PROPERTY AND EQUIPMENT

6 Months Ended

Dec. 31, 2016

Property, Plant and Equipment [Abstract]

NOTE 4- PROPERTY AND EQUIPMENT

In March 2006, the Company entered into a sale and leaseback transaction with respect to its Media Center real estate. The real estate was sold for approximately $14.0 million resulting in a $1.3 million after tax gain. In accordance with the Accounting Standards Codification (ASC) 840-40, the gain is being amortized over the initial 15-year lease term as reduced rent. Net proceeds at the closing of the sale were used to pay off the mortgage and other outstanding debt. A $250,000 security deposit related to the lease has been recorded as a deposit in “other assets, net” in the Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2016.

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 were $1,111,000, increasing annually thereafter based on the Consumer Price Index change from year to year.

In June 2011, the Company entered into a lease amendment with respect to the Company’s Media Center facility. The amendment provided that the landlord would reimburse the Company up to $2 million for the leasehold improvements to be made by the Company to the premises. The leasehold improvements would be recorded as a fixed asset and amortized over the remaining term of the lease (until March 2021). Pursuant to the lease amendment, the Company’s monthly lease costs increased by approximately $27,000 on April 1, 2012. The Company incurred $2.1 million of costs for construction, of which $2.0 million was reimbursed by the landlord. A deferred lease incentive has been recorded for the total amount reimbursed by the landlord in accordance with ASC 840-20. The lease incentive is being amortized over the remaining lease term as an offset to rent.

On October 11, 2016, the Company sold to HWAY LLC, a California limited liability company (“HWAY”), all of its right, title and interest in and to certain land and improvements located at 1122 and 1133 North Hollywood Way, Burbank, CA (the “Property”) pursuant to a Standard Offer, Agreement and Escrow Instructions for Purchase of Real Estate (the “Purchase Agreement”). Concurrently, the Company leased the Property from HWAY pursuant to a Standard Industrial/Commercial Single-Tenant Lease (the “Lease Agreement”, and together with the Purchase Agreement, the “Sale and Leaseback”). Haig Bagerdjian, Chief Executive Officer, director and majority shareholder of the Company, holds a 99% membership interest in HWAY.

Pursuant to the Purchase Agreement, the Company sold the Property to HWAY for a purchase price of $9.8 million in cash (the “Purchase Price”). The Company received approximately $4.8 million in cash after payment of approximately $4.6 million to Bank of the West in full payment of indebtedness secured by a first lien mortgage on the Property, approximately $0.3 million paid to HWAY for a security deposit and rent under the Lease Agreement, and other closing costs. The security deposit related to the lease has been recorded as a deposit in “other assets, net” in the Condensed Consolidated Balance Sheet as of December 31, 2016. The sale resulted in a $1.2 million after tax gain. In accordance with the Accounting Standards Codification (ASC) 840-40, the gain will be amortized over the initial 11-year lease term as reduced rent.

Under the Lease Agreement, the Company will continue to occupy the Property consisting of 31,259 square feet in a two-story office building with a basement and a 3,732 square foot parking lot (the “Lease”). The Lease is for an initial term of 11 years, commencing on October 11, 2016 (the “Commencement Date”). The Lease may be extended for two five-year option periods; however such options may not be exercised if (i) the Company is sold to another person, or (ii) if Mr. Bagerdjian and/or his affiliates cease to be a controlling shareholder of the Company. The term of the Lease expires on October 31, 2027, unless it is extended under the Company’s option rights.

Beginning with the Commencement Date, the monthly base rent under the Lease will be $65,644 which base rent is subject to an annual increase of 3%. The Company is responsible for paying utilities, operating expenses and real estate taxes for the Property.

Property and equipment consist of the following as of December 31, 2016:

Machinery and equipment	$	43,932,000
Leasehold improvements		9,162,000
Computer equipment		8,293,000
Equipment under capital lease		1,359,000
Office equipment, vehicles, CIP		818,000
Subtotal		63,564,000
Less accumulated depreciation and amortization		(57,806,000)
Property and equipment, net	$	5,758,000

Point.360 10-Q