize the long-term value of their investment in the Company |
| They will not prevent a takeover, but should encourage anyone seeking to acquire the Company to negotiate with the Board prior to attempting a takeover |
| Although we have no current plans to issue any other shares of Preferred Stock, the rights of the holders of common stock would be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future |
| Issuance of Preferred Stock could have the effect of discouraging, delaying, or preventing a change in control of the Company |
| 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 |