Cineverse Corp. - Quarter Report: 2009 September (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: September 30, 2009
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: 001-31810
______________________________________
Cinedigm
Digital Cinema Corp.
(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)
Access
Integrated Technologies, Inc.
(Former
name, former address and former fiscal year, if changed since last
report)
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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and
post such files).
|
Yes
o 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 o
|
Non-accelerated
filer o (Do not check if a
smaller reporting company)
|
Smaller reporting company
x
|
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 November 12, 2009, 28,032,875 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.
|
CINEDIGM
DIGITAL CINEMA CORP.
CONTENTS
TO FORM 10-Q
PART
I --
|
FINANCIAL
INFORMATION
|
Page
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
Condensed
Consolidated Balance Sheets at March 31, 2009 and September 30, 2009
(Unaudited)
|
1
|
|
Unaudited
Condensed Consolidated Statements of Operations for the Three and Six
Months ended September 30, 2008 and 2009
|
3
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows for the Six Months ended
September 30, 2008 and 2009
|
4
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
5
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
29
|
Item
4T.
|
Controls
and Procedures
|
43
|
PART
II --
|
OTHER
INFORMATION
|
|
Item
1.
|
Legal
Proceedings
|
43
|
Item
1A.
|
Risk
Factors
|
43
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
45
|
Item
3.
|
Defaults
Upon Senior Securities
|
45
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
45
|
Item
5.
|
Other
Information
|
46
|
Item
6.
|
Exhibits
|
46
|
Signatures
|
|
47
|
Exhibit
Index
|
48
|
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS (UNAUDITED)
CINEDIGM
DIGITAL CINEMA CORP.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except for share data)
March
31,
2009
|
September
30,
2009
|
|||||||
ASSETS
|
(Unaudited)
|
|||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 26,329 | $ | 19,732 | ||||
Restricted
short-term investment securities
|
— | 5,594 | ||||||
Accounts
receivable, net
|
13,884 | 11,527 | ||||||
Deferred
costs, current portion
|
3,936 | 2,999 | ||||||
Unbilled
revenue, current portion
|
3,082 | 3,522 | ||||||
Prepaid
and other current assets
|
1,798 | 3,159 | ||||||
Note
receivable, current portion
|
616 | 170 | ||||||
Total
current assets
|
49,645 | 46,703 | ||||||
Restricted
long-term investment securities
|
— | 4,974 | ||||||
Restricted
cash
|
255 | 7,161 | ||||||
Security
deposits
|
424 | 427 | ||||||
Property
and equipment, net
|
243,124 | 235,853 | ||||||
Intangible
assets, net
|
10,707 | 9,192 | ||||||
Capitalized
software costs, net
|
3,653 | 3,738 | ||||||
Goodwill
|
8,024 | 8,024 | ||||||
Deferred
costs, net of current portion
|
3,967 | 7,735 | ||||||
Unbilled
revenue, net of current portion
|
1,253 | 1,062 | ||||||
Note
receivable, net of current portion
|
959 | 878 | ||||||
Accounts
receivable, net of current portion
|
386 | 386 | ||||||
Total
assets
|
$ | 322,397 | $ | 326,133 |
See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements
1
CINEDIGM
DIGITAL CINEMA CORP.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except for share data)
(continued)
March
31,
2009
|
September
30,
2009
|
|||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
(Unaudited)
|
|||||||
Current
liabilities
|
||||||||
Accounts
payable and accrued expenses
|
$ | 14,954 | $ | 8,995 | ||||
Current
portion of notes payable, non-recourse
|
24,824 | 24,758 | ||||||
Current
portion of notes payable
|
424 | 177 | ||||||
Current
portion of capital leases
|
175 | 700 | ||||||
Current
portion of deferred revenue
|
5,535 | 5,860 | ||||||
Current
portion of customer security deposits
|
314 | 314 | ||||||
Total
current liabilities
|
46,226 | 40,804 | ||||||
Notes
payable, non-recourse, net of current portion
|
170,624 | 162,112 | ||||||
Notes
payable, net of current portion
|
55,333 | 65,627 | ||||||
Capital
leases, net of current portion
|
5,832 | 5,778 | ||||||
Warrant
liability
|
— | 14,308 | ||||||
Interest
rate swap
|
4,529 | 3,306 | ||||||
Deferred
revenue, net of current portion
|
1,057 | 2,013 | ||||||
Customer
security deposits, net of current portion
|
9 | 9 | ||||||
Total
liabilities
|
283,610 | 293,957 | ||||||
Commitments
and contingencies (see Note 7)
|
||||||||
Stockholders’
Equity
|
||||||||
Preferred
stock, 15,000,000 shares authorized;
Series
A 10% - $0.001 par value per share; 20 shares authorized; 8 shares issued
and outstanding at March 31, 2009 and September 30, 2009, respectively.
Liquidation preference $4,050
|
3,476 | 3,529 | ||||||
Class
A common stock, $0.001 par value per share; 65,000,000 shares authorized;
27,544,315 and 28,084,315 shares issued and 27,492,875 and 28,032,875
shares outstanding at March 31, 2009 and September 30, 2009,
respectively
|
27 | 28 | ||||||
Class
B common stock, $0.001 par value per share; 15,000,000 shares authorized;
733,811 shares issued and outstanding, at March 31, 2009 and September 30,
2009, respectively
|
1 | 1 | ||||||
Additional
paid-in capital
|
173,565 | 175,281 | ||||||
Treasury
stock, at cost; 51,440 Class A shares
|
(172 | ) | (172 | ) | ||||
Accumulated
deficit
|
(138,110 | ) | (146,474 | ) | ||||
Accumulated
other comprehensive loss
|
— | (17 | ) | |||||
Total
stockholders’ equity
|
38,787 | 32,176 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 322,397 | $ | 326,133 |
See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements
2
CINEDIGM
DIGITAL CINEMA CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except for share and per share data)
(Unaudited)
For
the Three
Months
Ended
September
30,
|
For
the Six
Months
Ended
September
30,
|
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
Revenues
|
$
|
21,849
|
$
|
19,881
|
$
|
42,419
|
$
|
38,547
|
||||||||
Costs
and Expenses:
|
||||||||||||||||
Direct
operating (exclusive of depreciation and amortization shown
below)
|
6,732
|
6,066
|
12,529
|
11,528
|
||||||||||||
Selling,
general and administrative
|
4,187
|
4,073
|
9,020
|
7,942
|
||||||||||||
Provision
for doubtful accounts
|
145
|
136
|
173
|
264
|
||||||||||||
Research
and development
|
93
|
64
|
100
|
104
|
||||||||||||
Stock-based
compensation
|
200
|
441
|
358
|
766
|
||||||||||||
Depreciation
and amortization of property and equipment
|
8,133
|
8,323
|
16,268
|
16,476
|
||||||||||||
Amortization
of intangible assets
|
901
|
750
|
1,848
|
1,515
|
||||||||||||
Total
operating expenses
|
20,391
|
19,853
|
40,296
|
38,595
|
||||||||||||
Income
(loss) from operations
|
1,458
|
28
|
2,123
|
(48
|
)
|
|||||||||||
Interest
income
|
99
|
95
|
223
|
135
|
||||||||||||
Interest
expense
|
(6,990
|
)
|
(8,791
|
)
|
(14,166
|
)
|
(16,341
|
)
|
||||||||
Extinguishment
of debt
|
—
|
10,744
|
—
|
10,744
|
||||||||||||
Other
expense, net
|
(176
|
)
|
(158
|
)
|
(326
|
)
|
(301
|
)
|
||||||||
Change
in fair value of interest rate swap
|
(687
|
)
|
540
|
1,565
|
1,223
|
|||||||||||
Change
in fair value of warrants
|
—
|
(3,576
|
)
|
—
|
(3,576
|
)
|
||||||||||
Net
loss
|
$
|
(6,296
|
)
|
$
|
(1,118
|
)
|
$
|
(10,581
|
)
|
$
|
(8,164
|
)
|
||||
Preferred
stock dividends
|
—
|
(100
|
)
|
—
|
(200
|
)
|
||||||||||
Net
loss attributable to common stockholders
|
$
|
(6,296
|
)
|
$
|
(1,218
|
)
|
$
|
(10,581
|
)
|
$
|
(8,364
|
)
|
||||
Net
loss per Class A and Class B common share - basic and
diluted
|
$
|
(0.23
|
)
|
$
|
(0.04
|
)
|
$
|
(0.39
|
)
|
$
|
(0.29
|
)
|
||||
Weighted
average number of Class A and Class B common shares
outstanding:
|
||||||||||||||||
Basic
and diluted
|
27,536,371
|
28,663,959
|
27,202,593
|
28,475,217
|
See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements
3
CINEDIGM
DIGITAL CINEMA CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands) (Unaudited)
For
the Six Months Ended September 30,
|
|||||||
2008
|
2009
|
||||||
Cash
flows from operating activities
|
|||||||
Net
loss
|
$
|
(10,581
|
)
|
$
|
(8,164
|
)
|
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|||||||
Loss
on disposal of assets
|
79
|
4
|
|||||
Depreciation
and amortization of property and equipment and amortization of intangible
assets
|
18,116
|
17,991
|
|||||
Amortization
of capitalized software costs
|
387
|
323
|
|||||
Amortization
of debt issuance costs included in interest expense
|
749
|
938
|
|||||
Provision
for doubtful accounts
|
173
|
264
|
|||||
Stock-based
compensation
|
358
|
766
|
|||||
Non-cash
interest expense
|
3,018
|
1,861
|
|||||
Change
in fair value of interest rate swap and warrant
|
(1,565
|
)
|
2,353
|
||||
Loss
on available-for-sale investments
|
—
|
2
|
|||||
Note
payable included in interest expense
|
—
|
817
|
|||||
Gain
on extinguishment of debt
|
—
|
(10,744
|
)
|
||||
Accretion
of note payable discount included in interest expense
|
—
|
300
|
|||||
Changes
in operating assets and liabilities:
|
|||||||
Accounts
receivable
|
4,012
|
2,093
|
|||||
Unbilled
revenue
|
1,318
|
(250
|
)
|
||||
Prepaids
and other current assets
|
(1,535
|
)
|
(1,308
|
)
|
|||
Other
assets
|
150
|
533
|
|||||
Accounts
payable and accrued expenses
|
943
|
(2,194
|
)
|
||||
Deferred
revenue
|
(407
|
)
|
1,236
|
||||
Other
liabilities
|
9
|
—
|
|||||
Net
cash provided by operating activities
|
15,224
|
6,821
|
|||||
Cash
flows from investing activities
|
|||||||
Purchases
of property and equipment
|
(16,008
|
)
|
(12,573
|
)
|
|||
Additions
to capitalized software costs
|
(508
|
)
|
(408
|
)
|
|||
Maturities
of available-for-sale investments
|
—
|
671
|
|||||
Purchase
of available-for-sale investments
|
—
|
(11,265
|
)
|
||||
Restricted
cash
|
—
|
(6,906
|
)
|
||||
Net
cash used in investing activities
|
(16,516
|
)
|
(30,481
|
)
|
|||
Cash
flows from financing activities
|
|||||||
Proceeds
from notes payable
|
—
|
76,513
|
|||||
Repayment
of notes payable
|
(1,100
|
)
|
(42,862
|
)
|
|||
Repayment
of credit facilities
|
(3,858
|
)
|
(18,950
|
)
|
|||
Proceeds
from credit facilities
|
200
|
8,884
|
|||||
Payments
of debt issuance costs
|
(368
|
)
|
(6,064
|
)
|
|||
Principal
payments on capital leases
|
(53
|
)
|
(432
|
)
|
|||
Costs
associated with issuance of preferred stock
|
—
|
(8
|
)
|
||||
Costs
associated with issuance of Class A common stock
|
(37
|
)
|
(18
|
)
|
|||
Net
cash (used in) provided by financing activities
|
(5,216
|
)
|
17,063
|
||||
Net
decrease in cash and cash equivalents
|
(6,508
|
)
|
(6,597
|
)
|
|||
Cash
and cash equivalents at beginning of period
|
29,655
|
26,329
|
|||||
Cash
and cash equivalents at end of period
|
$
|
23,147
|
$
|
19,732
|
See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements
4
CINEDIGM
DIGITAL CINEMA CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
($ in
thousands, except for per share data)
(Unaudited)
1.
|
NATURE
OF OPERATIONS
|
Cinedigm
Digital Cinema Corp. was incorporated in Delaware on March 31, 2000 (“Cinedigm”,
and collectively with its subsidiaries, the “Company”). On September
30, 2009, the Company’s stockholders approved a change in the Company’s name
from Access Integrated Technologies, Inc., to Cinedigm Digital Cinema Corp. and
such change was effected October 5, 2009. The Company provides
technology solutions, financial services and advice, software services,
electronic delivery and content distribution services to owners and distributors
of digital content to movie theatres and other venues. Beginning
September 1, 2009, the Company made changes to its organizational structure
which impacted its reportable segments, but did not impact its consolidated
financial position, results of operations or cash flows. The Company realigned
its focus to five primary businesses as follows: the first digital cinema
deployment (“Phase I Deployment”), the second digital cinema deployment (“Phase
II Deployment”), services (“Services”), media content and entertainment
(“Content & Entertainment”) and other (“Other”). The Company’s
Phase I Deployment and Phase II Deployment segments are the non-recourse,
financing vehicles and administrators for the Company’s digital cinema equipment
(the “Systems”) installed in movie theatres nationwide. The Company’s
Services segment provides services and support to the Phase I Deployment and
Phase II Deployment segments as well as to other third party
customers. Included in these services are asset management services
for a specified fee via service agreements with Phase I Deployment and Phase II
Deployment; software license, maintenance and consulting services; and
electronic content delivery services via satellite and hard drive to the motion
picture industry. These services primarily facilitate the conversion
from analog (film) to digital cinema and have positioned the Company at what it
believes to be the forefront of a rapidly developing industry relating to the
delivery and management of digital cinema and other content to theatres and
other remote venues worldwide. The Company’s Content &
Entertainment segment provides content distribution services to alternative and
theatrical content owners and to theatrical exhibitors and in-theatre
advertising. The Company’s Other segment provides motion picture
exhibition to the general public, information technology consulting and managed
network monitoring services and hosting services and network access for other
web hosting services (“Access Digital Server Assets”). Overall, the
Company’s goal is to aid in the transformation of movie theatres to
entertainment centers by providing a platform of hardware, software and content
choices. Additional information related to the Company’s reporting segments can
be found in Note 9.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
BASIS
OF PRESENTATION, USE OF ESTIMATES AND CONSOLIDATION
The
Company has incurred net losses historically and has an accumulated deficit of
$146,474 as of September 30, 2009. The Company also has significant contractual
obligations related to its recourse and non-recourse debt for the remaining part
of fiscal year 2010 and beyond. Management expects that the Company will
continue to generate net losses for the foreseeable future. Based on
the Company’s cash position at September 30, 2009, and expected cash flows from
operations, management believes that the Company has the ability to meet its
obligations through September 30, 2010. In August 2009, the Company entered into
a private placement of a senior secured note and extinguished its existing
senior notes, which provided net proceeds after repayment of existing debt,
funding of an interest reserve and transactions fees and expenses of
approximately $11,300 of working capital funding. The Company has
signed commitment letters for additional non-recourse debt capital, primarily to
meet equipment requirements related to the Company’s Phase II Deployment (see
Note 11). Although the Company recently entered into certain agreements related
to the Phase II Deployment (see Note 7), there is no assurance that financing
for the Phase II Deployment will be completed as contemplated or under terms
acceptable to the Company or its existing stockholders. 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. The accompanying condensed consolidated financial statements do
not reflect any adjustments which may result from the Company’s inability to
continue as a going concern.
The
condensed consolidated balance sheet as of March 31, 2009, which has been
derived from audited financial statements, and the condensed consolidated
financial statements were prepared following the interim reporting requirements
of the Securities and Exchange Commission (“SEC”). They do not
include all disclosures normally
5
made in
financial statements contained in Form 10-K. In management’s opinion, all
adjustments necessary for a fair presentation of financial position, the results
of operations and cash flows in accordance with accounting principles generally
accepted in the United States (GAAP) for the periods presented have been made.
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
condensed consolidated financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the fiscal year ended March 31, 2009 filed with the SEC
on June 15, 2009 (the “Form 10-K”).
The
Company’s condensed consolidated financial statements include the accounts of
Cinedigm, Access Digital Media, Inc. (“AccessDM”), Hollywood Software, Inc.
d/b/a AccessIT Software (“Software”), Core Technology Services, Inc. (“Managed
Services”), FiberSat Global Services, Inc. d/b/a AccessIT Satellite and Support
Services (“Satellite”), ADM Cinema Corporation (“ADM Cinema”) d/b/a the Pavilion
Theatre (the “Pavilion Theatre”), Christie/AIX, Inc. d/b/a AccessIT Digital
Cinema (“Phase 1 DC”), PLX Acquisition Corp., UniqueScreen Media, Inc.
(“USM”), Vistachiara Productions, Inc. f/k/a The Bigger Picture,
currently d/b/a Cinedigm Content and Entertainment Group (“CEG”),
Access Digital Cinema Phase 2 Corp. (“Phase 2 DC”) and Access Digital Cinema
Phase 2 B/AIX Corp. (“Phase 2 B/AIX”). AccessDM and Satellite are together
referred to as the Digital Media Services Division (“DMS”). All intercompany
transactions and balances have been eliminated.
The
preparation of the consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the condensed consolidated financial statements and accompanying
notes. On an on-going basis, the Company evaluates its estimates, including
those related to the carrying values of its long-lived assets, intangible assets
and goodwill, the valuation of deferred tax assets, the valuation of assets
acquired and liabilities assumed in purchase business combinations, stock-based
compensation expense, revenue recognition and capitalization of software
development costs. The Company bases its estimates on historical experience and
on 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. Because of the uncertainty inherent in such estimates, actual
results could differ materially from these estimates under different assumptions
or conditions.
The March
31, 2009 consolidated balance sheets were reclassified to break out the recourse
and non-recourse notes payable to conform to the current period
presentation.
REVENUE
RECOGNITION
Phase
I Deployment and Phase II Deployment
Virtual
print fees (“VPFs”) are earned pursuant to contracts with movie studios and
distributors, whereby amounts are payable to Phase 1 DC and to Phase 2 DC, when
movies distributed by the studio are displayed on screens utilizing the
Company’s digital cinema equipment (the “Systems”) installed in movie
theatres. VPFs are earned and payable to Phase 1 DC based on a
defined fee schedule with a reduced VPF rate year over year until the sixth year
(calendar 2011) at which point the VPF rate remains unchanged through the tenth
year. One VPF is payable for every movie title displayed per System.
The amount of VPF revenue is therefore dependent on the number of movie titles
released and displayed on the Systems in any given accounting period. VPF
revenue is recognized in the period in which the movie first opens for general
audience viewing in that digitally-equipped movie theatre, as Phase 1 DC’s and
Phase 2 DC’s performance obligations have been substantially met at that
time.
Phase 2
DC’s agreements with distributors require the payment of VPFs, according to a
defined fee schedule, for 10 years from the date each system is installed;
however, Phase 2 DC may no longer collect VPFs once “cost recoupment,” as
defined in the agreements, is achieved. Cost recoupment will occur once
the cumulative VPFs and other cash receipts collected by Phase 2 DC have equaled
the total of all cash outflows, including the purchase price of all Systems, all
financing costs, all “overhead and ongoing costs”, as defined and including the
Company’s service fees, subject to maximum agreed upon amounts during the
three-year rollout period and thereafter, plus a compounded return on any billed
but unpaid overhead and ongoing costs, of 15% per year. Further, if cost
recoupment occurs before the end of the eighth contract year, a one-time “cost
recoupment bonus” is payable by the studios to Cinedigm. Any other cash
flows, net of expenses, received by Phase 2 DC following the achievement of cost
recoupment are required to be returned to the distributors on a pro-rata basis.
At this time, the Company cannot estimate the timing or probability of the
achievement of cost recoupment.
6
Alternative
content fees (“ACFs”) are earned pursuant to contracts with movie exhibitors,
whereby amounts are payable to Phase 1 DC and to Phase 2 DC, 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”). ACF revenue
is recognized in the period in which the alternative content opens for audience
viewing.
Services
For
software multi-element licensing arrangements that do not require significant
production, modification or customization of the licensed software, revenue is
recognized for the various elements as follows: revenue for the licensed
software element is recognized upon delivery and acceptance of the licensed
software product, as that represents the culmination of the earnings process and
the Company has no further obligations to the customer, relative to the software
license. Revenue earned from consulting services is recognized upon the
performance and completion of these services. Revenue earned from annual
software maintenance is recognized ratably over the maintenance term (typically
one year).
Revenue
is deferred in cases where: (1) a portion or the entire contract
amount cannot be recognized as revenue, due to non-delivery or pre-acceptance of
licensed software or custom programming, (2) uncompleted implementation of
application service provider arrangements (“ASP Service”), 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 earned revenue in accordance with the
Company’s revenue recognition policies described above.
Revenues
from the delivery of data via satellite and hard drive are recognized upon
delivery, as DMS’ performance obligations have been substantially met at that
time.
Content
& Entertainment
USM has
contracts with exhibitors to display pre-show advertisements on their screens,
in exchange for certain fees paid to the exhibitors. USM then contracts with
businesses of various types to place their advertisements in select theatre
locations, designs the advertisement, and places it on-screen for specific
periods of time, generally ranging from three to twelve
months. 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. USM 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 an 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 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.
Barter
advertising revenue is recognized for the fair value of the advertising time
surrendered in exchange for alternative content. The Company includes
the value of such exchanges in both Content & Entertainment’s net revenues
and direct operating expenses. There may be a timing difference
between the screening of alternative content and the screening of the underlying
advertising used to acquire the content. The acquisition cost is
being recorded and recognized as a direct operating expense by CEG when the
alternative content is screened, and the underlying advertising is being
deferred and recognized as revenue ratably over the period such advertising is
screened by USM. The Company has not recorded any net revenues or
direct operating expenses related to barter advertising during the three and six
months ended September 30, 2008 and 2009.
CEG has
contracts for the theatrical distribution of third party feature films and
alternative content. CEG’s distribution fee revenue is
recognized at the time a feature film and alternative content is viewed, based
on CEG’s participation in box office receipts. CEG 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
7
all
related distribution revenue is deferred until the third party feature films’ or
alternative content’s theatrical release date.
Other
Movie
theatre admission and concession revenues are generated at the Company’s
nine-screen digital movie theatre, the Pavilion Theatre. Movie theatre admission
revenues are recognized on the date of sale, as the related movie is viewed on
that date and the Company’s performance obligation is met at that time.
Concession revenues consist of food and beverage sales and are also recognized
on the date of sale.
Managed
Services’ revenues, which consist of monthly recurring billings pursuant to
network monitoring and maintenance contracts, are recognized as revenues in the
period the services are provided, and other non-recurring billings are
recognized on a time and materials basis as revenues in the period in which the
services were provided.
Other
revenues, attributable to the Access Digital Server Assets, which consist of
monthly recurring billings for hosting and network access fees, are recognized
as revenues in the period the services are provided.
Since May
1, 2007, the Company’s three internet data centers (“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 since May 1, 2008, 100% of the revenues and expenses are
being realized by FiberMedia. In June 2009, one of the IDC leases expired,
leaving two IDC leases with the Company as lessee.
RESTRICTED
INVESTMENT SECURITIES
In
connection with the $75,000 Senior Secured Note issued in August 2009 (see Note
5), the Company was required to segregate $11,265 of the proceeds into
marketable securities which will be used to repay interest over the next two
years. The Company classifies the marketable securities as
available-for-sale securities and accordingly, these investments are recorded at
fair value. The maturity dates of these investments coincide with the
quarterly interest payment dates through September 2011. The changes
in the value of these securities are recorded in other comprehensive loss in the
condensed consolidated financial statements. Realized gains and
losses are recorded in earnings when securities mature or are
redeemed. There were realized losses of $2 recorded during the three
months ended September 30, 2009.
The
Company held no available-for-sale securities at March 31,
2009. During the three months ended September 30, 2009, the Company
made the first scheduled quarterly interest payment in the amount of
$715. Investment securities with a maturity of twelve months or less
are classified as short-term; those that mature in greater than twelve months
are classified as long-term. The carrying value and fair value of
investment securities available-for-sale at September 30, 2009 were as
follows:
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair
Value
|
|||||||||||||
U.S.
Treasury securities
|
$ | 4,517 | $ | 1 | $ | (8 | ) | $ | 4,510 | |||||||
Obligations
of U.S. government agencies and FDIC guaranteed bank debt
|
5,099 | 2 | (11 | ) | 5,090 | |||||||||||
Corporate
debt securities
|
506 | — | — | 506 | ||||||||||||
Other
interest bearing securities
|
463 | — | (1 | ) | 462 | |||||||||||
$ | 10,585 | $ | 3 | $ | (20 | ) | $ | 10,568 |
8
DEFERRED
COSTS
Deferred
costs primarily consist of the unamortized debt issuance costs related to the
credit facility with General Electric Capital Corporation (“GECC”), the $55,000
of 10% Senior Notes issued in August 2007 up to August 2009 (see Note 5) and the
$75,000 Senior Secured Note issued in August 2009 (see Note 5), which are
amortized on a straight-line basis over the term of the respective debt (see
Note 5 for extinguishment of debt). The straight-line basis is not
materially different from the effective interest method. Also
included in deferred costs is advertising production, post production and
technical support costs related to developing and displaying advertising in the
amount of $778, which are capitalized and amortized on a straight-line basis
over the same period as the related cinema advertising revenues of $4,704 are
recognized.
DIRECT
OPERATING COSTS
Direct
operating costs consist 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.
STOCK-BASED
COMPENSATION
For the
three months ended September 30, 2008 and 2009, the Company recorded stock-based
compensation expense of $200 and $441, respectively, and $358 and $766, for the
six months ended September 30, 2008 and 2009, respectively. The
Company estimates that the stock-based compensation expense related to current
outstanding stock options, using a Black-Scholes option valuation model, and
current outstanding restricted stock awards will be approximately $1,432 in
fiscal 2010.
The
weighted-average grant-date fair value of options granted during the three
months ended September 30, 2008 and September 30, 2009 was $0.55 and $0.57,
respectively, and $0.58 and $0.57, for the six months ended September 30, 2008
and 2009, respectively. There were no stock options exercised during the three
and six months ended September 30, 2008 and 2009.
The
Company estimated the fair value of stock options at the date of each grant
using a Black-Scholes option valuation model with the following
assumptions:
For
the Three Months Ended September 30,
|
For
the Six Months Ended
September 30, |
|||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||
Range
of risk-free interest rates
|
2.7-4.4 | % | 2.7 | % | 2.5-5.2 | % | 2.7 | % | ||||||||
Dividend
yield
|
— | — | — | — | ||||||||||||
Expected
life (years)
|
5 | 5 | 5 | 5 | ||||||||||||
Range
of expected volatilities
|
52.6-58.7 | % | 77.4 | % | 52.5-58.7 | % | 77.4 | % |
The
risk-free interest rate used in the Black-Scholes option valuation model for
options granted under the Company’s stock option plan awards is the historical
yield on U.S. Treasury securities with equivalent remaining lives. The Company
does not currently anticipate paying any cash dividends on common stock in the
foreseeable future. Consequently, an expected dividend yield of zero is used in
the Black-Scholes option valuation model. The Company estimates the
expected life of options granted under the Company’s stock option plans using
both exercise behavior and post-vesting termination behavior, as well as
consideration of outstanding options. The Company estimates
expected volatility for options granted under the Company’s stock option plans
based on a measure of historical volatility in the trading market for the
Company’s common stock.
CAPITALIZED
SOFTWARE COSTS
Internal
Use Software
The
Company accounts for internal use software development costs based on three
distinct stages to the software development process for internal use
software. The first stage, the preliminary project stage, includes
the conceptual
9
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 are 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, Capitalized costs are amortized on a
straight-line basis over estimated lives ranging from three to five years,
beginning when the software is ready for its intended use.
Software
to be Sold, Licensed or Otherwise Marketed
Software
development costs that are incurred subsequent to establishing technological
feasibility are capitalized until 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 with other long-lived assets. Amortization of
capitalized software development costs, included in direct operating costs, for
the three months ended September 30, 2008 and 2009 amounted to $194 and $161,
respectively and $387 and $323 for the six months ended September 30, 2008 and
2009, respectively. At September 30, 2009, there were no unbilled
receivables under such customized software development contracts included in
unbilled revenue in the condensed consolidated balance sheets.
GOODWILL
AND INTANGIBLE ASSETS
Goodwill
is the excess of the purchase price paid over the fair value of the net assets
of the acquired business. The Company assesses its goodwill for impairment at
least annually and in interim periods if certain triggering events occur
indicating that the carrying value of goodwill may be impaired. The Company also
reviews possible impairment of finite lived intangible assets annually. During
the six months ended September 30, 2008 and 2009, no impairment charge was
recorded.
As of
September 30, 2009, 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. No intangible assets were
acquired during the three and six months ended September 30,
2009. During the six months ended September 30, 2008 and 2009, no
impairment charge was recorded.
PROPERTY
AND EQUIPMENT
Property
and equipment are stated at cost, less accumulated depreciation and
amortization. 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 and amortization are
removed from the accounts and the gain or loss is included in the condensed
consolidated statement of operations.
IMPAIRMENT
OF LONG-LIVED
ASSETS
The
Company reviews the recoverability of its long-lived assets when events or
conditions exist that indicate a possible impairment exists. The assessment for
recoverability is based primarily on the Company’s ability to recover the
carrying value of its long-lived assets from expected future undiscounted net
cash flows. If the total of expected future undiscounted net cash flows is less
than the total carrying value of the assets the asset is deemed not to be
recoverable and possibly impaired. The Company then estimates the
fair value of the asset to determine whether an impairment loss should be
recognized. An impairment loss will be recognized if for the
difference between the fair value (computed based upon) and the carrying value
of the asset exceeds its fair value. Fair value is estimated by
computing the expected future discounted cash flows. During the six
months ended September 30, 2008 and 2009, no impairment charge for long-lived
assets was recorded.
10
NET
LOSS PER SHARE
Basic and
diluted net loss per share has been calculated as follows:
Basic
and diluted net loss per share =
|
Net
loss
|
|
Weighted
average number of Common Stock
outstanding
during the period
|
Shares
issued and any shares that are reacquired during the period are weighted for the
portion of the period that they are outstanding.
The
Company incurred net losses for each of the three and six months ended September
30, 2008 and 2009 and, therefore, the impact of dilutive potential common shares
from outstanding stock options, warrants, restricted stock, and restricted stock
units, totaling 4,360,882 shares and 23,451,352 shares as of September 30, 2008
and 2009, respectively, were excluded from the computation as it would be
anti-dilutive.
ACCOUNTING
FOR DERIVATIVE ACTIVITIES
In April
2008, the Company executed an interest rate swap agreement (the “Interest Rate
Swap”) (see Note 5) to limit the Company’s exposure to changes in interest
rates. Changes in fair value of derivative financial instruments are
either recognized in other comprehensive income (a component of stockholders'
equity) or in the condensed consolidated statement of operations depending on
whether the derivative is being used to hedge changes in cash flows or fair
value. The Company has determined that this is not a hedging
transaction and changes in the value of its Interest Rate Swap were recorded in
the condensed consolidated statements of operations (see Note 5).
Fair
Value of Financial Instruments
The fair
value measurement disclosures are grouped into three levels based on valuation
factors:
·
|
Level
1 – quoted prices in active markets for identical
investments
|
·
|
Level
2 – other significant observable inputs (including quoted prices for
similar investments, market corroborated inputs,
etc.)
|
·
|
Level
3 – significant unobservable inputs (including the Company’s own
assumptions in determining the fair value of
investments)
|
Assets
and liabilities measured at fair value on a recurring basis use the market
approach, where prices and other relevant information is generated by market
transactions involving identical or comparable assets or
liabilities.
The
following table summarizes the levels of fair value measurements of the
Company’s financial assets:
Financial
Assets at Fair Value
as
of September 30, 2009
|
||||||||||||
Level
1
|
Level
2
|
Level
3
|
||||||||||
Cash
and cash equivalents
|
$ | 19,732 | $ | — | $ | — | ||||||
Investment
securities, available-for-sale
|
$ | 885 | $ | 9,683 | $ | — | ||||||
Interest
rate swap
|
$ | — | $ | (3,306 | ) | $ | — |
3.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
Effective
July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting
Standards Codification (“ASC”) became the single official source of
authoritative, nongovernmental generally accepted accounting principles (“GAAP”)
in the United States. The historical GAAP hierarchy was eliminated
and the ASC became the only level of authoritative GAAP, other than guidance
issued by the SEC. Our accounting policies were not affected by the
conversion to ASC. However, references to specific accounting
standards in the footnotes to our condensed consolidated financial statements
have been changed to refer to the appropriate section of ASC.
11
At its
September 23, 2009 board meeting, the FASB ratified final EITF consensus on
revenue arrangements with multiple deliverables (“Issue 08-1”). This
Issue supersedes Issue 00-21 (codified in ASC 605-25). Issue 08-1
addresses the unit of accounting for arrangements involving multiple
deliverables. It also addresses how arrangement consideration should
be allocated to the separate units of accounting, when applicable. However,
guidance on determining when the criteria for revenue recognition are met and on
how an entity should recognize revenue for a given unit of accounting are
located in other sections of the Codification. Issue 08-1 will
ultimately be issued as an Accounting Standards Update (ASU) that will amend ASC
605-25. Final consensus is effective for fiscal years beginning on or
after June 15, 2010. Entities can elect to apply this Issue (1)
prospectively to new or materially modified arrangements after the Issue’s
effective date or (2) retrospectively for all periods presented. The
Company does not believe that revisions to ASC 605-25 will have a material
impact on the Company’s consolidated financial statements.
At its
September 23, 2009 board meeting, the FASB also ratified final EITF consensus on
software revenue recognition (“Issue 09-3”). This Issue amends ASC
985-605 (formerly SOP 97-2) and ASC 985-605-15-3 (formerly Issue 03-5) to
exclude from their scope all tangible products containing both software and
non-software components that function together to deliver the product’s
essential functionality. That is, the entire product (including the software
deliverables and non-software deliverables) would be outside the scope of ASC
985-605 and would be accounted for under other accounting literature. The
revised scope of ASC 985-605 (Issue 09-3) will ultimately be issued as an
Accounting Standards Update (ASU) that will amend the ASC. The final
consensus is effective for fiscal years beginning on or after June 15, 2010.
Entities can elect to apply this Issue (1) prospectively to new or materially
modified arrangements after the Issue’s effective date or (2) retrospectively
for all periods presented. Early application is permitted. The
Company does not believe that ASC 985-605 (Issue 09-3) will have a material
impact on the Company’s consolidated financial statements.
In June
2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”
(“SFAS 167”) (which will be codified in ASC 810-10). Revisions to ASC 810-10
improves financial reporting by enterprises involved with variable interest
entities and to address (1) the effects on certain provisions of FASB
Interpretation No. 46 (revised December 2003), “Consolidation of Variable
Interest Entities”, as a result of the elimination of the qualifying
special-purpose entity concept in SFAS 166 and (2) constituent concerns about
the application of certain key provisions of Interpretation 46(R), including
those in which the accounting and disclosures under the Interpretation do not
always provide timely and useful information about an enterprise’s involvement
in a variable interest entity. Revisions to ASC 810-10 is effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. The Company
is currently
evaluating the impact of adoption and application of revisions to ASC
810-10 will have on the Company’s consolidated financial
statements.
4.
|
NOTES
RECEIVABLE
|
Notes
receivable consisted of the following:
As
of March 31, 2009
|
As
of September 30, 2009
|
|||||||||||||||
Note
Receivable (as defined below)
|
Current
Portion
|
Long
Term Portion
|
Current
Portion
|
Long
Term Portion
|
||||||||||||
Exhibitor
Note
|
$ | 54 | $ | 37 | $ | 56 | $ | 8 | ||||||||
Exhibitor
Install Notes
|
118 | 908 | 89 | 863 | ||||||||||||
FiberMedia
Note
|
431 | — | — | — | ||||||||||||
Other
|
13 | 14 | 25 | 7 | ||||||||||||
$ | 616 | $ | 959 | $ | 170 | $ | 878 |
In March
2006, in connection with Phase 1 DC’s deployment, 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 payment for certain financed digital
projectors. The Exhibitor Note requires monthly principal and
interest payments through September 2010. As of September 30, 2009,
the outstanding balance of the Exhibitor Note was $64.
In
connection with Phase 1 DC’s deployment, 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 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
12
monthly
interest only payments through October 2007 and quarterly principal and interest
payments thereafter through August 2009 and August 2017,
respectively. As of September 30, 2009, the aggregate outstanding
balance of the Exhibitor Install Notes was $952.
In
November 2008, FiberMedia issued to the Company a 10% note receivable for $631
(the “FiberMedia Note”) related to certain expenses FiberMedia is required to
repay to the Company under a master collocation agreement of the IDCs.
FiberMedia is required to make monthly principal and interest payments beginning
in January 2009 through July 2009. As of September 30, 2009, the
FiberMedia Note was repaid in full.
The
Company has not experienced a default by any party to any of their obligations
in connection with any of the above notes.
5.
|
NOTES
PAYABLE
|
Notes
payable consisted of the following:
As
of March 31, 2009
|
As
of September 30, 2009
|
|||||||||||||||
Note
Payable (as defined below)
|
Current
Portion
|
Long
Term Portion
|
Current
Portion
|
Long
Term Portion
|
||||||||||||
First
USM Note
|
$ | 221 | $ | — | $ | — | $ | — | ||||||||
SilverScreen
Note
|
20 | — | — | — | ||||||||||||
2007
Senior Notes
|
— | 55,000 | — | — | ||||||||||||
NEC
Facility
|
168 | 333 | 177 | 242 | ||||||||||||
2009
Note, net of debt discount
|
— | — | — | 65,385 | ||||||||||||
Other
|
15 | — | — | — | ||||||||||||
Total
recourse notes payable
|
$ | 424 | $ | 55,333 | $ | 177 | $ | 65,627 | ||||||||
Vendor
Note
|
$ | — | $ | 9,600 | $ | — | $ | 9,600 | ||||||||
GE
Credit Facility
|
24,824 | 161,024 | 23,759 | 143,221 | ||||||||||||
KBC
Related Facility
|
— | — | 952 | 7,933 | ||||||||||||
P2
Vendor Note
|
— | — | 32 | 758 | ||||||||||||
P2
Exhibitor Notes
|
— | — | 15 | 600 | ||||||||||||
Total
non-recourse notes payable
|
$ | 24,824 | $ | 170,624 | $ | 24,758 | $ | 162,112 | ||||||||
Total
notes payable
|
$ | 25,248 | $ | 225,957 | $ | 24,935 | $ | 227,739 |
Non-recourse
debt is generally defined as debt whereby the lenders’ sole recourse with
respect to defaults by the Company is limited to the value of the asset
collateralized by the debt. The Vendor Note and the GE Credit
Facility are not guaranteed by the Company or its other subsidiaries, other than
Phase 1 DC. The KBC Related Facility, the P2 Vendor Note and the P2 Exhibitor
Notes are not guaranteed by the Company or its other subsidiaries, other than
Phase 2 DC.
As part
of the consideration for the purchase price of USM in 2006, the
Company issued an 8% note payable in the principal amount of $1,204 (the “USM
Note”) The First USM Note was payable in twelve equal quarterly installments
commencing on October 1, 2006 until July 1, 2009. During the six months ended
September 30, 2008 and 2009, the Company repaid principal of $204 and $221,
respectively, on the First USM Note. As of September 30, 2009, the
First USM Note was repaid in full.
Prior to
the Company’s acquisition of USM, USM 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 was payable
in equal monthly installments until May 2009. During the six months
ended September 30, 2008 and 2009, the Company repaid principal of $28 and $20,
respectively, on the SilverScreen Note. As of September 30, 2009, the
SilverScreen Note was repaid in full.
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
13
the 2007
Senior Notes was three years which may be extended for one 6 month period at the
discretion of the Company if certain conditions were met. Interest on
the 2007 Senior Notes was 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 issued
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 Company and its subsidiaries,
other than Phase 1 DC and its subsidiaries, were prohibited from paying
dividends under the terms of the 2007 Senior Notes. Interest expense
on the 2007 Senior Notes for the three months ended September 30, 2008 and 2009
amounted to $1,375 and $621, respectively and $2,717 and $1,996 for the six
months ended September 30, 2008 and 2009, respectively. In August
2009, in connection with the consummation of the 2009 Private Placement (see
below), the Company consummated purchase agreements (the “Note Purchase
Agreements”) with the holders of all of its outstanding 2007 Senior Notes
pursuant to which the Company purchased all of the 2007 Senior Notes, in
satisfaction of the principal and any accrued and unpaid interest thereon, for
an aggregate purchase price of $42,500 in cash. The source of such
aggregate cash payment was the proceeds of the 2009 Private Placement discussed
below. Upon such purchase, the 2007 Senior Notes were canceled and
the remaining principal of $12,500 along with unamortized debt issuance costs of
$(2,377) and accrued interest of $621 resulted in a $10,744 gain on
extinguishment of debt included in the condensed consolidated statements of
operations.
In August
2009, the Company entered into a securities purchase agreement (the “Purchase
Agreement”) with an affiliate of Sageview Capital LP (the “Purchaser”) pursuant
to which the Company agreed to issue a Senior Secured Note (the “2009 Note”) in
the aggregate principal amount of $75,000 and warrants (the “Sageview Warrants”)
to purchase 16,000,000 shares of its Class A Common Stock (the “2009 Private
Placement”). The remaining proceeds of the 2009 Private Placement
after the repayment of existing indebtedness of the Company and one of its
subsidiaries, the funding of a cash reserve to pay the cash interest amount
required under the 2009 Note for the first two years, the payment of fees and
expenses incurred in connection with the 2009 Private Placement and related
transactions, and other general corporate purposes was approximately
$11,300. The 2009 Note has a term of five years, which may be
extended for up to one 12 month period at the discretion of the Company if
certain conditions are satisfied. Subject to certain adjustments set
forth in the 2009 Note, interest on the 2009 Note is 8% per annum to be accrued
as an increase in the aggregate principal amount of the 2009 Note (“PIK
Interest”) and 7% per annum paid in cash. The Company may prepay the
2009 Note (i) during the initial 18 months of their term, in an amount up to 20%
of the original principal amount of the 2009 Note plus accrued and unpaid
interest without penalty and (ii) following the second anniversary of issuance
of the 2009 Note, subject to a prepayment penalty equal to 7.5% of the principal
amount prepaid if the 2009 Note is prepaid prior to the three year anniversary
of its issuance, a prepayment penalty of 3.75% of the principal amount prepaid
if the 2009 Note is prepaid after such third anniversary but prior to the fourth
anniversary of its issuance and without penalty if the 2009 Note is prepaid
thereafter, plus cash in an amount equal to the accrued and unpaid interest
amount with respect to the principal amount through and including the prepayment
date. The Company is obligated to offer to redeem all or a portion of
the 2009 Note upon the occurrence of certain triggering events described in the
2009 Note. Subject to limited exceptions, the Purchaser may not
assign the 2009 Note until the earliest of (a) August 11, 2011, (b) the
consummation of a change in control as defined in the 2009 Note or (c) an event
of default as defined under the Notes. The Purchase Agreement also
requires the 2009 Note to be guaranteed by each of the Company’s existing and
future subsidiaries, other than AccessDM, Phase 1 DC and its subsidiaries and
Phase 2 DC and its subsidiaries and subsidiaries formed after August 11, 2009
which are primarily engaged in the financing or deployment of digital cinema
equipment (the "Guarantors"), and that the Company and each Guarantor pledge
substantially all of their assets to secure payment on the 2009 Note, except
that AccessDM and Phase 1 DC are not required to become Guarantors until such
time as certain indebtedness is repaid. Accordingly, the Company and
each of the Guarantors entered into a guarantee and collateral agreement (the
“Guarantee and Collateral Agreement”) pursuant to which each Guarantor
guaranteed the obligations of the Company under the 2009 Note and the Company
and each Guarantor pledged substantially all of their assets to secure such
obligations. The Company agreed to register the
resale of the shares of Class A Common Stock underlying the Sageview Warrants
(the
“Registration Rights Agreement”). The Purchase Agreement, Note
Purchase Agreement, 2009 Note, Warrants, Registration Rights Agreement and
Guarantee and Collateral Agreement contain representations, warranties,
covenants and events of default as are customary for transactions of this type
and nature.
14
The 2009
Note is shown net of the discount associated with the issuance of the Sageview
Warrants (see Note 6) and the PIK Interest. As of September 30,
2009, the net balance of the 2009 Note was as follows:
As
of March 31, 2009
|
As
of September 30, 2009
|
|||||||
2009
Note, at issuance
|
$ | — | $ | 75,000 | ||||
Discount
on 2009 Note
|
— | (10,432 | ) | |||||
PIK
Interest
|
— | 817 | ||||||
2009
Note, net
|
$ | — | $ | 65,385 | ||||
Less
current portion
|
— | — | ||||||
Total
long term portion
|
$ | — | $ | 65,385 |
In August
2007, Phase 1 DC obtained $9,600 of vendor financing (the “Vendor Note”) for
equipment used in Phase 1 DC’s 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 September 30, 2009, the outstanding balance of the Vendor
Note was $9,600.
In
September 2009, Phase 2 DC obtained $898 of vendor financing (the “P2 Vendor
Note”) for equipment used in Company’s Phase II Deployment. The P2 Vendor Note
bears interest at 7% and requires quarterly interest-only payments through
January 2010. Quarterly installments commencing in April 2010 are to
be repaid with 92.5% of the VPFs and ACFs received on this equipment with the
payments being applied to accrued and unpaid interest first and any remaining
amounts be applied to the principal. The balance of the P2 Vendor
Note, together with all accrued and unpaid interest is due on the maturity date
of December 31, 2018. The P2 Vendor Note may be prepaid at any
time without penalty and is not guaranteed by the Company or its other
subsidiaries, other than Phase 2 DC. During the three months ended
September 30, 2009, the Phase 2 DC repaid principal of $108 on the P2 Vendor
Note. As of September 30, 2009, the outstanding balance of the Vendor
Note was $790.
During
the three months ended September 30, 2009, Phase 2 DC obtained $615 of financing
from certain exhibitors (the “P2 Exhibitor Notes”) for equipment used in the
Company’s Phase II Deployment. The P2 Exhibitor Notes bear interest
at 7% and may be prepaid without penalty. The P2 Exhibitor Notes requires
quarterly interest-only payments through June 2010. Principal is to be repaid in
thirty-two equal quarterly installments commencing in September 2010. The P2
Exhibitor Notes may be prepaid at any time without penalty and are not
guaranteed by the Company or its other subsidiaries, other than Phase 2
DC. As of September 30, 2009, the outstanding balance of the P2
Exhibitor Notes was $615.
CREDIT
FACILITIES
In August
2006, Phase 1 DC entered into an agreement with GECC pursuant to which GECC and
certain other lenders agreed to provide to Phase 1 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 Phase 1 DC’s deployment 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 was funded from other
sources of capital including contributed equity. Each of the borrowings by Phase
1 DC bears interest, at the option of Phase 1 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
Phase 1 DC and the total debt of Phase 1 DC. Under the GE Credit Facility, Phase
1 DC must pay interest only through July 31, 2008. Beginning August 31, 2008, in
addition to the interest payments, Phase 1 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 Phase 1 DC pursuant to the
GE Credit Facility on the maturity date of August 1, 2013. In addition, Phase 1
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 Phase 1 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 Phase 1 DC and the Guarantors, including real estate owned or leased,
and all capital stock or
15
other
equity interests in Phase 1 DC and its subsidiaries, subject to specified
exceptions. The GE Credit Facility is not guaranteed by the Company or its other
subsidiaries, other than Phase 1 DC. During the six months ended September 30,
2008 and 2009, the Company repaid principal of $3,858 and $18,868, respectively,
on the GE Credit Facility. The 2009 payments include a prepayment of
$5,000 in accordance with the GE Fifth Amendment described below, and an
additional voluntary prepayment of $2,000. As of September 30, 2009,
the outstanding principal balance of the GE Credit Facility was $166,980 at a
weighted average interest rate of 10.7%.
In May
2009, Phase 1 DC entered into the fourth amendment (the “GE Fourth Amendment”)
with respect to the GE Credit Facility to (1) increase the interest rate from
4.5% to 6% above the Eurodollar Base Rate; (2) set the Eurodollar Base Rate
floor at 2.5%; (3) reduce the required amount to be reserved for the payment of
interest from 9 months of forward cash interest to a fixed $6,900, and permitted
a one-time payment of $2,600 to be made from Phase 1 DC to its parent Company,
AccessDM; (4) increase the quarterly maximum consolidated leverage ratio
covenants that Phase 1 DC is required to meet on a trailing 12 months basis; (5)
increase the maximum consolidated senior leverage ratio covenants that Phase 1
DC is required to meet on a trailing 12 months basis; (6) reduce the quarterly
minimum consolidated fixed charge coverage ratio covenants that Phase 1 DC is
required to meet on a trailing 12 months basis and (7) add a covenant requiring
Phase 1 DC to maintain a minimum unrestricted cash balance of $2,000 at all
times. All of the changes contained in the GE Fourth Amendment are
effective as of May 4, 2009 except for the covenant changes in (4), (5) and (6)
above, which were effective as of March 31, 2009. In connection with
the GE Fourth Amendment, Phase 1 DC paid an amendment fee to GE and the other
lenders of approximately $1,000. The amendment fee was recorded as
debt issue costs and is being amortized over the remaining term of the GE Credit
Facility. At September 30, 2009, the Company was in compliance with
all covenants contained in the GE Credit Facility, as amended.
In August
2009, in connection with the 2009 Private Placement (see Note 5), Phase 1 DC
entered into a fifth amendment (the “GE Fifth Amendment”) with respect to
the GE Credit Facility, whereby $5,000 of the proceeds of the 2009 Private
Placement were used by the Company to purchase capital stock of AccessDM, which
in turn used such amount to purchase capital stock of Phase 1 DC. Phase 1 DC
then funded the prepayment with respect to the GE Credit Facility. The
prepayment is being applied ratably to each of the next 24
successive regularly scheduled monthly amortization payments due under the GE
Credit Facility beginning in August 2009.
In
October 2009, in connection with the Phase II Deployment, the Company signed
commitment letters for financing with GECC and Société Générale (see Note
11).
In April
2008, Phase 1 DC executed the Interest Rate Swap 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,
Phase 1 DC will effectively pay a fixed rate of 7.3%, to guard against Phase 1
DC’s exposure to increases in the variable interest rate under the GE Credit
Facility. GE Corporate Financial Services arranged the transaction, which took
effect commencing August 1, 2008 as required by the GE Credit Facility and will
remain in effect until August 2010. 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.
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
counterparty. As of September 30, 2009, the fair value of the
Interest Rate Swap liability was $3,306. The change in fair value of
the interest rate swap for the three months ended September 30, 2008 and 2009
amounted to a loss of $687and a gain of $540, respectively and gains of $1,565
and $1,223 for the six months ended September 30, 2008 and 2009,
respectively.
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
approximately $2,000, repayments over a 47 month period, and interest at annual
rates ranging from 8.25-8.44%. As of September 30, 2009, AccessDM has
borrowed $569 and the equipment purchased therewith is included in property and
equipment. During the six months ended September 30, 2008 and 2009,
the Company repaid principal of $0 and $82, respectively, on the NEC Credit
Facility. As of September 30, 2009, the outstanding principal balance
of the NEC Credit Facility was $419.
16
In
December 2008, Phase 2 B/AIX, a direct wholly-owned subsidiary of Phase 2 DC and
an indirect wholly-owned subsidiary of the Company, entered into a credit
facility with KBC Bank NV (the “KBC Related Facility”) to fund the purchase of
Systems from Barco, Inc. (“Barco”), to be installed in movie theatres as part of
the Company’s Phase II Deployment. The KBC Related Facility provides
for borrowings of up to a maximum of $8,900 through December 31, 2009 (the “Draw
Down Period”) and requires interest-only payments at 7.3% per annum during the
Draw Down Period. For any funds drawn, the principal is to be repaid
in twenty-eight equal quarterly installments commencing in March 2010 (the
“Repayment Period”) at an interest rate of 8.5% per annum during the Repayment
Period. The KBC Related Facility may be prepaid at any time
without penalty and is not guaranteed by the Company or its other subsidiaries,
other than Phase 2 DC. As of September 30, 2009, $8,885 has been
drawn down on the KBC Related Facility. Interest expense on the KBC
Related Facility for the three months ended September 30, 2008 and 2009 amounted
to $0 and $152, respectively and $0 and $218 for the six months ended September
30, 2008 and 2009, respectively. As of September 30, 2009, the
outstanding principal balance of the KBC Related Facility was
$8,885.
At
September 30, 2009, the Company was in compliance with all of its debt
covenants.
6.
|
STOCKHOLDERS’
EQUITY
|
STOCKHOLDERS’
RIGHTS
On August
10, 2009, the Company entered into a tax benefit preservation plan (the "Tax
Preservation Plan"), dated August 10, 2009, between the Company and American
Stock Transfer & Trust Company, LLC, as rights agent. The
Company’s board of directors (the "Board") adopted the Tax Preservation Plan in
an effort to protect stockholder value by attempting to protect against a
possible limitation on its ability to use net operating loss carryforwards (the
"NOLs") to reduce potential future federal income tax
obligations.
On August
10, 2009, the Board declared a dividend of one preferred share purchase right
(the "Rights") for each outstanding share of the Company’s Class A Common Stock
and each outstanding share of the Company’s Class B Common Stock, (the
"Class B Common Stock," and together with the Class A Common Stock, the
"Common Stock") under the terms of the Tax Preservation Plan. The
dividend is payable to the stockholders of record as of the close of business on
August 10, 2009. Each Right entitles the registered holder to
purchase from the Company one one-thousandth of a share of the Company’s Series
B Junior Participating Preferred Stock, par value $0.001 per share, (the
"Preferred B Stock") at a price of $6.00, subject to adjustment. The
Rights are not exercisable, and would only become exercisable when any person or
group has acquired, subject to certain conditions, beneficial ownership of 4.99%
or more of the Company’s outstanding shares of Class A Common
Stock. As of September 30, 2009, the Company did not record the
dividends as a 4.99% or more change in the beneficial ownership of the Company’s
outstanding shares of Class A Common Stock had not occurred.
CAPITAL
STOCK
In August
2004, the 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. Under the terms of the 2007 Senior Notes (see
Note 5), the Company was previously precluded from purchasing shares of its
Class A Common Stock. In a prior year, the Company 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.
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 September 30, 2008 and 2009, the Company recorded $401 and
$134, respectively, and $802 and $534 for the six months ended September 30,
2008 and 2009, respectively, to interest expense in connection with the Advance
Additional Interest Shares. See Note 5 on extinguishment of
debt.
17
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 was obligated
to issue a minimum of 132,000 shares or a maximum of 220,000 shares of Class A
Common Stock per quarter as Additional Interest (the “Additional Interest
Shares”). The Company estimated the initial value of the Additional
Interest Shares to be $5,244 and is amortizing that amount over the 36 month
term of the 2007 Senior Notes. For the three months ended
September 30, 2008 and 2009, the Company recorded $437 and $0, respectively, and
$874 and $0 for the six months ended September 30, 2008 and 2009, respectively,
to interest expense in connection with the Additional Interest
Shares. In March 2009 and June 2009, the Company issued 220,000
shares of Class A Common Stock, each period, as Additional Interest Shares with
a value of $136 and $220, respectively. No Additional Interest Shares
were issued in September 2009, as the 2007 Senior Notes were cancelled in August
2009.
In March
2008 and June 2008, the Company issued 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 September 30, 2008 and 2009, the Company did not record
any non-cash interest expense in connection with the Interest
Shares. For the six months ended September 30, 2008 and 2009, the
Company recorded $1,342 and $186 as non-cash interest expense in connection with
the Interest Shares. No Interest Shares were issued and no interest
was paid in cash in September 2009, as the 2007 Senior Notes were cancelled in
August 2009.
In
connection with the acquisition of CEG in January 2007, CEG 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 $18 per month, of which 70% may be paid periodically in the form
of Cinedigm Class A Common Stock, at the Company’s option. In
September 2008 and January 2009, the Company issued 22,010 and 70,432 shares of
unregistered Class A Common Stock, respectively, with a value of $33 and $49,
respectively, to SDE as partial payment for such services and
resources.
In August
2009, in connection with the 2009 Private Placement (see Note 5), the Purchaser
agreed with the Company that, subject to limited exceptions, the Purchaser and
its affiliates would not, without the Company’s consent, acquire, offer to
acquire or join or participate in any group, as defined in Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, that would result in Purchaser and
its affiliates beneficially owning more than 42.5% of the Class A Common Stock
and the Company’s Class B Common Stock outstanding. This agreement
will terminate upon the earliest of August 11, 2011, a change of control, an
event of default (each as defined in the 2009 Note) and the date when the
Purchaser and its affiliates own less than 10% of the outstanding Class A Common
Stock and the Company’s Class B Common Stock.
In August
2009, in connection with the 2009 Private Placement (see Note 5), the Company
entered into an agreement (the “Aquifer Agreement”) with Aquifer Capital Group,
LLC (“Aquifer Capital”) pursuant to which Aquifer Capital provided financial
advisory services to the Company in connection with the purchase of the 2007
Senior Notes in exchange for the issuance of 200,000 shares of unregistered
Class A Common Stock to designees of Aquifer Capital. In August
2009, 200,000 shares were issued to designees of Aquifer Capital, with a value
of $198 as payment for such services and were recorded as a debt issuance cost
associated with the 2009 Note.
In
September 2009, the Company issued 12,815 shares of Class A Common Stock for
restricted stock awards that vested.
PREFERRED
STOCK
In
February 2009, the Company issued eight shares of Series A 10% Non-Voting
Cumulative Preferred Stock (“Preferred Stock”) to two
investors. There is no public trading market for the Preferred Stock.
The Preferred Stock has the designations, preferences and rights set forth in
the certificate of designations filed with the Secretary of State for the State
of Delaware on February 3, 2009 (the “Certificate of Designations”). Pursuant to
the Certificate of Designations, holders of Preferred Stock shall have the
following rights among others: (1) the holders are entitled to receive dividends
at the rate of 10% of the Preferred Stock original issue price per annum on each
outstanding share of Preferred Stock (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such
shares). Such dividends shall begin to accrue commencing upon the first date
such share is issued and becomes outstanding and shall be payable in cash or, at
the Company’s option, by converting the cash amount
18
of such
dividends into Class A Common Stock, and will not be paid until September 30,
2010, as the Company was not permitted to do so under the terms of the 2007
Senior Notes and is not so permitted under the 2009 Note, (2) the holders will
not have the right to vote on matters brought before the stockholders of the
Corporation, (3) upon any liquidation, dissolution, or winding up of the
Corporation, whether voluntary or involuntary, before any distribution or
payment shall be made to the holders of any Junior Stock (as defined in the
Certificate of Designations), subject to the rights of any series of preferred
stock that may from time-to-time come into existence and which is expressly
senior to the rights of the Preferred Stock, the holders of Preferred Stock
shall be entitled to be paid in cash out of the assets of the Company an amount
per share of Preferred Stock equal to 100% of the Preferred Stock original issue
price (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares), plus accrued but
unpaid dividends (the “Liquidation Preference”), for each share of Preferred
Stock held by each such holder, (4) the holders will have no rights with respect
to the conversion of the Preferred Stock into shares of Class A Common Stock or
any other security of the Company and (5) the Preferred Stock may be redeemed by
the Company at any time after the second anniversary of the original issue date
upon 30 days advance written notice to the holder for a price equal to 110% of
the Liquidation Preference, payable in cash or, at the Company’s option, so long
as the closing price of the Class A Common Stock is $2.18 or higher (as shall be
adjusted for stock splits) for at least 90 consecutive trading
days ending on the trading day into Class A Common Stock at the market
price, as measured on the original issue date for the initial issuance of shares
of Series A Preferred Stock.
In
connection with the issuance of Preferred Stock, the Company issued warrants to
purchase 700,000 shares of Class A Common Stock, to each holder of Preferred
Stock, at an exercise price of $0.63 per share (the “Preferred Warrants”). The
Preferred Warrants are exercisable beginning on March 12, 2009 for a period of
five years thereafter. The Preferred Warrants are callable by the Company,
provided that the closing price of the Company’s Class A Common Stock is $1.26
per share, 200% of the applicable exercise price, for twenty consecutive trading
days. The Company allocated $537 of the proceeds from the Preferred
Stock issuance to the estimated fair value of the Preferred
Warrants.
STOCK
OPTION PLAN
The
Company’s equity incentive plan (“the Plan”) provides for the issuance of up to
5,000,000 shares of Class A Common Stock to employees, outside directors and
consultants. The Company obtained stockholder approval to expand the size of the
Plan to 5,000,000, from the previously authorized 3,700,000, shares of Class A
Common Stock at the Company’s 2009 Annual Meeting of Stockholders held on
September 30, 2009.
Stock
Options
During
the six months ended September 30, 2009, under the Plan, the Company granted
stock options to purchase 621,000 shares of its Class A Common Stock to its
employees at an exercise price of $1.37 per share, of which 171,000 were issued
in exchange for the termination of the AccessDM options. As of
September 30, 2009, the weighted average exercise price for outstanding stock
options is $5.09 and the weighted average remaining contractual life is 5.3
years.
The
following table summarizes the activity of the Plan related to stock option
awards:
Shares
Under Option
|
Weighted
Average Exercise Price Per Share
|
|||||||
Balance
at March 31, 2009
|
2,313,622 | $ | 6.11 | |||||
Granted
|
621,000 | 1.37 | ||||||
Exercised
|
— | — | ||||||
Cancelled/Forfeited
|
(14,750 | ) | 9.02 | |||||
Balance
at September 30, 2009
|
2,919,872 | $ | 5.09 |
Restricted
Stock Awards
The Plan
also provides for the issuance of restricted stock and restricted stock unit
awards. During the six months ended September 30, 2009, the Company
granted 504,090 restricted stock units, of which 274,750 will vest
equally
19
over a
three year period and 229,340 will vest at the end of the third year or sooner
depending on the Company’s stock price.
The
following table summarizes the activity of the Plan related to restricted stock
and restricted stock unit awards:
Restricted
Stock Awards
|
Weighted
Average Market Price Per Share
|
|||||||
Balance
at March 31, 2009
|
773,168 | $ | 1.83 | |||||
Granted
|
504,090 | 1.06 | ||||||
Vested
|
(120,000 | ) | 2.06 | |||||
Cancelled/Forfeited
|
(3,249 | ) | 2.30 | |||||
Balance
at September 30, 2009
|
1,154,009 | $ | 1.47 |
There
were 1,101,356 restricted stock units granted which have not vested as of
September 30, 2009. 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.
ACCESSDM
STOCK OPTION PLAN
In August
2009, in connection with the 2009 Private Placement (see Note 5), AccessDM
terminated its stock option plan and all stock options outstanding
thereunder. In exchange for the termination of the AccessDM stock
options, the Company issued 171,000 stock options to the holders of AccessDM
stock options, pursuant to the Plan.
WARRANTS
Warrants
outstanding consist of the following:
Outstanding
Warrant (as defined below)
|
March
31,
2009
|
September
30,
2009
|
||||||
July
2005 Private Placement Warrants
|
467,275 | 467,275 | ||||||
August
2005 Warrants
|
760,196 | 760,196 | ||||||
Preferred
Warrants
|
1,400,000 | 1,400,000 | ||||||
Sageview
Warrants
|
— | 16,000,000 | ||||||
Imperial
Warrants
|
— | 750,000 | ||||||
2,627,471 | 19,377,471 |
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
conditionally callable by the Company. The underlying shares of these warrants
are registered for resale. As of September 30, 2009, 467,275 July
2005 Private Placements Warrants remained outstanding.
In August
2005, certain then outstanding 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 underlying shares of these
warrants are registered for resale. As of September 30, 2009, all
760,196 of the August 2005 Warrants remained outstanding.
In
February 2009, in connection with the issuance of Preferred Stock, the Company
issued warrants to purchase 700,000 shares of Class A Common Stock, to each
holder of Preferred Stock, at an exercise price of $0.63 per share (the
“Preferred Warrants”). The Preferred Warrants are exercisable beginning on March
12, 2009 for a period of five years thereafter. The Preferred Warrants are
conditionally callable by the Company. The Company allocated $537 of
the proceeds from the Preferred Stock issuance to the estimated fair value of
the Preferred Warrants. As of September 30, 2009, all 1,400,000 of
the Preferred Warrants remained outstanding.
20
In August
2009, in connection with the 2009 Private Placement (see Note 5), the Company
issued warrants to purchase 16,000,000 shares of Class A Common Stock at an
exercise price of $1.37 per share (the “Sageview Warrants”). The
Sageview Warrants are exercisable beginning on September 30, 2009 and
contain customary cashless exercise provision and anti-dilution
adjustments, and expire on August 11, 2016 (subject to extension in limited
circumstances). The Company also entered into a Registration Rights
Agreement with the Purchaser pursuant to which the Company agreed to register
the resale of the underlying shares of the Sageview Warrants from time to time
in accordance with the terms of the Registration Rights
Agreement. The fair value of the Sageview Warrants at the date of
issuance was $10,732, using a Black-Scholes option valuation model and was
recorded as a liability in the condensed consolidated financial
statements. The change in fair value of a $3,576 loss was recognized
in the condensed consolidated statement of operations and resulted in a warrant
liability fair value of $14,308 at September 30, 2009. All 16,000,000
of the Sageview Warrants remained outstanding and the underlying shares have not
yet been registered.
In August
2009, in connection with the 2009 Private Placement (see Note 5), the Company
engaged Imperial Capital, LLC (“Imperial”) to provide financial advisory
services. As partial consideration for such services, the Company
issued warrants to Imperial to purchase 750,000 shares of Class A Common Stock
(the “Imperial Warrants”). The Imperial Warrants have a customary
cashless exercise feature and a strike price of $1.37 per share, become
exercisable on February 11, 2010 and expire on August 11, 2014. In
connection with the issuance of the Imperial Warrants, the Company and Imperial
entered into a registration rights agreement (the “Imperial Registration Rights
Agreement”) pursuant to which the Company agreed to register the shares of Class
A Common Stock underlying the Imperial Warrants from time to time if other
registrations are filed, as defined in the terms of the Imperial Registration
Rights Agreement. The fair value of the Imperial Warrants at the date
of issuance was $427, using a Black-Scholes option valuation model and was
recorded in debt issuance costs and stockholders’ equity in the condensed
consolidated financial statements at September 30, 2009. As of
September 30, 2009, all 750,000 of the Imperial Warrants remained
outstanding.
7.
|
COMMITMENTS
AND CONTINGENCIES
|
As of
September 30, 2009, in connection with the Phase II Deployment, Phase 2 DC
entered into digital cinema deployment agreements with six motion picture
studios for the distribution of digital movie releases to motion picture
exhibitors equipped with Systems, and providing for payment of VPFs to Phase 2
DC. As of September 30, 2009, Phase 2 DC also entered into master
license agreements with four exhibitors covering a total of 503 screens, whereby
the exhibitors agreed to the placement of Systems as part of the Phase II
Deployment. As of September 30, 2009 the Company has installed 160
Systems. Installation of additional Systems in the Phase II Deployment is
still contingent upon the completion of appropriate vendor supply agreements and
financing for the purchase of Systems.
In
September 2009, in connection with the Company’s Phase II Deployment, Phase 2 DC
entered into master license agreements with two additional exhibitors covering a
total of 457 screens, bringing the number of screens licensed by Phase 2 DC to
960. Both exhibitors will purchase its own equipment through their
own financing and pay an upfront activation fee to the Company. The
Company will manage the billing and collection of VPFs and the remittance of a
percentage of the VPFs collected, less a servicing fee, to the exhibitors for a
ten-year term.
In
November 2008, in connection with the Phase II Deployment, Phase 2 DC entered
into a supply agreement with Christie, for the purchase of up to 10,000 Systems
at agreed upon pricing, as part of the Phase II Deployment. As of
September 30, 2009, the Company has purchased 12 Systems under this agreement
for $898.
In
November 2008, in connection with the Phase II Deployment, Phase 2 DC entered
into a supply agreement with Barco, for the purchase of up to 5,000 Systems at
agreed upon pricing, as part of the Phase II Deployment. As of
September 30, 2009, the Company has purchased 138 Systems under this agreement
for $10,096.
LITIGATION
The
Company’s subsidiary, 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 violated its obligations under
Article 12 of the lease in that
21
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. In
July 2009, the Company entered into an agreement with Landlord to settle this
matter whereby the Company would be responsible for 25% of the cost and expenses
related to the installation of a sprinkler system. The Company’s share of the
cost to install a sprinkler system is estimated to be $100. As
an additional condition of this agreement, any option to renew or extend this
lease has been eliminated. This lease ends on July 31,
2022.
8.
|
SUPPLEMENTAL
CASH FLOW DISCLOSURE
|
For
the Six Months
Ended September 30, |
||||||||
2008
|
2009
|
|||||||
Interest
paid
|
$ | 9,413 | $ | 14,907 | ||||
Equipment
purchased from Christie included in accounts payable and accrued expenses
at end of period
|
$ | 1,414 | $ | — | ||||
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
|
$ | 93 | $ | — | ||||
Assets
acquired under capital leases
|
$ | 92 | $ | 901 | ||||
Accretion
of preferred stock discount
|
$ | — | $ | 54 | ||||
Accrued
dividends on preferred stock
|
$ | — | $ | 200 | ||||
Issuance
of Class A Common Stock to Aquifer Capital for financial advisory services
in connection with the purchase of the 2007 Senior Notes
|
$ | — | $ | 198 | ||||
Issuance
of Class A Common Stock to Imperial to provide financial advisory
services
|
$ | — | $ | 437 |
9.
|
SEGMENT
INFORMATION
|
During
the quarter ended September 30, 2009, the Company modified how its decision
makers review and allocate resources to operating segments, which resulted in
revised reportable segments. The Company is comprised of five
reportable segments: Phase I Deployment, Phase II Deployment, Services, Content
& Entertainment and Other. The segments were determined based on the
products and services provided by each segment and how management reviews and
makes decisions regarding segment operations. Performance of the segments is
evaluated on income (loss) from operations before interest, taxes, depreciation
and amortization. As a result of the change in the Company’s
reportable segments, the Company has restated the segment information for the
prior periods. Future changes to this organization structure may
result in changes to the reportable segments disclosed.
The Phase
I Deployment and Phase II Deployment segments consist of the
following:
22
Operations
of:
|
Products
and services provided:
|
Phase
1 DC
|
Financing
vehicles and administrators for the Company’s 3,724 Systems installed
nationwide in Phase 1 DC’s deployment to theatrical
exhibitors. The Company retains ownership of the residual cash
flows and the Systems after the repayment of all non-recourse debt and at
the expiration of exhibitor master license agreements.
|
Phase
2 DC
|
Financing
vehicles and administrators for the Company’s second digital cinema
deployment, through Phase 2 DC (the “Phase II Deployment”). The
Company retains no ownership of the residual cash flows and digital cinema
equipment after the completion of cost recoupment and at the expiration of
the exhibitor master license
agreements.
|
The
Services segment consists of the following:
Operations
of:
|
Products
and services provided:
|
Digital
Cinema Services
|
Provides
monitoring, billing, collection, verification and other management
services to the Company’s Phase I Deployment, Phase II Deployment as well
as to exhibitors who purchase their own equipment. Collects and disburses
VPFs from motion picture studios and distributors and ACFs from
alternative content providers, movie exhibitors and theatrical
exhibitors.
|
Software
|
Develops
and licenses software to the theatrical distribution and exhibition
industries, provides ASP Service, and provides software enhancements and
consulting services.
|
DMS
|
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.
|
The
Content & Entertainment segment consists of the following:
Operations
of:
|
Products
and services provided:
|
USM
|
Provides
cinema advertising services and entertainment.
|
CEG
|
Acquires,
distributes and provides the marketing for programs of alternative content
and feature films to movie
exhibitors.
|
The Other
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.
|
Managed
Services
|
Provides
information technology consulting services and managed network monitoring
services through its global network command center.
|
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,
23
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 since May 1, 2008, 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, 2009
|
||||||||||||||||||||||||||||
Phase
I
|
Phase
II
|
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
||||||||||||||||||||||
Total
intangible assets, net
|
$ | 527 | $ | — | $ | 156 | $ | 10,010 | $ | 14 | $ | — | $ | 10,707 | ||||||||||||||
Total
goodwill
|
$ | — | $ | — | $ | 4,306 | $ | 1,568 | $ | 2,150 | $ | — | $ | 8,024 | ||||||||||||||
Total
assets
|
$ | 250,030 | $ | 5,330 | $ | 19,911 | $ | 21,391 | $ | 9,476 | $ | 16,259 | $ | 322,397 | ||||||||||||||
Notes
payable, non-recourse
|
$ | 195,448 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 195,448 | ||||||||||||||
Notes
payable
|
— | — | 501 | 35 | — | 55,221 | 55,757 | |||||||||||||||||||||
Capital
leases
|
— | — | — | 68 | 5,939 | — | 6,007 | |||||||||||||||||||||
Total
debt
|
$ | 195,448 | $ | — | $ | 501 | $ | 103 | $ | 5,939 | $ | 55,221 | $ | 257,212 |
As
of September 30, 2009
|
||||||||||||||||||||||||||||
Phase
I
|
Phase
II
|
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
||||||||||||||||||||||
Total
intangible assets, net
|
$ | 504 | $ | — | $ | 76 | $ | 8,599 | $ | 13 | $ | — | $ | 9,192 | ||||||||||||||
Total
goodwill
|
$ | — | $ | — | $ | 4,306 | $ | 1,568 | $ | 2,150 | $ | — | $ | 8,024 | ||||||||||||||
Total
assets
|
$ | 235,261 | $ | 12,947 | $ | 20,111 | $ | 19,759 | $ | 8,602 | $ | 29,453 | $ | 326,133 | ||||||||||||||
Notes
payable, non-recourse
|
$ | 176,580 | $ | 10,290 | $ | — | $ | — | $ | — | $ | — | $ | 186,870 | ||||||||||||||
Notes
payable
|
— | — | 419 | — | — | 65,385 | 65,804 | |||||||||||||||||||||
Capital
leases
|
— | 31 | 524 | 54 | 5,869 | — | 6,478 | |||||||||||||||||||||
Total
debt
|
$ | 176,580 | $ | 10,321 | $ | 943 | $ | 54 | $ | 5,869 | $ | 65,385 | $ | 259,152 |
Capital
Expenditures
|
Phase
I
|
Phase
II
|
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
|||||||||||||||||||||
For
the six months ended September 30, 2008
|
$ | 14,353 | $ | — | $ | 1,320 | $ | 191 | $ | 123 | $ | 21 | $ | 16,008 | ||||||||||||||
For
the six months ended September 30, 2009
|
$ | 66 | $ | 11,768 | $ | 635 | $ | 13 | $ | 44 | $ | 47 | $ | 12,573 |
24
For
the Three Months Ended September 30, 2008
|
||||||||||||||||||||||||||||
Phase
I
|
Phase
II
|
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
||||||||||||||||||||||
Revenues
from external customers
|
$ | 12,713 | $ | — | $ | 2,269 | $ | 4,368 | $ | 2,499 | $ | — | $ | 21,849 | ||||||||||||||
Intersegment
revenues
|
1 | — | 128 | 6 | 96 | — | 231 | |||||||||||||||||||||
Total
segment revenues
|
12,714 | — | 2,397 | 4,374 | 2,595 | — | 22,080 | |||||||||||||||||||||
Less
:Intersegment revenues
|
(1 | ) | — | (128 | ) | (6 | ) | (96 | ) | — | (231 | ) | ||||||||||||||||
Total
consolidated revenues
|
$ | 12,713 | $ | — | $ | 2,269 | $ | 4,368 | $ | 2,499 | $ | — | $ | 21,849 | ||||||||||||||
Direct
operating (exclusive of depreciation and amortization shown
below)
|
241 | — | 1,512 | 2,874 | 2,105 | — | 6,732 | |||||||||||||||||||||
Selling,
general and administrative
|
313 | — | 376 | 1,641 | 201 | 1,656 | 4,187 | |||||||||||||||||||||
Plus:
Allocation of Corporate overhead
|
— | — | 745 | 207 | 99 | (1,051 | ) | — | ||||||||||||||||||||
Provision
for doubtful accounts
|
— | — | — | 115 | 30 | — | 145 | |||||||||||||||||||||
Research
and development
|
— | — | 93 | — | — | — | 93 | |||||||||||||||||||||
Stock-based
compensation
|
— | — | 40 | 23 | 2 | 135 | 200 | |||||||||||||||||||||
Depreciation
and amortization of property and equipment
|
7,137 | — | 447 | 267 | 265 | 17 | 8,133 | |||||||||||||||||||||
Amortization
of intangible assets
|
— | — | 150 | 728 | 22 | 1 | 901 | |||||||||||||||||||||
Total
operating expenses
|
7,691 | — | 3,363 | 5,855 | 2,724 | 758 | 20,391 | |||||||||||||||||||||
Income
(loss) from operations
|
$ | 5,022 | $ | — | $ | (1,094 | ) | $ | (1,487 | ) | $ | (225 | ) | $ | (758 | ) | $ | 1,458 |
25
For
the Three Months Ended September 30, 2009
|
||||||||||||||||||||||||||||
Phase
I
|
Phase
II
|
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
||||||||||||||||||||||
Revenues
from external customers
|
$ | 11,406 | $ | 450 | $ | 1,735 | $ | 3,947 | $ | 2,343 | $ | — | $ | 19,881 | ||||||||||||||
Intersegment
revenues
|
— | — | 69 | 6 | 117 | — | 192 | |||||||||||||||||||||
Total
segment revenues
|
11,406 | 450 | 1,804 | 3,953 | 2,460 | — | 20,073 | |||||||||||||||||||||
Less
:Intersegment revenues
|
— | — | (69 | ) | (6 | ) | (117 | ) | — | (192 | ) | |||||||||||||||||
Total
consolidated revenues
|
$ | 11,406 | $ | 450 | $ | 1,735 | $ | 3,947 | $ | 2,343 | $ | — | $ | 19,881 | ||||||||||||||
Direct
operating (exclusive of depreciation and amortization shown
below)
|
262 | 61 | 1,349 | 2,553 | 1,841 | — | 6,066 | |||||||||||||||||||||
Selling,
general and administrative
|
117 | 244 | 463 | 1,228 | 223 | 1,798 | 4,073 | |||||||||||||||||||||
Plus:
Allocation of Corporate overhead
|
— | — | 1,267 | 122 | 58 | (1,447 | ) | — | ||||||||||||||||||||
Provision
for doubtful accounts
|
— | — | — | 136 | — | — | 136 | |||||||||||||||||||||
Research
and development
|
— | — | 64 | — | — | — | 64 | |||||||||||||||||||||
Stock-based
compensation
|
— | — | 84 | 28 | 3 | 326 | 441 | |||||||||||||||||||||
Depreciation
and amortization of property and equipment
|
7,139 | 290 | 470 | 217 | 198 | 9 | 8,323 | |||||||||||||||||||||
Amortization
of intangible assets
|
11 | — | 32 | 706 | 1 | — | 750 | |||||||||||||||||||||
Total
operating expenses
|
7,529 | 595 | 3,729 | 4,990 | 2,324 | 686 | 19,853 | |||||||||||||||||||||
Income
(loss) from operations
|
$ | 3,877 | $ | (145 | ) | $ | (1,994 | ) | $ | (1,043 | ) | $ | 19 | $ | (686 | ) | $ | 28 |
26
For
the Six Months Ended September 30, 2008
|
||||||||||||||||||||||||||||
Phase
I
|
Phase
II
|
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
||||||||||||||||||||||
Revenues
from external customers
|
$ | 24,614 | $ | — | $ | 4,215 | $ | 8,463 | $ | 5,127 | $ | — | $ | 42,419 | ||||||||||||||
Intersegment
revenues
|
1 | — | 289 | 21 | 172 | — | 483 | |||||||||||||||||||||
Total
segment revenues
|
24,615 | — | 4,504 | 8,484 | 5,299 | — | 42,902 | |||||||||||||||||||||
Less
:Intersegment revenues
|
(1 | ) | — | (289 | ) | (21 | ) | (172 | ) | — | (483 | ) | ||||||||||||||||
Total
consolidated revenues
|
$ | 24,614 | $ | — | $ | 4,215 | $ | 8,463 | $ | 5,127 | $ | — | $ | 42,419 | ||||||||||||||
Direct
operating (exclusive of depreciation and amortization shown
below)
|
421 | — | 2,563 | 5,401 | 4,144 | — | 12,529 | |||||||||||||||||||||
Selling,
general and administrative
|
710 | — | 1,020 | 3,536 | 425 | 3,329 | 9,020 | |||||||||||||||||||||
Plus:
Allocation of Corporate overhead
|
— | — | 1,498 | 416 | 200 | (2,114 | ) | — | ||||||||||||||||||||
Provision
for doubtful accounts
|
(150 | ) | — | 40 | 223 | 60 | — | 173 | ||||||||||||||||||||
Research
and development
|
— | — | 100 | — | — | — | 100 | |||||||||||||||||||||
Stock-based
compensation
|
— | — | 99 | 43 | (30 | ) | 246 | 358 | ||||||||||||||||||||
Depreciation
and amortization of property and equipment
|
14,255 | — | 889 | 559 | 532 | 33 | 16,268 | |||||||||||||||||||||
Amortization
of intangible assets
|
— | — | 301 | 1,503 | 43 | 1 | 1,848 | |||||||||||||||||||||
Total
operating expenses
|
15,236 | — | 6,510 | 11,681 | 5,374 | 1,495 | 40,296 | |||||||||||||||||||||
Income
(loss) from operations
|
$ | 9,378 | $ | — | $ | (2,295 | ) | $ | (3,218 | ) | $ | (247 | ) | $ | (1,495 | ) | $ | 2,123 |
27
For
the Six Months Ended September 30, 2009
|
||||||||||||||||||||||||||||
Phase
I
|
Phase
II
|
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
||||||||||||||||||||||
Revenues
from external customers
|
$ | 22,027 | $ | 694 | $ | 3,815 | $ | 7,210 | $ | 4,801 | $ | — | $ | 38,547 | ||||||||||||||
Intersegment
revenues
|
— | — | 133 | 7 | 226 | — | 366 | |||||||||||||||||||||
Total
segment revenues
|
22,721 | 694 | 3,948 | 7,217 | 5,027 | — | 38,913 | |||||||||||||||||||||
Less
:Intersegment revenues
|
— | — | (133 | ) | (7 | ) | (226 | ) | — | (366 | ) | |||||||||||||||||
Total
consolidated revenues
|
$ | 22,027 | $ | 694 | $ | 3,815 | $ | 7,210 | $ | 4,801 | $ | — | $ | 38,547 | ||||||||||||||
Direct
operating (exclusive of depreciation and amortization shown
below)
|
443 | 85 | 2,523 | 4,709 | 3,768 | — | 11,528 | |||||||||||||||||||||
Selling,
general and administrative
|
237 | 495 | 914 | 2,747 | 430 | 3,119 | 7,942 | |||||||||||||||||||||
Plus:
Allocation of Corporate overhead
|
— | — | 2,199 | 212 | 101 | (2,512 | ) | — | ||||||||||||||||||||
Provision
for doubtful accounts
|
— | — | 39 | 225 | — | — | 264 | |||||||||||||||||||||
Research
and development
|
— | — | 104 | — | — | — | 104 | |||||||||||||||||||||
Stock-based
compensation
|
— | — | 161 | 55 | 6 | 544 | 766 | |||||||||||||||||||||
Depreciation
and amortization of property and equipment
|
14,280 | 443 | 887 | 436 | 412 | 18 | 16,476 | |||||||||||||||||||||
Amortization
of intangible assets
|
23 | — | 79 | 1,411 | 2 | — | 1,515 | |||||||||||||||||||||
Total
operating expenses
|
14,983 | 1,023 | 6,906 | 9,795 | 4,719 | 1,169 | 38,595 | |||||||||||||||||||||
Income
(loss) from operations
|
$ | 7,044 | $ | (329 | ) | $ | (3,091 | ) | $ | (2,585 | ) | $ | 82 | $ | (1,169 | ) | $ | (48 | ) |
10.
RELATED PARTY TRANSACTIONS
In August
2009, the Company hired Adam M. Mizel to be its Chief Financial Officer and
Chief Strategy Officer. Mr. Mizel has been a member of the Company’s Board
of Directors since March 2009 and is currently the
28
Managing
Principal of Aquifer Capital Group, LLC and the General Partner of the Aquifer
Opportunity Fund, L.P., currently the Company’s largest
shareholder.
11.
SUBSEQUENT EVENTS
The Company
has evaluated events and transactions that occurred between September 30, 2009
and November 13, 2009, which is the date the financial statements were issued,
for possible disclosure or recognition in the financial
statements. The Company has determined that there were no such
events or transactions that warrant disclosure or recognition in the financial
statements except as noted below.
In October 2009, in connection with the
Company’s Phase II Deployment, Phase 2 DC has received commitment letters from
GECC’s Media, Communications & Entertainment business (“GE Capital”) and
Société Générale Corporate & Investment Banking (“Soc Gen”) for senior
credit facilities totaling up to $100 million. The Company
anticipates the closing of this new loan facility, together with support from
digital cinema equipment vendors Christie and Barco by December 31, 2009
with installations targeted to commence in early 2010. GE Capital’s
commitment covers the financing of up to about 1,600 Systems and Soc Gen’s
commitment covers the financing of up to an additional 533
Systems.
In
October 2009, in connection with the Company’s Phase II Deployment, Phase 2 DC
entered into digital cinema deployment agreements with two additional motion
picture studios for the distribution of digital movie releases to motion picture
exhibitors equipped with Systems, and providing for payment of VPFs to Phase 2
DC. Phase 2 DC now has digital cinema deployment agreements with
eight motion picture studios.
In
October 2009, the Company’s name change from Access Integrated Technologies,
Inc., to Cinedigm Digital Cinema Corp. and the increase in the number of shares
Class A Common Stock authorized for issuance from 65,0000,000 to 75,000,000
shares became effective.
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 Cinedigm Digital Cinema Corp. (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 for the year ended March 31, 2009.
This
report contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties,
many of which are beyond our control. Our actual results could differ
materially and adversely from those anticipated in such forward-looking
statements as a result of certain factors, including those set forth in our
Annual Report on Form 10-K for the year ended March 31, 2009. 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, “Cinedigm,” “we,” “us,” “our” refers to Cinedigm Digital Cinema Corp.
f/k/a Access Integrated Technologies, Inc. and the “Company” refers to Cinedigm
and its subsidiaries unless the context otherwise requires.
OVERVIEW
Cinedigm
Digital Cinema Corp. was incorporated in Delaware on March 31, 2000 (“Cinedigm”,
and collectively with its subsidiaries, the “Company”). On September
30, 2009 the Company’s stockholders approved a change in the Company’s name from
Access Integrated Technologies, Inc., to Cinedigm Digital Cinema Corp. and such
change was effected October 5, 2009. The Company provides technology
solutions, financial services and advice, software services, electronic delivery
and content distribution services to owners and distributors of digital content
to movie theatres and other venues. During the quarter ended
September 30, 2009, the Company modified how its
29
decision
makers review and allocate resources to operating segments, which resulted in
revised reportable segments, but did not impact our consolidated financial
position, results of operations or cash flows. We realigned our focus
to five primary businesses: first digital cinema deployment (“Phase I
Deployment”), second digital cinema deployment (“Phase II Deployment”), services
(“Services”), media content and entertainment (“Content & Entertainment”)
and other (“Other”). The Company’s Phase I Deployment and Phase II
Deployment segments are the financing vehicles and administrators for the
Company’s digital cinema equipment (the “Systems”) installed in movie theatres
nationwide. The Company’s Services segment provides technology
solutions, software services, electronic content delivery services via satellite
and hard drive to the motion picture industry, primarily to facilitate the
conversion from analog (film) to digital cinema and has positioned the Company
at what it believes to be the forefront of rapidly developing industry relating
to the delivery and management of digital cinema and other content to theatres
and other remote venues worldwide. The Company’s Content &
Entertainment segment provides content distribution services to theatrical
exhibitors and in-theatre advertising. The Company’s Other segment
provides motion picture exhibition to the general public, information technology
consulting and managed network monitoring services and hosting services and
network access for other web hosting services (“Access Digital Server
Assets”). Overall, the Company’s goal is to aid in the transformation
of movie theatres to entertainment centers by providing a platform of hardware,
software and content choices.
The Phase
I Deployment segment of our business is comprised of Christie/AIX, Inc. (“Phase
1 DC”). The Phase II Deployment segment is comprised of Access
Digital Cinema Phase 2 Corp. (“Phase 2 DC”). The Services segment of our
business is comprised of FiberSat Global Services, Inc. d/b/a AccessIT Satellite
and Support Services, (“Satellite”), Access Digital Media, Inc. (“AccessDM” and,
together with Satellite, “DMS”), Hollywood Software, Inc. d/b/a AccessIT
Software (“Software”), and PLX Acquisition Corp. The Content &
Entertainment segment of our business is comprised of UniqueScreen Media, Inc.
(“USM”) and Vistachiara Productions, Inc. f/k/a The Bigger Picture, currently
d/b/a Cinedigm Content and Entertainment Group (“CEG”). Our Other segment
consists of the operations of Core Technology Services, Inc. (“Managed
Services”), ADM Cinema Corporation (“ADM Cinema”) d/b/a the Pavilion Theatre
(the “Pavilion Theatre”) and our Access Digital Server Assets. In the
past our Other segment included the operations of our internet data centers
(“IDCs”). However, since May 2007, our three IDCs have been operated
by FiberMedia, consisting of unrelated third parties, and substantially all of
the revenues and expenses were being realized by FiberMedia and not the Company
and since May 1, 2008, 100% of the revenues and expenses are being realized by
FiberMedia. In June 2009, one of the IDC leases expired, leaving two
IDC leases with the Company as lessee.
The
following organizational chart provides a graphic representation of our business
and our five reporting segments:
![](https://www.sec.gov/Archives/edgar/data/0001173204/000093244009000714/form10q_13855590.jpg)
We have
incurred net losses of $6.3 million and $1.1 million in the three months ended
September 30, 2008 and 2009, respectively, and $10.6 million and $8.2 million in
the six months ended September 30, 2008 and 2009,
30
respectively,
and we have an accumulated deficit of $146.5 million as of September 30, 2009.
We also have significant contractual obligations related to our recourse and
non-recourse debt for the remainder of fiscal year 2010 and beyond. We expect to
continue generating net losses for the foreseeable future. Based on
our cash position at September 30, 2009, and expected cash flows from
operations, we believe that we have the ability to meet our obligations through
September 30, 2010. We are seeking to raise additional capital to refinance
certain outstanding debt, to meet equipment requirements related to the Phase 2
DC second digital cinema deployment (the “Phase II Deployment”) and for working
capital as necessary. Although we recently entered into certain agreements
related to the Phase II Deployment, there is no assurance that financing of
additional Systems for the Phase II Deployment will be completed as contemplated
or under terms acceptable to us or our existing stockholders. We expect any
Phase II debt will be non-recourse to the parent company, as is the case with
our existing debt at Phase 1 DC. Failure to generate additional
revenues, raise additional capital or manage discretionary spending could have a
material adverse effect on our ability to continue as a going concern. The
accompanying condensed consolidated financial statements do not reflect any
adjustments which may result from our inability to continue as a going
concern.
Results
of Operations for the Three Months Ended September 30, 2008 and
2009
Revenues
For
the Three Months Ended September 30,
|
||||||||||||
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
Phase
I Deployment
|
$ | 12,713 | $ | 11,406 | (10 | )% | ||||||
Phase
II Deployment
|
— | 450 | — | |||||||||
Services
|
2,269 | 1,735 | (24 | )% | ||||||||
Content
& Entertainment
|
4,368 | 3,947 | (10 | )% | ||||||||
Other
|
2,499 | 2,343 | (6 | )% | ||||||||
$ | 21,849 | $ | 19,881 | (9 | )% |
Revenues
decreased $2.0 million or 9%. The decrease in revenues in the Phase I
Deployment segment was due to a 10% decrease in Phase 1 DC’s VPF revenues,
attributable to a contractual 16% reduction in VPF rates starting in November
2008, offset by an increase in quarterly screen turnover. The
increase in revenues in the Phase II Deployment segment was due to Phase 2 DC
VPF revenues which were not generated during the three months ended September
30, 2008, as no Phase 2 DC’s Systems were installed and ready for content until
December 2008. The decrease in revenues in the Services segment was
primarily due to (i) a 26% decrease in DMS revenues, attributable to flat
revenues from digital feature and trailer deliveries as DMS maintained its movie
studio customers but experienced limited growth in the number of digital
delivery sites and a 52% decrease in non-theatrical satellite services revenues
due to general economic factors; and (ii) a 22% decrease in Software revenues
due to delayed Phase 2 deployments, limiting expected license and maintenance
fees. We expect Phase 2 DC service fees, DMS revenues and software license fees
to increase as additional Systems are deployed under both the recent $100
million non-recourse credit facility committed to by GECC’s Media,
Communications & Entertainment business (“GE Capital”) and Société Générale
Corporate & Investment Banking (“Soc Gen”) as well as through the
exhibitor-buyer model launched in late September 2009 initially with two
exhibitors.
In the
Content & Entertainment segment, revenues decreased 10% due to a 24% decline
in in-theatre advertising revenues, attributable to the elimination of various
under-performing customer contracts, as well as the current weak economic
environment, offset by a 4% increase in national advertising revenues generated
by the partnership with Screenvision and non-cash barter revenues of $0.5
million, which represents the fair value of advertising provided to alternative
content providers of CEG. CEG’s distribution revenues relating to
digitally-equipped locations decreased 51% for alternative content and content
sponsorship revenues as CEG planned a limited number of events and independent
films during the three months ended September 30, 2009. The CEG
distribution slate is expected to be more significant in the second half of our
2010 fiscal year commencing in October 2009 with the release of Opa! and the
December 11, 2009 release of Dave Matthews Band in 3-D. The primary
driver of CEG revenues is the number of programs CEG is distributing, together
with the nationwide (and anticipated worldwide) conversion of theatres to
digital capabilities, a trend the Company expects to continue. In addition to
the distribution of independent motion pictures, the Company also expects that
with its implementation of the CineLiveSM
product into movie theatres, CEG’s revenues will increase from the distribution
of live 2D and 3D content such as concerts and sporting events.
31
We expect
consolidated revenues to increase during the remainder of our fiscal year
relative to the previous fiscal year due to increased amounts of financing that
are generally available to fund digital deployments, and the growing number of
3-D movies to be released by the motion picture studios. In
particular, the Company recently signed 457 screens with two exhibitors who are
purchasing the equipment directly and have hired the Company to manage the asset
base in exchange for an upfront activation fee and on-going share of VPF
revenues. In addition, the Company expects to sign definitive
documentation for a $100 million non-recourse, senior credit facility with GE
Capital and Soc Gen prior to year end and commence deployments under this
facility in the fourth quarter of fiscal 2010. As the number of
industry wide digital screens increases generally, the Company expects to earn
additional delivery fees in its DMS business unit as well as distribution fees
in CEG and software fees from our TCC software. We are
dependent on the availability of suitable financing for any large scale Phase II
Deployment. To date such sources of financing are still being
pursued.
Direct Operating
Expenses
For
the Three Months Ended September 30,
|
||||||||||||
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
Phase
I Deployment
|
$ | 241 | $ | 262 | 9 | % | ||||||
Phase
II Deployment
|
— | 61 | — | |||||||||
Services
|
1,512 | 1,349 | (11 | )% | ||||||||
Content
& Entertainment
|
2,874 | 2,553 | (11 | )% | ||||||||
Other
|
2,105 | 1,841 | (13 | )% | ||||||||
$ | 6,732 | $ | 6,066 | (10 | )% |
Direct
operating expenses decreased $0.7 million or 10%. The increase in
direct operating costs in the Phase I Deployment segment was primarily due to a
27% increase in property taxes on Systems. The increase in
direct
operating
costs in the Phase II Deployment segment was due to Phase 2 DC costs which were
not generated during the three months ended September 30, 2008. The
decrease in the Content & Entertainment segment was primarily related to a
28% decrease in minimum guaranteed obligations under theatre advertising
agreements with exhibitors for displaying cinema advertising, reduced
operational staffing levels at USM and reduced advertising and marketing costs
in CEG related to the fewer number of programs CEG distributed during the
quarter offset by non-cash content acquisition expenses of $0.5 million for CEG
related to the fair value of barter advertising provided by USM. We expect
direct operating expenses to decrease as compared to prior periods and remain
constant at the current level.
Selling, General and
Administrative Expenses
For
the Three Months Ended September 30,
|
||||||||||||
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
Phase
I Deployment
|
$ | 313 | $ | 117 | (63 | )% | ||||||
Phase
II Deployment
|
— | 244 | — | |||||||||
Services
|
376 | 463 | 23 | % | ||||||||
Content
& Entertainment
|
1,641 | 1,228 | (25 | )% | ||||||||
Other
|
201 | 223 | 11 | % | ||||||||
Corporate
|
1,656 | 1,798 | 9 | % | ||||||||
$ | 4,187 | $ | 4,073 | (3 | )% |
Selling,
general and administrative expenses decreased approximately $0.1 million or
3%. The decrease was primarily caused by reduced payroll related
expenses in the Phase I Deployment segment due to the completion of our Phase I
Deployment as those costs are now being allocated to the Phase II Deployment
segment. The decrease was also related to reduced staffing levels in
the Content & Entertainment segment offset by increased professional fees
within Corporate due to one-time investor relations expenses and compensation
consulting fees and scheduled quarterly directors’ fees. Following the
completion of our Phase I Deployment, overall headcount reductions have now
stabilized. As of September 30, 2008 and 2009, we had 252 and 244
employees, of which 40 and 47, were part-time employees and 39 and 43, were
salespersons, respectively. We expect selling, general and
administrative expenses to decrease as compared to prior periods and remain
relatively constant at the current level.
32
Stock-based
compensation
Stock-based
compensation expense increased approximately $0.2 million or
120%. The increase was primarily related to the expenses associated
with the stock option awards granted during the three months ended September 30,
2009, which were issued in exchange for the termination of the AccessDM
options. Such grants vested upon issuance and resulted in an
additional $0.3 million of stock-based compensation expense for the
quarter.
Depreciation and
Amortization Expense on Property and Equipment
For
the Three Months Ended September 30,
|
||||||||||||
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
Phase
I Deployment
|
$ | 7,137 | $ | 7,139 | — | |||||||
Phase
II Deployment
|
— | 290 | — | |||||||||
Services
|
447 | 470 | 5 | % | ||||||||
Content
& Entertainment
|
267 | 217 | (19 | )% | ||||||||
Other
|
265 | 198 | (25 | )% | ||||||||
Corporate
|
17 | 9 | (47 | )% | ||||||||
$ | 8,133 | $ | 8,323 | 2 | % |
Depreciation
and amortization expense remained consistent with last year. Other
than the Phase II Deployment and Services segments, the decreases reflect
reduced expense on assets which are fully depreciated or amortized at September
30, 2009. The increase in the Phase II Deployment segment represents
depreciation on the Phase 2 DC Systems which were not in service during the
three months ended September 30, 2008. We expect the
depreciation and amortization expense in the Phase II Deployment segment to
increase as new Phase 2 DC Systems are installed.
Interest
expense
For
the Three Months Ended September 30,
|
||||||||||||
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
Phase
I Deployment
|
$ | 4,315 | $ | 5,456 | 26 | % | ||||||
Phase
II Deployment
|
— | 227 | — | |||||||||
Services
|
4 | 25 | 525 | % | ||||||||
Content
& Entertainment
|
4 | 3 | (25 | )% | ||||||||
Other
|
260 | 259 | — | |||||||||
Corporate
|
2,407 | 2,821 | 17 | % | ||||||||
$ | 6,990 | $ | 8,791 | 26 | % |
Interest
expense increased $1.8 million or 26%. Total interest expense included $6.2
million and $7.7 million of interest paid and accrued for the three months ended
September 30, 2008 and 2009, respectively. The increase in interest
paid and accrued within the Phase I Deployment segment relates to the increased
interest rate on the GE Credit Facility related to the fourth amendment and in
part to the Interest Rate Swap (see change in fair value of interest rate swap
discussed below) and increased interest within the Phase II Deployment segment
related to the credit facility with KBC Bank NV (“KBC”) to fund the purchase of
Systems (the “KBC Related Facility”) from Barco, Inc. (“Barco”).
Non-cash
interest expense was $0.7 million and $1.1 million for the three months ended
September 30, 2008 and 2009, respectively. The increase was due to
the accretion of the note payable discount associated with the note issued in
August 2009 (the “2009 Note”). Non-cash interest related to the
interest payments on the 2007 Senior Notes has ceased as the 2007 Senior Notes
were cancelled in August 2009. Accretion of the note payable discount
associated with the 2009 Note will continue over the term of the 2009
Note.
As a
result of the completion of our Phase I Deployment and the continued payments of
principal related to the GE Credit Facility, partially offset by limited
borrowings related to the Phase II Deployment, we expect our
interest
33
expense
to stabilize and remain relatively constant at the current level, as reduced
interest from the 2007 Senior Notes will be replaced by increased interest on
the 2009 Note.
Extinguishment of
debt
The gain
on the extinguishment of debt was $10.7 million for the three months ended
September 30, 2009, related to the satisfaction of the principal and any accrued
and unpaid interest on the 2007 Senior Notes for an aggregate purchase price of
$42.5 million which resulted in a gain of $12.5 million of remaining principal
along with $0.6 million in unpaid accrued interest offset by unamortized debt
issuance costs of $2.4 million.
Change in fair value of
interest rate swap
The
change in fair value of the interest rate swap was $0.6 million for the three
months ended September 30, 2009. This represents Phase 1 DC’s
unrealized gain from the change in the fair value of the Interest Rate Swap
executed in April 2008 related to the GE Credit Facility.
Change in fair value of
warrants
The
change in fair value of warrants issued to Sageview Capital LP (“Sageview”),
related to the 2009 Note, was a loss of $3.6 million for the three months ended
September 30, 2009. Until the shares underlying these warrants are
registered with the SEC, the Company will continue to adjust the warrant
liability each quarter to the then fair value.
Results
of Operations for the Six Months Ended September 30, 2008 and 2009
Revenues
For
the Six Months Ended September 30,
|
||||||||||||
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
Phase
I Deployment
|
$ | 24,614 | $ | 22,027 | (11 | )% | ||||||
Phase
II Deployment
|
— | 694 | — | |||||||||
Services
|
4,215 | 3,815 | (10 | )% | ||||||||
Content
& Entertainment
|
8,463 | 7,210 | (15 | )% | ||||||||
Other
|
5,127 | 4,801 | (6 | )% | ||||||||
$ | 42,419 | $ | 38,547 | (9 | )% |
Revenues
decreased $3.9 million or 9%. The decrease in revenues in the Phase I
Deployment segment was primarily due to an 11% decrease in Phase 1 DC’s VPF
revenues, attributable to a contractual 16% reduction in VPF rates starting in
November 2008, offset by an increase in quarterly screen
turnover. The increase in revenues in the Phase II Deployment
segment was due to Phase 2 DC VPF revenues which were not generated during the
six months ended September 30, 2008, as no Phase 2 DC’s Systems were installed
and ready for content until December 2008. The decrease in revenues in the
Services segment was primarily due to (i) a 14% decrease in DMS revenues,
attributable to flat revenues from digital feature and trailer deliveries as DMS
maintained its movie studio customers but experienced limited growth in the
number of digital delivery sites and a 26% decrease in non-theatrical satellite
services revenues due to general economic factors; and (ii) a 10% decrease in
Software revenues due to delayed Phase 2 deployments, limiting expected license
and maintenance fees. We expect Phase 2 DC service fees, DMS revenues and
software license fees to increase as additional Systems are deployed under both
the recent $100 million non-recourse credit facility committed to by GE Capital
and Soc Gen as well as through the exhibitor-buyer model launched in late
September 2009 initially with two exhibitors.
In the
Content & Entertainment segment, revenues decreased 15% due to a 25% decline
in in-theatre advertising revenues, attributable to the elimination of various
under-performing customer contracts, as well as the current weak macro-economic
environment, offset by 21% increase in national advertising revenues generated
by the partnership with Screenvision and non-cash barter revenues of $0.5
million, which represents the fair value of advertising provided to alternative
content providers of CEG. CEG’s distribution revenues relating to
digitally-equipped locations decreased 53% for alternative content and content
sponsorship revenues as CEG planned a limited number of events and independent
films during the six months ended September 30, 2009. The CEG
distribution slate will expand to be more significant in the second half of our
2010 fiscal year commencing in October 2009 with the
34
release
of Opa! and the December 11, 2009 release of Dave Matthews Band in
3-D The primary driver of CEG revenues is the number of programs CEG
is distributing, together with the nationwide (and anticipated worldwide)
conversion of theatres to digital capabilities, a trend the Company expects to
continue. In addition to the distribution of independent motion pictures, the
Company also expects that with its implementation of the CineLiveSM
product into movie theatres, CEG’s revenues will increase from the distribution
of live 2D and 3D content such as concerts and sporting events.
We expect
consolidated revenues to increase during the remainder of our fiscal year
relative to the previous fiscal year due to increased amounts of financing that
are generally available to fund digital deployments, and the growing number of
3-D movies to be released by the motion picture studios. In particular, the
Company recently signed 457 screens with two exhibitors who are purchasing the
equipment directly and have hired the Company to manage the asset base in
exchange for an upfront activation fee and on-going share of VPF
revenues. In addition, the Company expects to sign definitive
documentation for a $100 million non-recourse, senior credit facility with GE
Capital and Soc Gen prior to year end and commence deployments under this
facility in the fourth quarter of fiscal 2010. As the number of
industry wide digital screens increases generally, the Company expects to earn
additional delivery fees in its DMS business unit as well as distribution fees
in CEG and software fees from our TCC software. We are
dependent on the availability of suitable financing for any large scale Phase II
Deployment. To date such sources of financing are still being
pursued.
Direct Operating
Expenses
For
the Six Months Ended September 30,
|
||||||||||||
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
Phase
I Deployment
|
$ | 421 | $ | 443 | 5 | % | ||||||
Phase
II Deployment
|
— | 85 | — | |||||||||
Services
|
2,563 | 2,523 | (2 | )% | ||||||||
Content
& Entertainment
|
5,401 | 4,709 | (13 | )% | ||||||||
Other
|
4,144 | 3,768 | (9 | )% | ||||||||
$ | 12,529 | $ | 11,528 | (8 | )% |
Direct
operating expenses decreased $1.0 million or 8%. The increase in
direct operating costs in the Phase I Deployment segment was primarily due to a
5% increase in Phase 1 DC’s costs, attributable to a 38% increase in property
taxes on Systems. The increase in direct operating costs in the
Phase II Deployment segment was due to Phase 2 DC costs which were not generated
during the six months ended September 30, 2008. The decrease in the
Content & Entertainment segment was primarily related to a 14% decrease in
minimum guaranteed obligations under theatre advertising agreements with
exhibitors for displaying cinema advertising, reduced operational staffing
levels at USM and reduced advertising and marketing costs in CEG related to the
fewer number of programs CEG distributed during the quarter offset by non-cash
content acquisition expenses of $0.5 million for CEG related to the fair value
of barter advertising provided by USM. We expect direct operating expenses to
decrease as compared to prior periods and remain constant at the current
level.
Selling, General and
Administrative Expenses
For
the Six Months Ended September 30,
|
||||||||||||
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
Phase
I Deployment
|
$ | 710 | $ | 237 | (67 | )% | ||||||
Phase
II Deployment
|
— | 495 | — | |||||||||
Services
|
1,020 | 914 | (10 | )% | ||||||||
Content
& Entertainment
|
3,536 | 2,747 | (22 | )% | ||||||||
Other
|
425 | 430 | 1 | % | ||||||||
Corporate
|
3,329 | 3,119 | (6 | )% | ||||||||
$ | 9,020 | $ | 7,942 | (12 | )% |
Selling,
general and administrative expenses decreased approximately $1.1 million or
12%. The decrease was primarily caused by reduced payroll related
expenses in the Phase I Deployment segment due to the completion of our Phase I
Deployment as those costs are now being allocated to the Phase II Deployment
segment. The decrease
35
was also
related to reduced staffing levels in both the Services segment and the Content
& Entertainment segment, and decreased professional fees and travel expenses
within Corporate. Following the completion of our Phase I Deployment, overall
headcount reductions have now stabilized. As of September 30, 2008
and 2009, we had 252 and 244 employees, of which 40 and 47, were part-time
employees and 39 and 43, were salespersons, respectively. We expect
selling, general and administrative expenses to decrease as compared to prior
periods and remain relatively constant at the current level.
Stock-based
compensation
Stock-based
compensation expense increased approximately $0.4 million or
114%. The increase was primarily related to the expenses associated
with the stock option awards granted during the three months ended September 30,
2009 which were issued in exchange for the termination of the AccessDM
options. Such grants vested upon issuance and resulted in an
additional $0.3 million of expense for the quarter.
Depreciation and
Amortization Expense on Property and Equipment
For
the Six Months Ended September 30,
|
||||||||||||
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
Phase
I Deployment
|
$ | 14,255 | $ | 14,280 | — | |||||||
Phase
II Deployment
|
— | 443 | — | |||||||||
Services
|
889 | 887 | — | |||||||||
Content
& Entertainment
|
559 | 436 | (22 | )% | ||||||||
Other
|
532 | 412 | (23 | )% | ||||||||
Corporate
|
33 | 18 | (45 | )% | ||||||||
$ | 16,268 | $ | 16,476 | 1 | % |
Depreciation
and amortization expense remained consistent with last year. Other
than the Phase II Deployment segment, the decreases reflect reduced expense on
assets which are fully depreciated or amortized at September 30,
2009. The increase in the Phase II Deployment segment represents
depreciation on the Phase 2 DC Systems which were not in service during the six
months ended September 30, 2008. We expect the depreciation and
amortization expense in the Phase II Deployment segment to generally increase as
new Phase 2 DC Systems are installed.
Interest
expense
For
the Six Months Ended September 30,
|
||||||||||||
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
Phase
I Deployment
|
$ | 8,851 | $ | 10,283 | 16 | % | ||||||
Phase
II Deployment
|
— | 294 | — | |||||||||
Services
|
5 | 40 | 700 | % | ||||||||
Content
& Entertainment
|
7 | 6 | (14 | )% | ||||||||
Other
|
521 | 520 | — | |||||||||
Corporate
|
4,782 | 5,198 | 9 | % | ||||||||
$ | 14,166 | $ | 16,341 | 15 | % |
Interest
expense increased $2.2 million or 15%. Total interest expense included $11.1
million and $14.4 million of interest paid and accrued for the six months ended
September 30, 2008 and 2009, respectively. The increase in interest
paid and accrued within the Phase I Deployment segment relates to the increased
interest rate on the GE Credit Facility related to the fourth amendment and in
part to the Interest Rate Swap (see change in fair value of interest rate swap
discussed below) and increased interest within the Phase II Deployment segment
related to the KBC Related Facility to fund the purchase of Systems from
Barco.
Non-cash
interest expense was $3.0 million and $1.9 million for the six months ended
September 30, 2008 and 2009, respectively. The increase was due to
the accretion of the note payable discount associated with the 2009
Note. Non-cash interest related to the interest payments on the 2007
Senior Notes has ceased as the 2007 Senior Notes were cancelled in August
2009. Accretion of the note payable discount associated with the 2009
Note will continue over the term of the 2009 Note.
36
As a
result of the completion of our Phase I Deployment and the continued payments of
principal related to the GE Credit Facility, partially offset by limited
borrowings related to the Phase II Deployment, we expect our interest expense to
stabilize, as reduced interest from the 2007 Senior Notes will be replaced by
increased interest on the 2009 Note.
Extinguishment of
debt
The gain
on the extinguishment of debt was $10.7 million for the six months ended
September 30, 2009, which resulted from the satisfaction of the principal and
any accrued and unpaid interest on the 2007 Senior Notes for an aggregate
purchase price of $42.5 million which resulted in a gain of $12.5 million of
remaining principal along with $0.6 million in unpaid accrued interest offset by
unamortized debt issuance costs of $2.4 million.
Change in fair value of
interest rate swap
The
change in fair value of the interest rate swap was $1.2 million for the six
months ended September 30, 2009. This represents Phase 1 DC’s
unrealized gain from the change in the fair value of the Interest Rate Swap
executed in April 2008 related to the GE Credit Facility.
Change in fair value of
warrants
The
change in fair value of warrants issued to Sageview, related to the 2009 Note,
was a loss of $3.6 million for the six months ended September 30,
2009. At September 30, 2009, the fair value of the warrant liability
was $14.3 million. Until the shares underlying these warrants are
registered with the SEC, the Company will continue to adjust the warrant
liability each quarter to the then fair value.
Recent
Accounting Pronouncements
Effective
July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting
Standards Codification (“ASC”) became the single official source of
authoritative, nongovernmental generally accepted accounting principles (“GAAP”)
in the United States. The historical GAAP hierarchy was eliminated
and the ASC became the only level of authoritative GAAP, other than guidance
issued by the SEC. Our accounting policies were not affected by the
conversion to ASC. However, references to specific accounting
standards in the footnotes to our condensed consolidated financial statements
have been changed to refer to the appropriate section of ASC.
At its
September 23, 2009 board meeting, the FASB ratified final EITF consensus on
revenue arrangements with multiple deliverables (“Issue 08-1”). This
Issue supersedes Issue 00-21 (codified in ASC 605-25). Issue 08-1
addresses the unit of accounting for arrangements involving multiple
deliverables. It also addresses how arrangement consideration should
be allocated to the separate units of accounting, when applicable. However,
guidance on determining when the criteria for revenue recognition are met and on
how an entity should recognize revenue for a given unit of accounting are
located in other sections of the Codification. Issue 08-1 will
ultimately be issued as an Accounting Standards Update (ASU) that will amend ASC
605-25. Final consensus is effective for fiscal years beginning on or
after June 15, 2010. Entities can elect to apply this Issue (1)
prospectively to new or materially modified arrangements after the Issue’s
effective date or (2) retrospectively for all periods presented. The
Company does not believe that revisions to ASC 605-25 will have a
material impact on the Company’s consolidated financial statements.
At its
September 23, 2009 board meeting, the FASB also ratified final EITF consensus on
software revenue recognition (“Issue 09-3”). This Issue amends ASC
985-605 (formerly SOP 97-2) and ASC 985-605-15-3 (formerly Issue 03-5) to
exclude from their scope all tangible products containing both software and
non-software components that function together to deliver the product’s
essential functionality. That is, the entire product (including the software
deliverables and non-software deliverables) would be outside the scope of ASC
985-605 and would be accounted for under other accounting literature. The
revised scope of ASC 985-605 (Issue 09-3) will ultimately be issued as an
Accounting Standards Update (ASU) that will amend the ASC. The final
consensus is effective for fiscal years beginning on or after June 15, 2010.
Entities can elect to apply this Issue (1) prospectively to new or materially
modified arrangements after the Issue’s effective date or (2) retrospectively
for all periods presented. Early application is permitted. The
Company does not believe that ASC 985-605 (Issue 09-3) will have a material
impact on the Company’s consolidated financial statements.
37
In June
2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”
(“SFAS 167”) (which will be codified in ASC 810-10). Revisions to ASC 810-10
improves financial reporting by enterprises involved with variable interest
entities and to address (1) the effects on certain provisions of FASB
Interpretation No. 46 (revised December 2003), “Consolidation of Variable
Interest Entities”, as a result of the elimination of the qualifying
special-purpose entity concept in SFAS 166 and (2) constituent concerns about
the application of certain key provisions of Interpretation 46(R), including
those in which the accounting and disclosures under the Interpretation do not
always provide timely and useful information about an enterprise’s involvement
in a variable interest entity. Revisions to ASC 810-10 is effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. The Company
is currently
evaluating the impact of adoption and application of revisions to ASC
810-10 will have on the Company’s consolidated financial
statements.
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.
Our
business is primarily driven by the emerging digital cinema marketplace and the
primary revenue driver will be the increasing number of digitally equipped
screens. There are approximately 38,000 domestic (United States and Canada)
movie theatre screens and approximately 107,000 screens
worldwide. Approximately 6,500 of the domestic screens are equipped
with digital cinema technology, and 3,884 of those screens contain our Systems
and software. We anticipate the vast majority of the industry’s screens to be
converted to digital in the next 5-7 years, and we have announced plans to
convert up to an additional 10,000 domestic screens to digital in our Phase II
Deployment over a three year period starting October 2008, of which 160 Systems
have been installed as of September 30, 2009. For those screens that are
deployed by us, the primary revenue source will be VPFs, with the number of
digital movies shown per screen, per year being the key factor for earnings and
measuring the VPFs, since the studios pay such fees on a per movie, per screen
basis. For all new digital screens, whether or not deployed by us,
the opportunity for other forms of revenue also increases. We may generate
additional software license fee revenues (mainly from the TCC software which is
used by exhibitors to aid in the operation of their systems), ACFs (such as
concerts and sporting events) and fees from the delivery of content via
satellite or hard drive. In all cases, the number of
digitally-equipped screens in the marketplace is the primary determinant of our
potential revenue streams, although the emerging presence of competitors for
software and content distribution and delivery may limit this
opportunity.
In August
2006, Phase 1 DC entered into a credit agreement (the “Credit Agreement”) with
GECC, as administrative agent and collateral agent for the lenders party
thereto, and one or more lenders party thereto. Further borrowings
are not permitted under the GE Credit Facility. The Credit Agreement
contains certain restrictive covenants that restrict Phase 1 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. The GE Credit Facility is
not guaranteed by the Company or its other subsidiaries, other than Phase 1
DC. As of September 30, 2009, the outstanding principal balance of
the GE Credit Facility was $167.0 million at a weighted average interest rate of
10.7%.
In August
2007, Phase 1 DC received $9.6 million of vendor financing (the “Vendor Note”)
for equipment used in Phase 1 DC’s deployment. The Vendor Note bears interest at
11% and may be prepaid without penalty. Interest is due semi-annually
commencing February 2008 and is paid by Cinedigm. The balance of the
Vendor Note, together with all unpaid interest is due on the maturity date of
August 1, 2016. The Vendor Note is not guaranteed by the Company or
its other subsidiaries, other than Phase 1 DC. As of September 30,
2009, the outstanding principal balance of the Vendor Note was $9.6
million.
In April
2008, Phase 1 DC executed the Interest Rate Swap with a counterparty for a
notional amount of approximately 90% of the amounts outstanding under the GE
Credit Facility or an initial amount of $180.0 million. Under the Interest Rate
Swap, Phase 1 DC will effectively pay a fixed rate of 7.3%, to guard against
Phase 1 DC’s exposure to increases in the variable interest rate under the GE
Credit Facility. GE Corporate Financial Services arranged the transaction, which
took effect commencing August 1, 2008 as required by the GE Credit Facility and
will remain in effect until August 2010. As principal repayments of
the GE Credit Facility occur, the notional
38
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.
In May
2009, Phase 1 DC entered into the fourth amendment (the “GE Fourth Amendment”)
with respect to the GE Credit Facility to (1) increase the interest rate from
4.5% to 6% above the Eurodollar Base Rate; (2) set the Eurodollar Base Rate
floor at 2.5%; (3) reduce the required amount to be reserved for the payment of
interest from nine months of forward cash interest to a fixed $6.9 million, and
permitted a one-time payment of $2.6 million to be made from Phase 1 DC to its
parent Company, AccessDM; (4) increase the quarterly maximum consolidated
leverage ratio covenants that Phase 1 DC is required to meet on a trailing 12
months basis; (5) increase the maximum consolidated senior leverage ratio
covenants that Phase 1 DC is required to meet on a trailing 12 months basis; (6)
reduce the quarterly minimum consolidated fixed charge coverage ratio covenants
that Phase 1 DC is required to meet on a trailing 12 months basis and (7) add a
covenant requiring Phase 1 DC to maintain a minimum unrestricted cash balance of
$2.0 million at all times. All of the changes contained in the GE
Fourth Amendment are effective as of May 4, 2009 except for the covenant changes
in (4), (5) and (6) above, which were effective as of March 31,
2009. In connection with the GE Fourth Amendment, Phase 1 DC paid
fees to GE and the other lenders totaling $1.0 million. At September
30, 2009 the Company was in compliance with all covenants contained in the GE
Credit Facility, as amended and noted above.
In
December 2008, Phase 2 B/AIX, an indirect wholly-owned subsidiary of the
Company, entered into the KBC Related Facility to fund the purchase of Systems
from Barco, to be installed in movie theatres as part of the Company’s Phase II
Deployment. As of September 30, 2009, $8.9 million has been drawn
down on the KBC Related Facility and the outstanding principal balance of the
KBC Related Facility was $8.9 million.
In August
2009, the Company entered into a securities purchase agreement (the “Purchase
Agreement”) with an affiliate of Sageview Capital LP (the “Purchaser”) pursuant
to which the Company agreed to issue a Senior Secured Note (the “2009 Note”) in
the aggregate principal amount of $75.0 million and warrants (the “Sageview
Warrants”) to purchase 16,000,000 shares of its Class A Common Stock (the “2009
Private Placement”). The net proceeds of the 2009 Private Placement
of approximately $63.7 million will be used for the repayment of existing
indebtedness of the Company and one of its subsidiaries, the funding of a cash
reserve to pay the cash interest amount required under the 2009 Note for the
first two years, the payment of fees and expenses incurred in connection with
the Private Placement and related transactions, and other general corporate
purposes. The 2009 Note has a term of five years, which may be
extended for up to one 12 month period at the discretion of the Company if
certain conditions set forth in the 2009 Note are satisfied. Subject
to certain adjustments set forth in the 2009 Note, interest on the 2009 Note is
8% per annum to be accrued as an increase in the aggregate principal amount of
the 2009 Note (“PIK Interest”) and 7% per annum paid in cash. The
Company may prepay the 2009 Note (i) during the initial 18 months of their term,
in an amount up to 20% of the original principal amount of the 2009 Note plus
accrued and unpaid interest without penalty and (ii) following the second
anniversary of issuance of the 2009 Note, subject to a prepayment penalty equal
to 7.5% of the principal amount prepaid if the 2009 Note is prepaid prior to the
three year anniversary of its issuance, a prepayment penalty of 3.75% of the
principal amount prepaid if the 2009 Note is prepaid after such third
anniversary but prior to the fourth anniversary of its issuance and without
penalty if the 2009 Note is prepaid thereafter, plus cash in an amount equal to
the accrued and unpaid interest amount with respect to the principal amount
through and including the prepayment date. The Company is obligated
to offer to redeem all or a portion of the 2009 Note upon the occurrence of
certain triggering events described in the 2009 Note. Subject to
limited exceptions, the Purchaser may not assign the 2009 Note until the
earliest of (a) August 11, 2011, (b) the consummation of a change in control as
defined in the 2009 Note or (c) an event of default as defined in the 2009
Note. The Purchase Agreement also requires the 2009 Note to be
guaranteed by each of the Company’s existing and future subsidiaries, other than
AccessDM, Phase 1 DC and its subsidiaries and Phase 2 DC and its subsidiaries
and subsidiaries formed after August 11, 2009 which are primarily engaged in the
financing or deployment of digital cinema equipment (the "Guarantors"), and that
the Company and each Guarantor pledge substantially all of their assets to
secure payment on the 2009 Note, except that AccessDM and Phase 1 DC are not
required to become Guarantors until such time as certain indebtedness is paid
off. Accordingly, the Company and each of the Guarantors entered into
a guarantee and collateral agreement (the “Guarantee and Collateral Agreement”)
pursuant to which each Guarantor guaranteed the obligations of the Company under
the 2009 Note and the Company and each Guarantor pledged substantially all of
their assets to secure such obligations. The Company agreed to
register the resale of the shares of Class A Common Stock underlying the
Sageview Warrants (the
“Registration Rights Agreement”). The Purchase Agreement, Note
Purchase Agreement, 2009 Note, Warrants, Registration Rights Agreement and
Guarantee and Collateral Agreement contain representations, warranties,
covenants and events of default as are customary for transactions of this type
and nature. As of September 30, 2009, the net balance of the 2009
Note was $65.4 million.
39
In August
2009, in connection with the 2009 Private Placement, Phase 1 DC entered into a
fifth amendment (the “GE Fifth Amendment”) with respect to the GE
Credit Facility, whereby $5.0 million of the proceeds of the 2009 Private
Placement were used by the Company to purchase capital stock of AccessDM, which
in turn used such amount to purchase capital stock of Phase 1 DC, which in turn
used such amount to fund a prepayment with respect to the GE Credit Facility,
with such prepayment being applied ratably to each of the next 24 successive
regularly scheduled monthly amortization payments due under the GE Credit
Facility beginning in August 2009.
As of
September 30, 2009, we had cash and cash equivalents of $19.7 million and our
working capital, defined as current assets less current liabilities, was $5.9
million.
Operating
activities provided net cash of $15.2 million and $6.8 million for the six
months ended September 30, 2008 and 2009, respectively. The decrease
in cash provided by operating activities was primarily due decreased collections
of outstanding accounts receivable, increased payments for accounts payable and
accrued expenses and an increase in unbilled revenue coupled with greater
amounts of non-cash expenses, specifically the gain from extinguishment of debt,
offset by a decreased net loss and decreased deferred revenues. We
expect operating activities to continue to be a positive source of
cash.
Investing
activities used net cash of $16.5 million and $30.5 million for the six months
ended September 30, 2008 and 2009, respectively. The increase was due to the
purchase of available-for-sale investments related to the funds received from
the 2009 Note offset by reduced payments on Systems purchased in addition to an
increase in restricted cash of $6.9 million related to the fourth amendment with
respect to the GE Credit Facility. We expect investing activities to use less
cash than prior periods moving forward at least until additional Systems for the
Phase II Deployment are purchased and installed.
Financing
activities used net cash of $5.2 million for the six months ended September 30,
2008 and provided net cash of $17.1 million for the six months ended September
30, 2009. The increase in cash provided was due to the proceeds from
the 2009 Note and the proceeds from credit facilities for Systems for our Phase
II Deployment offset by the repayment of the 2007 Senior Notes, increased
principal repayments on the GE Credit Facility and debt issuance costs paid
resulting from the GE Fourth Amendment and the 2009 Note. Financing
activities are expected to continue using net cash, primarily for principal
repayments on the GE Credit Facility and other existing debt
facilities. Although we continue to seek new sources of financing and
to refinance existing obligations, the terms of any such financing have not yet
been determined.
The
Company expects future Phase II screen deployments to vary from the structure it
has used to deploy Phase II systems to date. One such structure will
entail the exhibitor purchasing the equipment, incurring any debt necessary, and
using the Company as an administrative agent to bill VPFs and oversee the
assets, in exchange for a fee, expressed as a percentage of VPFs and other
revenues.
We have
contractual obligations that include long-term debt consisting of notes payable,
credit facilities, non-cancelable long-term capital lease obligations for the
Pavilion Theatre and other various computer related equipment, non-cancelable
operating leases consisting of real estate leases and minimum guaranteed
obligations under theatre advertising agreements with exhibitors for displaying
cinema advertising.
40
The
following table summarizes our significant contractual obligations as of
September 30, 2009 ($ in thousands):
Payments
Due by Period
|
||||||||||||||||||||
Contractual
Obligations
|
Total
|
2010
|
2011
&
2012
|
2013
&
2014
|
Thereafter
|
|||||||||||||||
Long-term
recourse debt (1)
|
$ | 88,294 | $ | 177 | $ | 242 | $ | 87,875 | $ | — | ||||||||||
Long-term
non-recourse debt (2)
|
186,869 | 24,758 | 61,995 | 86,873 | 13,243 | |||||||||||||||
Capital
lease obligations
|
6,478 | 700 | 436 | 479 | 4,863 | |||||||||||||||
Debt-related
obligations, principal
|
281,641 | 25,635 | 62,673 | 175,227 | 18,106 | |||||||||||||||
Interest
(3)
|
86,786 | 21,610 | 37,127 | 21,572 | 6,477 | |||||||||||||||
Total
debt-related obligations
|
$ | 368,427 | $ | 47,245 | $ | 99,800 | $ | 196,799 | $ | 24,583 | ||||||||||
Operating
lease obligations (4)
|
$ | 7,627 | $ | 2,411 | $ | 2,589 | $ | 1,702 | $ | 925 | ||||||||||
Theatre
agreements (5)
|
19,072 | 3,809 | 5,053 | 4,377 | 5,833 | |||||||||||||||
Obligations
to be included in operating expenses
|
26,699 | 6,220 | 7,642 | 6,079 | 6,758 | |||||||||||||||
Purchase
obligations
|
191 | 191 | — | — | — | |||||||||||||||
Total
|
$ | 395,317 | $ | 53,656 | $ | 107,442 | $ | 202,878 | $ | 31,341 | ||||||||||
Total
non-recourse debt including interest
|
$ | 235,622 | $ | 39,826 | $ | 85,074 | $ | 95,163 | $ | 15,559 |
|
(1)
|
The
outstanding principal amount of $75.0 million for the 2009 Note is due
August 2014, but may be extended for one 12 month period at the discretion
of the Company to August 2015, if certain conditions set forth in the 2009
Note are satisfied. Includes the interest on the 2009 Note to
be accrued as an increase in the aggregate principal amount of the 2009
Note (“PIK Interest”).
|
|
(2)
|
Non-recourse
debt is generally defined as debt whereby the lenders’ sole recourse with
respect to defaults by the Company is limited to the value of
the asset collateralized by the debt. The Vendor Note and
the GE Credit Facility are not guaranteed by the Company or its other
subsidiaries, other than Phase 1 DC and the KBC Related Facility is not
guaranteed by the Company or its other subsidiaries, other than Phase 2
DC.
|
|
(3)
|
Includes
the first two years of interest of approximately $11.3 million on the 2009
Notes to be paid with the funding of a cash reserve established with
proceeds from the 2009 Private Placement and excludes the PIK Interest on
the 2009 Note to be accrued as an increase in the aggregate principal
amount of the 2009 Note.
|
|
(4)
|
Includes
operating lease agreements for the IDCs now operated and paid for by
FiberMedia, consisting of unrelated third parties, which total aggregates
to $5.3 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.
|
|
(5)
|
Represents
minimum guaranteed obligations under theatre advertising agreements with
exhibitors for displaying cinema
advertising.
|
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 2009 Note, 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 2009 Note and the Credit Agreement 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 are seeking to raise additional capital for
equipment requirements related to our Phase II Deployment or for working capital
as necessary. Although we recently entered into certain agreements with studio
and exhibitors related to the Phase II Deployment, there is no assurance that
financing of additional Systems for the Phase II Deployment will be completed as
contemplated or under terms acceptable to us or our existing stockholders.
Failure to generate additional revenues, raise additional capital 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. The
accompanying condensed consolidated financial statements do not reflect any
adjustments which may result from our inability to continue as a going
concern.
41
Seasonality
Revenues
derived from our Pavilion Theatre in our Other segment and our Phase I
Deployment and Phase II Deployment segment revenues derived from the collection
of VPFs from motion picture studios 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.
Related
Party Transactions
In August
2009, the Company hired Adam M. Mizel to be its Chief Financial Officer and
Chief Strategy Officer. Mr. Mizel has been a member of the Company’s Board
of Directors since March 2009 and is currently the Managing Principal of Aquifer
Capital Group, LLC and the General Partner of the Aquifer Opportunity Fund,
L.P., currently the Company’s largest shareholder.
Subsequent
Events
We have
evaluated events and transactions that occurred between September 30, 2009 and
November 13, 2009, which is the date the financial statements were issued, for
possible disclosure or recognition in the financial statements. We have
determined that there were no such events or transactions that warrant
disclosure or recognition in the financial statements except as noted
below.
In October 2009, in connection with the
Company’s Phase II Deployment, Phase 2 DC has received commitment letters from
GE Capital and Soc Gen for senior credit facilities totaling up to $100
million. The Company anticipates the closing of this new loan
facility, together with support from digital cinema equipment
vendors Christie Digital Systems USA, Inc. and Barco by December 31, 2009
with installations targeted to commence in early 2010. GE Capital’s
commitment covers the financing of up to about 1,600 Systems and Soc Gen’s
commitment covers the financing of up to an additional 533
Systems.
In
October 2009, in connection with the Company’s Phase II Deployment, Phase 2 DC
entered into digital cinema deployment agreements with two additional motion
picture studios for the distribution of digital movie releases to motion picture
exhibitors equipped with Systems, and providing for payment of VPFs to Phase 2
DC. Phase 2 DC now has digital cinema deployment agreements with
eight motion picture studios.
In
October 2009, the Company’s name change from Access Integrated Technologies,
Inc., to Cinedigm Digital Cinema Corp. and the increase in the number of shares
Class A Common Stock authorized for issuance from 65,0000,000 to 75,000,000
shares became effective.
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.
42
Item
4T. CONTROLS AND PROCEDURES
Our
management, with the participation of our principal executive officer and
principal financial officer, has evaluated the effectiveness of the Company’s
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)) as of the end of the period covered by this report. Based on
such evaluation, our principal executive officer and principal financial officer
have concluded that, as of the end of such period, the Company’s disclosure
controls and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act and are
effective in ensuring that information required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act is accumulated
and communicated to the Company’s management, including the Company’s principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
Our
subsidiary, 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 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. In July 2009, we entered into an agreement with
Landlord to settle this matter where we would be responsible for 25% of the cost
and expenses related to the installation of a sprinkler system. As an
additional condition of this agreement, any option to renew or extend this lease
has been eliminated. This lease ends on July 31, 2022.
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, 2009, except as set forth below, although we
may disclose changes to such factors or disclose additional factors from time to
time in our future filings with the SEC.
The acquisition restrictions
contained in our certificate of incorporation and our Tax Benefit Preservation
Plan, which are intended to help preserve our net operating losses, may not be
effective or may have unintended negative effects.
We have
experienced, and may continue to experience, substantial operating losses, and
under Section 382 of the Internal Revenue Code of 1986, as amended ("Section
382"), and rules promulgated by the Internal Revenue Service, we may "carry
forward" these net operating losses (“NOLs”) in certain circumstances to offset
any current and future earnings and thus reduce our federal income tax
liability, subject to certain requirements and restrictions. To the
extent that the NOLs do not otherwise become limited, we believe that we will be
able to carry forward a significant amount of the NOLs, and therefore these NOLs
could be a substantial asset to us. If, however, we experience a
Section 382 ownership change, our ability to use the NOLs will be substantially
limited, and the
43
timing of
the usage of the NOLs could be substantially delayed, which could therefore
significantly impair the value of that asset.
To reduce
the likelihood of an ownership change, we have established acquisition
restrictions in our certificate of incorporation and our board of directors (the
"Board") adopted a tax benefit preservation plan (the "Tax Benefit Preservation
Plan"). The Tax Benefit Preservation Plan is designed to protect shareholder
value by attempting to protect against a limitation on our ability to use our
existing NOLs. The acquisition restrictions in our certificate of incorporation
are also intended to restrict certain acquisitions of our common stock to help
preserve our ability to utilize our NOLs by avoiding the limitations imposed by
Section 382 and the related Treasury regulations. The acquisition
restrictions and the Tax Benefit Preservation Plan are generally designed to
restrict or deter direct and indirect acquisitions of our common stock if such
acquisition would result in a shareholder becoming a “5-percent shareholder” (as
defined by Section 382 and the related Treasury regulations) or increase
the percentage ownership of Cinedigm stock that is treated as owned by an
existing 5-percent shareholder.
Although
the acquisition restrictions and the Tax Benefit Preservation Plan are intended
to reduce the likelihood of an ownership change that could adversely affect us,
we can give no assurance that such restrictions would prevent all transfers that
could result in such an ownership change. In particular, we have been advised by
our counsel that, absent a court determination, there can be no assurance that
the acquisition restrictions will be enforceable against all of our
shareholders, and that they may be subject to challenge on equitable grounds. In
particular, it is possible that the acquisition restrictions may not be
enforceable against the shareholders who voted against or abstained from voting
on the restrictions at our 2009 annual meeting of stockholders.
Under
certain circumstances, our Board may determine it is in the best interest of the
Company to exempt certain 5-percent shareholders from the operation of the
acquisition restrictions or the Tax Benefit Preservation Plan, if a proposed
transaction is determined not to be detrimental to the Company’s utilization of
its NOLs.
The
acquisition restrictions and Tax Benefit Preservation Plan also require any
person attempting to become a holder of 5% or more of our common stock, as
determined under Section 382, to seek the approval of our Board. This may have
an unintended “anti-takeover” effect because our Board may be able to prevent
any future takeover. Similarly, any limits on the amount of stock that a
stockholder may own could have the effect of making it more difficult for
stockholders to replace current management. Additionally, because the
acquisition restrictions and the Tax Benefit Preservation Plan have the effect
of restricting a stockholder’s ability to dispose of or acquire our common
stock, the liquidity and market value of our Class A Common Stock might suffer.
The Tax Benefit Preservation Plan will remain in effect until the earlier of (a)
August 10, 2012, or (b) such other date as our Board in good faith
determines it is no longer in the best interests of Cinedigm and its
stockholders. The acquisition restrictions may be waived by our Board.
Stockholders are advised to monitor carefully their ownership of our common
stock and consult their own legal advisors and/or Cinedigm to determine whether
their ownership of our common stock approaches the proscribed
level.
The occurrence of various events may
adversely affect the ability of the Company to fully utilize
NOLs.
The
Company has a substantial amount of NOLs for U.S. federal income tax
purposes that are available both currently and in the future to offset taxable
income and gains. Events outside of our control may cause us to experience a
Section 382 ownership change, and limit our ability to fully utilize such
NOLs.
In
general, an ownership change occurs when, as of any testing date, the percentage
of stock of a corporation owned by one or more “5-percent shareholders,” as
defined in the Section 382 and the related Treasury regulations, has increased
by more than 50 percentage points over the lowest percentage of stock of
the corporation owned by such shareholders at any time during the three-year
period preceding such date. In general, persons who own 5% or more of a
corporation’s stock are 5-percent shareholders, and all other persons who own
less than 5% of a corporation’s stock are treated, together, as a single, public
group 5-percent shareholder, regardless of whether they own an aggregate of 5%
or more of a corporation’s stock. If a corporation experiences an ownership
change, it is generally subject to an annual limitation, which limits its
ability to use its NOLs to an amount equal to the equity value of the
corporation multiplied by the federal long-term tax-exempt rate.
If we
were to experience an ownership change, we could potentially have, in the
future, higher U.S. federal income tax liabilities than we would otherwise
have had and it may also result in certain other adverse consequences to us.
Therefore, we have adopted the Tax Benefit Preservation Plan and the acquisition
restrictions set forth in Article Fourth of our certificate of
incorporation in order to reduce the likelihood that we will experience
an
44
ownership
change under Section 382. There can be no assurance, however, that these
efforts will deter or prevent the occurrence of an ownership change and the
adverse consequences that may arise therefrom, as described above under “The
acquisition restrictions contained in our certificate of incorporation and our
Tax Benefit Preservation Plan, which are intended to help preserve our net
operating losses, may not be effective or may have unintended negative
effects.”
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
Our
Annual Meeting of stockholders was held on September 30, 2009. Proxies for the
meeting were solicited pursuant to Regulation 14A under the Exchange
Act. There was no solicitation of proxies in opposition to
management’s nominees as listed in the proxy statement and all of management’s
nominees were elected to our Board of Directors. Details of the
voting are provided below:
Proposal
1:
To elect
nine (9) members of the Company’s Board of Directors to serve until the 2010
Annual Meeting of Stockholders (or until successors are elected or directors
resign or are removed).
Votes
For
|
Votes
Withheld |
||
A.
Dale Mayo
|
21,256,163
|
584,635
|
|
Gary
S. Loffredo
|
21,114,092
|
726,706
|
|
Wayne
L. Clevenger
|
21,031,034
|
809,764
|
|
Gerald
C. Crotty
|
21,268,160
|
572,638
|
|
Robert
Davidoff
|
19,134,977
|
2,705,821
|
|
Matthew
W. Finlay
|
21,112,060
|
728,738
|
|
Edward
A. Gilhuly
|
21,738,324
|
102,474
|
|
Adam
M. Mizel
|
21,264,680
|
576,118
|
|
Robert
E. Mulholland
|
21,268,060
|
572,738
|
Proposal
2:
To
change the name of the Company from
“Access
Integrated Technologies, Inc.” to “Cinedigm Digital
Cinema Corp.”
|
Votes
For
21,817,051
|
Votes
Against
10,000
|
Abstentions
13,747
|
Broker
Non-Vote
0
|
Proposal
3:
To
amend the Company’s Second Amended and
Restated
2000 Equity Incentive Plan to increase
the
total
number of shares of Class A Common
Stock
available for issuance thereunder from
3,700,000
to 5,000,000.
|
Votes
For
21,251,682
|
Votes
Against
588,866
|
Abstentions
250
|
Broker
Non-Vote
0
|
Proposal
4:
To
ratify the appointment of Eisner LLP as our independent auditors for the
fiscal year ending
March
31, 2010.
|
Votes
For
21,809,321
|
Votes
Against
6,905
|
Abstentions
24,572
|
Broker
Non-Vote
0
|
45
Proposal
5:
To
(i) eliminate the Exercise Restriction in the Warrants and (ii) grant the
right of Sageview Capital to nominate a second director to the
Board.
|
Votes
For
19,642,806
|
Votes
Against
2,196,557
|
Abstentions
1,435
|
Broker
Non-Vote
0
|
Proposal
6:
To
eliminate the Exercise Price Floor in the Warrants.
|
Votes
For
19,592,548
|
Votes
Against
2,204,207
|
Abstentions
44,043
|
Broker
Non-Vote
0
|
Proposal
7:
To
amend the Company’s Certificate of Incorporation to effect a reverse stock
split and to reduce the number of authorized shares of the Company’s
Common Stock, subject to the
Board’s
discretion.
|
Votes
For
21,116,855
|
Votes
Against
721,386
|
Abstentions
2,557
|
Broker
Non-Vote
0
|
Proposal
8:
To
amend the Company’s Certificate of Incorporation to reclassify our Common
Stock
and
add transfer restrictions to preserve the value of our tax net operating
losses.
|
Votes
For
20,748,097
|
Votes
Against
1,089,703
|
Abstentions
2,998
|
Broker
Non-Vote
0
|
Proposal
9:
To
amend the Company’s Certificate of Incorporation to increase the number of
shares of Common Stock authorized for issuance and to designate the
additional shares as Class A Common Stock.
|
Votes
For
21,531,174
|
Votes
Against
273,896
|
Abstentions
35,728
|
Broker
Non-Vote
0
|
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
The
exhibits are listed in the Exhibit Index on page 48 herein.
46
SIGNATURES
In
accordance with the requirements of section 13 or 15(d) 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.
CINEDIGM
DIGITAL CINEMA CORP.
(Registrant)
Date:
|
November 13, 2009 |
By:
|
/s/ A. Dale Mayo | |
A.
Dale Mayo
President
and Chief Executive Officer and Director
(Principal
Executive Officer)
|
||||
Date:
|
November 13, 2009 |
By:
|
/s/ Adam M. Mizel | |
Adam
M. Mizel
Chief
Financial Officer and Chief Strategy Officer and Director
(Principal
Financial Officer)
|
||||
Date:
|
November 13, 2009 |
By:
|
/s/ Brian D. Pflug | |
Brian
D. Pflug
Senior
Vice President – Accounting & Finance
(Principal
Accounting Officer)
|
47
EXHIBIT
INDEX
Exhibit
Number |
Description of Document
|
|
2.1 |
Amendment
and Waiver, dated as of November 4, 2009, to Securities Purchase Agreement
by and among the Company, the Subsidiary Note Parties party thereto and
Sageview Capital Master, L.P., as Collateral Agent.
|
|
3.1 |
Fourth
Amended and Restated Certificate of Incorporation, as
amended.
|
|
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.
|
|
31.3
|
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.
|
|
32.3
|
Certification
of Chief Accounting Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
48