Cineverse Corp. - Quarter Report: 2008 June (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
(Mark
One)
x QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended: June 30, 2008
o TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
For the
transition period from --- to ---
Commission
File Number: 000-51910
______________________________________
Access
Integrated Technologies, Inc.
(Exact
Name of Registrant as Specified in its Charter)
______________________________________
Delaware
|
22-3720962
|
(State
or Other Jurisdiction of Incorporation
or
Organization)
|
(I.R.S.
Employer Identification No.)
|
55
Madison Avenue, Suite 300, Morristown New Jersey 07960
(Address
of Principal Executive Offices, Zip Code)
(973-290-0080)
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|
Yes
x No
o
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act. (Check one):
|
|
Large
accelerated filer o
Accelerated
filer x
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
|
Yes
o No
x
|
As
of August 8, 2008, 26,797,817 shares of Class A Common Stock, $0.001 par
value, and 733,811 shares of Class B Common Stock, $0.001 par value, were
outstanding.
|
ACCESS
INTEGRATED TECHNOLOGIES, INC.
CONTENTS
TO FORM 10-Q
PART
I --
|
FINANCIAL
INFORMATION
|
Page
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
Condensed
Consolidated Balance Sheets at March 31, 2008 and June 30, 2008
(Unaudited)
|
1
|
|
Unaudited
Condensed Consolidated Statements of Operations for the Three Months ended
June 30, 2007 and 2008
|
3
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows for the Three Months ended
June 30, 2007 and 2008
|
4
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
5
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
22
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
28
|
Item
4.
|
Controls
and Procedures
|
28
|
PART
II --
|
OTHER
INFORMATION
|
|
Item
1.
|
Legal
Proceedings
|
29
|
Item
1A.
|
Risk
Factors
|
29
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
29
|
Item
3.
|
Defaults
Upon Senior Securities
|
30
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
30
|
Item
5.
|
Other
Information
|
30
|
Item
6.
|
Exhibits
|
30
|
Signatures
|
31
|
|
Exhibit Index | 32 |
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS (UNAUDITED)
ACCESS
INTEGRATED TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except for share data)
March
31,
2008
|
June
30,
2008
|
|||||||
ASSETS
|
* |
(Unaudited)
|
||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 29,655 | $ | 25,003 | ||||
Accounts
receivable, net
|
21,494 | 17,259 | ||||||
Unbilled
revenue, current portion
|
6,393 | 5,652 | ||||||
Deferred
costs, current portion
|
3,859 | 3,809 | ||||||
Prepaid
and other current assets
|
1,316 | 1,834 | ||||||
Note
receivable, current portion
|
158 | 261 | ||||||
Total
current assets
|
62,875 | 53,818 | ||||||
Property
and equipment, net
|
269,031 | 261,930 | ||||||
Intangible
assets, net
|
13,592 | 12,645 | ||||||
Capitalized
software costs, net
|
2,777 | 2,794 | ||||||
Goodwill
|
14,549 | 14,549 | ||||||
Deferred
costs, net of current portion
|
6,595 | 5,915 | ||||||
Unbilled
revenue, net of current portion
|
2,075 | 1,967 | ||||||
Note
receivable, net of current portion
|
1,220 | 1,079 | ||||||
Security
deposits
|
408 | 425 | ||||||
Accounts
receivable, net of current portion
|
299 | 299 | ||||||
Restricted
cash
|
255 | 255 | ||||||
Fair
value of interest rate swap
|
— | 2,252 | ||||||
Total
assets
|
$ | 373,676 | $ | 357,928 |
* The
March 31, 2008 balance sheet was derived from the Company’s audited financial
statements.
See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements
1
ACCESS
INTEGRATED TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except for share data)
(continued)
March
31,
2008
|
June
30,
2008
|
|||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
* |
(Unaudited)
|
||||||
Current
liabilities
|
||||||||
Accounts
payable and accrued expenses
|
$ | 25,213 | $ | 12,354 | ||||
Current
portion of notes payable
|
16,998 | 22,159 | ||||||
Current
portion of deferred revenue
|
6,204 | 5,924 | ||||||
Current
portion of customer security deposits
|
333 | 354 | ||||||
Current
portion of capital leases
|
89 | 119 | ||||||
Total
current liabilities
|
48,837 | 40,910 | ||||||
Notes
payable, net of current portion
|
250,689 | 244,940 | ||||||
Capital
leases, net of current portion
|
5,814 | 5,851 | ||||||
Deferred
revenue, net of current portion
|
283 | 283 | ||||||
Customer
security deposits, net of current portion
|
46 | 25 | ||||||
Total
liabilities
|
305,669 | 292,009 | ||||||
Commitments
and contingencies (see Note 7)
|
||||||||
Stockholders’
Equity
|
||||||||
Class
A common stock, $0.001 par value per share; 40,000,000 shares authorized;
26,143,612 and 26,849,257 shares issued and 26,092,172 and 26,797,817
shares outstanding at March 31, 2008 and June 30, 2008,
respectively
|
26 | 27 | ||||||
Class
B common stock, $0.001 par value per share; 15,000,000 shares authorized;
733,811 shares issued and outstanding, at March 31, 2008 and June 30,
2008, respectively
|
1 | 1 | ||||||
Additional
paid-in capital
|
168,844 | 171,040 | ||||||
Treasury
stock, at cost; 51,440 Class A shares
|
(172 | ) | (172 | ) | ||||
Accumulated
deficit
|
(100,692 | ) | (104,977 | ) | ||||
Total
stockholders’ equity
|
68,007 | 65,919 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 373,676 | $ | 357,928 |
* The
March 31, 2008 balance sheet was derived from the Company’s audited financial
statements.
See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements
2
ACCESS
INTEGRATED TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except for share and per share data)
(Unaudited)
For
the Three Months Ended
June
30,
|
||||||||
2007
|
2008
|
|||||||
Revenues
|
$ | 18,146 | $ | 20,570 | ||||
Costs
and Expenses:
|
||||||||
Direct
operating (exclusive of depreciation and
amortization
shown below)
|
6,206 | 5,797 | ||||||
Selling,
general and administrative
|
5,558 | 4,833 | ||||||
Provision
for doubtful accounts
|
186 | 28 | ||||||
Research
and development
|
223 | 7 | ||||||
Stock-based
compensation
|
87 | 158 | ||||||
Depreciation
of property and equipment
|
6,125 | 8,135 | ||||||
Amortization
of intangible assets
|
1,070 | 947 | ||||||
Total
operating expenses
|
19,455 | 19,905 | ||||||
(Loss)
income from operations
|
(1,309 | ) | 665 | |||||
Interest
income
|
321 | 124 | ||||||
Interest
expense
|
(5,744 | ) | (7,176 | ) | ||||
Other
expense, net
|
(111 | ) | (150 | ) | ||||
Change
in fair value of interest rate swap
|
— | 2,252 | ||||||
Net
loss
|
$ | (6,843 | ) | $ | (4,285 | ) | ||
Net
loss per Class A and Class B common share - basic and
diluted
|
$ | (0.28 | ) | $ | (0.16 | ) | ||
Weighted
average number of Class A and Class B common
shares
outstanding:
|
||||||||
Basic
and diluted
|
24,758,441 | 26,865,147 |
See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements
3
ACCESS
INTEGRATED TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands) (Unaudited)
For
the Three Months Ended
June
30,
|
||||||||
2007
|
2008
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
loss
|
$ | (6,843 | ) | $ | (4,285 | ) | ||
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
||||||||
Write
off of property and equipment
|
47 | 3 | ||||||
Depreciation
of property and equipment and amortization of intangible
assets
|
7,195 | 9,082 | ||||||
Amortization
of software development costs
|
129 | 194 | ||||||
Amortization
of debt issuance costs included in interest expense
|
337 | 372 | ||||||
Provision
for doubtful accounts
|
186 | 28 | ||||||
Stock-based
compensation
|
87 | 158 | ||||||
Non-cash
interest expense
|
1,086 | 2,180 | ||||||
Change
in fair value of interest rate swap
|
— | (2,252 | ) | |||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(1,981 | ) | 4,207 | |||||
Unbilled
revenue
|
214 | 849 | ||||||
Prepaids
and other current assets
|
(109 | ) | (517 | ) | ||||
Other
assets
|
42 | 91 | ||||||
Accounts
payable and accrued expenses
|
33 | (1,068 | ) | |||||
Deferred
revenue
|
(779 | ) | (280 | ) | ||||
Other
liabilities
|
209 | — | ||||||
Net
cash (used in) provided by operating activities
|
(147 | ) | 8,762 | |||||
Cash
flows from investing activities
|
||||||||
Purchases
of property and equipment
|
(29,554 | ) | (12,466 | ) | ||||
Deposits
paid for property and equipment
|
(5,000 | ) | — | |||||
Additions
to capitalized software costs
|
(284 | ) | (210 | ) | ||||
Purchase
of available-for-sale securities
|
(1,500 | ) | — | |||||
Net
cash used in investing activities
|
(36,338 | ) | (12,676 | ) | ||||
Cash
flows from financing activities
|
||||||||
Repayment
of notes payable
|
(907 | ) | (788 | ) | ||||
Proceeds
from notes payable
|
5,000 | 200 | ||||||
Proceeds
from credit facilities
|
31,312 | — | ||||||
Payments
of debt issuance costs
|
(239 | ) | (114 | ) | ||||
Principal
payments on capital leases
|
(18 | ) | (25 | ) | ||||
Costs
associated with issuance of Class A common stock
|
(10 | ) | (11 | ) | ||||
Net
proceeds from issuance of Class A common stock
|
20 | — | ||||||
Net
cash provided by (used in) financing activities
|
35,158 | (738 | ) | |||||
Net
decrease in cash and cash equivalents
|
(1,327 | ) | (4,652 | ) | ||||
Cash
and cash equivalents at beginning of period
|
29,376 | 29,655 | ||||||
Cash
and cash equivalents at end of period
|
$ | 28,049 | $ | 25,003 |
See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements
4
ACCESS
INTEGRATED TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
($ in
thousands, except for per share data)
(Unaudited)
1.
|
NATURE
OF OPERATIONS
|
Access
Integrated Technologies, Inc. (“AccessIT”, and collectively with its
subsidiaries, the “Company”) was incorporated in Delaware on March 31,
2000. The Company provides fully managed storage, electronic delivery
and software services and technology solutions for owners and distributors of
digital content to movie theatres and other venues. The Company has
three primary businesses, media services (“Media Services”), media content and
entertainment (“Content & Entertainment”) and other (“Other”). The Company’s
Media Services business provides software, services and technology solutions to
the motion picture and television industries, primarily to facilitate the
transition from analog (film) to digital cinema and has positioned the Company
at what the Company believes to be the forefront of an industry relating to the
delivery and management of digital cinema and other content to entertainment and
other remote venues worldwide. The Company’s Content &
Entertainment business provides motion picture exhibition to the general public
and cinema advertising and film distribution services to movie
exhibitors. The Company’s Other business provides hosting services
and network access for other web hosting services (“Access Digital Server
Assets”).
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
BASIS
OF PRESENTATION AND CONSOLIDATION
The
Company has incurred net losses historically and through the current period, and
until recently, has used cash in operating activities, and has an accumulated
deficit of $104,977 as of June 30, 2008. The Company also has significant
contractual obligations related to its debt for the fiscal year 2009 and beyond.
Management expects that the Company will continue to generate net losses for the
foreseeable future. Certain of the Company’s costs could be reduced if working
capital decreased. Based on the Company’s cash position at June 30, 2008, and
expected cash flows from operations, management believes that the Company has
the ability to meet its obligations through June 30, 2009. The Company is
seeking to raise additional capital for equipment requirements related to
AccessIT DC’s second digital cinema deployment (the “Phase II Deployment”)
or for working capital as necessary. There is no assurance that such financing
will be completed as contemplated or under terms acceptable to the Company or
its existing shareholders. Failure to generate additional revenues, raise
additional capital or manage discretionary spending could have a material
adverse effect on the Company’s ability to continue as a going concern and to
achieve its intended business objectives. The accompanying unaudited condensed
consolidated financial statements do not reflect any adjustments which may
result from the Company's inability to continue as a going concern.
The
unaudited condensed consolidated financial statements were prepared following
the interim reporting requirements of the Securities and Exchange Commission
(“SEC”). As permitted under those rules, annual footnotes or other
financial information that are normally required by accounting principles
generally accepted in the United States of America (“GAAP”), have been condensed
or omitted. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included.
The
Company’s unaudited condensed consolidated financial statements include the
accounts of AccessIT, Access Digital Media, Inc. (“AccessDM”), Hollywood
Software, Inc. d/b/a AccessIT Software (“AccessIT SW”), Core Technology
Services, Inc. (“Managed Services”), FiberSat Global Services, Inc. d/b/a
AccessIT Satellite and Support Services (“AccessIT Satellite”), ADM Cinema
Corporation (“ADM Cinema”) d/b/a the Pavilion Theatre (the “Pavilion Theatre”),
Christie/AIX, Inc. d/b/a AccessIT Digital Cinema (“AccessIT DC”), PLX
Acquisition Corp., UniqueScreen Media, Inc. d/b/a AccessIT Advertising and
Creative Services (“ACS”), Vistachiara Productions, Inc. d/b/a The
Bigger Picture (“The Bigger Picture”) and Access Digital Cinema Phase 2 Corp.
(“Phase 2 Corporation”). AccessDM and AccessIT Satellite are together referred
to as the Digital Media Services Division (“DMS”). All intercompany transactions
and balances have been eliminated.
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the
unaudited condensed consolidated financial statements and accompanying notes.
The Company’s most significant estimates related to software revenue
recognition,
5
capitalization
of software development costs, amortization and impairment testing of intangible
assets and depreciation of fixed assets. On an on-going basis, the Company
evaluates its estimates, including those related to the carrying values of its
fixed assets and intangible assets, the valuation of deferred tax assets, and
the valuation of assets acquired and liabilities assumed in purchase business
combinations. The Company bases its estimates on historical experience and on
various other assumptions that the Company believes 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 could differ materially from these estimates under
different assumptions or conditions.
The
results of operations for the respective interim periods are not necessarily
indicative of the results to be expected for the full year. The accompanying
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in AccessIT’s Annual Report on Form 10-K for the fiscal year
ended March 31, 2008 filed with the SEC on June 16, 2008 and as amended on June
26, 2008 (the “Form 10-K”).
REVENUE
RECOGNITION
Media
Services
Media
Services revenues are generated as follows:
Revenues
consist of:
|
Accounted
for in accordance with:
|
|
Software
licensing, including customer licenses and application service provider
(“ASP Service”) agreements.
|
Statement
of Position (“SOP”) 97-2, “Software Revenue
Recognition”
|
|
Software
maintenance contracts, and professional consulting services, which
includes systems implementation, training, custom software development
services and other professional services, delivery revenues via satellite
and hard drive, data encryption and preparation fee revenues, satellite
network monitoring and maintenance fees, virtual print fees (“VPFs”) and
alternative content fees (“ACFs”).
|
Staff
Accounting Bulletin (“SAB”) No. 104 “Revenue Recognition in Financial
Statements” (“SAB No. 104”).
|
Software
licensing revenue is recognized when the following criteria are met: (a)
persuasive evidence of an arrangement exists, (b) delivery has occurred and no
significant obligations remain, (c) the fee is fixed or determinable and (d)
collection is determined to be probable. Significant upfront fees are received
in addition to periodic amounts upon achievement of contractual events for
licensing of the Company’s products. Such amounts are deferred until the revenue
recognition criteria have been met, which typically occurs upon delivery and
acceptance.
Revenues
relating to customized software development contracts are recognized on a
percentage-of-completion method of accounting.
Deferred
revenue is recorded in cases where: (1) a portion or the entire
contract amount cannot be recognized as revenue, due to non-delivery or
acceptance of licensed software or custom programming, (2) incomplete
implementation of ASP Service arrangements, or (3) unexpired pro-rata periods of
maintenance, minimum ASP Service fees or website subscription fees. As license
fees, maintenance fees, minimum ASP Service fees and website subscription fees
are often paid in advance, a portion of this revenue is deferred until the
contract ends. Such amounts are classified as deferred revenue and are
recognized as revenue in accordance with the Company’s revenue recognition
policies described above.
Managed
Services’ revenues, which consist of monthly recurring billings pursuant to
network monitoring and maintenance contracts, are recognized as revenues in the
month earned, and other non-recurring billings are recognized on a time and
materials basis as revenues in the period in which the services were
provided.
VPFs are
earned pursuant to contracts with movie studios and distributors, whereby
amounts are payable to the Company according to a fixed fee schedule, when
movies distributed by the studio are displayed on screens
utilizing
6
the
Company’s digital cinema equipment installed in movie theaters. The
Company recognizes VPF revenue in the period in which the movie opens for
audience viewing.
ACFs are
earned pursuant to contracts with movie exhibitors, whereby amounts
are payable to the Company, generally as a percentage of the applicable box
office revenue derived from the exhibitor’s showing of content other than
feature films, such as concerts and sporting events (typically referred to as
“alternative content”). The Company recognizes ACF revenue in the
period in which the alternative content opens for audience viewing.
Content
& Entertainment
Content
& Entertainment revenues are generated as follows:
Revenues
consist of:
|
Accounted
for in accordance with:
|
||
Movie
theatre admission and concession revenues.
|
SAB
No. 104
|
||
Cinema
advertising service revenues and distribution fee
revenues.
|
SOP
00-2, “Accounting by Producers or Distributors of Films” (“SOP
00-2”)
|
Cinema
advertising service revenue, and the associated direct selling, production and
support cost, is recognized on a straight-line basis over the period the related
in-theatre advertising is displayed, pursuant to the specific terms of each
advertising contract. The Company has the right to receive or bill the entire
amount of the advertising contract upon execution, and therefore such amount is
recorded as a receivable at the time of execution, and all related advertising
revenue and all direct costs actually incurred are deferred until such time as
the a in-theatre advertising is displayed.
The right
to sell and display such advertising, or other in-theatre programs, products and
services, is based upon advertising contracts with exhibitors which stipulate
payment terms to such exhibitors for this right. Payment terms generally consist
of either, fixed annual payments or annual minimum guarantee payments, plus a
revenue share of the excess of a percentage of advertising revenue over the
minimum guarantee, if any. The Company recognizes the cost of fixed
and minimum guarantee payments on a straight-line basis over each advertising
contract year, and the revenue share cost, if any, in accordance with the terms
of the advertising contract.
Distribution
fee revenue is recognized for the theatrical distribution of third party feature
films and alternative content at the time of exhibition based on the Company’s
participation in box office receipts. The Company has the right to
receive or bill a portion of the theatrical distribution fee in advance of the
exhibition date, and therefore such amount is recorded as a receivable at the
time of execution, and all related distribution revenue is deferred until the
third party feature films’ or alternative content’s theatrical release
date.
Other
Other
revenues, attributable to the Access Digital Server Assets, were generated as
follows:
Revenues
consist of:
|
Accounted
for in accordance with:
|
|
Hosting
and network access fees.
|
SAB
No. 104
|
Since May
1, 2007, the Company’s IDCs have been operated by FiberMedia AIT, LLC and
Telesource Group, Inc. (together, “FiberMedia”), unrelated third parties,
pursuant to a master collocation agreement. Although the Company is
still the lessee of the IDCs, substantially all of the revenues and expenses
were being realized by FiberMedia and not the Company and effective May 1, 2008,
100% of the revenues and expenses are being realized by
FiberMedia.
7
DEFERRED
COSTS
Deferred
costs primarily consist of the unamortized debt issuance costs related to the
credit facility with General Electric Capital Corporation (“GECC”) and the
$55,000 of 10% Senior Notes issued in August 2007 (see Note 5), which are
amortized on a straight-line basis over the term of the respective debt.
Also included in deferred costs is advertising production, post production and
technical support costs related to developing and displaying advertising, which
are capitalized and amortized on a straight-line basis over the same period as
the related cinema advertising revenues are recognized.
DIRECT
OPERATING COSTS
Direct
operating costs consists of facility operating costs such as rent, utilities,
real estate taxes, repairs and maintenance, insurance and other related
expenses, direct personnel costs, film rent expense, amortization of capitalized
software development costs, exhibitors payments for displaying cinema
advertising and other deferred expenses, such as advertising production, post
production and technical support related to developing and displaying
advertising. These other deferred expenses are capitalized and amortized on a
straight-line basis over the same period as the related cinema advertising
revenues are recognized.
STOCK-BASED
COMPENSATION
The
Company has two stock-based employee compensation plans, which are described
more fully in Note 6. Effective April 1, 2006, the Company adopted Statement of
Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based
Payment” (“SFAS 123(R)”), which is a revision of SFAS No. 123, Accounting
for Stock-Based Compensation. Under SFAS 123(R), the Company is required to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award (with limited
exceptions) and recognize such cost in the statement of operations over the
period during which an employee is required to provide service in exchange for
the award (usually the vesting period). Pro forma disclosure is no longer an
alternative.
For the
three months ended June 30, 2007 and 2008, the Company recorded stock-based
compensation expense of $87 and $158, respectively. The Company has
estimated that the stock-based compensation expense related to current
outstanding stock options, using a Black-Scholes option valuation model, and
current outstanding restricted stock will be approximately $750 in fiscal 2009,
which includes $158 of stock-based compensation expense recorded for the three
months ended June 30, 2008 and excludes the awards subject to shareholder
approval of the increase in the size of the Plan (defined below) being
sought at the Company’s 2008 Annual Meeting of Stockholders to be held on
September 4, 2008 (see Note 6).
CAPITALIZED
SOFTWARE DEVELOPMENT COSTS
Internal
Use Software
The
Company accounts for these software development costs under Statement of
Position (“SOP”) 98-1, “Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use” (“SOP
98-1”). SOP 98-1 states that there are three distinct stages to the
software development process for internal use software. The first
stage, the preliminary project stage, includes the conceptual formulation,
design and testing of alternatives. The second stage, or the program
instruction phase, includes the development of the detailed functional
specifications, coding and testing. The final stage, the
implementation stage, includes the activities associated with placing a software
project into service. All activities included within the preliminary
project stage would be considered research and development and expensed as
incurred. During the program instruction phase, all costs incurred
until the software is substantially complete and ready for use, including all
necessary testing, are capitalized and amortized on a straight-line basis over
estimated lives ranging from three to five years. The Company has not
sold, leased or licensed software developed for internal use to the Company’s
customers and the Company has no intention of doing so in the
future.
Software
to be Sold, Licensed or Otherwise Marketed
The
Company accounts for these software development costs under SFAS No. 86,
“Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed” (“SFAS No. 86”). SFAS No. 86 states that software
development costs that are incurred subsequent to establishing technological
feasibility are capitalized until
8
the
product is available for general release. Amounts capitalized as software
development costs are amortized using the greater of revenues during the period
compared to the total estimated revenues to be earned or on a straight-line
basis over estimated lives ranging from three to five years. The Company reviews
capitalized software costs for impairment on a periodic basis. To the extent
that the carrying amount exceeds the estimated net realizable value of the
capitalized software cost, an impairment charge is recorded. No impairment
charge was recorded for the three months ended June 30, 2007 and 2008,
respectively. Amortization of capitalized software development costs,
included in direct operating costs, for the three months ended June 30, 2007 and
2008 amounted to $129 and $194, respectively. Revenues relating to
customized software development contracts are recognized on a
percentage-of-completion method of accounting using the cost to date to the
total estimated cost approach. For the three months ended June 30,
2007 and 2008, unbilled receivables under such customized software development
contracts aggregated $1,454 and $966, respectively.
BUSINESS
COMBINATIONS AND INTANGIBLE ASSETS
The
Company adopted SFAS No. 141, “Business Combinations” (“SFAS No. 141”) and SFAS
No. 142, “Goodwill and other Intangible Assets” (“SFAS No. 142”). SFAS No. 141
requires all business combinations to be accounted for using the purchase method
of accounting and that certain intangible assets acquired in a business
combination must be recognized as assets separate from goodwill. SFAS No. 142
addresses the recognition and measurement of goodwill and other intangible
assets subsequent to their acquisition. SFAS No. 142 also addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination, whether acquired individually or with a group of other assets. This
statement provides that intangible assets with indefinite lives and goodwill
will not be amortized but will be tested at least annually for impairment. If
impairment is indicated, then the asset will be written down to its fair value,
typically based upon its future expected discounted cash flows. As of June 30,
2008, the Company’s finite-lived intangible assets consisted of customer
relationships and agreements, theatre relationships, covenants not to compete,
trade names and trademarks and Federal Communications Commission licenses (for
satellite transmission services), which are estimated to have useful lives
ranging from two to ten years. In June 2007, the unamortized balance
of the liquor license (for the Pavilion Theatre) was charged to other
expense. Additional information related to the segments of the
Company and its subsidiaries can be found in Note 9. At June 30,
2008, the Company concluded that there was no impairment of
goodwill.
PROPERTY
AND EQUIPMENT
Property
and equipment are stated at cost, less accumulated depreciation. Depreciation
expense is recorded using the straight-line method over the estimated useful
lives of the respective assets. Leasehold improvements are being amortized over
the shorter of the lease term or the estimated useful life of the improvement.
Maintenance and repair costs are charged to expense as incurred. Major renewals,
improvements and additions are capitalized. Upon the sale or other
disposition of any property and equipment, the cost and related accumulated
depreciation are removed from the accounts and the gain or loss is included in
the statement of operations.
IMPAIRMENT
OF LONG-LIVED
ASSETS
The
Company reviews the recoverability of its long-lived assets on a periodic basis
in order to identify business conditions, which may indicate a possible
impairment. The assessment for potential impairment is based primarily on the
Company’s ability to recover the carrying value of its long-lived assets from
expected future undiscounted cash flows. If the total of expected future
undiscounted cash flows is less than the total carrying value of the assets, a
loss is recognized for the difference between the fair value (computed based
upon the expected future discounted cash flows) and the carrying value of the
assets. At June 30, 2008, the Company concluded that there was no
impairment of long-lived assets.
NET
LOSS PER SHARE
Computations
of basic and diluted net loss per share of the Company’s Class A common stock
(“Class A Common Stock”) and Class B common stock (“Class B Common Stock”), and
together with the Class A Common Stock, (the “Common Stock”) have been made in
accordance with SFAS No. 128, “Earnings Per Share”. Basic and diluted net loss
per share have been calculated as follows:
Basic
and diluted net loss per share =
|
Net
loss
|
|
Weighted
average number of Common Stock
outstanding
during the period
|
9
Shares
issued and reacquired during the period are weighted for the portion of the
period that they are outstanding.
The
Company has incurred net losses for each of the three months ended June 30, 2007
and 2008 and, therefore, the impact of dilutive potential common shares from
outstanding stock options, warrants, restricted stock, and restricted stock
units, totaling 2,882,243 shares and 3,385,070 shares, respectively, were
excluded from the computation as it would be anti-dilutive.
ACCOUNTING
FOR DERIVATIVE ACTIVITIES
The
Company uses an interest rate swap agreement (the “Interest Rate Swap”) (see
Note 5) to limit exposure to changes in interest rates. The Interest
Rate Swap is a derivative financial instrument, which the Company accounts for
pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended and
interpreted ("SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and requires that all derivatives
be recorded at fair value on the balance sheet. Changes in fair value
of derivative financial instruments are either recognized in other comprehensive
income (a component of stockholders' equity) or net income depending on whether
the derivative is being used to hedge changes in cash flows or fair
value. The Company has determined that changes in value of its
Interest Rate Swap should be recorded as a component of net income.
3.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157 “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value,
establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. SFAS 157 applies to derivatives and
other financial instruments measured at fair value under SFAS No. 133
“Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) at
initial recognition and in all subsequent periods. Therefore, SFAS 157 nullifies
the guidance in footnote 3 of the Emerging Issues Task Force (“EITF”)
Issue No. 02-3, “Issues Involved in Accounting for Derivative
Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and
Risk Management Activities” (“EITF 02-3”). SFAS 157 also amends SFAS 133 to
remove the similar guidance to that in EITF 02-3, which was added by SFAS
155. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Any transition adjustment, measured as the difference between the
carrying amounts and the fair values of those financial instruments at the date
SFAS 157 is initially applied, should be recognized as a cumulative-effect
adjustment to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position) for
the fiscal year in which SFAS 157 is initially applied.
Relative
to SFAS 157, the FASB issued FASB Staff Positions (FSP) 157-1 and 157-2. FSP
157-1 amends SFAS 157 to exclude SFAS No. 13, “Accounting for Leases” (SFAS
13), and its related interpretive accounting pronouncements that address leasing
transactions, while FSP 157-2 delays the effective date of the application of
SFAS 157 to fiscal years beginning after November 15, 2008 for all
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring
basis.
The Company adopted SFAS 157 as of
April 1,
2008, with the exception
of the application of the statement to non-recurring nonfinancial assets and
nonfinancial liabilities. Non-recurring nonfinancial assets and nonfinancial
liabilities for which the Company has not applied the provisions of SFAS 157
include those measured at fair value in goodwill impairment testing, indefinite
lived intangible assets measured at fair value for impairment testing, and those
non-recurring nonfinancial assets and nonfinancial liabilities initially
measured at fair value in a business combination. The adoption of
SFAS 157 did not have a material impact the Company’s consolidated
financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—including an amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to elect to measure
many financial instruments and certain other items at fair value. The objective
is to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 is expected to expand the use of fair value measurement,
which is consistent with the FASB’s long-term measurement objectives for
accounting for financial instruments. SFAS 159 is effective for fiscal years
beginning after November 15, 2007 and early adoption is permitted provided the
entity also elects to apply the provisions of
10
SFAS 157.
The Company has adopted SFAS 159 and has elected not to measure any additional
financial instruments and other items at fair value.
In
December 2007, the FASB released SFAS No. 141(R), “Business Combinations
(revised 2007)” (“SFAS 141(R)”), which changes many well-established business
combination accounting practices and significantly affects how acquisition
transactions are reflected in the financial statements. Additionally, SFAS
141(R) will affect how companies negotiate and structure transactions, model
financial projections of acquisitions and communicate to stakeholders. SFAS
141(R) must be applied prospectively to 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. The Company is currently
evaluating the impact the adoption of this statement could have on its financial
condition, results of operations and cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”). SFAS 160 establishes new
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS
No. 160 is effective for fiscal years beginning on or after
December 15, 2008. The Company does not believe that SFAS
160 will have a material impact on its 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” (“SFAS 161”).
SFAS 161 changes the
disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under FASB Statement No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. SFAS 161 encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. The Company
does not believe that SFAS 161 will have a material impact on its consolidated
financial statements.
In April
2008, the FASB issued FASB Staff Position No. FAS 142-3,”Determination of the
Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3
applies to all recognized intangible assets and its guidance is restricted to
estimating the useful life of recognized intangible assets. FSP FAS 142-3 is
effective for the first fiscal period beginning after December 15, 2008 and must
be applied prospectively to intangible assets acquired after the effective date.
The Company will be required to adopt FSP FAS 142-3 to intangible assets
acquired beginning with the first quarter of fiscal 2010.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” (“SFAS 162”). SFAS 162 identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with GAAP. SFAS 162 is effective 60 days following
the SEC’s approval of Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.” The Company
does not believe that SFAS 162 will have a material impact on its consolidated
financial statements.
4.
|
NOTES
RECEIVABLE
|
Notes
receivable consisted of the following:
As
of March 31, 2008
|
As
of June 30, 2008
|
|||||||||||||||
Note
Receivable (as defined below)
|
Current
Portion
|
Long
Term Portion
|
Current
Portion
|
Long
Term Portion
|
||||||||||||
Exhibitor
Note
|
$ | 50 | $ | 91 | $ | 51 | $ | 78 | ||||||||
Exhibitor
Install Notes
|
95 | 1,002 | 97 | 977 | ||||||||||||
TIS
Note
|
— | 100 | 100 | — | ||||||||||||
Other
|
13 | 27 | 13 | 24 | ||||||||||||
$ | 158 | $ | 1,220 | $ | 261 | $ | 1,079 |
In March
2006, in connection with AccessIT DC’s Phase I Deployment (see Note 7), the
Company issued to a certain motion picture exhibitor a 7.5% note receivable for
$231 (the “Exhibitor Note”), in return for the Company’s
11
payment
for certain financed digital projectors. The Exhibitor Note requires
monthly principal and interest payments through September 2010. As of
June 30, 2008, the outstanding balance of the Exhibitor Note was
$129.
In
connection with AccessIT DC’s Phase I Deployment (see Note 7), the Company
agreed to provide financing to certain motion picture exhibitors upon the
billing to the motion picture exhibitors by Christie Digital Systems USA, Inc.
(“Christie”) for the installation costs associated with the placement of digital
cinema projection systems (the “Systems”) in movie theatres. In April
2006, certain motion picture exhibitors agreed to issue to the Company two 8%
notes receivable for an aggregate of $1,287 (the “Exhibitor Install Notes”).
Under the Exhibitor Install Notes, the motion picture exhibitors are required to
make monthly interest only payments through October 2007 and quarterly principal
and interest payments thereafter through August 2009 and August 2017,
respectively. As of June 30, 2008, the aggregate outstanding balance
of the Exhibitor Install Notes was $1,074.
Prior to
the Company’s acquisition of ACS, Theatre Information Systems, Ltd. (“TIS”), a
developer of proprietary software, issued to ACS a 4.5% note receivable for $100
(the “TIS Note”) to fund final modifications to certain proprietary software and
the development and distribution of related marketing materials. Interest
accrues monthly on the outstanding principal amount. The TIS Note and all the
accrued interest is due in one lump-sum payment in April 2009. Provided that the
TIS Note has not been previously repaid, the entire unpaid principal balance and
any accrued but unpaid interest may, at ACS’s option, be converted into a 10%
limited partnership interest in TIS. As of June 30, 2008, the
outstanding balance of the TIS Note was $100.
The
Company has not experienced a default by any party to any of their obligations
in connection with any of the above notes.
5.
|
DEBT
AND CREDIT FACILITIES
|
Notes
payable consisted of the following:
As
of March 31, 2008
|
As
of June 30, 2008
|
|||||||||||||||
Note
Payable (as defined below)
|
Current
Portion
|
Long
Term Portion
|
Current
Portion
|
Long
Term Portion
|
||||||||||||
HS
Notes
|
$ | 540 | $ | — | $ | 367 | $ | — | ||||||||
Boeing
Note
|
450 | — | — | — | ||||||||||||
First
ACS Note
|
414 | 221 | 422 | 112 | ||||||||||||
SilverScreen
Note
|
113 | 20 | 106 | — | ||||||||||||
Vendor
Note
|
— | 9,600 | — | 9,600 | ||||||||||||
2007
Senior Notes
|
— | 55,000 | — | 55,000 | ||||||||||||
Other
|
50 | — | 15 | — | ||||||||||||
GE
Credit Facility
|
15,431 | 185,848 | 21,217 | 180,062 | ||||||||||||
NEC
Facility
|
— | — | 32 | 166 | ||||||||||||
$ | 16,998 | $ | 250,689 | $ | 22,159 | $ | 244,940 |
In
November 2003, the Company issued two 5-year, 8% notes payable aggregating
$3,000 (the “HS Notes”) to the founders of AccessIT SW as part of the purchase
price for AccessIT SW. In March 2007, one of the holders of the HS
Notes agreed to reduce their note by $150 for 30,000 shares of unregistered
Class A Common Stock and forego $150 of principal payments at the end of their
note term. During the three months ended June 30, 2008, the Company
repaid principal of $173 on the HS Notes. As of June 30, 2008, the
outstanding principal balance of the HS Notes was $367.
In March
2004, in connection with the Boeing Digital Asset Acquisition, the Company
issued a 4-year, non-interest bearing note payable with a face amount of $1,800
(the “Boeing Note”). The estimated fair value of the Boeing Note was determined
to be $1,367 on the closing date. Interest is being imputed, at a
rate of 12%, over the term of the Boeing Note, and is being charged to non-cash
interest expense. During the three months ended June 30, 2008, the Company
repaid principal of $450 and the Boeing Note was repaid in full.
In July
2006, in connection with the acquisition of ACS, the Company issued an 8% note
payable in the principal amount of $1,204 (the “First ACS Note”) and an 8% note
payable in the principal amount of $4,000 (the “Second ACS Note”), both in favor
of the stockholders of ACS. The First ACS Note is payable in twelve equal
quarterly installments commencing on October 1, 2006 until July 1, 2009. The
Second ACS Note was payable on November
12
30, 2006
or earlier if certain conditions were met, and was paid by the Company in
October 2006. The First ACS Note may be prepaid in whole or from time to time in
part without penalty provided that the Company pays all accrued and unpaid
interest. During the three months ended June 30, 2008, the Company repaid
principal of $100 on the First ACS Note. As of June 30, 2008, the
outstanding principal balance of the First ACS Note was $534.
Prior to
the Company’s acquisition of ACS, ACS had purchased substantially all the assets
of SilverScreen Advertising Incorporated (“SilverScreen”) and issued a 3-year,
4% note payable in the principal amount of $333 (the “SilverScreen Note”) as
part of the purchase price for SilverScreen. The SilverScreen Note is payable in
equal monthly installments until May 2009. During the three months
ended June 30, 2008, the Company repaid principal of $28 on the SilverScreen
Note. As of June 30, 2008, the outstanding principal balance of the
SilverScreen Note was $106.
In
October 2006, the Company entered into a securities purchase agreement (the
“Purchase Agreement”) with the purchasers party thereto (the “Purchasers”)
pursuant to which the Company issued 8.5% Senior Notes (the “One Year Senior
Notes”) in the aggregate principal amount of $22,000 (the “October 2006 Private
Placement”). The term of the One Year Senior Notes was one year and could be
extended for up to two 90-day periods at the discretion of the Company if
certain market conditions were met. Interest on the One Year Senior Notes would
be paid on a quarterly basis in cash or, at the Company’s option and subject to
certain conditions, in shares of its Class A Common Stock (“Interest Shares”).
In addition, each quarter, the Company would issue shares of Class A Common
Stock to the Purchasers as payment of interest owed under the One Year Senior
Notes based on a formula (“Additional Interest”). The Company also entered into
a registration rights agreement with the Purchasers pursuant to which the
Company agreed to register the resale of any shares of its Class A Common Stock
issued pursuant to the One Year Senior Notes at any time and from time to time.
In August 2007, the One Year Senior Notes were repaid in full with a portion of
the proceeds from the refinancing which closed in August 2007, which is
discussed further below.
In August
2007, AccessIT DC obtained $9,600 of vendor financing (the “Vendor Note”) for
equipment used in AccessIT DC’s Phase I Deployment. The Vendor Note bears
interest at 11% and may be prepaid without penalty. Interest is due
semi-annually commencing February 2008. The balance of the Vendor
Note, together with all unpaid interest is due on the maturity date of August 1,
2016. As of June 30, 2008, the outstanding balance of the Vendor Note
was $9,600.
In August
2007, the Company entered into a securities purchase agreement (the “Purchase
Agreement”) with the purchasers party thereto (the “Purchasers”) pursuant to
which the Company issued 10% Senior Notes (the “2007 Senior Notes”) in the
aggregate principal amount of $55,000 (the “August 2007 Private Placement”). The
term of the 2007 Senior Notes is three years which may be extended for one 6
month period at the discretion of the Company if certain conditions are
met. Interest on the 2007 Senior Notes is payable on a quarterly
basis in cash or, at the Company’s option and subject to certain conditions, in
shares of its Class A Common Stock (“Interest Shares”). In addition, each
quarter, the Company issues shares of Class A Common Stock to the Purchasers as
payment of additional interest owed under the 2007 Senior Notes based on a
formula (“Additional Interest”). The Company may prepay the 2007
Senior Notes in whole or in part following the first anniversary of issuance of
the 2007 Senior Notes, subject to a penalty of 2% of the principal if the 2007
Senior Notes are prepaid prior to the two year anniversary of the issuance and a
penalty of 1% of the principal if the 2007 Senior Notes are prepaid thereafter,
and subject to paying the number of shares as Additional Interest that would be
due through the end of the term of the 2007 Senior Notes. The net
proceeds of approximately $53,200 from the August 2007 Private Placement were
used for expansion of digital cinema rollout plans, to pay off the existing
obligations under the $22,000 of One Year Senior Notes, to pay off certain other
outstanding debt obligations, for investment in Systems and for working capital
and other general corporate purposes. The Purchase Agreement also requires the
2007 Senior Notes to be guaranteed by each of the Company’s existing and,
subject to certain exceptions, future subsidiaries (the “Guarantors”), other
than AccessIT DC and its respective subsidiaries. Accordingly, each of the
Guarantors entered into a subsidiary guaranty (the “Subsidiary Guaranty”) with
the Purchasers pursuant to which it guaranteed the obligations of the Company
under the 2007 Senior Notes. The Company also entered into a
Registration Rights Agreement with the Purchasers pursuant to which the Company
agreed to register the resale of any shares of its Class A Common Stock issued
pursuant to the 2007 Senior Notes at any time and from time to
time. As of December 31, 2007, all shares issued to the holders of
the 2007 Senior Notes have been registered for resale (see Note
6). Under the 2007 Senior Notes the Company agreed (i) to
limit its total indebtedness to an aggregate of $315,000 unless certain
conditions are met and (ii) not to, and not to cause its subsidiaries (except
for AccessIT DC and its subsidiaries) to, incur indebtedness, with certain
exceptions, including an exception for $10,000; provided that no more than
$5,000 of such indebtedness is incurred by AccessDM or AccessIT Satellite or any
of their
13
respective
subsidiaries except as incurred by AccessDM pursuant to a guaranty entered into
in accordance with the GE Credit Facility (see below). At the present
time, the Company and its subsidiaries, other than AccessIT DC and its
subsidiaries, are prohibited from paying dividends under the terms of the 2007
Senior Notes. Additionally, under the 2007 Senior Notes, AccessIT DC
and its subsidiaries may incur additional indebtedness in connection with the
deployment of Systems beyond the Company’s initial rollout of up to 4,000
Systems, if certain conditions are met. As of June 30, 2008, the
outstanding principal balance of the 2007 Senior Notes was $55,000.
CREDIT
FACILITIES
In August
2006, AccessIT DC entered into an agreement with General Electric Capital
Corporation (“GECC”) pursuant to which GECC and certain other lenders agreed to
provide to AccessIT DC a $217,000 Senior Secured Multi Draw Term Loan (the “GE
Credit Facility”). Proceeds from the GE Credit Facility were used for the
purchase and installation of up to 70% of the aggregate purchase price,
including all costs, fees or other expenses associated with the purchase
acquisition, receipt, delivery, construction and installation of Systems in
connection with AccessIT DC’s Phase I Deployment (see Note 7) and to pay
transaction fees and expenses related to the GE Credit Facility, and for certain
other specified purposes. The remaining cost of the Systems has been funded from
other sources of capital including contributed equity. Each of the borrowings by
AccessIT DC bears interest, at the option of AccessIT DC and subject to certain
conditions, based on the bank prime loan rate in the United States or the
Eurodollar rate, plus a margin ranging from 2.75% to 4.50%, depending on, among
other things, the type of rate chosen, the amount of equity contributed into
AccessIT DC and the total debt of AccessIT DC. Under the GE Credit Facility,
AccessIT DC must pay interest only through July 31, 2008. Beginning August 31,
2008, in addition to the interest payments, AccessIT DC must repay approximately
71.5% of the principal amount of the borrowings over a five-year period with a
balloon payment for the balance of the principal amount, together with all
unpaid interest on such borrowings and any fees incurred by AccessIT DC pursuant
to the GE Credit Facility on the maturity date of August 1, 2013. In addition,
AccessIT DC may prepay borrowings under the GE Credit Facility in whole or in
part, after July 31, 2007 and before August 1, 2010, subject to paying certain
prepayment penalties ranging from 3% to 1%, depending on when the prepayment is
made. The GE Credit Facility is required to be guaranteed by each of AccessIT
DC’s existing and future direct and indirect domestic subsidiaries (the
“Guarantors”) and secured by a first priority perfected security interest on all
of the collective assets of AccessIT DC and the Guarantors, including real
estate owned or leased, and all capital stock or other equity interests in
AccessIT DC and its subsidiaries, subject to specified exceptions. The GE Credit
Facility is not guaranteed by the Company or its other subsidiaries, other than
AccessIT DC. As of June 30, 2008, $201,279 was borrowed under the GE Credit
Facility at a weighted average interest rate of 7.6%.
In August
2006, the GE Credit Facility was amended to allow borrowings by AccessIT DC to
be in aggregate amounts not in exact multiples of $1,000.
Under the
GE Credit Facility, as amended, AccessIT DC is required to maintain compliance
with certain financial covenants. Material covenants include a leverage ratio,
and an interest coverage ratio. In September 2007, AccessIT DC
entered into the third amendment with respect to the GE Credit Facility to (1)
lower the interest reserve from 12 months to 9 months; (2) modify the definition
of total equity ratio to count as capital contributions (x) up to $23,300 of
permitted subordinated indebtedness and (y) up to $4,000 of previously paid and
approved expenses that were incurred during the deployment of Systems; (3)
change the leverage ratio covenant; (4) add a new consolidated senior leverage
ratio covenant; and (5) change the consolidated fixed charge coverage ratio
covenant.
At
June 30, 2008, the Company was in compliance with these
covenants.
In April
2008, AccessIT DC entered into the Interest Rate Swap, otherwise known as an
“arranged hedge transaction” or "synthetic fixed rate financing" with a
counterparty for a notional amount of approximately 90% of the amounts
outstanding under the GE Credit Facility or an initial amount of $180,000. Under
the Interest Rate Swap, AccessIT DC will effectively pay a fixed rate of 7.3%,
to guard against AccessIT DC’s exposure to increases in the variable interest
rate under the GE Credit Facility. GE Corporate Financial Services arranged the
transaction, which will take effect commencing August 1, 2008 as required by the
GE Credit Facility. As principal repayments of the GE Credit Facility
occur, the notional amount will decrease by a pro rata amount, such that
approximately 90% of the remaining principal amount will be covered by the
Interest Rate Swap at any time.
The
Interest Rate Swap did not qualify as a fair value hedge under SFAS No. 133,
since the terms of the GE Credit Facility and the Interest Rate Swap agreement
did not fully agree at inception. Accordingly, all changes in the
fair
14
value of
the Interest Rate Swap will be recorded to results of operations each period.
Upon any refinance of the GE Credit Facility or other early termination or at
the maturity date of the Interest Rate Swap, the fair value of the Interest Rate
Swap, whether favorable to the Company or not, would be settled in cash with the
counter party. As of June 30, 2008, the fair value of the Interest Rate Swap was
$2,252.
In May
2008, AccessDM entered into a credit facility with NEC Financial Services, LLC
(the “NEC Facility”) to fund the purchase and installation of equipment to
enable the exhibition of 3-D live events in movie theatres as part of the
Company’s CineLiveSM
product offering. The NEC Facility provides for maximum borrowings
of up to $2,000, repayments over a 47 month period, and interest at an annual
rate of 8.25%. As of June 30, 2008, AccessDM has borrowed $200 and
the equipment purchased therewith is included in property and equipment within
the condensed consolidated balance sheets as of June 30, 2008. As of
June 30, 2008, the outstanding principal balance of the NEC Credit Facility was
$198.
6.
|
STOCKHOLDERS’
EQUITY
|
CAPITAL
STOCK
In August
2004, the Company’s Board authorized the repurchase of up to 100,000 shares of
Class A Common Stock, which may be purchased at prevailing prices from
time-to-time in the open market depending on market conditions and other
factors. As of June 30, 2008, the Company has repurchased 51,440
shares of Class A Common Stock for an aggregate purchase price of $172,
including fees, which have been recorded as treasury stock.
In April
2007, in connection with the acquisition of ACS and the achievement of certain
digital cinema deployment milestones, the Company issued 67,906 shares of the
Company’s Class A Common Stock, with a value of $512, to the ACS Stockholders as
additional purchase price. The Company agreed to register the resale
of these shares of Class A Common Stock with the SEC. The Company filed a
registration statement on Form S-3 on April 27, 2007, which was declared
effective by the SEC on May 18, 2007.
In June
2007, the Company issued 74,947 and 72,104 shares of Class A Common Stock as
Additional Interest and Interest Shares, respectively, pursuant to the One Year
Senior Notes (see Note 5). The Company agreed to register the resale of these
shares of Class A Common Stock with the SEC. The Company filed a registration
statement on Form S-3 on July 27, 2007, which was declared effective by the SEC
on August 9, 2007.
In July
2007, in connection with the acquisition of ACS and the achievement of certain
digital cinema deployment milestones, the Company issued an additional 77,955
shares of the Company’s Class A Common Stock, with a value of $488, to the ACS
Stockholders as additional purchase price. The Company agreed to
register the resale of these shares of Class A Common Stock with the SEC. The
Company filed a registration statement on Form S-3 on July 27, 2007, which was
declared effective by the SEC on August 9, 2007.
In August
2007, the Company issued 105,715 shares of Class A Common Stock as Interest
Shares pursuant to the One Year Senior Notes (see Note 5) for interest due up
through the date refinanced. The Company issued an additional 104,971
shares of Class A Common Stock as an inducement for certain holders of the One
Year Senior Notes to invest in the August 2007 Private Placement and $686 was
recorded as debt refinancing expense for the value of such
shares. The Company agreed to register the resale of all 210,686
shares of Class A Common Stock with the SEC. The Company filed a registration
statement on Form S-3 on September 26, 2007, which was declared effective by the
SEC on November 2, 2007.
Pursuant
to the 2007 Senior Notes, in August 2007 the Company issued 715,000 shares of
Class A Common Stock (the “Advance Additional Interest Shares”) covering the
first 12 months of Additional Interest (see Note 5). The Company
registered the resale of these shares of Class A Common Stock and also
registered an additional 1,249,875 shares of Class A Common Stock for future
Interest Shares and Additional Interest. The Company filed a
registration statement on Form S-3 on September 26, 2007, which was declared
effective by the SEC on November 2, 2007. The Company is recording
the value of the Advance Additional Interest Shares of $4,676 to interest
expense over the 36 month term of the 2007 Senior Notes. For the
three months ended June 30, 2007 and 2008, the Company recorded $0 and $401 of
interest expense in connection with the Advance Additional Interest
Shares.
Commencing
with the quarter ended December 31, 2008 and through the maturity of the 2007
Senior Notes in the quarter ended September 30, 2010, the Company is obligated
to issue a minimum of 132,000 shares of Class A Common Stock per quarter as
Additional Interest (the “Minimum Additional Interest Shares”). The
Company has
15
estimated
the value of the Minimum Additional Interest Shares to be $5,244 and is
recording that amount over the 36 month term of the 2007 Senior
Notes. For the three months ended June 30, 2007 and 2008, the Company
recorded $0 and $437 to interest expense in connection with the Minimum
Additional Interest Shares.
In
December 2007, March 2008 and June 2008, the Company issued 345,944, 548,572 and
635,847 shares of Class A Common Stock, respectively, as Interest Shares
pursuant to the 2007 Senior Notes (see Note 5), which were part of the 1,249,875
shares previously registered on the registration statement on Form S-3 filed on
September 26, 2007, which was declared effective by the SEC on November 2, 2007
and the additional 500,000 shares registered on the registration statement on
Form S-3 filed on May 6, 2008, which was declared effective by the SEC on June
30, 2008. For the three months ended June 30, 2007 and 2008, the
Company recorded $0 and $1,342 as non-cash interest expense in connection with
the Interest Shares.
In April
2008, in connection with the acquisition of Managed Services in January 2004,
the Company issued 15,219 shares of unregistered Class A Common Stock as
additional purchase price based on subsequent performance of the business
acquired. The value of such shares was accrued for in the fiscal year
ended March 31, 2008. No additional purchase price will be payable in
connection with the acquisition of Managed Services.
In April
2008, in connection with the acquisition of the Access Digital Server Assets by
the Company in January 2006, the Company issued 30,000 shares of
unregistered Class A Common Stock as additional purchase price based on
subsequent performance. The value of such shares was accrued for in
the fiscal year ended March 31, 2008. No additional purchase price
will be payable in connection with the acquisition of the Access Digital Server
Assets.
In
connection with the acquisition of The Bigger Picture in January 2007, The
Bigger Picture entered into a services agreement (the “SD Services Agreement”)
with SD Entertainment, Inc. (“SDE”) to provide certain services, such as the
provision of shared office space and certain shared administrative
personnel. The SD Services Agreement is on a month-to-month term and
requires the Company to pay approximately $17 per month, of which 70% may be
paid periodically in the form of AccessIT Class A Common Stock, at the Company’s
option. In June 2008, the Company issued 24,579 shares of
unregistered Class A Common Stock with a value of $60 to SDE as partial payment
for such services and resources.
ACCESSIT
STOCK OPTION PLAN
Stock
Options
AccessIT’s
stock option plan (“the Plan”) provides for the issuance of options to purchase
up to 2,200,000 shares of Class A Common Stock to employees, outside directors
and consultants. The Company intends to obtain shareholder approval to expand
the size of the Plan to 3,700,000 shares of Class A Common Stock at the
Company’s 2008 Annual Meeting of Stockholders to be held on September 4,
2008.
During
the three months ended June 30, 2008, under the Plan, the Company granted stock
options to purchase 5,500 shares of its Class A Common Stock to its employees at
an exercise price of $3.87 per share.
The
following table summarizes the activity of the Plan:
Shares
Under Option
|
Weighted
Average Exercise Price Per Share
|
|||||||
Balance
at March 31, 2008
|
2,076,569 | (1) | $ | 6.68 | ||||
Granted
|
5,500 | (2) | 3.87 | |||||
Exercised
|
— | — | ||||||
Cancelled
|
(23,750 | ) | 9.52 | |||||
Balance
at June 30, 2008
|
2,058,319 | $ | 6.65 |
(1)
|
As
of March 31, 2008, there were no shares available for issuance under the
Plan, due to the number of options and restricted stock currently
outstanding along with historical option exercises. An
expansion of the number of shares issuable under the Plan is being sought
at the Company’s 2008 Annual Meeting of Stockholders to be held on
September 4, 2008.
|
16
(2)
|
Excludes
an additional 320,003 stock options granted in March 2008 which are
subject to shareholder approval of the increase in the size of the Plan
being sought at the Company’s 2008 Annual Meeting of Stockholders to be
held on September 4, 2008.
|
Restricted
Stock Awards
The Plan
also provides for the issuance of restricted stock awards. During the
three months ended June 30, 2008, the Company granted 723,700 restricted stock
units. The Company may pay such restricted stock units upon vesting
in cash or shares of Class A Common Stock or a combination thereof at the
Company’s discretion.
The
following table summarizes the activity of the Plan related to restricted stock
awards:
Restricted
Stock Awards
|
Weighted
Average Market Price Per Share
|
|||||||
Balance
at March 31, 2008
|
102,614 | $ | 3.78 | |||||
Granted
|
— | (1) | — | |||||
Forfeitures
|
(3,334 | ) | 5.56 | |||||
Balance
at June 30, 2008
|
99,280 | $ | 3.72 |
(1)
|
Excludes
723,700 restricted stock units awarded in May 2008 which are subject to
shareholder approval of the increase in the size of the Plan being sought
at the Company’s 2008 Annual Meeting of Stockholders to be held on
September 4, 2008.
|
ACCESSDM
STOCK OPTION PLAN
As of
December 31, 2006, AccessDM’s separate stock option plan (the “AccessDM Plan”)
provides for the issuance of options to purchase up to 2,000,000 shares of
AccessDM common stock to employees. During the three months ended June 30, 2008,
there were no AccessDM options issued.
The
following table summarizes the activity of the AccessDM Plan:
Shares
Under
Option
|
Weighted
Average
Exercise
Price
Per
Share
|
|||||||
Balance
at March 31, 2008
|
1,055,000 | (2) | $ | 0.95 | (1) | |||
Granted
|
— | — | ||||||
Exercised
|
— | — | ||||||
Cancelled
|
— | — | ||||||
Balance
at June 30, 2008
|
1,055,000 | (2) | $ | 0.95 | (1) |
(1)
|
Since
there is no public trading market for AccessDM’s common stock, the fair
market value of AccessDM’s common stock on the date of grant was
determined by an appraisal of such
options.
|
(2)
|
As
of June 30, 2008, there were 50,000,000 shares of AccessDM’s common stock
authorized and 19,213,758 shares of AccessDM’s common stock issued and
outstanding.
|
WARRANTS
Warrants
outstanding consisted of the following:
Outstanding
Warrant (as defined below)
|
March
31,
2008
|
June
30,
2008
|
||||||
July
2005 Private Placement Warrants
|
467,275 | 467,275 | ||||||
August
2005 Warrants
|
760,196 | 760,196 | ||||||
1,227,471 | 1,227,471 |
17
In July
2005, in connection with the July 2005 Private Placement, the Company issued
warrants to purchase 477,275 shares of Class A Common Stock at an exercise price
of $11.00 per share (the “July 2005 Private Placement Warrants”). The July 2005
Private Placement Warrants were exercisable beginning on February 18, 2006 for a
period of five years thereafter. The July 2005 Private Placement Warrants are
callable by the Company, provided that the closing price of the Company’s Class
A Common Stock is $22.00 per share, 200% of the applicable exercise price, for
twenty consecutive trading days. The Company agreed to register the resale of
the shares of Class A Common Stock underlying the July 2005 Private Placement
Warrants with the SEC. The Company filed a Form S-3 on August 18, 2005, which
was declared effective by the SEC on August 31, 2005. As of June 30, 2008,
467,275 July 2005 Private Placements Warrants remained outstanding.
In August
2005, in connection with a conversion agreement, certain warrants were exercised
for $2,487 and the Company issued to the investors 560,196 shares of Class A
Common Stock and warrants to purchase 760,196 shares of Class A Common Stock at
an exercise price of $11.39 per share (the “August 2005 Warrants”). The August
2005 Warrants were immediately exercisable upon issuance and for a period of
five years thereafter. The Company was required to register the resale of the
shares of Class A Common Stock underlying the August 2005 Warrants with the SEC.
The Company filed a Form S-3 on November 16, 2005, which was declared effective
by the SEC on December 2, 2005. As of June 30, 2008, all 760,196 of the August
2005 Warrants remained outstanding.
7.
|
COMMITMENTS
AND CONTINGENCIES
|
Pursuant
to a digital cinema framework agreement and related supply agreement, as
amended, entered into with Christie through the Company’s indirect wholly-owned
subsidiary, AccessIT DC, in June 2005, AccessIT DC was able to order up to 4,000
Systems from Christie (the “Phase I Deployment”).
In
connection with AccessIT DC’s Phase I Deployment, the Company entered into
digital cinema deployment agreements with seven motion picture studios
and a digital cinema agreement with one alternative content provider for the
distribution of digital movie releases and alternate content to motion picture
exhibitors equipped with Systems, and providing for payment of VPFs and ACFs to
AccessIT DC. AccessIT DC also entered into master license agreements
with sixteen motion picture exhibitors for the placement of Systems in movie
theatres (including screens at AccessIT’s Pavilion Theatre). In
December 2007, AccessIT DC completed its Phase I Deployment with 3,723 Systems
installed.
As of
June 30, 2008, the Company has approximately $4,400 remaining to pay towards
Systems installed and related installation costs in connection with AccessIT
DC’s Phase I Deployment. AccessIT DC provided financing to certain motion
picture exhibitors upon the billing to the motion picture exhibitors by Christie
for the installation costs associated with the placement of the Systems in movie
theatres (see Note 4).
Our
subsidiary, ADM Cinema Corporation (“ADM Cinema”), was named as a defendant
in an action filed
on May 19, 2008 in the Supreme Court of the State of New York, County of Kings
by Pavilion on the Park, LLC (“Landlord”). Landlord is the owner of
the premises located at 188 Prospect Park West, Brooklyn, New York, known as the
Pavilion Theatre. Pursuant to the relevant lease, ADM Cinema leases
the Pavilion Theatre from Landlord and operates it as a movie theatre.
In the
complaint, Landlord alleges that ADM Cinema has violated its obligations under
Article 12 of the lease in that ADM Cinema failed to comply with an Order of the
Fire Department of the City of New York issued on September 24, 2007 calling for
the installation of a sprinkler system in the Pavilion Theatre and that such
violation constitutes an event of default under the lease. Landlord
seeks to terminate the lease and evict ADM Cinema from the premises and to
recover its attorneys’ fees and damages for ADM Cinema’s alleged “holding over”
by remaining on the premises. We believe that we have meritorious defenses
against these claims and we intend to defend our position vigorously. However,
if we do not prevail, any significant loss resulting in eviction may have a
material effect on our business and results of operations.
8.
|
SUPPLEMENTAL
CASH FLOW DISCLOSURE
|
For
the three months ended June 30,
|
||||||||
2007
|
2008
|
|||||||
Interest
paid
|
$ | 3,958 | $ | 4,689 | ||||
Equipment
purchased from Christie included in accounts payable and accrued expenses
at end of period
|
$ | 12,797 | $ | 4,410 | ||||
Deposits
applied to equipment purchased from Christie
|
$ | 8,513 | — | |||||
Issuance
of Class A Common Stock as additional purchase price for
ACS
|
$ | 512 | $ | — | ||||
Issuance
of Class A Common Stock as additional purchase price for Access Digital
Server Assets
|
$ | — | $ | 129 | ||||
Issuance
of Class A Common Stock as additional purchase price for Managed
Services
|
$ | — | $ | 82 | ||||
Issuance
of Class A Common Stock to SDE as payment for services
and resources
|
$ | — | $ | 60 | ||||
Assets
acquired under capital lease
|
$ | — | $ | 92 |
18
For the
three months ended June 30, 2007 and 2008, included in purchases of property and
equipment on the condensed consolidated statements of cash flows are payments
made on prior period accounts payable and accrued expenses related to equipment
additions of $19,197 and $11,522, respectively.
9.
|
SEGMENT
INFORMATION
|
Segment
information has been prepared in accordance with SFAS No. 131, “Disclosures
about Segments of an Enterprise and Related Information.” The Company is
comprised of three primary reportable segments: Media Services, Content &
Entertainment and Other. The segments were determined based on the products and
services provided by each segment. Accounting policies of the segments are the
same as those described in Note 2. Performance of the segments is evaluated on
operating income before interest, taxes, depreciation and
amortization. Future changes to this organization structure may
result in changes to the reportable segments disclosed.
The Media
Services segment consists of the following:
Operations
of:
|
Products
and services provided:
|
|
AccessIT DC
and its subsidiary, Access Digital Cinema Phase 2 Corp. (“Phase 2
Corporation”)
|
Financing
vehicles and administrators for the Company’s 3,723 Systems installed
nationwide in AccessIT DC’s Phase I Deployment and AccessIT DC’s
second digital cinema deployment (the “Phase II Deployment”) to motion
picture exhibitors.
Collect
VPFs from motion picture studios and distributors and ACFs from
alternative content providers.
|
|
AccessIT
SW
|
Develops
and licenses software to the theatrical distribution and exhibition
industries, provides ASP Service, and provides software enhancements and
consulting services.
|
|
DMS
|
Stores
and distributes digital content to movie theatres and other venues having
digital projection equipment and provides satellite-based broadband video,
data and Internet transmission, encryption management services, video
network origination and management services and a virtual booking center
to outsource the booking and scheduling of satellite and fiber networks
and provides forensic watermark detection services for motion picture
studios and forensic recovery services for content
owners.
|
|
Managed
Services
|
Provides
information technology consulting services and managed network monitoring
services through its global network command
center.
|
The
Content & Entertainment segment consists of the following:
Operations
of:
|
Products
and services provided:
|
|
Pavilion
Theatre
|
A
nine-screen digital movie theatre and showcase to demonstrate the
Company’s integrated digital cinema solutions.
|
|
ACS
|
Provides
cinema advertising services and entertainment.
|
|
The
Bigger Picture
|
Acquires,
distributes and provides the marketing for programs of alternative content
to theatrical exhibitors.
|
The Other
segment consists of the following:
Operations
of:
|
Products
and services provided:
|
|
Access
Digital Server Assets
|
Provides
hosting services and provides network access for other web hosting
services.
|
Since May
1, 2007, the Company’s IDCs have been operated by FiberMedia, consisting of
unrelated third parties, pursuant to a master collocation
agreement. Although the Company is still the lessee of the IDCs,
substantially all of the revenues and expenses were being realized by FiberMedia
and not the Company and effective May 1, 2008,
19
100% of
the revenues and expenses are being realized by FiberMedia.
Information
related to the segments of the Company and its subsidiaries is detailed
below:
As
of March 31, 2008
|
||||||||||||||||||||
Media
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
||||||||||||||||
Total
intangible assets, net
|
$ | 666 | $ | 12,924 | $ | — | $ | 2 | $ | 13,592 | ||||||||||
Total
goodwill
|
$ | 4,529 | $ | 9,856 | $ | 164 | $ | — | $ | 14,549 | ||||||||||
Total
assets
|
$ | 315,588 | $ | 39,755 | $ | 1,136 | $ | 17,197 | $ | 373,676 |
As
of June 30, 2008
|
||||||||||||||||||||
Media
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
||||||||||||||||
Total
intangible assets, net
|
$ | 494 | $ | 12,150 | $ | — | $ | 1 | $ | 12,645 | ||||||||||
Total
goodwill
|
$ | 4,529 | $ | 9,856 | $ | 164 | $ | — | $ | 14,549 | ||||||||||
Total
assets
|
$ | 305,527 | $ | 38,560 | $ | 1,245 | $ | 12,596 | $ | 357,928 |
Capital
Expenditures
|
Media
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
|||||||||||||||
For
the three months ended June 30, 2007
|
$ | 29,283 | $ | 260 | $ | 7 | $ | 4 | $ | 29,554 | ||||||||||
For
the three months ended June 30, 2008
|
$ | 12,297 | $ | 159 | $ | — | $ | 10 | $ | 12,466 |
For
the Three Months Ended June 30, 2007
|
||||||||||||||||||||
Media
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
||||||||||||||||
Revenues
from external customers
|
$ | 11,013 | $ | 6,802 | $ | 331 | $ | — | $ | 18,146 | ||||||||||
Intersegment
revenues
|
177 | — | — | — | 177 | |||||||||||||||
Total
segment revenues
|
11,190 | 6,802 | 331 | — | 18,323 | |||||||||||||||
Less
:Intersegment revenues
|
(177 | ) | — | — | — | (177 | ) | |||||||||||||
Total
consolidated revenues
|
$ | 11,013 | $ | 6,802 | $ | 331 | $ | — | $ | 18,146 | ||||||||||
Direct
operating (exclusive of depreciation and amortization shown
below)
|
1,888 | 4,128 | 190 | — | 6,206 | |||||||||||||||
Selling,
general and administrative
|
1,691 | 2,596 | 47 | 1,224 | 5,558 | |||||||||||||||
Provision
for doubtful accounts
|
8 | 178 | — | — | 186 | |||||||||||||||
Research
and development
|
223 | — | — | — | 223 | |||||||||||||||
Stock-based
compensation
|
52 | 15 | — | 20 | 87 | |||||||||||||||
Depreciation
of property and equipment
|
5,571 | 431 | 105 | 18 | 6,125 | |||||||||||||||
Amortization
of intangible assets
|
193 | 876 | — | 1 | 1,070 | |||||||||||||||
Total
operating expenses
|
9,626 | 8,224 | 342 | 1,263 | 19,455 | |||||||||||||||
(Loss)
income from operations
|
$ | 1,387 | $ | (1,422 | ) | $ | (11 | ) | $ | (1,263 | ) | $ | (1,309 | ) |
20
For
the Three Months Ended June 30, 2008
|
||||||||||||||||||||
Media
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
||||||||||||||||
Revenues
from external customers
|
$ | 14,652 | $ | 5,590 | $ | 328 | $ | — | $ | 20,570 | ||||||||||
Intersegment
revenues
|
237 | 15 | — | — | 252 | |||||||||||||||
Total
segment revenues
|
14,889 | 5,605 | 328 | — | 20,822 | |||||||||||||||
Less:
Intersegment revenues
|
(237 | ) | (15 | ) | — | — | (252 | ) | ||||||||||||
Total
consolidated revenues
|
$ | 14,652 | $ | 5,590 | $ | 328 | $ | — | $ | 20,570 | ||||||||||
Direct
operating (exclusive of depreciation and amortization shown
below)
|
1,945 | 3,633 | 219 | — | 5,797 | |||||||||||||||
Selling,
general and administrative
|
1,153 | 1,951 | 55 | 1,674 | 4,833 | |||||||||||||||
Provision
for doubtful accounts
|
(80 | ) | 108 | — | — | 28 | ||||||||||||||
Research
and development
|
7 | — | — | — | 7 | |||||||||||||||
Stock-based
compensation
|
26 | 21 | — | 111 | 158 | |||||||||||||||
Depreciation
of property and equipment
|
7,631 | 421 | 66 | 17 | 8,135 | |||||||||||||||
Amortization
of intangible assets
|
173 | 774 | — | — | 947 | |||||||||||||||
Total
operating expenses
|
10,855 | 6,908 | 340 | 1,802 | 19,905 | |||||||||||||||
(Loss)
income from operations
|
$ | 3,797 | $ | (1,318 | ) | $ | (12 | ) | $ | (1,802 | ) | 665 |
21
10.
|
SUBSEQUENT EVENTS
|
The
Company has received a comment letter dated August 6, 2008 from the SEC relating
to the Form 10-K, the Form 8-K filed by the Company on June 12, 2008
and the definitive proxy statement filed by the Company on July 28, 2008.
The Company is in the process of responding to such letter and resolving such
comments.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following is a discussion of the historical results of operations and financial
condition of Access Integrated Technologies, Inc. (the “Company”) and factors
affecting the Company’s financial resources. This discussion should be read in
conjunction with the condensed consolidated financial statements, including the
notes thereto, set forth herein under Item 1 “Financial Statements” and the
Form 10-K.
This
report contains forward-looking statements within the meaning of the federal
securities laws. These include statements about our expectations, beliefs,
intentions or strategies for the future, which are indicated by words or phrases
such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “will,”
“estimates,“ and similar words. Forward-looking statements represent, as of the
date of this report, our judgment relating to, among other things, future
results of operations, growth plans, sales, capital requirements and general
industry and business conditions applicable to us. These
forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties, assumptions and other factors, some of which
are beyond the Company’s control that could cause actual results to differ
materially from those expressed or implied by such forward-looking
statements. Additional information regarding risks to the Company can
be found below (see Part II Item 1A under Risk Factors).
In this
report, “AccessIT,” “we,” “us,” “our” and the “Company” refers to Access
Integrated Technologies, Inc. and its subsidiaries unless the context otherwise
requires.
OVERVIEW
AccessIT
was incorporated in Delaware on March 31, 2000. We provide fully
managed storage, electronic delivery and software services and technology
solutions for owners and distributors of digital content to movie theatres and
other venues. We have three primary businesses, media services
(“Media Services”), media content and entertainment (“Content &
Entertainment”) and other (“Other”). Our Media Services business provides
software, services and technology solutions to the motion picture and television
industries, primarily to facilitate the transition from analog (film) to digital
cinema and has positioned us at what we believe to be the forefront of an
industry relating to the delivery and management of digital cinema and other
content to entertainment and other remote venues worldwide. Our
Content & Entertainment business provides motion picture exhibition to the
general public and cinema advertising and film distribution services to movie
exhibitors. Our Other business provides hosting services and network
access for other web hosting services (“Access Digital Server
Assets”).
We have
three reportable segments: Media Services, Content &
Entertainment and Other. The Media Services segment of our business is comprised
of FiberSat Global Services, Inc. d/b/a AccessIT Satellite and Support Services,
(“AccessIT Satellite”), Access Digital Media, Inc. (“AccessDM” and, together
with AccessIT Satellite, “DMS”), Christie/AIX, Inc. (“AccessIT DC”), PLX
Acquisition Corp., Core Technology Services, Inc. (“Managed Services”) and
Access Digital Cinema Phase 2 Corp. (“Phase 2 Corporation”). The
Content & Entertainment segment of our business is comprised of ADM Cinema
Corporation (“ADM Cinema”) d/b/a the Pavilion Theatre (the “Pavilion Theatre”),
UniqueScreen Media, Inc. d/b/a AccessIT Advertising and Creative Services
(“ACS”) and Vistachiara Productions, Inc. d/b/a The Bigger Picture (“The Bigger
Picture”). Our Other segment consists of the operations of our Access Digital
Server Assets. In the past our Other segment included the operations
of our internet data centers (“IDCs”). However, since May 2007, the
IDCs have been operated by FiberMedia, consisting of unrelated third parties
(see Note 9), and substantially all of the revenues and expenses were being
realized by FiberMedia and not the Company and effective May 1, 2008, 100% of
the revenues and expenses are being realized by FiberMedia.
22
The
following organizational chart provides a graphic representation of our business
and our three reporting segments:
![](https://www.sec.gov/Archives/edgar/data/0001173204/000093244008000514/form10q_13013195.jpg)
We have
incurred net losses of $6.8 million and $4.3 million in the three months ended
June 30, 2007 and 2008, respectively, and we have an accumulated deficit of
$105.0 million as of June 30, 2008. We anticipate that with the operations of
AccessIT DC and DMS, our results of operations will improve. If we experience
further significant growth, we expect our operating costs and general and
administrative expenses will also increase for the foreseeable future, but as a
lower percentage of revenue. In order to achieve and sustain profitable
operations, we will need to generate more revenues than we have in prior years
and we will need to obtain additional financing.
Results
of Operations for the Three Months Ended June 30, 2007 and 2008
Revenues
For
the Three Months Ended June 30,
|
||||||||||||
($
in thousands)
|
2007
|
2008
|
Change
|
|||||||||
Revenues:
|
||||||||||||
Media
Services
|
$ | 11,013 | $ | 14,652 | 33 | % | ||||||
Content
& Entertainment
|
6,802 | 5,590 | (18 | )% | ||||||||
Other
|
331 | 328 | (1 | )% | ||||||||
$ | 18,146 | $ | 20,570 | 13 | % |
Revenues
increased $2.4 million or 13%. The increase in revenues was primarily
due to a 40% increase in VPF revenues, in the Media Service segment,
attributable to the increased number of Systems installed in movie theatres,
following the completion of our Phase I Deployment. We also
experienced a 35% increase in revenues from delivery of movies to digitally
equipped theatres, due to the increase in the number of such theatres over the
last year. The gains were partially offset by a 17% decline in
in-theatre advertising revenues, in the Content & Entertainment segment,
mostly attributable to the elimination of various under performing customer
contracts. We also experienced a decline in software revenues, due to
one-time license fees from our Theater Command Center software realized during
the Phase I Deployment. We expect these software license fees to
resume upon either an anticipated further domestic deployment of Systems (“the
Phase II Deployment”), or an international deployment of Systems. There were
2,692 Systems installed at June 30, 2007 compared to 3,723 Systems installed at
June 30, 2008. We expect revenues to generally remain near current
levels until there is an increase in the number of Systems deployed from our
anticipated Phase II Deployment, due to the resultant VPFs and other revenue
sources including content delivery and distribution of alternative content
generated from digitally equipped movie theatres.
23
Direct Operating
Expenses
For
the Three Months Ended June 30,
|
||||||||||||
($
in thousands)
|
2007
|
2008
|
Change
|
|||||||||
Direct
operating expenses:
|
||||||||||||
Media
Services
|
$ | 1,888 | $ | 1,945 | 3 | % | ||||||
Content
& Entertainment
|
4,128 | 3,633 | (12 | )% | ||||||||
Other
|
190 | 219 | 15 | % | ||||||||
Corporate
|
— | — | — | |||||||||
$ | 6,206 | $ | 5,797 | (7 | )% |
Direct
operating expenses decreased $0.4 million or 7%. The decrease was
primarily related to reduced staffing levels and reduced minimum guaranteed
obligations under theatre advertising agreements with exhibitors for displaying
cinema advertising in the Content & Entertainment segment. We expect direct
operating expenses to decrease as compared to prior periods.
Selling, General and
Administrative Expenses
For
the Three Months Ended June 30,
|
||||||||||||
($
in thousands)
|
2007
|
2008
|
Change
|
|||||||||
Selling,
general and administrative expenses:
|
||||||||||||
Media
Services
|
$ | 1,691 | $ | 1,153 | (32 | )% | ||||||
Content
& Entertainment
|
2,596 | 1,951 | (25 | )% | ||||||||
Other
|
47 | 55 | 17 | % | ||||||||
Corporate
|
1,224 | 1,674 | 37 | % | ||||||||
$ | 5,558 | $ | 4,833 | (13 | )% |
Selling,
general and administrative expenses decreased $0.7 million or
13%. The decrease was primarily related to reduced staffing levels in
both the Media Services segment and the Content & Entertainment segment,
offset by increased staffing costs and professional fees within Corporate.
Following the completion of our Phase I Deployment, overall headcount reductions
have now stabilized. As of June 30, 2007 and 2008 we had 350 and 270
employees, respectively, of which 49 and 50, respectively, were part-time
employees and 85 and 55, respectively, were salespersons. Due to
reduced headcount levels primarily from the consolidation of sales territories
in ACS, resulting in a reduced sales and administrative work force within the
Content & Entertainment segment, we expect selling, general and
administrative expenses to decrease as compared to prior periods.
Depreciation Expense on
Property and Equipment
For
the Three Months Ended June 30,
|
||||||||||||
($
in thousands)
|
2007
|
2008
|
Change
|
|||||||||
Depreciation
expense:
|
||||||||||||
Media
Services
|
$ | 5,571 | $ | 7,631 | 37 | % | ||||||
Content
& Entertainment
|
431 | 421 | (10 | )% | ||||||||
Other
|
105 | 66 | (37 | )% | ||||||||
Corporate
|
18 | 17 | (6 | )% | ||||||||
$ | 6,125 | $ | 8,135 | 33 | % |
Depreciation
expense increased $2.0 million or 33%. The increase was primarily
attributable to the depreciation for the increased amount of assets to support
AccessIT DC’s Phase I Deployment. The value of gross property and
equipment increased by $68.0 million between June 30, 2007 and June 30,
2008.
24
Interest
expense
For
the Three Months Ended June 30,
|
||||||||||||
($
in thousands)
|
2007
|
2008
|
Change
|
|||||||||
Interest
expense:
|
||||||||||||
Media
Services
|
$ | 3,986 | $ | 4,538 | 14 | % | ||||||
Content
& Entertainment
|
407 | 264 | (35 | )% | ||||||||
Other
|
— | — | — | |||||||||
Corporate
|
1,351 | 2,374 | 76 | % | ||||||||
$ | 5,744 | $ | 7,176 | 25 | % |
Interest
expense increased $1.4 million or 25%. Total interest expense included $4.6
million and $5.0 million of interest paid and accrued along with non-cash
interest expense of $1.1 million and $2.2 million for the three months
ended June 30, 2007 and 2008, respectively. With the completion of
our Phase I Deployment, and pending any Phase II Deployment related borrowings,
we expect our interest expense to stabilize. The decrease in interest
expense within the Content & Entertainment segment related to reduced
interest due to the repayment of an ACS term note with a portion of the proceeds
from the 2007 Senior Notes in August 2007 (see Note 5). The increase
in non-cash interest was due to the value of the shares issued as payment of
interest on the $55.0 million of 2007 Senior Notes (see Note 5), which were not
outstanding at June 30, 2007. Non-cash interest could continue to
increase depending on management’s future decisions to pay interest payments on
the 2007 Senior Notes in cash or shares of Class A Common Stock.
Change in fair value of
interest rate swap
Interest
rate swap income was $2.3 million for the three months ended June 30,
2008. This represents AccessIT DC’s unrealized gain from the change
in the fair value of the Interest Rate Swap entered into in April 2008 related
to the GE Credit Facility (see Note 5).
Liquidity
and Capital Resources
We have
incurred operating losses in each year since we commenced our operations. Since
our inception, we have financed our operations substantially through the private
placement of shares of our common and preferred stock, the issuance of
promissory notes, our initial public offering and subsequent private and public
offerings, notes payable and common stock used to fund various
acquisitions.
In August
2006, AccessIT DC entered into a credit agreement (the “Credit Agreement”) with
General Electric Capital Corporation (“GECC”), as administrative agent and
collateral agent for the lenders party thereto, and one or more lenders party
thereto. Pursuant to the Credit Agreement, at any time prior to
August 1, 2008, AccessIT DC may draw up to $217.0 million under the GE Credit
Facility. As of June 30, 2008, $201.3 million was borrowed under the GE Credit
Facility at a weighted average interest rate of 7.6%. We do not intend to make
any further borrowings under the GE Credit Facility. The Credit
Agreement contains certain restrictive covenants that restrict AccessIT DC and
its subsidiaries from making certain capital expenditures, incurring other
indebtedness, engaging in a new line of business, selling certain assets,
acquiring, consolidating with, or merging with or into other companies and
entering into transactions with affiliates and is non-recourse to the Company
and its other subsidiaries.
In August
2007, AccessIT DC received $9.6 million of vendor financing (the “Vendor Note”)
for equipment used in AccessIT DC’s Phase I Deployment. The Vendor Note bears
interest at 11% and may be prepaid without penalty. Interest is due
semi-annually commencing February 2008. The balance of the Vendor
Note, together with all unpaid interest is due on the maturity date of August 1,
2016. As of June 30, 2008, the outstanding balance of the Vendor Note
was $9.6 million.
In August
2007, we entered into a securities purchase agreement (the “Purchase Agreement”)
with the purchasers party thereto (the “Purchasers”) pursuant to which we issued
10% Senior Notes (the “2007 Senior Notes”) in the aggregate principal amount of
$55.0 million (the “August 2007 Private Placement”) and received net proceeds of
approximately $53.0 million. The term of the 2007 Senior Notes is three years
which may be extended for one 6 month period at our discretion if certain
conditions are met. Interest on the 2007 Senior Notes will be paid on
a
25
quarterly
basis in cash or, at our option and subject to certain conditions, in shares of
its Class A Common Stock (“Interest Shares”). In addition, each quarter, we will
issue shares of Class A Common Stock to the Purchasers as payment of additional
interest owed under the 2007 Senior Notes based on a formula (“Additional
Interest”). We may prepay the 2007 Senior Notes in whole or in part
following the first anniversary of issuance of the 2007 Senior Notes, subject to
a penalty of 2% of the principal if the 2007 Senior Notes are prepaid prior to
the two year anniversary of the issuance and a penalty of 1% of the principal if
the 2007 Senior Notes are prepaid thereafter, and subject to paying the number
of shares as Additional Interest that would be due through the end of the term
of the 2007 Senior Notes. The Purchase Agreement also requires the
2007 Senior Notes to be guaranteed by each of our existing and, subject to
certain exceptions, future subsidiaries (the “Guarantors”), other than AccessIT
DC and its respective subsidiaries. Accordingly, each of the Guarantors entered
into a subsidiary guaranty (the “Subsidiary Guaranty”) with the Purchasers
pursuant to which it guaranteed our obligations under the 2007 Senior
Notes. We also entered into a Registration Rights Agreement with the
Purchasers pursuant to which we agreed to register the resale of any shares of
its Class A Common Stock issued pursuant to the 2007 Senior Notes at any time
and from time to time. As of June 30, 2008, all shares issued to the
holders of the 2007 Senior Notes have been registered for
resale. Under the 2007 Senior Notes we agreed (i) to limit
our total indebtedness to an aggregate of $315.0 million unless certain
conditions are met and (ii) not to, and not to cause our subsidiaries (except
for AccessIT DC and its subsidiaries) to, incur indebtedness, with certain
exceptions, including an exception for $10.0 million; provided that no more than
$5.0 million of such indebtedness is incurred by AccessDM or AccessIT Satellite
or any of their respective subsidiaries except as incurred by AccessDM pursuant
to a guaranty entered into in accordance with the GE Credit Facility (see
below). Additionally, under the 2007 Senior Notes,
AccessIT DC and its subsidiaries may incur additional indebtedness in connection
with the deployment of Systems beyond our initial rollout of up to 4,000
Systems, if certain conditions are met. As of June 30, 2008, the
outstanding principal balance of the 2007 Senior Notes was $55.0
million.
As of
June 30, 2008, AccessIT DC has approximately $4.4 million remaining to pay for
Systems installed and related installation costs in connection with AccessIT
DC’s Phase I Deployment.
As of
June 30, 2008, we had cash and cash equivalents of $25.0 million and our working
capital was $12.9 million.
Operating
activities used net cash of $0.1 million for the three months ended June 30,
2007, and provided net cash of $8.8 million for the three months ended June 30,
2008. The increase in cash provided by operating activities was
primarily due to the decreased net loss and an increase of adjustments not
requiring cash, such as depreciation and amortization and non-cash interest
along with increased collections of outstanding accounts receivable offset by
increased payments for accounts payable and accrued expenses.
Investing
activities used net cash of $36.3 million and $12.7 million for the three months
ended June 30, 2007 and 2008, respectively. The decrease was due to reduced
payments for purchases of and deposits paid for property and equipment, as our
Phase I Deployment was completed during the quarter ended December 2007. We
expect investing activities to continue to use cash for the remaining payments
due on Systems purchased for AccessIT DC’s Phase I Deployment. If and
when a Phase II Deployment begins, we would expect an increase in capital
expenditures resulting in an increase in cash used by investing
activities.
Financing
activities provided net cash of $35.2 million for the three months ended June
30, 2007 due to the proceeds from the GE Credit Facility and the Christie Note
(see Note 5). Financing activities used net cash of $0.7 million for
the three months ended June 30, 2008 due to principal repayments on various
notes payable (see Note 5). Financing activities are expected to
start using net cash for principal repayments on the GE Credit Facility, which
begin in August 2008. Although we have engaged a third-party
investment banking firm to assist us in seeking to refinance the GE Credit
Facility and to finance the planned Phase II Deployment, the terms of any such
refinancing or financing have not yet been determined. If and when a
Phase II Deployment begins, we expect an increase in cash provided by financing
activities for borrowings under a financing that we intend to enter
into in connection with the Phase II Deployment. Our Phase II
Deployment would require the purchase of up to 10,000 digital cinema projection
systems, which together with installation and related costs, could aggregate
approximately $700 million. The cost of such equipment is expected to
be funded with a combination of long term debt and payments from exhibitors and
other third parties.
We have
contractual obligations that include long-term debt consisting of notes payable,
a revolving credit facility, a non-cancelable long-term capital lease
obligations for the Pavilion Theatre and computer network equipment for ACS,
non-cancelable operating leases consisting of real estate leases and minimum
guaranteed obligations under theatre advertising agreements with exhibitors for
displaying cinema advertising.
26
The
following table summarizes our significant contractual obligations as of June
30, 2008 ($ in thousands):
Payments
Due by Period
|
||||||||||||||||||||
Contractual
Obligations
|
Total
|
2009
|
2010
&
2011
|
2012
&
2013
|
Thereafter
|
|||||||||||||||
Long-term
debt (1)
|
$ | 75,361 | $ | 2,982 | $ | 57,356 | $ | 2,167 | $ | 12,856 | ||||||||||
Credit
facilities
|
252,787 | 35,356 | 76,563 | 79,880 | 60,988 | |||||||||||||||
Capital
lease obligations
|
16,219 | 1,164 | 2,325 | 2,266 | 10,464 | |||||||||||||||
Debt-related
obligations, including interest
|
$ | 344,367 | $ | 39,502 | $ | 136,244 | $ | 84,313 | $ | 84,308 | ||||||||||
Operating
lease obligations (2)
|
10,373 | 3,236 | 3,665 | 1,657 | 1,815 | |||||||||||||||
Theatre
agreements
|
24,489 | 5,609 | 5,942 | 4,489 | 8,449 | |||||||||||||||
Obligations
included in operating expenses
|
$ | 34,862 | $ | 8,845 | $ | 9,607 | $ | 6,146 | $ | 10,264 | ||||||||||
Purchase
obligations
|
1,141 | 1,141 | — | — | — | |||||||||||||||
Total
|
$ | 380,370 | $ | 49,488 | $ | 145,851 | $ | 90,459 | $ | 94,572 |
(1)
|
Excludes
interest on the 2007 Senior Notes to be paid on a quarterly basis that may
be paid, at the Company’s option and subject to certain conditions, in
shares of our Class A Common Stock.
|
(2)
|
Includes
operating lease agreements for the IDCs now operated by FiberMedia,
consisting of unrelated third parties (see Note 9), which total aggregates
to $7.9 million. The Company will attempt to obtain landlord
consents to assign each facility lease to FiberMedia. Until
such landlord consents are obtained, the Company will remain as the
lessee.
|
We expect
to continue to generate net losses for the foreseeable future primarily due to
depreciation and amortization, interest on funds advanced under the GE Credit
Facility, interest on the 2007 Senior Notes, software development, marketing and
promotional activities and the development of relationships with other
businesses. Certain of these costs, including costs of software development and
marketing and promotional activities, could be reduced if necessary. The
restrictions imposed by the 2007 Senior Notes and the Credit Agreement with GECC
may limit our ability to obtain financing, make it more difficult to satisfy our
debt obligations or require us to dedicate a substantial portion of our cash
flow to payments on our existing debt obligations, thereby reducing the
availability of our cash flow to fund working capital, capital expenditures and
other corporate requirements. We may attempt to raise additional
capital from various sources for working capital as necessary, but there is no
assurance that such financing will be completed as contemplated or under terms
acceptable to us, or our existing shareholders. Failure to generate additional
revenues, raise additional capital, meet our financial covenants or other
obligations under our Credit Agreement with GECC or manage discretionary
spending could have a material adverse effect on our ability to continue as a
going concern and to achieve our intended business objectives.
Our
management believes that the cash on hand and cash receipts from existing
operations will be sufficient to permit us to meet our obligations through June
30, 2009.
Seasonality
Media
Services revenues derived from the collection of VPFs from motion picture
studios and Content & Entertainment revenues derived from our Pavilion
Theatre are seasonal, coinciding with the timing of releases of movies by the
motion picture studios. Generally, motion picture studios release the most
marketable movies during the summer and the holiday season. The unexpected
emergence of a hit movie during other periods can alter the traditional trend.
The timing of movie releases can have a significant effect on our results of
operations, and the results of one quarter are not necessarily indicative of
results for the next quarter or any other quarter. We believe the seasonality of
motion picture exhibition, however, is becoming less pronounced as the motion
picture studios are releasing movies somewhat more evenly throughout the
year.
27
Subsequent Events
|
We
have received a comment letter dated August 6, 2008 from the SEC relating
to the Form 10-K, our Form 8-K filed on June 12, 2008 and our definitive
proxy statement filed on July 28, 2008. We are in the process of
responding to such letter and resolving such comments.
Off-balance
sheet arrangements
We are
not a party to any off-balance sheet arrangements, other than operating leases
in the ordinary course of business, which is disclosed above in the table of our
significant contractual obligations.
Impact
of Inflation
The
impact of inflation on our operations has not been significant to
date. However, there can be no assurance that a high rate of
inflation in the future would not have an adverse impact on our operating
results.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
exposure to market risk for changes in interest rates relates primarily to our
GE Credit Facility and cash equivalents. The interest rate on certain advances
under the GE Credit Facility fluctuates with the bank’s prime
rate. As of June 30, 2008, $201.3 million was borrowed under the GE
Credit Facility at a weighted average interest rate of 7.6%.
Pursuant
to the GE Credit Facility, AccessIT DC was required to enter into some form, or
combination, of interest rate swap agreements, cap agreements, collar agreements
and insurance (“Interest Rate Contracts”) and thereafter maintain Interest Rate
Contracts on terms and with counter-parties reasonably satisfactory to GECC
until August 2013 for an amount equal to at least 50% of the aggregate principal
amount outstanding at August 1, 2008. These Interest Rate Contracts
will provide protection against fluctuation of interest rates. In
April 2008, AccessIT DC entered into an Interest Rate Swap also known as an
“arranged hedge transaction” or "synthetic fixed rate financing", with a
counterparty for approximately 90% of the amounts outstanding under the GE
Credit Facility or an initial amount of $180 million. Under the
Interest Rate Swap, AccessIT DC will effectively pay a fixed rate of 7.3%, to
guard against AccessIT DC’s exposure to increases in the variable interest rate
under the GE Credit Facility. GE Corporate Financial Services arranged the
transaction, which will take effect commencing August 1, 2008 as required by the
GE Credit Facility. As principal repayments of the GE Credit Facility
occur, the notional amount will decrease by a pro rata amount, such that
approximately 90% of the remaining principal amount will be covered by the
Interest Rate Swap at any time.
Our
customer base is primarily composed of businesses throughout the United
States. We routinely assess the financial strength of our customers
and the status of our accounts receivable and, based upon factors surrounding
the credit risk, we establish an allowance, if required, for uncollectible
accounts and, as a result, we believe that our accounts receivable credit risk
exposure beyond such allowance is limited.
All sales
and purchases are denominated in U.S. dollars.
ITEM
4. CONTROLS AND PROCEDURES
As of the
end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our principal executive officer and
principal financial officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act
of 1934 (the “Exchange Act”)). Based on this evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures are effective to ensure that information required to be disclosed
by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC
rules and forms, and that such information is accumulated and communicated to
our management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required
disclosure.
In
designing and evaluating our disclosure controls and procedures, management
recognizes that any controls, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance of achieving the desired
control objectives. Due to the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud,
if any, within the Company have been detected.
There was
no change in our internal control over financial reporting during our most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial
reporting.
28
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
Our
subsidiary, ADM Cinema Corporation (“ADM Cinema”), was named as a defendant
in an action filed
on May 19, 2008 in the Supreme Court of the State of New York, County of Kings
by Pavilion on the Park, LLC (“Landlord”). Landlord is the owner of
the premises located at 188 Prospect Park West, Brooklyn, New York, known as the
Pavilion Theatre. Pursuant to the relevant lease, ADM Cinema leases
the Pavilion Theatre from Landlord and operates it as a movie
theatre.
In the
complaint, Landlord alleges that ADM Cinema has violated its obligations under
Article 12 of the lease in that ADM Cinema failed to comply with an Order of the
Fire Department of the City of New York issued on September 24, 2007 calling for
the installation of a sprinkler system in the Pavilion Theatre and that such
violation constitutes an event of default under the lease. Landlord
seeks to terminate the lease and evict ADM Cinema from the premises and to
recover its attorneys’ fees and damages for ADM Cinema’s alleged “holding over”
by remaining on the premises. We believe that we have meritorious defenses
against these claims and we intend to defend our position vigorously. However,
if we do not prevail, any significant loss resulting in eviction may have a
material effect on our business and results of operations.
ITEM
1A. RISK FACTORS
The information regarding certain
factors which could materially affect our business, financial condition or
future results set forth under Item 1A. “Risk Factors” in the Form
10-K, should be carefully
reviewed and considered. There have been no material changes from the factors
disclosed in the Form 10-K for the fiscal year ended March 31, 2008, although we may disclose changes to
such factors or disclose additional factors from time to time in our future
filings with the SEC.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As
previously reported in the Form 10-K, in April 2008, in connection with the
acquisition of Managed Services in January 2004, we issued 15,219 shares of
unregistered Class A Common Stock as additional purchase price based on the
subsequent performance of the business acquired. There was no
underwriter associated with this privately negotiated
transaction. These shares were issued in reliance upon applicable
exemptions from registration under Section 4(2) of the Securities Act of 1933,
as amended (the “Securities Act”).
As
previously reported in the Form 10-K, in April 2008, in connection with the
acquisition of the Access Digital Server Assets, we issued 30,000 shares of
unregistered Class A Common Stock as additional purchase price based on the
subsequent performance. There was no underwriter associated with this
privately negotiated transaction. These shares were issued in
reliance upon applicable exemptions from registration under Section 4(2) of the
Securities Act.
In
connection with the acquisition of The Bigger Picture in January 2007, The
Bigger Picture entered into a services agreement with SD Entertainment, Inc.
(“SDE”) to provide certain services, such as the provision of shared office
space and certain shared administrative personnel. In June 2008, we
issued 24,579 shares of unregistered Class A Common Stock to SDE as partial
payment for such services and resources. There was no underwriter
associated with this privately negotiated transaction. These shares
were issued in reliance upon applicable exemptions from registration under
Section 4(2) of the Securities Act.
On June
30, 2008, pursuant to the 2007 Senior Notes (see Note 5), the Company issued
635,847 shares of Class A Common Stock to the Purchasers of the 2007 Senior
Notes as Interest Shares in payment of the quarterly interest due June 30, 2008
on the 2007 Senior Notes. The Company elected to pay the quarterly interest due
June 30, 2008 in 635,847 shares of its Class A Common Stock. The
Company agreed to register the resale of these shares of Class A Common Stock
with the SEC. The Company filed a registration statement on Form S-3 filed on
September 26, 2007, which was declared effective by the SEC on November 2, 2007
and a registration statement on Form S-3 for the issuance of an additional
500,000 shares of its Class A Common Stock on May 6, 2008, which was declared
effective by the SEC on June 30, 2008. These shares were issued in
reliance upon applicable exemptions from registration under Section 4(2) of the
Securities Act.
29
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
The
exhibits are listed in the Exhibit Index on page 32 herein.
30
SIGNATURES
In
accordance with 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.
ACCESS
INTEGRATED TECHNOLOGIES, INC.
(Registrant)
Date:
|
August
11, 2008
|
By:
|
/s/
A. Dale Mayo
|
|
A.
Dale Mayo
President
and Chief Executive Officer and Director
(Principal
Executive Officer)
|
||||
Date:
|
August
11, 2008
|
By:
|
/s/
Brian D. Pflug
|
|
Brian
D. Pflug
Senior
Vice President – Accounting & Finance
(Principal
Financial Officer)
|
31
EXHIBIT
INDEX
Exhibit
Number
|
Description of Document
|
|
31.1
|
Officer’s
Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Officer’s
Certificate 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. Section 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. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32