UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 ___________
 
 FORM
10-Q/A
 
 (Mark
One)
 
 þQuarterly report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
 
 For the
quarterly period ended March 31, 2009 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 001-33468
 
 Point.360
 (Exact
Name of Registrant as Specified in Its Charter)
 
 California
                  (State
      or other jurisdiction of
                  incorporation
      or organization)
                01-0893376
                  (I.R.S.
      Employer Identification No.)2777
      North Ontario Street, Burbank, CA
                  (Address
      of principal executive offices)
                91504
                  (Zip
      Code)
 
 (818) 565-1400
 (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.
 
 þYes                       ̈No
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
 
 þYes                       ̈No
 
 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):
 Large
accelerated filer    o                                                         
Accelerated filer   o
 Non-accelerated
filero                                                   Smaller reporting
companyþ
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 
 oYes                      þNo
 
 As of
March 31, 2009, there were 10,225,300 shares of the registrant’s common stock
outstanding.
  
  EXPLANATORY
NOTE
 
 The
purpose of this Form 10-Q/A of Point.360 (the “Company”) for the three and nine
months ended March 31, 2009 is to restate the Company’s interim consolidated
financial statements as of and for the three and nine months ended March 31,
2009 contained in the Company’s original Form 10-Q (the “Original Form 10-Q”) to
correct amounts on the Company’s consolidated balance sheet, statements of
income (loss) and cash flows.  Specifically, the amounts presented in
the Company’s consolidated balance sheet, statements of income (loss) and cash
flows as of and for the nine months ended March 31, 2009 in this Form 10-Q/A
reflect a correction with respect to sales cutoff errors related to the timing
of revenue recognition under  the proportional performance
method.  The adjustments to revenues were a follows:
 
 Three
      months ended March 31, 2009 (increase in revenues)
                      
                      $
                      165,000Nine
      months ended March 31, 2009  (increase in
    revenues)
                      
                      $
                      79,000
 
 As a
result of the correction, the Company has determined it to be necessary to amend
the Original Form 10-Q.  This Form 10-Q/A amends and restates, in its
entirety, Part I, Item 1, Item 2 and Item 4T of the Original Form
10-Q.  This Form 10-Q/A continues to reflect circumstances as of the
date of the filing of the Original Form 10-Q and does not reflect events
occurring after the filing of the Original Form 10-Q, or modify or update those
disclosures in any way, except as required to reflect the effects of the
restatement as described in Note 15 to the accompanying interim consolidated
financial statements.
  2
  PART
I – FINANCIAL INFORMATION
  ITEM
1.   FINANCIAL STATEMENTS
 POINT.360
 CONSOLIDATED
BALANCE SHEETS
 
 March
      31,Assets
                              
                              June
      30,
                                2008
                              
                              
                              2009
                                (As
      Restated,
                                See
      Note 15)(unaudited)Current
      assets:Cash
      and cash equivalents
                              
                              $
                              13,056,000
                              
                              
                              $
                              7,047,000Accounts
      receivable, net of allowances for doubtful accounts of $541,000 and
      $526,000,respectively
                              
                              
                              6,971,000
                              
                              
                              
                              8,717,000Inventories,
      net
                              
                              
                              502,000
                              
                              
                              
                              430,000Prepaid
      expenses and other current assets
                              
                              
                              667,000
                              
                              
                              
                              646,000Prepaid
      income taxes
                              
                              
                              1,441,000
                              
                              
                              
                              2,142,000Deferred
      income taxes
                              
                              
                              490,000
                              
                              
                              
                              490,000Total
      current assets
                              
                              
                              23,127,000
                              
                              
                              
                              19,472,000Property
      and equipment, net
                              
                              
                              8,667,000
                              
                              
                              
                              15,684,000Deferred
      income taxes
                              
                              
                              210,000
                              
                              
                              
                              165,000Other
      assets, net
                              
                              
                              533,000
                              
                              
                              
                              317,000Goodwill
                              
                              
                              9,820,000
                              
                              
                              
                              9,961,000Total
      assets
                              
                              $
                              42,358,000
                              
                              
                              $
                              45,599,000Liabilities and Shareholders’
      EquityCurrent
      liabilities:Accounts
      payable
                              
                              $
                              1,716,000
                              
                              
                              $
                              1,504,000Accrued
      wages and benefits
                              
                              
                              2,109,000
                              
                              
                              
                              1,775,000Other
      accrued expenses
                              
                              
                              816,000
                              
                              
                              
                              520,000Current
      portion of borrowings under notes payable and capital lease
      obligations
                              
                              
                              1,810,000
                              
                              
                              
                              1,962,000Current
      portion of deferred gain on sale of real estate
                              
                              
                              178,000
                              
                              
                              
                              178,000Total
      current liabilities
                              
                              
                              6,631,000
                              
                              
                              
                              5,940,000Notes
      payable and capital lease obligations, less current
portion
                              
                              
                              2,839,000
                              
                              
                              
                              7,458,000Deferred
      gain on sale of real estate, less current portion
                              
                              
                              2,089,000
                              
                              
                              
                              1,955,000Total
      long-term liabilities
                              
                              
                              4,928,000
                              
                              
                              
                              9,413,000Total
      liabilities
                              
                              
                              11,558,000
                              
                              
                              
                              15,353,000Commitments
      and contingencies
                              
                              
                              -
                              
                              
                              
                              -Shareholders’
      equityPreferred
      stock – no par value; 5,000,000 shares authorized; none
      outstanding
                              
                              
                              -
                              
                              
                              
                              -Common
      stock – no par value; 50,000,000 shares authorized; 10,553,410 and
      10,225,300shares
      issued and outstanding, respectively
                              
                              
                              21,583,000
                              
                              
                              
                              21,124,000Additional
      paid-in capital
                              
                              
                              9,320,000
                              
                              
                              
                              9,491,000Retained
      earnings (deficit)
                              
                              
                              (103,000
                              )
                              
                              
                              (369,000
                              )Total
      shareholders’ equity
                              
                              
                              30,800,000
                              
                              
                              
                              30,246,000Total
      liabilities and shareholders’ equity
                              
                              $
                              42,358,000
                              
                              
                              $
                              45,599,000
 
 See
accompanying notes to consolidated financial statements.
  3
 
 POINT.360
 
 CONSOLIDATED
STATEMENTS OF INCOME (LOSS)
 (Unaudited)
 
 Three
      Months Ended
                              March
      31,
                            
                            
                            Nine
      Months Ended
                              March
      31,2008
                            
                            
                            2009
                              (As
      Restated,
                              See
      Note 15)
                            
                            
                            2008
                            
                            
                            2009
                              (As
      Restated,
                              See
      Note 15)Revenues
                            
                            $
                            11,284,000
                            
                            
                            $
                            11,269,000
                            
                            
                            $
                            33,785,000
                            
                            
                            $
                            34,627,000Cost
      of services
                            
                            
                            (7,361,000
                            )
                            
                            
                            (7,513,000
                            )
                            
                            
                            (23,600,000
                            )
                            
                            
                            (22,901,000
                            )Gross
      profit
                            
                            
                            3,923,000
                            
                            
                            
                            3,756,000
                            
                            
                            
                            10,185,000
                            
                            
                            
                            11,726,000Selling,
      general and administrative expense
                            
                            
                            (3,713,000
                            )
                            
                            
                            (4,267,000
                            )
                            
                            
                            (10,858,000
                            )
                            
                            
                            (11,968,000
                            )Restructuring
      costs
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (513,000
                            )
                            
                            
                            -Operating
      income (loss)
                            
                            
                            210,000
                            
                            
                            
                            (511,000
                            )
                            
                            
                            (1,186,000
                            )
                            
                            
                            (242,000
                            )Interest
      expense
                            
                            
                            (49,000
                            )
                            
                            
                            (177,000
                            )
                            
                            
                            (398,000
                            )
                            
                            
                            (502,000
                            )Interest
      income
                            
                            
                            7,000
                            
                            
                            
                            2,000
                            
                            
                            
                            293,000
                            
                            
                            
                            46,000Other
      income (expense)
                            
                            
                            100,000
                            
                            
                            
                            13,000
                            
                            
                            
                            100,000
                            
                            
                            
                            152,000Income
      (loss) before income taxes
                            
                            
                            269,000
                            
                            
                            
                            (673,000
                            )
                            
                            
                            (1,191,000
                            )
                            
                            
                            (546,000
                            )(Provision
      for) benefit from income taxes
                            
                            
                            (119,000
                            )
                            
                            
                            253,000
                            
                            
                            
                            159,000
                            
                            
                            
                            280,000Net
      income (loss)
                            
                            $
                            150,000
                            
                            
                            $
                            (420,000
                            )
                            
                            $
                            (1,032,000
                            )
                            
                            $
                            (
      266,000
                            )Earnings
      (loss) per share:Basic:Net
      income (loss)
                            
                            $
                            0.01
                            
                            
                            $
                            (0.04
                            )
                            
                            $
                            (0.10
                            )
                            
                            $
                            (0.03
                            )Weighted
      average number of shares
                            
                            
                            10,553,410
                            
                            
                            
                            10,319,664
                            
                            
                            
                            10,553,410
                            
                            
                            
                            10,421,256Diluted:Net
      income (loss)
                            
                            $
                            0.01
                            
                            
                            $
                            (0.04
                            )
                            
                            $
                            (0.10
                            )
                            
                            $
                            (0.03
                            )Weighted
      average number of shares including the dilutive effect of stock
      options
                            
                            
                            10,553,410
                            
                            
                            
                            10,319,664
                            
                            
                            
                            10,553,410
                            
                            
                            
                            10,421,256
 
 See
accompanying notes to consolidated financial statements.
  4
  POINT.360
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
  Nine
      Months Ended
                              March
      31,2008
                            
                            
                            2009
                              (As
      Restated,
                              See
      Note 15)Cash
      flows from operating activities:Net
      income (loss)
                            
                            $
                            (1,032,000
                            )
                            
                            $
                            (266,000
                            )Stock
      based compensation expense
                            
                            
                            -
                            
                            
                            
                            171,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                            
                            
                            3,528,000
                            
                            
                            
                            3,643,000Provision
      for doubtful accounts
                            
                            
                            41,000
                            
                            
                            
                            (15,000
                            )Changes
      in assets and liabilities:(Increase)
      in accounts receivable
                            
                            
                            (681,000
                            )
                            
                            
                            (1,731,000
                            )Decrease
      in inventories
                            
                            
                            1,000
                            
                            
                            
                            72,000(Increase)
      in prepaid expenses andother
      current assets
                            
                            
                            (161,000
                            )
                            
                            
                            (680,000
                            )(Increase)
      decrease in other assets
                            
                            
                            (3,000
                            )
                            
                            
                            222,000(Increase)
      decrease in deferred tax asset
                            
                            
                            54,000
                            
                            
                            
                            45,000(Decrease)
      in accounts payable
                            
                            
                            (1,030,000
                            )
                            
                            
                            (212,000
                            )(Decrease)
      in accrued expenses
                            
                            
                            (445,000
                            )
                            
                            
                            (629,000
                            )Decrease
      in income taxes payable
                            
                            
                            -
                            
                            
                            
                            -Increase
      in deferred taxes
                            
                            
                            10,000
                            
                            
                            
                            -Net
      cash (used in) operating activities
                            
                            
                            282,000
                            
                            
                            
                            620,000Cash
      used in investing activities:Capital
      expenditures
                            
                            
                            (1,400,000
                            )
                            
                            
                            (10,384,000
                            )Investment
      in Acquisitions
                            
                            
                            -
                            
                            
                            
                            (422,000
                            )Net
      cash used in investing activities
                            
                            
                            (1,400,000
                            )
                            
                            
                            (10,806,000
                            )Cash
      flows provided by  (used in) financing
    activities:Amortization
      of deferred gain on sale of real estate.
                            
                            
                            (140,000
                            )
                            
                            
                            (134,000
                            )Stock
      compensation and stock buyback
                            
                            
                            -
                            
                            
                            
                            (459,000
                            )Decrease
      in invested equity
                            
                            
                            7,155,000
                            
                            
                            
                            -Increase
      (decrease) in notes payable
                            
                            
                            (774,000
                            )
                            
                            
                            4,612,000Repayment
      of capital lease
                            
                            
                            (5,000
                            )
                            
                            
                            (96,000
                            )Acquisition
      of capital lease
                            
                            
                            -
                            
                            
                            
                            254,000Net
      cash provided by (used in) financing activities
                            
                            
                            6,236,000
                            
                            
                            
                            4,177,000Net
      increase (decrease) in cash
                            
                            
                            5,118,000
                            
                            
                            
                            (6,009,000
                            )Cash
      and cash equivalents at beginning of period
                            
                            
                            7,302,000
                            
                            
                            
                            13,056,000Cash
      and cash equivalents at end of period
                            
                            $
                            12,420,000
                            
                            
                            $
                            7,047,000Supplemental
      disclosure of cash flow information  - Cash paid
      for:Interest
                            
                            $
                            402,000
                            
                            
                            $
                            474,000Income
      tax
                            
                            $
                            15,000
                            
                            
                            $
                            375,000
 
 See
accompanying notes to consolidated financial statements.
  5
  POINT.360
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 March
31, 2009
 
 NOTE
1 - THE COMPANY
  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.
  The
Company seeks to capitalize on growth in demand for the services related to the
distribution of entertainment content, without assuming the production or
ownership risk of any specific television program, feature film or other form of
content.  The primary users of the Company’s services are
entertainment studios and advertising agencies that choose to outsource such
services due to the sporadic demand of any single customer for such services and
the fixed costs of maintaining a high-volume physical plant.
  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”).
  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.  Subsequent to the Merger, the
Company changed its name back to Point.360.
  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.
  The
accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles and the Securities and Exchange
Commission’s rules and regulations for reporting interim financial statements
and footnotes.  In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included.  Operating results for the three
month and nine month periods ended March 31, 2009 are not necessarily indicative
of the results that may be expected for the fiscal year ending June 30,
2009.  These financial statements should be read in conjunction with
the financial statements and related notes contained in the Company’s Forms 10-K
and 10-K/A for the period ended June 30, 2008.
  Earnings
Per Share
  The
weighted number of shares outstanding reflects the dilutive effect of stock
options outstanding, if any.
  6
  NOTE
2- LONG TERM DEBT AND NOTES PAYABLE
  On
December 30, 2005, Old Point.360 entered into a new $10 million term loan
agreement.  The term loan provides for interest at LIBOR (1.80% as of
March  31, 2009) plus 3.15%, or 4.95% on that date, and is secured by
equipment.  The term loan will be repaid in 60 equal monthly principal
payments plus interest.  Proceeds of the term loan were used to repay
a previously existing term loan.  In March 2006, Old Point.360 prepaid
$4 million of the term loan.  Monthly principal payments were
subsequently reduced pro rata.
  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
equipment. The loan is being repaid in 45 equal monthly installments of
principal and interest.
  The
Company assumed both term loan agreements upon the Spin-off.
  In August
2007, the Company entered into a new credit agreement which provides up to $8
million of revolving credit.  The two-year agreement provides for
interest at either (i) prime (3.25% as of March  31, 2009) minus 0% -
1.00% or (ii) LIBOR plus 1.5% - 2.5%, depending on the level of the Company’s
ratio of outstanding debt to fixed charges (as defined), or 2.75% and 3.80%,
respectively, on  March 31, 2009.  The facility is secured
by all of the Company’s assets, except for equipment securing the term
loans.  The revolving credit agreement requires the Company to comply
with various financial and business covenants.  There are cross
default provisions contained in both the revolving and term loan
agreements.  No amount was outstanding under the credit agreement as
of March 31, 2009.
 
 In July
2008, the Company entered into a Promissory Note with a bank (the “Note”) in
order to purchase land and a building that has been occupied by the Company
since 1998 (the total purchase price was approximately $8.1 million, of which
$2.4 million was allocated to land).  Pursuant to the Note, the
Company borrowed $6,000,000 payable in monthly installments of principal and
interest on a fully amortized bases over 30 years at an initial five-year
interest rate of 7.1% and thereafter at a variable rate equal to LIBOR plus 3.6%
(5.4% as of March 31, 2009).  The mortgage debt is secured by the land
and building.
 
 NOTE
3- SALE OF REAL ESTATE
  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 Sale and
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
improvement advance (approximately $13.8 million) were used to pay off the
mortgage and other outstanding debt.
  All
rights and obligations under the lease were transferred to the Company in the
Spin-off.  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, increasing annually thereafter
based on the Consumer Price Index change from year to year.
 
 NOTE
4- CONTINGENCIES
 
 From time
to time the Company may become a party to other legal actions and complaints
arising in the ordinary course of business, although it is not currently
involved in any such material legal proceedings.
 
 NOTE
5- INCOME TAXES
 
 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,  were 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.
  7
 
 NOTE
6- STOCK OPTION PLAN, STOCK-BASED COMPENSATION
 
 In May
2007, the Board of Directors approved the 2007 Equity Incentive Plan (the “2007
Plan”).  The 2007 Plan provides for the award of options to purchase
up to 2,000,000 shares of common stock, appreciation rights and restricted stock
awards.
  Under the
2007 Plan, the stock option price per share for options granted is determined by
the Board of Directors and is based on the market price of the Company’s common
stock on the date of grant, and each option is exercisable within the period and
in the increments as determined by the Board, except that no option can be
exercised later than ten years from the grant date.  The stock options
generally vest in one to five years.
  The
Company has adopted SFAS 123(R) which requires the measurement and recognition
of compensation expense for all share-based payment awards made to employees and
directors based on estimated fair values.  SFAS 123(R) requires
companies to estimate the fair value of the award that is ultimately expected to
vest to be recognized as expense over the requisite service periods in our
Consolidated Statements of Income (Loss).
  SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards to employees and directors on the date of grant using an option-pricing
model. The value of the portion of the award that is ultimately expected to vest
is recognized as expense over the requisite service periods in the Company’s
Consolidated Statements of Income (Loss).  Stock-based compensation
expense recognized in the Consolidated Statements of Income (Loss) for the
quarter and nine months ended March 31, 2009 included compensation expense for
the share-based payment awards based on the grant date fair value estimated in
accordance with the provisions of SFAS 123(R).  For stock-based awards
issued to employees and directors, stock-based compensation is attributed to
expense using the straight-line single option method.  As stock-based
compensation expense recognized in the Statements of Consolidated Income (Loss)
for the periods reported in this Form 10-Q/A is based on awards expected to
vest, SFAS 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. For the periods being reported in this Form 10-Q/A, expected
forfeitures are immaterial. The Company will re-assess the impact of forfeitures
if actual forfeitures increase in future quarters.  Stock-based
compensation expense related to employee or director stock options recognized
for the three and nine month periods ended March 31, 2009 was $54,000 ($32,000
net of tax benefit) and $171,000 ($103,000 net of tax benefit),
respectively.
 
 The
Company’s determination of fair value of share-based payment awards to employees
and directors on the date of grant uses the Black-Scholes model, which is
affected by the Company’s stock price as well as assumptions regarding a number
of complex and subjective variables.  These variables include, but are
not limited to, the expected stock price volatility over the expected term of
the awards, and actual and projected employee stock options exercise behaviors.
The Company estimates expected volatility using historical data. The expected
term is estimated using the “safe harbor” provisions under SAB 110.
 
 During
the quarter and nine months ended March 31, 2009 and 2008, the Company granted
awards of stock options as follows:
 
 Three
      Months Ended
                          March
      31,
                        
                        
                        Nine
      Months Ended
                          March
      31,2008
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        2009Stock
      option awards
                        
                        
                        1,045,600
                        
                        
                        
                        279,450
                        
                        
                        
                        1,045,600
                        
                        
                        
                        309,450Weighted
      average exercise price
                        
                        $
                        1.79
                        
                        
                        $
                        1.20
                        
                        
                        $
                        1.79
                        
                        
                        $
                        1.22
 
 As of
March 31, 2009, there were options outstanding to acquire 1,323,550 shares at an
average exercise price of $1.66 per share. The
estimated fair value of all awards granted during the nine months ended March
31, 2009 was $119,000.   The fair value of each
option was estimated on the date of grant using the Black-Scholes option–pricing
model with the following weighted average
assumptions:
  8
 
 Three
      Months Ended
                      March
      31,
                    
                    
                    Nine
      Months Ended
                      March
      31,2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009Risk-free
      interest rate
                    
                    
                    3.02
                    %
                    
                    
                    0.23
                    %
                    
                    
                    4.12
                    %
                    
                    
                    0.89
                    %Expected
      term (years)
                    
                    
                    5.0
                    
                    
                    
                    5.0
                    
                    
                    
                    5.0
                    
                    
                    
                    5.0Volatility
                    
                    
                    51
                    %
                    
                    
                    48
                    %
                    
                    
                    51
                    %
                    
                    
                    48
                    %Expected
      annual dividends
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
 
 The
following table summarizes the status of the 2007 Plan as of March 31,
2009:
 
 Options
      originally available
                      
                      
                      2,000,000Stock
      options outstanding
                      
                      
                      1,323,550Options
      available for grant
                      
                      
                      676,450
 
 Transactions
involving stock options are summarized as follows:
  Number
                      of
      Shares
                    
                    
                    Weighted
      Average
                      Exercise
      PriceBalance
      at June 30, 2008
                    
                    
                    1,045,600
                    
                    
                    $
                    1.79Granted
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -Cancelled
                    
                    
                    -
                    
                    
                    
                    -Balance
      at September 30, 2008
                    
                    
                    1,045,600
                    
                    
                    $
                    1.79Granted
                    
                    
                    30,000
                    
                    
                    
                    1.37Exercised
                    
                    
                    -
                    
                    
                    
                    -Cancelled
                    
                    
                    (5,000
                    )
                    
                    
                    1.79Balance
      at December 31, 2008
                    
                    
                    1,070,600
                    
                    
                    $
                    1.78Granted
                    
                    
                    279,450
                    
                    
                    
                    1.20Exercised
                    
                    
                    -
                    
                    
                    
                    -Cancelled
                    
                    
                    (26,500
                    )
                    
                    
                    1.79Balance
      at March 31, 2009
                    
                    
                    1,323,550
                    
                    
                    $
                    1.66
 
 As of
March 31, 2009, the total compensation costs related to non-vested awards yet to
be expensed was approximately $0.6 million to be amortized over the next four
years.
 
 The
weighted average exercise prices for options granted and exercisable and the
weighted average remaining contractual life for options outstanding as of June
30, 2008 and March 31, 2009 were as follows:
 
 As of June 30, 2008
                        
                        Number
      of
                          Shares
                        
                        
                        Weighted
      Average
                          Exercise Price
                        
                        
                        Weighted
      Average
                          Remaining
                          Contractual
      Life
                          (Years)
                        
                        
                        Intrinsic
                          ValueEmployees
      – Outstanding
                        
                        
                        945,600
                        
                        
                        $
                        1.79
                        
                        
                        
                        4.63
                        
                        
                        $
                        -Employees
      – Expected to Vest
                        
                        
                        851,040
                        
                        
                        $
                        1.79
                        
                        
                        
                        4.63
                        
                        
                        $
                        -Employees
      – Exercisable
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        -Non-Employees-Outstanding
                        
                        
                        100,000
                        
                        
                        $
                        1.79
                        
                        
                        
                        4.63
                        
                        
                        $
                        -Non-Employees-Vested
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        4.63
                        
                        
                        $
                        -Non-Employees-Exercisable
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        -
  9
 
 As of March 31, 2009
                      
                      Number
      of
                        Shares
                      
                      
                      Weighted
      Average
                        Exercise Price
                      
                      
                      Weighted
      Average
                        Remaining
                        Contractual
      Life
                        (Years)
                      
                      
                      Intrinsic
                        ValueEmployees
      – Outstanding
                      
                      
                      1,193,550
                      
                      
                      $
                      1.65
                      
                      
                      
                      4.11
                      
                      
                      $
                      -Employees
      – Expected to Vest
                      
                      
                      1,074.195
                      
                      
                      $
                      1.65
                      
                      
                      
                      4.11
                      
                      
                      $
                      -Employees
      – Exercisable
                      
                      
                      228,525
                      
                      
                      $
                      1.79
                      
                      
                      
                      3.88
                      
                      
                      $
                      -Non-Employees
      – Outstanding
                      
                      
                      130,000
                      
                      
                      $
                      1.69
                      
                      
                      
                      4.05
                      
                      
                      $
                      -Non-Employees
      – Vested
                      
                      
                      55,000
                      
                      
                      $
                      1.56
                      
                      
                      
                      4.28
                      
                      
                      $
                      -Non-Employees
      – Exercisable
                      
                      
                      55,000
                      
                      
                      $
                      1.56
                      
                      
                      
                      4.28
                      
                      
                      $
                      -
 
 Additional
information with respect to outstanding options as of March 31, 2009 is as
follows (shares in thousands):
  Options Outstanding
                        
                        Options ExercisableOptions
                          Exercise
                          Price Range
                        
                        Number
      of
                          Shares
                        
                        Weighted
      Average
                          Remaining
                          Contractual Life
                        
                        Weighted
      Average
                          Exercise Price
                        
                        
                        Number
                          of Shares
                        
                        
                        Weighted
                          Average
                          Exercise Price$
                        1.79
                        
                        
                        1,040
                        
                        3.9
      Years
                        
                        $
                        1.79
                        
                        
                        
                        253
                        
                        
                        $
                        1.791.37
                        
                        
                        30
                        
                        4.6
      Years
                        
                        
                        1.37
                        
                        
                        
                        30
                        
                        
                        
                        1.371.20
                        
                        
                        279
                        
                        4.9
      Years
                        
                        
                        1.20
                        
                        
                        
                        -
                        
                        
                        
                        1.20
 
 We have
elected to adopt the detailed method provided in SFAS 123(R) for calculating the
beginning balance of the additional paid-in capital pool (APIC pool) related to
the tax effects of employee stock-based compensation, and to determine the
subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of
the tax effects of employee stock-based compensation awards that are outstanding
upon adoption of SFAS 123(R).
 
 NOTE
7- STOCK RIGHTS PLAN
 
 In July
2007, the Company implemented a stock rights program.  Pursuant to the
program, stockholders of record on August 7, 2007, received a dividend of one
right to purchase for $10 one one-hundredth of a share of a newly created Series
A Junior Participating Preferred Stock.  The rights are attached to
the Company’s Common Stock and will also become attached to shares issued
subsequent to August 7, 2007.  The rights will not be traded
separately and will not become exercisable until the occurrence of a triggering
event, defined as an accumulation by a single person or group of 20% or more of
the Company’s Common Stock.  The rights will expire on August 6, 2017
and are redeemable at $0.0001 per right.
 
 After a
triggering event, the rights will detach from the Common Stock.  If
the Company is then merged into, or is acquired by, another corporation, the
Company has the opportunity to either (i) redeem the rights or (ii) permit the
rights holder to receive in the merger stock of the Company or the acquiring
company equal to two times the exercise price of the right (i.e.,
$20).  In the latter instance, the rights attached to the acquirer’s
stock become null and void.  The effect of the rights program is to
make a potential acquisition of the Company more expensive for the acquirer if,
in the opinion of the Company’s Board of Directors, the offer is
inadequate.
 
 No
triggering events occurred in the nine months ended March 31,
2009.
  10
 
 NOTE
8- SHAREHOLDER’S EQUITY
 
 The
following table analyzes the components of shareholders’ equity from June 30,
2008 to March 31, 2009 (in thousands):
 
 Common
                        Stock
                      
                      
                      Pain-in
                        Capital
                      
                      
                      Retained
                        Earnings
                      
                      
                      Shareholders’
                        EquityBalance,
      June 30, 2008
                      
                      
                      21,583
                      
                      
                      $
                      9,320
                      
                      
                      $
                      (103
                      )
                      
                      $
                      30,800FAS
      123R option expense
                      
                      
                      -
                      
                      
                      
                      51
                      
                      
                      
                      -
                      
                      
                      
                      51Net
      income (loss)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      58
                      
                      
                      
                      58Stock
      buyback
                      
                      
                      (94
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (94
                      )Balance,
      September 30, 2008
                      
                      
                      21,488
                      
                      
                      
                      9,371
                      
                      
                      
                      (44
                      )
                      
                      
                      30,815
 
 FAS
      123R option expense
                      
                      
                      -
                      
                      
                      
                      66
                      
                      
                      
                      -
                      
                      
                      
                      66Net
      income (loss)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      95
                      
                      
                      
                      95Stock
      buyback
                      
                      
                      (151
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (151
                      )Balance,
      December 31, 2008
                      
                      
                      21,337
                      
                      
                      
                      9,437
                      
                      
                      
                      51
                      
                      
                      
                      30,825
 
 FAS
      123R option expense
                    
                    
                    -
                    
                    
                    
                    54
                    
                    
                    
                    -
                    
                    
                    
                    54Net
      income (loss)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (420
                    )
                    
                    
                    (420
                    )Stock
      buyback
                    
                    
                    (213
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (213
                    )Balance,
      March 31, 2009
                    
                    $
                    21,124
                    
                    
                    $
                    9,491
                    
                    
                    $
                    (369
                    )
                    
                    $
                    30,246
 
 NOTE
9- RESTRUCTURING CHARGE
 
 In the
first quarter of fiscal 2008, in conjunction with the completion of the Merger
and Spin-off transactions, we decided to close down one of our post production
facilities.  Future costs associated with the facility lease and
certain severance payments totaling $513,000 were treated as restructuring
costs.
 
 NOTE
10- STOCK REPURCHASE PLAN
 
 In
February 2008, the Company’s Board of Directors authorized a stock repurchase
program.  Under the stock repurchase program, the Company may purchase
outstanding shares of its common stock on the open market at such times and
prices determined in the sole discretion of management.  During the
three and nine month periods ended March 31, 2009, the Company purchased 166,200
and 328,110 shares for $213,000 and $459,000, respectively.  In April
and May 2009, the Company purchased an additional 76,600 shares for
$99,000.
 
 NOTE
11- ACQUISITION
 
 On
November 1, 2008, the Company acquired the assets and business of Video Box
Studios, Inc., for $315,000 and the assumption of $98,000 of capital lease
obligations.  Of the total purchase price, $275,000 was allocated to
machinery and equipment, $24,000 to a covenant not to compete and the balance to
goodwill.
 
 NOTE
12- POTENTIAL ACQUISITION
  On
September 29, 2008, the Company and CenterStaging Musical Productions, Inc.
(“CMPI”) entered an Asset Purchase Agreement (the “Agreement”) whereby the
Company intends to acquire certain assets of CMPI for $3 million and the
assumption of up to $1.3 million of equipment financing obligations subject to
bankruptcy court approval and overbid in CMPI’s pending Chapter 11 bankruptcy
case.  The Company was approved as the “stalking horse” bidder
pursuant to a motion to approve sale procedures in the United States Bankruptcy
Court.
  CMPI is
primarily engaged in the business of (i) providing production and support
services for live musical performances for major television programs; (ii)
renting its studio and soundstage facilities, and (iii) renting musical
instruments and related equipment for use at its studios and other venues as
debtor and debtor in possession pursuant to Sections 1107(a) and 1108 of the
Bankruptcy Code.  The Agreement provides that CMPI will sell,
transfer, convey, assign and deliver to the Company, in accordance with Section
363 and 365 and the other applicable provisions of the Bankruptcy Code, certain
assets and liabilities of CMPI upon the terms and subject to the conditions set
forth in the Agreement.
  11
  The
proposed sale of CMPI’s assets to the Company was subject to overbid pursuant to
sale procedures approved by the Bankruptcy Court and any sale will be pursuant
to a Sale Order of the Bankruptcy Court approving such sale under Section 363 of
the Bankruptcy Code and will include the assumption and assignment of certain
executory contracts, unexpired leases and liabilities thereunder pursuant to
Section 365 of the Bankruptcy Code and the terms and conditions of the
Agreement.  Another party offered to purchase the CMPI assets for an
amount in excess of that proposed by the Company, and the Court approved the
sale.  The sale failed to close by the December 31, 2008 deadline
established by the Court.  The Company is once again considering the
purchase and may submit a new offer to the Court.
  Any new
offer will be conditioned upon the approval of the bankruptcy
court.  Additionally, the Company’s obligation to complete a purchase
will be subject to satisfactory negotiation of real estate and personal property
leases and other conditions.   There can be no assurance that the
transaction will ultimately be approved by the Bankruptcy Court and
completed.
  NOTE
13- PROPERTY AND EQUIPMENT
  Property
and equipment as of March 31, 2009 consists of the following:
  Land
                      
                      $
                      2,406,000Building
                      
                      
                      5,718,000Machinery
      and equipment
                      
                      
                      34,946,000Leasehold
      improvements
                      
                      
                      6,958,000Computer
      equipment
                      
                      
                      6,422,000Equipment
      under capital lease
                      
                      
                      285,000Office
      equipment, CIP
                      
                      
                      755,000Subtotal
                      
                      $
                      57,490,000Less
      accumulated depreciation and amortization
                      
                      
                      (41,806,000
                      )Property
      and equipment, net
                      
                      $
                      15,684,000
  NOTE
14- SUBSEQUENT EVENTS
  On April
6, 2009, the Company acquired the assets and business of Moving Images NY LLC
(“MI”) for approximately $800,000 - $300,000 in cash and the assumption of
approximately $500,000 of capital equipment lease obligations.  In the
transaction, the Company assumed the real estate obligations of MI with respect
to the lease of 11,000 square feet of office space in New York
City.  The Lease Agreement provides for rental payments totaling
approximately $4.5 million from April 6, 2009 through June 30,
2016.  The Lease Agreement may be terminated by Point.360 after
December 31, 2010 upon 12 months written notice and the payment of a $300,000
termination fee, which fee shall decline to $200,000 if the lease is terminated
after December 31, 2011.
  NOTE
15- RESTATEMENT OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS
  Subsequent
to the issuance of our March 31, 2009 interim consolidated financial statements,
we determined that amounts reflected as revenues for the three and nine month
periods ended March 31, 2009 required an adjustment to correct sales errors
related to the timing of revenue recognition under the proportional performance
method.  The correction resulted in an increase of $165,000 and
$78,000 in revenues for the three and nine months ended March 31, 2009,
respectively, and related adjustments to other line items in the consolidated
statements of income(loss), balance sheet and cash flows as of and for the
respective periods as follows:
  Changes
      to Consolidated Statements of  Income (Loss) for the
      Three
                        and
      Nine Month Periods Ended March 31, 2009:
                      
                      Increase
                        (Decrease)Three
      Months
                        Ended
                        March 31, 2009
                      
                      
                      Nine
      Months
                        Ended
                        March 31, 2009Revenues
                      
                      $
                      165,000
                      
                      
                      $
                      79,000Gross
      profit
                      
                      
                      165,000
                      
                      
                      
                      79,000Operating
      income (loss)
                      
                      
                      165,000
                      
                      
                      
                      79,000Income
      (loss) before income taxes
                      
                      
                      165,000
                      
                      
                      
                      79,000(Provision
      for) benefit from income taxes
                      
                      
                      (141,000
                      )
                      
                      
                      (22,000
                      )Net
      income (loss)
                      
                      
                      24,000
                      
                      
                      
                      57,000Basic
      and diluted earnings (loss) per share
                      
                      
                      -
                      
                      
                      
                      -
  12
  
 Changes
      in Consolidated Balance Sheet
                          as
      of March 31, 2009:
                        
                        Increase
                          (Decrease)Accounts
      receivable, net of allowances for doubtful accounts of
      $526,000
                        
                        $
                        79,000Total
      current assets
                        
                        $
                        79,000Deferred
      income taxes
                        
                        
                        (22,000
                        )Total
      assets
                        
                        
                        57,000Retained
      earnings (deficit)
                        
                        
                        57,000Total
      shareholders’ equity
                        
                        
                        57,000Total
      liabilities and shareholders’ equity
                        
                        
                        57,000Changes
      to Consolidated Changes in Cash Flows
                          For
      the Nine Months Ended March 31, 2009:Net
      income (loss)
                        
                        $
                        57,000Increase
      (decrease) in accounts receivable
                        
                        
                        (79,000
                        )Decrease
      in deferred tax asset
                        
                        
                        22,000
  13
  POINT.360
  MANAGEMENT’S
DISCUSSION AND ANALYSIS
  ITEM
      2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
  Except
for the historical information contained herein, certain statements in this
quarterly report are "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995, which involve certain risks and
uncertainties, which could cause actual results to differ materially from those
discussed herein, including but not limited to competition, customer and
industry concentration, dependence on technological developments, risks related
to expansion, dependence on key personnel, fluctuating results and seasonality
and control by management.
  See
the relevant portions of  the Company's documents filed with the
Securities and Exchange Commission and Risk Factors in Item 1A of Part II of
this Form 10-Q/A for a further discussion of these and other risks and
uncertainties applicable to the Company's business.
  Overview
 Point.360
is one of the largest providers of video and film asset management services to
owners, producers and distributors of entertainment content.  We provide
the services necessary to edit, master, reformat and archive our clients’ film
and video content, including television programming, feature films and movie
trailers using electronic and physical means. Clients include major motion
picture studios and independent producers.
  We
operate in a highly competitive environment in which customers desire a broad
range of services at a reasonable price.  There are many competitors
offering some or all of the services provided by us.  Additionally, some of
our customers are large studios, which also have in-house capabilities that may
influence the amount of work outsourced to companies like Point.360. We attract
and retain customers by maintaining a high service level at reasonable
prices.
  The
market for our services is primarily dependent on our customers’ desire and
ability to monetize their entertainment content.  The major studios
derive revenues from re-releases and/or syndication of motion pictures and
television content.  While the size of this market is not
quantifiable, we believe studios will continue to repurpose library content to
augment uncertain revenues from new releases.  The current uncertain
economic environment and entertainment industry labor unrest have negatively
impacted the ability and willingness of independent producers to create new
content.
  The
demand for entertainment content should continue to expand through web-based
applications.  We believe long and short form content will be sought
by users of personal computers, hand held devices and home entertainment
technology.  Additionally, changing formats from standard definition,
to high definition, to Blu Ray and perhaps to 3D will continue to give us the
opportunity to provide new services with respect to library
content.
  To meet
these needs, we must be prepared to invest in technology and equipment, and
attract the talent needed to serve our client needs.  Labor, facility
and depreciation expenses constitute approximately 75% of our cost of
sales.  Our goals include maximizing facility and labor usage, and
maintaining sufficient cash flow for capital expenditures and acquisitions of
complementary businesses to enhance our service offerings.
  We
continue to look for opportunities to solidify our businesses.  During
the fiscal year ending June 30, 2009, we have completed the
following:
  ·
              We
      purchased the 32,000 square foot Burbank facility to enhance future cash
      flow
 and
secure that operational capability for the future.
 
 ·
              We
      purchased the assets of Video Box Studios and consolidated its operations
      into our West
 Los
Angeles location.
 
 We have
an opportunity to expand our business by establishing closer relationships with
our customers through excellent service at a competitive price and adding to our
service offering.  Our success is also dependent on attracting and
maintaining employees capable of maintaining such relationships.  Also,
growth can be achieved by acquiring similar businesses (for example, the
acquisitions of IVC in July 2004, Eden FX in March 2007 and those described
above) that can increase revenues by adding new customers, or expanding current
services to existing customers.
  14
  Our
business generally involves the immediate servicing needs of our
customers.  Most orders are fulfilled within several days, with occasional
larger orders spanning weeks or months.  At any particular time, we have
little firm backlog.
  We
believe that our interconnected facilities provide the ability to better service
customers than single-location competitors.  We will look to expand both
our service offering and geographical presence through acquisition of other
businesses or opening additional facilities.
 
 Three
Months Ended March 31, 2009 (as restated) Compared To Three Months Ended March
31, 2008
 
 Revenues.  Revenues
were $11.3 million for the three months ended March 31, 2009, compared to $11.3
million for the quarter ended March 31, 2008.  The current period
revenues were similar to the previous four calendar quarters.  No
unusual trends have been noted; however, revenues may come under some downward
pressure in the future due to lower prices that might occur if major studios
reduce output due to current difficult economic considerations and other
competitors reduce pricing to compete for our business.
 
 Cost of
Services.Costs of services consist principally of wages and
benefits, facility costs and depreciation of physical assets.  During
the quarter ended March 31, 2009, total costs of services were 66.7% of sales
compared to 65.2% in the prior year’s period.  While wages and
benefits and depreciation costs were consistent between periods, facility
expenses declined by $89,000 due to elimination of rent for one of our Burbank
facilities which we purchased in July 2008.  Offsetting the reduction
in rent was an increase in the cost of outsourced work of $163,000 due to
unusually fast turnaround requirements for a particular project (we occasionally
farm out certain tasks for which we have insufficient production
capacity).  While outsourcing generally involves lower margins, it
allows us to better meet infrequent unusually fast delivery time requirements of
our clients.
 
 Gross Profit.  In
2009, gross margin was 33.3% of sales, compared to 34.8% for the same period
last year. The decline in gross profit percentage is due to the cost services of
factors cited above.  From time to time, we will increase staff
capabilities to satisfy potential customer demand. If the expected demand does
not materialize, we will adjust personnel levels.  We expect gross
margins to fluctuate in the future as the sales mix changes.
  Selling, General and Administrative
Expense.SG&A expense was $4.3 million (37.9% of sales) in
the 2009 period as compared to $3.7 million (32.9% of sales) in 2008. During the
quarter ended March 31, 2009, the Company incurred approximately $319,000 of
costs associated with documentation of its internal control processes in
anticipation of performing its first management assessment of internal controls
for the fiscal year ended June 30, 2009.  Additionally, the Company
spent approximately $257,000 in consulting fees to improve its information
technology infrastructure.  Excluding these costs, SG&A expenses
for the quarter ended March 31, 2009 were $3.7 million, or 32.7% of
sales.
  Operating Income
(Loss).Operating loss was $0.5 million in 2009 compared
to income of $0.2 million in 2008.
  Interest
Expense.Net interest expense in the current quarter was $0.2
million, compared to $0.1 million in the prior year period.  The
increase is due to a mortgage related to real estate purchase in July
2008.
  Other
Income.During the prior year’s period, the Company
realized $0.1 million of income from the sale of equipment.
  Net Income
(Loss).Net loss for the current quarter was $0.4 million
compared to a $0.2 million profit in the prior year’s quarter.
  Nine
Months Ended March 31, 2009 (as restated) Compared to Nine Months Ended March
31, 2008
 
 Revenues.  Revenues
were $34.6 million for the nine months ended March 31, 2009, compared to $33.8
million for the period ended March 31, 2008.  We expect revenues to
come under some downward pressure in the future if major studios reduce output
due to current difficult financial conditions and other competitors reduce
prices to compete for our business.  However, we continue to invest in
high definition capabilities where demand is expected to grow. We believe our
high definition service platform will attract additional business in the
future.
 
 Cost of Services. Costs of
services consist principally of wages and benefits, facility costs and
depreciation of physical assets.  During the nine months ended March
31, 2009, total costs of services were 66.1% of sales compared to 69.9% in the
prior year’s period.  While depreciation costs were consistent between
periods, wages and benefits declined $406,000 due to personnel reductions
following the August 2007 divestiture of the ADS Business. Additionally,
facility expenses declined $349,000 due to elimination of rent for one of our
Burbank facilities which we purchased in July 2008.  Offsetting the
reductions was an increase in the cost of outsourced work of $235,000 due to
unusually fast turnaround requirements for several projects (we occasionally
farm out certain tasks for which we have insufficient production
capacity).  While outsourcing generally involves lower margins, it
allows us to better meet infrequent unusually fast delivery time requirements of
our clients.
  15
 
 Gross Profit.  In
2009, gross margin was 33.9% of sales, compared to 30.1% for the same period
last year. The increase in gross profit percentage is due to the factors cited
above.  From time to time, we will increase staff capabilities to
satisfy potential customer demand. If the expected demand does not materialize,
we will adjust personnel levels.  We expect gross margins to fluctuate
in the future as the sales mix changes.
  Selling, General and Administrative
Expense.SG&A expense was $12.0 million (34.6% of sales)
in the 2009 period as compared to $11.3 million (33.3% of sales) in 2008
excluding the restructuring charge.  During the nine months ended
March 31, 2009, the Company incurred approximately $319,000 of costs associated
with documentation of its internal control processes in anticipation of
performing its first management assessment of internal controls for the fiscal
year ended June 30, 2009.  Additionally, the Company spent
approximately $257,000 in consulting fees to improve its information technology
infrastructure.  Excluding these costs, SG&A expenses for the nine
months ended March 31, 2009 were $11.4 million, or 33.0% of sales.
  Restructuring
Costs.In the nine months ended March 31, 2008, in conjunction
with the completion of the Merger and Spin-off transactions, we decided to close
down one of our post production facilities.  Future costs associated
with the facility lease and certain severance payments were treated as
restructuring costs.
  Operating Income (Loss).Operating loss was $0.2 million in 2009 compared to a loss of $1.2
million in 2008.  Restructuring costs contributed $0.5 million to the
loss in 2008.
  Interest Expense. Net
Interest expense for 2009 was $0.5 million, an increase of $0.1 million from
2008. The increase was due to a mortgage related to real estate purchased in
July 2008.
  Other
Income.  During the current period, the Company realized $0.2
million of income from the sale of equipment.
  Net Income (Loss).Net loss
for 2009 was $0.3 million compared to a loss of $1.0 million in
2008.
  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 elsewhere in
this Form 10-Q/A.
  On August
14, 2007 and thereafter, the Company received $7 million from DG FastChannel
upon completion of the Merger.  The Company also received
approximately $2.2 million for reimbursement of merger expenses and prepayment
for ADS Business working capital.  The Company expects to receive an
additional $0.3 million from DG FastChannel for ADS Business working capital,
which amount is included in other assets and is considered fully
collectible.
  On
December 30, 2005, Old Point.360 entered a $10 million term loan agreement. The
term loan provides for interest at LIBOR (1.80% at March 31, 2009) plus 3.15%
(4.95% on that date) and is secured by the Company’s equipment. The term loan
will be repaid in 60 equal principal payments plus interest.
  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 is being repaid in 45 equal monthly
installments of principal and interest.  Both the December 2005 and
March 2007 term loans were assumed by the Company in the 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 (i) prime (3.25%
at March 31, 2009) minus 0% - 1.00% or (ii) LIBOR plus 1.50% - 2.50% depending
on the level of the Company’s ratio of outstanding debt to fixed charges (as
defined), or 2.75% or 3.80%, respectively, at March 31, 2009.  The
facility is secured by all of the Company’s assets, except for equipment
securing term loans as described above.
  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
$13,946,000 resulting in a $1.3 million after tax gain. Additionally, Old
Point.360 received $500,000 from the purchaser for improvements.  In
accordance with SFAS No. 28, “Accounting for Sales with
Leasebacks”(“SFAS28”), the gain and the improvement allowance will be
amortized over the initial 15-year lease term as reduced rent.
  In July
2008, the Company entered into a Promissory Note with a bank (the “Note”) in
order to purchase land and a building that has been occupied by the Company
since 1998 (the total purchase price was approximately $8.1
million).  Pursuant to the Note, the company borrowed $6,000,000
payable in monthly installments of principal and interest on a fully amortized
basis over 30 years at an initial five-year interest rate of 7.1% and thereafter
at a variable rate equal to LIBOR plus 3.6% (5.40% as of March 31,
2009).
  16
  The
following table summarizes the March 31, 2009 amounts outstanding under our
revolving line of credit, and term (including capital lease obligations) and
mortgage loans:
 
 Revolving
      credit
                          
                          $
                          -Current
      portion of term loanand
      mortgage
                          
                          
                          1,962,000Long-term
      portion of term loanand
      mortgage
                          
                          
                          7,458,000Total
                          
                          $
                          9,420,000
 
 Monthly
and annual principal and interest payments due under the term debt and mortgage
are approximately $213,000 and $2.6 million, respectively, assuming no change in
interest rates.
 
 Our bank
revolving credit agreement requires us to maintain a minimum “fixed charge
coverage ratio.” Our fixed charge coverage ratio compares, on a rolling
twelve-month basis, (i) EBITDA plus rent expense and non-cash charges less
income tax payments, to (ii) interest expense plus rent expense, the current
portion of long term debt and maintenance capital expenditures. As of March 31,
2009, the fixed charge coverage ratio was 1.37 as compared to a minimum
requirement of 1.10.
 
 We expect
that amounts available under the revolving credit arrangement (approximately
$4.1 million at March 31, 2009), the availability of bank or institutional
credit from new sources and cash generated from operations will be sufficient to
fund debt service, operating needs and about $2.0 – $3.0 million of capital
expenditures for the next twelve months.
  In
      March 2007, we acquired substantially all the assets of Eden FX for
      approximately $2.2 million in cash. The purchase agreement requires
      additional payments of $0.7 million, $0.9 million and $1.2 million in
      March of 2008, 2009 and 2010, respectively, if earnings during the three
      years after acquisition meet certain predetermined levels.  The
      earnings levels for calendar 2007 and 2008 were not met; therefore, the
      2008 and 2009 payments were not
made.
 
 Cash
generated by operating activities is directly dependent upon sales levels and
gross margins achieved. We generally receive payments from customers in 50-90
days after services are performed. The larger payroll component of cost of sales
must be paid currently.  Payment terms of other liabilities vary by
vendor and type. Income taxes must be paid quarterly. Fluctuations in sales
levels will generally affect cash flow negatively or positively in early periods
of growth or contraction, respectively, because of operating cash
receipt/payment timing.  Other investing and financing cash flows also
affect cash availability.
 
 In recent
quarters, the underlying drivers of operating cash flows (sales, receivable
collections, the timing of vender payments, facility costs and employment
levels) have been consistent, except that days sales outstanding in accounts
receivable have risen from approximately 54 days to 66 days within the last 12
months.  Major studios have generally delayed payments in response to
the general economic slowdown.  However, we do not expect days sales
outstanding to materially increase in the future.
 
 As of
March 31, 2009, our facility costs consisted of building rent, maintenance and
communication expenses.  In July 2008, rents were reduced by the
purchase of our Hollywood Way facility in Burbank, CA, eliminating approximately
$625,000 of annual rent expense.  The real estate purchase involved a
down payment of $2.1 million and $6 million of mortgage debt (described
above).  The mortgage payments are approximately $488,000 per
year.  We believe our current cash position and a difficult economy
may provide us with the opportunity to invest in facility assets that will not
only help fix our operating costs, but give us the potential to own appreciating
real estate assets.  We will continue to evaluate opportunities to
reduce facility costs.  See below for descriptions of additional
facility related transactions occurring subsequent to March 31, 2009 and their
impact on future cash flows.
  17
 
 The
following table summarizes contractual obligations as of March 31, 2009 due in
the future:
 
 Payment
      due by PeriodContractual Obligations
                    
                    Total
                    
                    
                    Less than 1 Year
                    
                    
                    Years
                      2 and 3
                    
                    
                    Years
                      4 and 5
                    
                    
                    ThereafterLong
      Term Debt  Principal Obligations
                    
                    $
                    9,261,000
                    
                    
                    $
                    1,629,000
                    
                    
                    $
                    1,858,000
                    
                    
                    $
                    162,000
                    
                    
                    $
                    5,612,000Long
      Term Debt Interest Obligations  (1)
                    
                    
                    7,843,000
                    
                    
                    
                    589,000
                    
                    
                    
                    879,000
                    
                    
                    
                    800,000
                    
                    
                    
                    5,575,000Capital
      Lease Obligations
                    
                    
                    159,000
                    
                    
                    
                    53,000
                    
                    
                    
                    101,000
                    
                    
                    
                    5,000
                    
                    
                    
                    -Capital
      Lease Interest Obligations
                    
                    
                    16,000
                    
                    
                    
                    8,000
                    
                    
                    
                    8,000
                    
                    
                    
                    -
                    
                    
                    
                    -Operating
      Lease Obligations
                    
                    
                    17,995,000
                    
                    
                    
                    2,120,000
                    
                    
                    
                    5,049,000
                    
                    
                    
                    3,154,000
                    
                    
                    
                    7,672,000Total
                    
                    $
                    35,274,000
                    
                    
                    $
                    4,399,000
                    
                    
                    $
                    7,895,000
                    
                    
                    $
                    4,121,000
                    
                    
                    $
                    18,859,000
  (1)
Interest on variable rate debt has been computed using the rate on the latest
balance sheet date.
  In March
2009, the lease on one of our facilities in Hollywood, CA (“Highland”) expired
and the Company became a holdover tenant.  The landlord has issued a
Notice to Quit which will require us to move out of the facility within the next
60 days.  The Company is evaluating several alternatives, including
moving a portion of our operations to our other facilities and renting a
significantly smaller location, to purchasing an alternate
facility.
  Subsequent
to March 31, 2009, the Company assumed the lease of MI (see Note 14), calling
for annual rent payments of approximately $550,000 per year.  The
following table summarizes the pro forma contractual obligations assuming
completion of the purchase of the building, termination of the Highland and Eden
FX leases and assumption of the MI lease:
 
 Payment
      due by PeriodContractual Obligations
                    
                    Total
                    
                    
                    Less than 1 Year
                    
                    
                    Years
                      2 and 3
                    
                    
                    Years
                      4 and 5
                    
                    
                    ThereafterLong
      Term Debt  Principal Obligations
                    
                    $
                    9,261,000
                    
                    
                    $
                    1,629,000
                    
                    
                    $
                    1,858,000
                    
                    
                    $
                    162,000
                    
                    
                    $
                    5,612,000Long
      Term Debt Interest Obligations  (1)
                    
                    
                    7,843,000
                    
                    
                    
                    589,000
                    
                    
                    
                    879,000
                    
                    
                    
                    800,000
                    
                    
                    
                    5,575,000Capital
      Lease Obligations
                    
                    
                    632,000
                    
                    
                    
                    162,000
                    
                    
                    
                    343,000
                    
                    
                    
                    127,000
                    
                    
                    
                    -Capital
      Lease Interest Obligations
                    
                    
                    84,000
                    
                    
                    
                    38,000
                    
                    
                    
                    42,000
                    
                    
                    
                    4,000
                    
                    
                    
                    -Operating
      Lease Obligations
                    
                    
                    22,704,000
                    
                    
                    
                    2,771,000
                    
                    
                    
                    6,323,000
                    
                    
                    
                    4,419,000
                    
                    
                    
                    9,193,000Total
                    
                    $
                    40,526,000
                    
                    
                    $
                    5,189,000
                    
                    
                    $
                    9,445,000
                    
                    
                    $
                    5,512,000
                    
                    
                    $
                    20,380,000
  (1)
Interest on variable rate debt has been computed using the rate on the latest
balance sheet date.
  During
the past year, the Company has generated sufficient cash to meet operating,
capital expenditure and debt service needs and obligations, as well as to
provide sufficient cash reserves to address contingencies.  When
preparing estimates of future cash flows, we consider historical performance,
technological changes, market factors, industry trends and other
criteria.  In our opinion, the Company will continue to be able to
fund its needs for the foreseeable future.
  We will
continue to consider the acquisition of businesses which compliment our current
operations and possible real estate transactions.  Consummation of any
acquisition, real estate or other expansion transaction by the Company may be
subject to the Company securing additional financing, perhaps at a cost higher
than our existing term loans.  In the current economic climate,
additional financing may not be available.  Additionally, our current
bank line of credit might not be renewed upon its August 2009 expiration due to
recent changes in the bank lending environment.  Future earnings and
cash flow may be negatively impacted to the extent that any acquired entities do
not generate sufficient earnings and cash flow to offset the increased financing
costs.
  CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
  Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities.  On an on-going basis, we evaluate our estimates and
judgments, including those related to allowance for doubtful accounts, valuation
of long-lived assets, and accounting for income taxes.  We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions and conditions. We believe the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial
statements.
  18
  Critical
accounting policies are those that are important to the portrayal of the
Company’s financial condition and results, and which require management to make
difficult, subjective and/or complex judgments. Critical accounting policies
cover accounting matters that are inherently uncertain because the future
resolution of such matters is unknown.  We have made critical
estimates in the following areas:
  Revenues.We
perform a multitude of services for our clients, including film-to-tape
transfer, video and audio editing, standards conversions, adding special
effects, duplication, distribution, etc. A customer orders one or more of these
services with respect to an element (commercial spot, movie, trailer, electronic
press kit, etc.). The sum total of services performed on a particular element (a
“package”) becomes the deliverable (i.e., the customer will pay for the services
ordered in total when the entire job is completed). Occasionally, a major studio
will request that package services be performed on multiple
elements.  Each element creates a separate revenue stream which is
recognized only when all requested services have been performed on that
element.  At the end of an accounting period, revenue is accrued for
un-invoiced but shipped work.
 
 Certain
jobs specify that many discrete tasks must be performed which require up to four
months to complete.  In such cases, we use the proportional
performance method for recognizing revenue.  Under the proportional
performance method, revenue is recognized based on the value of each stand-alone
service completed.
  In some
instances, a client will request that we store (or “vault”) an element for a
period ranging from a day to indefinitely.  The Company attempts to
bill customers a nominal amount for storage, but some customers, especially
major movie studios, will not pay for this service.  In the latter
instance, storage is an accommodation to foster additional business with respect
to the related element.  It is impossible to estimate (i) the length
of time we may house the element, or (ii) the amount of additional services we
may be called upon to perform on an element.   Because these
variables are not reasonably estimable and revenues from vaulting are not
material (billed vaulting revenues are approximately 3% of sales), we do not
treat vaulting as a separate deliverable in those instances in which the
customer does not pay.
 
 The
Company records revenues in accordance with SAB 104, which states that revenue
is realized or realizable and earned when all of the following criteria are met:
(i) there is persuasive evidence that an arrangement exists; (ii) delivery has
occurred or the services have been rendered; (iii) the Company’s price to the
customer is fixed or determinable; and (iv) collectability is reasonably
assured.
  Allowance for doubtful
accounts.We are required to make judgments, based on
historical experience and future expectations, as to the collectibility of
accounts receivable.  The allowances for doubtful accounts and sales
returns represent allowances for customer trade accounts receivable that are
estimated to be partially or entirely uncollectible.  These allowances
are used to reduce gross trade receivables to their net realizable value. The
Company records these allowances as a charge to selling, general and
administrative expenses based on estimates related to the following factors: (i)
customer specific allowance; (ii) amounts based upon an aging schedule and (iii)
an estimated amount, based on the Company’s historical experience, for issues
not yet identified.
  Valuation of long-lived and
intangible assets.   Long-lived assets, consisting
primarily of property, plant and equipment and intangibles (consisting only of
goodwill), comprise a significant portion of the Company’s total assets.
Long-lived assets, including goodwill are reviewed for impairment whenever
events or changes in circumstances have indicated that their carrying amounts
may not be recoverable.  Recoverability of assets is measured by
comparing the carrying amount of an asset to its fair value in a current
transaction between willing parties, other than in a forced liquidation
sale.
  Factors
we consider important which could trigger an impairment review include the
following:
  ·
              Significant
      underperformance relative to expected historical or projected future
      operating results;
  ·
              Significant
      changes in the manner of our use of the acquired assets or the strategy of
      our overall business;
  ·
              Significant
      negative industry or economic
trends;
  ·
              Significant
      decline in our stock price for a sustained period;
  and
  ·
              Our
      market capitalization relative to net book
  value.
  19
  When we
determine that the carrying value of  intangibles, long-lived assets
and related goodwill and enterprise level goodwill may not be recoverable based
upon the existence of one or more of the above indicators of impairment, we
measure any impairment based on comparing the carrying amount of the asset to
its fair value in a current transaction between willing parties or, in the
absence of such measurement, on a projected discounted cash flow method using a
discount rate determined by our management to
be  commensurate  with the risk inherent in our current
business model. Any amount of impairment so determined would be written off as a
charge to the income statement, together with an equal reduction of the related
asset. Net intangible assets, long-lived assets and goodwill amounted to
approximately $10.0 million as of March 31, 2009.
  In 2002,
Statement of Financial Accounting Standards (“SFAS”) No.142, “Goodwill and Other Intangible
Assets” (“SFAS 142”) became effective.  As a result, Old
Point.360 ceased to amortize approximately $26.3 million of goodwill in 2002 and
performed an annual impairment review thereafter.  The initial test on
January 1, 2002, and the Fiscal 2002 to 2007 tests performed as of September 30
of each year required no goodwill impairment. On August 14, 2007, the Company
was formed by a spin-off transaction, and a certain portion of Old Point.360’s
goodwill was assigned to the Company.  In the 2008 test performed as
of June 30, 2008, the discounted cash flow method was used to evaluate goodwill
impairment and included cash flow estimates for 2009 and subsequent
years.  If actual flow performance does not meet these expectations
due to factors cited above, any resulting potential impairment could adversely
affect reported goodwill asset values and earnings.
  Accounting for income
taxes.   As part of the process of preparing our
consolidated financial statements, we are required to estimate our income taxes
in each of the jurisdictions in which we operate.  This process
involves us estimating our actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as
deferred revenue, for tax and accounting purposes.  These differences
result in deferred tax assets and liabilities, which are included within our
consolidated balance sheet.  We must then assess the likelihood that
our deferred tax assets will be recovered from future taxable income and to the
extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision in
the statement of operations.
  Significant
management judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities and any valuation allowance recorded
against our net deferred tax assets.  The net deferred tax assets as
of March 31, 2009 were $0.7 million.  The Company did not record a
valuation allowance against its deferred tax assets as of March 31,
2009.
 
 In June
2006, the 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 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 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.
  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 acquisitions by the Company after June
30, 2009.
  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.
  20
  In
January 2008, the SEC issued Staff Accounting Bulletin No. 110, “Certain Assumptions Used in
Valuation Methods” (“SAB 110”) 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.
  ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
  Market
Risk.The Company had borrowings of $9.4 million on
March 31, 2009 under term loan agreements.  One term loan was subject
to variable interest rates.  The weighted average interest rate paid
during the first nine months of fiscal 2009 was 6.43%.  For variable
rate debt outstanding at March 31, 2009, a .25% increase in interest rates will
increase annual interest expense by approximately $7,000.  Amounts
that may become outstanding under the revolving credit facility provide for
interest at the banks’ prime rate minus 0%-1.00% assuming the same amount of
outstanding debt or LIBOR plus 1.5% to 2.5% and LIBOR plus 3.15% for the term
loan.  The Company’s market risk exposure with respect to financial
instruments is to changes in prime or LIBOR rates.
  ITEM
4T CONTROLS AND PROCEDURES
  Disclosure
Controls
 
 Pursuant
to Rules 13a-15(b) and 15d-15(b) under the Exchange Act, an evaluation was
performed under the supervision and with the participation of the Company’s
management, including the Chief Executive Officer and President and the Chief
Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures as of the end of the period covered
by this report.  Based on the evaluation, the Chief Executive Officer
and President and the Chief Financial Officer, concluded that the Company’s
disclosure controls and procedures were not effective as of the end of the
period covered by the report due to sales cutoff errors related to the period
covered by this report discovered during the preparation of the Company’s
financial statements as of June 30, 2009.  The errors were related to
the timing of revenue recognition under the proportional performance
method.
 
 Changes
in Internal Control over Financial Reporting
 
 The Chief
Executive Officer and President and the Chief Financial Officer conducted an
evaluation of our internal control over financial reporting (as defined in
Exchange Act Rule 13a-15(f) (“Internal Control”) to determine whether any
changes in Internal Control occurred during the quarter ended March 31, 2009
that have materially affected or which are reasonably likely to materially
affect Internal Control.  Based on the evaluation, no such change
occurred during such period except as follows.  During the quarter
ended March 31, 2009, the Company changed certain controls governing the access
and use of information technology to strengthen such controls going
forward.  The evaluation of information technology resulting in the
changes was conducted as the Company prepares to implement new and enhanced
production operating systems and security over those systems.
 
 Internal
control over financial reporting refers to a process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
 
 ·
              Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of our
      assets;
 
 ·
              Provide
      reasonable assurance that transactions are recorded as necessary to permit
      the preparation of financial statements in accordance with generally
      accepted accounting principles, and that our receipts and expenditures are
      being made only in accordance with authorizations of our management and
      members of our board of directors;
and
 
 ·
              Provide
      reasonable assurance regarding the prevention or timely detection of
      unauthorized acquisition, use, or disposition of our assets that could
      have a material effect on our financial
  statements.
  21
 
 Limitations
on Internal Control over Financial Reporting
 
 Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent
limitations.  Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures.  Internal
control over financial reporting also can be circumvented by collusion or
improper override.  Because of such limitations, there is a risk that
material misstatements may not be prevented or detected on a timely basis by
internal control over financial reporting.  However, these inherent
limitations are known features of the financial reporting process, and it is
possible to design into the process safeguards to reduce, though not eliminate,
this risk.
 
 PART
II – OTHER INFORMATION
  ITEM
1.  LEGAL PROCEEDINGS
  From time
to time the Company may become a party to other legal actions and complaints
arising in the ordinary course of business, although it is not currently
involved in any such material legal proceedings.
  ITEM
1A.  RISK FACTORS
  In
our capacity as Company management, we may from time to time make written or
oral forward-looking statements with respect to our long-term objectives or
expectations which may be included in our filings with the Securities and
Exchange Commission (the “SEC”), reports to stockholders and information
provided on 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.”  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.  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:
  ●
              Recent
      history of losses.
 ●
              Prior
      breach and changes in credit agreements and ongoing
    liquidity.
 ●
              Our
      highly competitive marketplace.
 ●
              The
      risks associated with dependence upon significant
    customers.
 ●
              Our
      ability to execute our expansion
strategy.
 ●
              The
      uncertain ability to manage in a changing
  environment.
 ●
              Our
      dependence upon and our ability to adapt to technological
      developments.
 ●
              Dependence
      on key personnel.
 ●
              Our
      ability to maintain and improve service
quality.
 ●
              Fluctuation
      in quarterly operating results and seasonality in certain of our
      markets.
 ●
              Possible
      significant influence over corporate affairs by significant
      shareholders.
 ●
              Our
      ability to operate effectively as a stand-alone, publicly traded
      company.
 ●
              The
      cost associated with becoming compliant with the Sarbanes-Oxley Act of
      2002, and the consequences of failing to implement effective internal
      controls over financial reporting as required by Section 404 of the
      Sarbanes-Oxley Act of 2002 by the date that we must comply with that
      section of the Sarbanes-Oxley Act.
 
 Other
factors not identified above, including the risk factors described in the “Risk
Factors” section of the Company’s June 30, 2008 Form 10-K filed with the
Securities and Exchange Commission may also cause actual results to differ
materially from those projected by our forward-looking
statements.  Most of these factors are difficult to anticipate and are
generally beyond our control.  You should consider these areas of risk
in connection with considering any forward-looking statements that may be made
in this Form 10-Q/A and elsewhere by us and our business
generally.  Except to the extent of any obligation to disclose
material information under the federal securities laws or the rules of the
NASDAQ Global Market, we undertake no obligation to release publicly any
revisions to any forward-looking statements, to report events or to report the
occurrence of unanticipated events.
  22
 
 ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 The
following table sets forth information regarding purchases by the Company of
shares of its common stock during the quarter ended March 31, 2009
  Period
                  
                  (a)
                    

                    Total
      Number of
                    Shares
      (or Units)
                    Purchased(1)
                  
                  
                  (b)
                    Average
      Price
                    Paid
      per
                    Share
      (or
                    Unit)
                  
                  
                  (c)
                    Total
      Number of
                    Shares
      (or Units)
                    Purchased
      as Part
                    Of
      Publicly
                    Announced
      Plans
                    or
      Programs(1)
                  
                  
                  (d)
                    Maximum
      Number (or
                    Approximate
      Dollar
                    Value)
      of Shares (or
                    Units)
      that May Yet be
                    Purchased
      Under the
                    Plans or ProgramsJanuary
      1 to January 31, 2009
                  
                  
                  4,660
                  
                  
                  $
                  1.22
                  
                  
                  
                  4,600
                  
                  
                  
                  -February
      1 to February 28, 2009
                  
                  
                  160,000
                  
                  
                  
                  1.28
                  
                  
                  
                  160,000
                  
                  
                  
                  -March
      1 to March 31, 2009
                  
                  
                  1,600
                  
                  
                  
                  1.25
                  
                  
                  
                  1,600
                  
                  
                  
                  -Total
                  
                  
                  166,260
                  
                  
                  $
                  1.28
                  
                  
                  
                  166,260
                  
                  
                  
                  -
 
 (1)
              TheCompany
      purchased all shares of common stock listed in this column under Rule
      10b5-1 plans adopted pursuant to a stock purchase program that the
      Company’s  Board authorized in February 2008.  The
      Company did not purchase any other shares of its common stock during the
      quarter ended March 31, 2009.  Under the stock purchase program,
      the Company may purchase outstanding shares of its common stock on the
      open market at such times and prices as are determined in the sole
      discretion of management.  Under the current version of the
      stock purchase program, described in a Form 10-Q report for the quarter
      ended December 31, 2008 which the Company filed with the Securities and
      Exchange Commission on February 17, 2009, there is no maximum dollar
      amount or maximum number of shares that may be purchased under the program
      and the program does not have a specified expiration
  date.
 
 ITEM  6.  EXHIBITS
  (a)
                Exhibits
 
 31.1
              Certification
      of Chief Executive Officer Pursuant to 15 U.S.C. § 7241, as Adopted
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.
 
 31.2
              Certification
      of Chief Financial Officer Pursuant to 15 U.S.C. § 7241, as Adopted
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.
 
 32.1
              Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. § 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.
 
 32.2
              Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.
  23
 
 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.360DATE:  September
      28, 2009
                              BY:
                              /s/  Alan R.
  SteelAlan
      R. SteelExecutive
      Vice President,Finance
      and Administration(duly
      authorized officer and principal financial
  officer)
  24