UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2003
()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
Access Integrated Technologies, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
22-3720962
(I.R.S. Employer Identification No.)
55 Madison Avenue, Suite 300, Morristown New Jersey 07960
(Address of principal executive offices)
(973-290-0080)
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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. X Yes ___No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. ___ Yes ___ No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common
equity, as of the latest practicable date:
6,573,253 shares of Class A Common Stock, $.001 par value, and 1,005,811
shares of Class B Common Stock, $.001 par value, were
outstanding on February 12, 2004
Transitional Small Business Disclosure Format (check one): Yes__ No X
ACCESS INTEGRATED TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-QSB
CONTENTS
PART I -- FINANCIAL INFORMATION
Page
Item 1. Financial Statements.
Consolidated Balance Sheet at December 31, 2003 (unaudited) 3
Consolidated Statements of Operations for the three
months ended December 31, 2003 and 2002 (unaudited) 4
Consolidated Statements of Operations for the nine
months ended December 31, 2003 and 2002 (unaudited) 5
Consolidated Statement of Stockholders' Equity for
the nine months ended December 31, 2003 (unaudited) 6
Consolidated Statements of Cash Flows for the nine
months ended December 31, 2003 and 2002 (unaudited) 7
Notes to Consolidated Financial Statements(unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Controls and Procedures 26
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 26
Item 5. Other Information. 26
Item 6. Exhibits and Reports on Form 8-K. 26
Signatures 27
Exhibit Index 28
2
Access Integrated Technologies, Inc. and Subsidiaries
Consolidated Balance Sheet
(in thousands except share data)
(Unaudited)
December 31,
2003
-------------
Assets
Current assets
Cash and cash equivalents $ 2,417
Accounts receivable 792
Prepaids and other current assets 559
Unbilled revenue 142
-------------
Total current assets 3,910
Property and equipment, net 4,351
Goodwill 3,655
Intangible assets, net 3,721
Capitalized software costs, net 1,378
Deferred costs 122
Unbilled revenue 476
Security deposits 469
-------------
Total assets $ 18,082
=============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses $ 856
Current portion of notes payable 923
Current portion of security deposits payable 38
Current portion of capital leases 101
Deferred revenue 839
-------------
Total current liabilities 2,757
Notes payable, net of current portion 4,877
Customer security deposits 121
Deferred revenue, net of current portion 273
Capital leases, net of current portion 54
Deferred rent expense 834
Minority interest in subsidiary 29
-------------
Total liabilities 8,945
-------------
Commitments and contingencies
Stockholders' equity
Class A common stock, $0.001 par value per share; 40,000,000 shares
authorized; 6
6,473,253 shares issued and outstanding
Class B common stock, $0.001 par value per share; 15,000,000 shares
authorized; 1
1,005,811 shares issued and outstanding
Additional paid-in capital 21,358
Deferred stock-based compensation (1)
Accumulated deficit (12,227)
--------------
Total stockholders' equity 9,137
==============
Total liabilities and stockholders' equity $ 18,082
==============
See accompanying notes to consolidated financial statements.
3
Access Integrated Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended
December 31, December 31,
2003 2002
------------- -------------
Revenues
Software and services $ 722 $ 62
Datacenters 1,321 951
----------- -------------
Total revenues 2,043 1,013
Costs of revenues (exclusive of depreciation
and amortization shown below)
Software and services 83 29
Datacenters 811 814
-------------- -------------
Total costs of revenues 894 843
Gross profit 1,149 170
Operating expenses
Selling, general and administrative
(excludes non-cash stock- 914 590
based compensation of $56 in 2002)
Research and development 8 -
Non-cash stock-based compensation - 56
Depreciation and amortization 676 407
-------------- -------------
Total operating expenses 1,598 1,053
-------------- -------------
Loss from operations (449) (883)
Interest expense (143) (100)
Non-cash interest expense (111) (80)
Other income/(expense), net 4 6
-------------- -------------
Net loss before income taxes (699) (1,057)
Income tax benefit 127 185
-------------- -------------
Net loss (572) (872)
Accretion related to redeemable convertible
preferred stock (1,125) (28)
Accretion of preferred dividends (40) (60)
-------------- -------------
Net loss available to common stockholders $ (1,737) $ (960)
============== =============
Net loss available to common stockholders
per common share
Basic and diluted $ (0.30) $ (0.32)
============== =============
Weighted average number of common shares
outstanding
Basic and diluted 5,725,153 3,013,307
============== =============
See accompanying notes to consolidated financial statements.
4
Access Integrated Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
Nine Months Ended
December 31, December 31,
2003 2002
------------- -------------
Revenues
Software and services $ 897 $ 171
Datacenters 3,975 2,603
------------ -------------
Total revenues 4,872 2,774
Costs of revenues (exclusive of depreciation
and amortization shown below)
Software and services 151 97
Datacenters 2,492 2,170
------------- -------------
Total costs of revenues 2,643 2,267
Gross profit 2,229 507
Operating expenses
Selling, general and administrative
(excludes non-cash stock- 2,076 1,708
based compensation of $10 in 2003
and $90 in 2002)
Research and development 8 -
Non-cash stock-based compensation 10 90
Depreciation and amortization 1,915 1,003
------------ -------------
Total operating expenses 4,009 2,801
Loss from operations (1,780) (2,294)
Interest expense (389) (253)
Non-cash interest expense (302) (204)
Other income/(expense), net 11 13
------------ -------------
Net loss before income taxes (2,460) (2,738)
Income tax benefit 127 185
------------ -------------
Net loss (2,333) (2,553)
Accretion related to redeemable convertible
preferred stock (1,590) (305)
Accretion of preferred dividends (220) (140)
------------ -------------
Net loss available to common stockholders $ (4,143) $ (2,998)
============ =============
Net loss available to common stockholders
per common share
Basic and diluted $ (1.05) $ (1.00)
============ =============
Weighted average number of common shares
outstanding
Basic and diluted 3,954,827 3,011,685
============ =============
See accompanying notes to consolidated financial statements.
5
Access Integrated Technologies, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
(In thousands, except share data)
(Unaudited)
Deferred
Class A Class B Additional Stock- Total
Common Stock Common Stock Paid-in Based Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Deficit Equity
Balances as of March 31, 2003 2,015,770 $ 2 1,005,811 $ 1 $ 11,530 $ (11) $ (9,894) $ 1,628
Issuance of common stock for cash 1,380,000 1 6,899 6,900
Common stock issuance costs (2,520) (2,520)
Issuance of warrant to purchase
common stock 385 385
Issuance of common stock in exchange 2,207,976 2 4,498 4,500
for preferred stock and contingent
warrants
Issuance of common stock for
the purchase of Hollywood 400,000 1,380 1,380
Software, Inc.
Issuance of common stock for goods 8,700 -
and services
Issuance of warrants to purchase 615 615
common stock (attached to notes
payable)
Exercise of warrants to purchase 460,807 1 22 23
common stock (attached to notes
payable)
Amortization of stock-based compensation 10 10
Accretion of preferred stock to redemption (1,590) (1,590)
amount
Gain on sale of stock by subsidiary 139 139
Net loss (2,333) (2,333)
---------- ------ --------- ------- ---------- ------------ ----------- ------------
Balances as of December 31, 2003 6,473,253 $ 6 1,005,811 $ 1 $ 21,358 $ (1) $ (12,227) $ 9,137
========== ====== ========= ======= ========== ============ =========== =============
See accompanying notes to consolidated financial statements.
6
Access Integrated Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands, except share and per share data)
(Unaudited)
Nine Months Ended
December 31, December 31,
2003 2002
------------- -------------
Cash flows from operating activities
Net loss $ (2,333) $ (2,553)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 1,915 1,003
Amortization of software development costs 43 -
Non-cash stock-based compensation 10 90
Non-cash interest expense 302 204
Minority interest (6) -
Changes in operating assets and liabilities
Accounts receivable (566) 23
Prepaids and other current assets (259) (141)
Other assets (91) (245)
Accounts payable and accrued expenses (125) (13)
Deferred revenue 323 326
Other liabilities 188 192
------------- -------------
Net cash used in operating activities (599) (1,114)
Cash flows from investing activities
Settlement of Tower Obligation - (750)
Decrease in restricted cash - 951
Acquisition of data centers - (2,258)
Acquisition of Hollywood Software,
net of cash acquired (2,354) -
Purchase of intangible assets (110) -
Purchases of property and equipment (136) (266)
------------- -------------
Net cash used in investing activities (2,600) (2,323)
Cash flows from financing activities
Net proceeds from issuance of common stock 4,788 125
Net proceeds from issuance of preferred stock - 2,425
Net proceeds from issuance of notes payable
and warrants 1,230 1,360
Repayment of notes payable (1,000) (333)
Principal payments on capital leases (358) (98)
------------- -------------
Net cash provided by financing activities 4,660 3,479
Net increase in cash and cash equivalents 1,461 42
Cash and cash equivalents at beginning of period 956 1,001
------------- -------------
Cash and cash equivalents at end of period $ 2,417 $ 1,043
============= =============
See accompanying notes to consolidated financial statements.
7
ACCESS INTEGRATED TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(unaudited)
1. Nature of Operations and Basis of Presentation
Nature of Operations
Access Integrated Technologies, Inc. ("AccessIT"), was incorporated in Delaware
in March 2000. Access Digital Media Inc. ("AccessDM" or "Access Digital"), an
80% owned subsidiary of AccessIT, was incorporated in Delaware in February 2003.
Hollywood Software, Inc. ("HS") was incorporated in California in October 1997,
and was acquired by AccessIT on November 3, 2003 (see Note 3). AccessIT, Access
Digital and HS are referred to herein collectively as the "Company". The Company
designs, builds, and operates a national platform of carrier-diverse Internet
Data Centers ("IDCs") in which the Company's customers have access to: secure,
flexible space for installing network and server equipment; multiple fiber
providers for connecting to the Internet and/or other carrier networks; and a
broad range of value-added data center services including the Company's
AccessStorage-on-Demand managed storage service solutions. The Company's IDCs,
called AccessColocenters, are designed to serve a variety of customers,
including traditional voice/data competitive local exchange carriers, other
integrated communication providers, Internet Service Providers, Application
Service Providers, Streaming and Content Delivery Service Providers, storage
outsourcers, and small and medium sized enterprises. The Company currently
operates nine IDC's located in eight states: Arkansas, Kansas, Maine, New
Hampshire, New Jersey, New York, Texas and Virginia. AccessDM was formed to
utilize AccessIT's existing infrastructure to store and distribute digital
content to movie theaters and other remote venues. HS is a leading provider of
proprietary enterprise software and consulting services for distributors and
exhibitors of filmed entertainment in the United States and Canada. HS's
software manages the planning, booking scheduling, revenue sharing, cash flow
and reporting associated with the distribution and exhibition of theatrical
films.
Basis of Presentation
The accompanying unaudited consolidated interim financial information has been
prepared by the Company. The unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information and in accordance
with Regulation S-B. Accordingly, they do not include all of the financial
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included.
During the year ended March 31, 2003 and the nine months ended December 31,
2003, the Company has been financed primarily through equity and debt financing,
most recently the completion of its initial public offering in November 2003
that generated net cash receipts of $1,074. However, the Company has incurred
substantial losses and negative cash flows from operations since inception.
During the year ended March 31, 2003 and the nine months ended December 31,
2003, the Company incurred losses of $3,404 and $2,333 respectively, and
negative cash flows from operating activities of $760 and $599, respectively. In
addition, the Company has an accumulated deficit of $12,227 as of December 31,
2003. Furthermore, the Company has debt service requirements of $2,500 for the
twelve months beginning in March 2004, of which $1,900 of principal and interest
payments are due by December 31, 2004. Management expects that the Company will
continue to generate operating losses and negative cash flows for the
foreseeable future due to the continued efforts related to the identification of
acquisition targets, marketing and promotional activities and the development of
relationships with other businesses. Certain of these costs could be reduced if
working capital decreased. Based on the Company's cash position at December 31,
2003 and expected cash flows from operations, management believes that the
Company has the ability to meet its obligations for the foreseeable future. The
Company may attempt to raise additional capital from various sources for future
acquisitions or for working capital as necessary. There is no assurance that
such financing will be completed as contemplated or under terms acceptable to
the Company or its existing shareholders. Failure to generate additional
revenues, raise additional capital or manage discretionary spending could have a
material adverse effect on the Company's ability to continue as a going concern
and to achieve its intended business objectives.
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
The results of operations for the respective interim periods are not necessarily
indicative of the results to be expected for the full year. The accompanying
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and the notes thereto included in
AccessIT's registration statement on Form SB-2, as amended, for the year ended
March 31, 2003 filed with the Securities and Exchange Commission.
8
Segment Information
Segment information has been prepared in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The Company has two reportable segments:
datacenter operations and software operations. The segments were determined
based on products and services provided by each segment. Accounting policies of
the segments are the same as those described in Note 2. Performance of the
segments is evaluated on operating income before interest, taxes, depreciation
and amortization. The datacenters segment provides services through its nine
IDC's including the license of data center space, provision of power, data
connections to other businesses, and the installation of equipment. The software
segment consists of HS, which was acquired on November 3, 2003, and AccessDM. HS
develops and licenses software to the theatrical distribution and exhibition
industries, provides services as an Application Service Provider ("ASP"), and
provides software enhancements and consulting services. AccessDM was formed to
store and distribute digital content to movie theaters and other venues. Prior
to November 3, 2003, the Company operated only in the datacenters segment. All
of the Company's revenues were generated inside the United States.
Selected segment data:
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenue:
Software......................$ 637 $ - $ 637 $ -
Datacenters....................1,406 1,013 4,235 2,774
------ ------ ------ ------
Total.........................$2,043 $1,013 $4,872 $2,774
====== ====== ====== ======
Three Months Ended Nine Months Ended
December 31, December 31,
2003 2002 2003 2002
---- ----- ---- ----
Operating income before interest, taxes, depreciation and amortization:
Software......................$ 395 $ - $ 395 $ -
Datacenters................... (168) (476) (260) (1,291)
----- ------- ------ -------
Total.........................$ 227 $ (476) $ 135 $(1,291)
===== ======= ====== ========
There were no intersegment revenues or expenses during the three and nine months
ended December 31, 2003.
Assets: December 31, 2003
Software..............................$ 8,673
Datacenters........................... 9,409
-------
Total..................................$18,082
=======
2. Summary of Significant Accounting Policies
Principles of Consolidation
The unaudited consolidated financial statements include the accounts of
AccessIT, HS and AccessIT's 80% owned subsidiary, AccessDM. All intercompany
transactions and balances have been eliminated.
Software Revenue Recognition
Software revenues are accounted for in accordance with Statement of Position
97-2, "Software Revenue Recognition," ("SOP 97-2"). The Company's software
revenues are generated from the following primary sources: i) software
licensing, including customer licenses and ASP agreements, ii) software
maintenance contracts, and iii) professional consulting services, which includes
systems implementation, training, custom software development services and other
professional services.
Software licensing revenue is recognized when the following criteria are met: a)
persuasive evidence of an arrangement exists, b) delivery has occurred and no
significant obligations remain, c) the fee is fixed or determinable and d)
collection is determined to be probable. Significant upfront fees are received
in addition to periodic amounts upon achievement of contractual milestones for
licensing of our products. Such amounts are deferred until the revenue
recognition criteria has been met, which typically occurs after delivery and
acceptance.
For arrangements with multiple elements (e.g. delivered and undelivered
products, maintenance and other services), we separately negotiate each element
of the arrangement based on the fair value of the elements. The fair values for
ongoing maintenance and support obligations are based upon separate sales of
renewals to customers or upon substantive renewal rates quoted in the
agreements. The fair values for services, such as training or consulting, are
based upon hourly billing rates of these services when sold separately to other
9
customers. In instances where we are not able to determine fair value of each
element and the services are essential to the functionality of the software, we
follow percentage-of-completion accounting to recognize revenue.
Customers not wishing to license and operate the our software themselves may use
the software through an ASP arrangement, in which the we host the application
and provide customer access via the internet. Annual minimum ASP service fees
are recognized ratably over the contract term. Overage revenues for usage in
excess of stated minimums are recognized monthly.
Maintenance services and website subscription fees are recognized ratably over
the contract term. Professional consulting services, sales of third party
products and resale hardware revenues are recognized as services are provided.
Software development revenues are recognized when delivery has occurred and no
significant obligations remain.
Deferred revenue is recorded in cases of i) a portion or the entire contract
amount cannot be recognized as revenue due to non-delivery or acceptance of
licensed software or custom programming, ii) incomplete implementation of ASP
service arrangements, or iii) 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 in the Consolidated Balance Sheet and
are recognized as revenue in accordance with our revenue recognition policies
described above.
Net Loss per Share Available to Common Stockholders
Computations of basic and diluted net loss per share of common stock have been
made in accordance with SFAS No. 128, "Earnings Per Share". Basic net loss per
share is computed by dividing net loss available to common stockholders (the
numerator) by the weighted average number of common shares outstanding (the
denominator) during the period. Shares issued during the period are weighted for
the portion of the period that they are outstanding. The computation of diluted
net loss per share is similar to the computation of basic net loss per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued. The Company has incurred a net loss for the three and
nine months ending December 31, 2003 and 2002; therefore, the impact of dilutive
potential common shares has been excluded from the computation, as it would be
anti-dilutive.
The following outstanding stock options and warrants (prior to the application
of the treasury stock method), and mandatorily redeemable convertible preferred
stock (on an as-converted basis) were excluded from the computation of diluted
net loss per share:
December 31, December 31,
2003 2002
------------ ------------
Stock options.................................. 498,897 310,957
1-Year Notes Warrants.......................... -- 25,305
5-Year Notes Warrants.......................... -- 312,500
2001 Warrants.................................. -- 430,205
Contingent Warrants A-C........................ -- 680,092
Mandatorily redeemable convertible preferred stock -- 3,226,538
Issuances of Stock by Subsidiaries
Sales of stock by a subsidiary are accounted for in accordance with Staff
Accounting Bulletin No. 51, topic 5H, "Accounting for Sales of Stock of a
Subsidiary." At the time a subsidiary sells its stock to unrelated parties at a
price different from the Company's book value per share, the Company's share of
the subsidiary's net equity changes. If, at that time, the subsidiary is not a
newly-formed, non-operating entity, nor a research and development, start-up or
development stage company, nor is there question as to the subsidiary's ability
to continue in existence, the Company records the change in its share of the
subsidiary's net equity as a gain or loss in its Consolidated Statement of
Operations. Otherwise, the increase is reflected in "subsidiaries' equity
transactions" in the Company's Consolidated Statements of Shareholders' Equity.
10
Stock-Based Compensation
The Company accounts for its stock based employee compensation plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation is recorded on the date of grant only if the current fair
value of the underlying stock exceeds the exercise price. The Company has
adopted the disclosure standards of SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosures," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation," which requires the Company to provide
pro forma net loss and earnings per share disclosures for employee stock option
grants as if the fair-value-based method of accounting for stock options as
defined in SFAS No. 123 had been applied. The following table illustrates the
effect on net loss if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock based employee compensation for the three
and nine months ended December 31, 2003 and 2002:
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss as reported........ $(572) $(872) $(2,333) $(2,553)
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method, net of related
income tax benefits......... (108) (132) (341) (384)
------- --------- -------- --------
Pro forma net loss.......... $ (680) $(1,004) $(2,674) $(2,937)
======= ========= ======== ========
Basic and diluted net loss available to
common stockholders per share:
As reported................. $ (0.30) $ (0.32) $ (1.05) $ (1.00)
Pro forma................... $ (0.32) $ (0.36) $ (1.13) $ (1.12)
3. Significant Agreements and Transactions
Access Digital Media, Inc.
In March 2003, the Company engaged The Casey Group to help develop software
designed to enable the delivery of digital content. This software will be
utilized by AccessDM in its planned operations. As compensation for assisting
the Company in the development of the software, the cost of which was agreed to
be $174, the Company issued to The Casey Group 750,000 shares of AccessDM's
common stock in September 2003 and 8,700 shares of AccessIT's Class A Common
Stock in November 2003. The shares of AccessDM's common stock issued to The
Casey Group represent 20% of AccessDM's outstanding capital stock after giving
effect to such issuance. The cost of the software has been recorded in property
and equipment, net in the unaudited Consolidated Balance Sheet and is being
amortized over its expected useful life, which is estimated to be three years.
As a result of this transaction, the Company recorded a minority interest of $35
and a gain on the sale of stock by its subsidiary of $139, which has been
recorded in additional paid-in capital in the unaudited Consolidated Statement
of Stockholders' Equity. For the three months ended December 31, 2003 the
Company reduced minority interest by $6, representing the Casey Group's share of
AccessDM's net loss.
Hollywood Software
On November 3, 2003, the Company completed the acquisition of all of the capital
stock of HS, after amending the agreement it had entered into on July 17, 2003.
To complete the acquisition of HS, the Company issued secured promissory notes
to the two holders of all of the capital stock of HS, each in the principal
amount of $3,625 (the "Notes"). The amount of the Notes represented the original
purchase price of $7,300 (based on the initial public offering ("IPO") price
less the underwriter's discount), less $50 that had already been paid by the
Company. The Notes were due no later than five business days after the date that
the Company's registration statement was declared effective by the Securities
and Exchange Commission. On November 14, 2003, four business days after the
registration statement was declared effective, the Notes were exchanged for
$2,450 in cash, promissory notes in the aggregate principal amount of $3,000 and
400,000 shares of Class A Common Stock. For purchase accounting purposes, the
initial purchase price is $7,071, consisting of $2,691 of cash (including $191
of expenses); $1,380 of the Company's Class A Common Stock (400,000 shares
valued at $3.45 per share); and $3,000 of promissory notes. In addition, a
contingent purchase price is payable each year for the three years following the
closing if certain earnings targets are achieved. The Company has also agreed to
a one-time issuance of additional shares to the sellers in accordance with a
formula if the Company's Class A Common Stock declines in trading value beyond
$3.60 per share during the 90 day period at the end of the lock-up period. The
results of operations of HS have been included in the Company's financial
statements since the acquisition date.
Based on an initial valuation from an independent appraiser, the restricted
stock issued in the HS acquisition was estimated to have a fair value of $3.45
per share.
11
The total purchase price of $7,071, including fees and expenses of the
acquisition, has been allocated to the net assets acquired, including tangible
and intangible assets, and liabilities assumed, based upon preliminary results
of an independent appraisal of fair value, with the excess purchase price being
allocated to goodwill. The preliminary allocation of the purchase price may be
subject to further adjustment as the Company finalizes its allocation of the
purchase price in accordance with accounting principles generally accepted in
the United States of America. The preliminary estimate of fair value of the
tangible and intangible assets acquired and liabilities assumed has been
reflected in the Consolidated Balance Sheet as follows:
Tangible and intangible assets acquired:
Current assets............................................ $535
Property and equipment, net............................... 26
Capitalized software cost, net............................ 1,350
Intangible assets......................................... 2,170
Goodwill.................................................. 3,655
-----
Total tangible and intangible assets acquired............. 7,736
Less liabilities assumed:
Current liabilities....................................... 665
-----
Total liabilities assumed................................. 665
Total purchase price......................................$7,071
=====
The intangible assets consist of customer relationships, non-compete agreements
and corporate trade name. These assets are to be amortized over their estimated
useful lives of 3, 5 and 10 years, respectively.
4. Notes Payable
In April 2002, the Company repaid the remaining 1-year 8% subordinated
promissory notes (the "1-Year Notes") totaling $333, that were outstanding as of
March 31, 2002.
In February 2002, the Company commenced an offering of 5-year 8% subordinated
promissory notes (the "5-Year Notes") with detachable warrants. During the nine
months ended December 31, 2003 and 2002, the Company raised an aggregate of
$1,230 and $1,360, respectively, from the issuance of 5-Year Notes to several
investors. As of December 31, 2003, $4,405 of these notes payable were
outstanding, of which $375 was outstanding to two of the Company's founders. The
5-Year Notes were issued primarily to repay prior issuances of the 1-Year Notes
and to fund the Company's working capital needs. The 5-Year Notes bear interest
at 8% per annum with repayment terms as follows: i) for a period of two years
after the issuance date, interest-only payments are to be paid quarterly in
arrears and ii) for the remaining three years until the final maturity date, the
Company shall pay a) quarterly payments of principal in equal installments and
b) quarterly payments of interest on the remaining unpaid principal amount of
the 5-Year Notes. The Company may prepay the 5-Year Notes at any time. Principal
repayments of the 5-Year Notes begin in March 2004. As of December 31, 2003,
there have not been any principal repayments of the 5-year Notes.
Concurrent with the issuance of the 5-Year Notes, the Company issued 5-Year
Notes warrants to purchase a total of 440,500 shares of Class A Common Stock
(see Note 6), of which warrants to purchase 123,000 and 136,000 shares of Class
A Common Stock were issued during the nine months ended December 31, 2003 and
2002, respectively.
On November 26, 2003, the Company repaid certain notes payable incurred as part
of the acquisition of six data centers in November 2002. The amount repaid of
$1,009 represents the principal of $1,000, interest of $22, less agreed upon
deductions of $13 for certain expense reimbursements.
5. Mandatorily Redeemable Convertible Preferred Stock
On October 8, 2001, the Company authorized the issuance of 3,226,538 shares of
the Series A Preferred Stock at approximately $0.62 per share, resulting in
gross proceeds of $2,000, before considering expenses of $203. Concurrent with
this issuance, the Company issued warrants to purchase up to 430,205 shares of
Class A Common Stock (the "2001 Warrant"). On November 27, 2002, the Company
authorized the issuance of 4,976,391 shares of the Series B Preferred Stock to
the existing Series A Preferred Stock holder at approximately $0.50 per share,
resulting in gross proceeds of $2,500, before considering expenses of $125.
Concurrent with this issuance, the Company issued 381,909, 144,663 and 100,401
warrants to purchase Class A Common Stock ("Contingent Warrant A", "Contingent
Warrant B" and "Contingent Warrant C", respectively). The issuance of the Series
A Preferred Stock resulted in a beneficial conversion feature of $1,078,
calculated in accordance with EITF Issue No. 00-27, "Application of Issue No.
98-5 to Certain Convertible Instruments." The beneficial conversion feature is
reflected as an issuance cost and therefore has been reflected as a charge
against the Series A Preferred Stock and an increase to additional paid-in
capital.
The carrying value of the Company's Series A Preferred Stock is below its
liquidation value, as the Company incurred aggregate costs of $2,000 related to
the issuance of the preferred stock, of which $203 represents cash payments,
$719 represents the estimated fair value of the 2001 Warrants issued as
consideration for the issuance of the Company's Series A Preferred Stock and
$1,078 is the beneficial conversion feature. The Company's carrying value of the
Series B Preferred Stock is below its liquidation value, as the Company incurred
aggregate costs of $468 related to the issuance of the preferred stock, of which
$125 represents cash payments, and $343 represents the estimated fair value of
Contingent Warrant A and Contingent Warrant B, issued as consideration for the
issuance of the Company's Series B Preferred Stock.
12
The Series A Preferred Stock and Series B Preferred Stock is redeemable at the
election of each of the holders of the then-outstanding shares of Series A
Preferred Stock and Series B Preferred Stock at any time on or after the fifth
anniversary of the original issuance date of the Series A Preferred Stock if
certain liquidity events shall not have occurred by then, at a redemption price
equal to the greater of the (i) Company's gross revenue from all sources or (ii)
five times the Corporation's combined earnings from its data center operations,
before deduction for certain defined expenses, for the twelve months immediately
preceding the month of exercise of the redemption rights, in each case divided
by the number of fully-diluted, as converted shares of common stock outstanding.
The Company has the option of first redeeming only 25% of the redeemed Series A
Preferred Stock and Series B Preferred Stock, with the remainder then to be
redeemed in 3 annual installments. However, in the event that the Company
completes a qualifying underwritten public offering of its common stock, the
Company can terminate the Series A and Series B Preferred Stock redemption
rights and instead issue new warrants with an exercise price of $0.01 equal to
10% of the number of shares of common stock into which the Series A and Series B
Preferred Stock may be converted, respectively. Total accretion for the Series A
Preferred Stock to its estimated redemption value was $657 and $28 during the
three months ended December 31, 2003 and 2002, respectively, of which $633 and
($26) related to the accretion to the estimated redemption amount, respectively,
and $24 and $54 related to the accretion of the beneficial conversion feature,
respectively. Total accretion for the Series A Preferred Stock to its estimated
redemption value was $1,121 and $305 during the nine months ended December 31,
2003 and 2002, respectively, of which $990 and $142 related to the accretion to
the estimated redemption amount, respectively, and $131 and $163 related to the
accretion of the beneficial conversion feature, respectively. Accretion for the
Series B Preferred Stock to its redemption value was $468 for the three and nine
months ended December 31, 2003. There was no accretion recorded for the Series B
Preferred Stock for the three and nine months ended December 31, 2002, as the
estimated redemption amount was below the original carrying amount of the Series
B Preferred Stock.
In September 2003, the Company entered into an agreement (the "Exchange
Agreement") with the holder of the Series A and Series B Preferred Stock to (1)
convert all 8,202,929 shares of Series A and Series B Preferred Stock held by it
into 1,640,585 shares of Class A Common Stock: (2) exchange the 2001 Warrant,
Contingent Warrant A and Contingent Warrant C for 320,000 shares of Class A
Common Stock; (3) exercise Contingent Warrant B to purchase 143,216 shares of
Class A Common Stock on a cashless-exercise basis; and (4) accept shares of
Class A Common Stock at the IPO price of $5.00 as consideration for the
conversion of all accumulated dividends on the Series A and Series B Preferred
Stock through the effective date of the IPO. On November 14, 2003, the Exchange
Agreement was finalized, concurrent with the completion of the IPO. The Company
issued 104,175 shares of Class A Common Stock as consideration for the
conversion of all accumulated dividends on the Series A and B Preferred Stock.
The Company recorded remaining accretion on the Series A Preferred Stock and
Series B Preferred Stock of $523 and $468, respectively, related to the Exchange
Agreement, which is included in the above amounts. As of December 31, 2003,
there is no Series A Preferred Stock or Series B Preferred Stock issued or
outstanding.
6. Stockholders' Equity
Common Stock
In April 2002, 20,000 shares of Class A Common Stock were issued to one existing
investor for proceeds of $125. In May 2002, one holder of 5-Year Notes exercised
warrants to purchase 5,000 shares of Class A Common Stock. In August and
September 2003, several holders of 1-Year Notes and 5-Year Notes exercised
warrants to purchase 420,688 shares of Class A Common Stock by paying $21, and
in October 2003 the remaining holders of 1-Year Notes and 5-Year Notes exercised
warrants to purchase 40,119 shares of Class A Common Stock by paying $2.
In July 2003, in connection with the IPO, the Company's Board of Directors
approved a reverse stock split, subject to the completion of the IPO, to issue
one share of common stock in exchange for each five shares of common stock held
by its stockholders of record (the "1-5 Reverse Split"). The stockholders of the
Company approved this reverse stock split effective as of September 18, 2003.
The IPO was completed on November 14, 2003. The accompanying unaudited
consolidated financial statements have been adjusted retroactively to reflect
the reverse split of all outstanding common stock.
On November 10, 2003, the Company's registration statement on Form SB-2 was
declared effective by the Securities and Exchange Commission. On November 14,
2003, the Company issued 1,380,000 shares of its Class A Common Stock, 180,000
of which shares were issued in connection with the lead underwriter's exercise
of its over-allotment option, at the IPO price of $5.00. The Company's stock is
listed on the American Stock Exchange under the symbol "AIX". The net proceeds
from the IPO, after deducting all offering expenses, including underwriting
discounts and commissions, the cash portion of the purchase price of HS, and the
repayment of a note payable, was approximately $1,074.
In connection with the Exchange Agreement, on November 14, 2003 the Company
issued a total of 2,207,976 shares of Class A Common Stock to the holder of the
Series A Preferred Stock, Series B Preferred Stock and related contingent
warrants (see Note 5).
On November 14, 2003, the Company issued 8,700 shares of Class A Common Stock to
the Casey Group, pursuant to a software development agreement with AccessDM.
Stock Option Plan
13
There were 192,500 stock options granted under AccessIT's 2000 Stock Option Plan
(the "AccessIT Plan") during the nine months ended December 31, 2003. On
November 4, 2003, 167,500 stock options were granted to several employees at an
exercise price of $5.00 per share, and on December 15, 2003, 25,000 stock
options were granted to one employee at an exercise price of $5.05 per share.
These stock options expire ten years after issuance and vest ratably over three
years. Amortization of deferred stock compensation amounted to $0 and $10 and $8
and $42, respectively, for the three and nine months ended December 31, 2003 and
December 31, 2002, respectively, and has been recorded as non-cash stock
compensation expense in the unaudited consolidated statements of operations.
In September 2003, the AccessIT Plan was amended to increase the number of
shares of Class A Common Stock authorized for issuance upon exercise of options
granted under the AccessIT Plan from 400,000 to 600,000. As of December 31,
2003, there were 101,103 options available for grant under the 2000 Stock Option
Plan.
In May 2003, Access Digital adopted the 2003 Stock Option Plan (the "Access
Digital Plan") under which incentive and nonstatutory stock options may be
granted to employees, outside directors, and consultants. The purpose of the
Access Digital Plan is to enable the Company to attract, retain and motivate
employees, directors, advisors and consultants. During the nine months ended
December 31, 2003, Access Digital granted stock options to purchase 1,000,000
shares of its common stock to employees of Access Digital and AccessIT. These
stock options expire ten years after issuance and vest ratably over three years.
Warrants
In connection with the sale of the shares of Series A Preferred Stock, in
October 2001 the Company issued the 2001 Warrant to purchase 430,205 shares of
Class A Common Stock at a price of $0.05 per share. In connection with the
issuance of the Series B Preferred Stock during the year ended March 31, 2003,
the Company issued Contingent Warrant A to purchase an aggregate of 381,909
shares of Class A Common Stock at $0.05 per share, subject to certain call and
put rights upon the occurrence of certain events. Also, in connection with the
issuance of the Series B Preferred Stock, the Company issued Contingent Warrant
B to purchase an aggregate of 144,663 shares of Class A Common Stock at $0.05
per share, subject to certain call and put rights upon the occurrence of certain
events. Additionally, in connection with the issuance of the Series B Preferred
Stock, the Company issued Contingent Warrant C to purchase an aggregate of up to
100,401 shares of Class A Common Stock at $0.05 per share, subject to certain
call and put rights upon the occurrence of certain events. On November 14, 2003,
in connection with the completion of the IPO, the 2001 Warrant, Contingent
Warrant A and Contingent Warrant C were exchanged for 320,000 shares of Class A
Common Stock and Contingent Warrant B was exercised on a cashless-exercise basis
to purchase 143,216 shares of Class A Common Stock.
In connection with the issuance of its 1-Year Notes, the Company issued warrants
to purchase 25,305 shares of the Company's Class A Common Stock (the "1-Year
Notes Warrants") to the holders of the 1-Year Notes. Of these warrants, warrants
to purchase 6,902 shares of its Class A Common Stock were issued to two of the
Company's founders. The 1-Year Notes Warrants have an exercise price of $0.05
per share and are exercisable at any time from the date of issuance through the
earlier of i) 10 years from the date of issuance or ii) the closing of a firm
commitment underwritten public offering of the Company's common stock. In August
and September 2003, warrants to purchase 17,686 shares of Class A Common Stock
were exercised, and in October 2003 warrants to purchase the remaining 7,619 of
Class A Common Stock were exercised.
In connection with the issuance of its 5-Year Notes, the Company issued warrants
to purchase 440,500 shares of Class A Common Stock (the "5-Year Notes Warrants
") to the holders of the 1-Year Notes. Of the original 5-Year Notes Warrants to
purchase 440,500 shares of Class A Common Stock, 5,000 5-Year Notes Warrants
were exercised in May 2002, 5-Year Notes Warrants to purchase 403,000 shares of
Class A Common Stock were exercised in August and September 2003, and the
remaining 32,500 5-Year Notes Warrants were exercised in October 2003. Of the
original warrants to purchase 440,500 shares of Class A Common Stock, warrants
to purchase 123,000 shares of Class A Common Stock were issued during the nine
month period ending December 31, 2003. Two of the Company's founders were issued
5-Year Notes Warrants to purchase an aggregate of 37,500 shares of Class A
Common Stock, which were exercised in September 2003 and included in the above
number of warrants exercised. The warrants to purchase 440,500 shares of Class A
Common Stock were ascribed an estimated fair value of $2,202, which has been
recognized as issuance cost and therefore has been charged against the carrying
value of the related notes payable. During the three and nine months ended
December 31, 2003, a total of $111 and $302, respectively, was amortized to
non-cash interest expense to accrete the value of the notes to their face value
over the expected term of the related notes. During the three and nine months
ended December 31, 2002, a total of $80 and $204, respectively, was amortized to
non-cash interest expense to accrete the value of the notes to their face value
over the expected term of the related notes.
14
7. Supplemental Cash Flow Disclosure
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
Interest paid................ $ 122 $ 46 $ 306 $ 131
Accretion on mandatorily
redeemable convertible
preferred stock.............. $1,125 $ 28 $1,590 $ 305
Common stock issued to vendor
in lieu of cash $ - - $ 174 -
Exchange of preferred stock and
warrants for common stock..... $4,172 $ - $4,172 $ -
Issuance of common stock and
notes to acquire
Hollywood Software, Inc....... $4,380 $ - $4,380 $ -
8. Commitments and Contingencies
In the ordinary course of its business, the Company is potentially a party to
litigation regarding the operation of its business. In February 2003, HS
eliminated the position of an employee, and as part of the termination process,
HS attempted to secure a general release from liability from the employee. In
March 2003, the Company received a letter from the employee's attorney seeking a
payment of $145 to release HS from any potential claims, including alleged
improper classification as an exempt employee and unpaid vacation time. The
Company is discussing the matter with the employee's attorney and is evaluating
the merits of this complaint.
9. Related Party Transactions
In June 2003, one of the members of the Company's board of directors resigned.
This former member is a partner in a law firm that provides legal services to
the Company, including handling legal matters related to the IPO. For the nine
months ended December 31, 2003 and 2002, we paid approximately $85 and $606,
respectively, to this firm.
10. Subsequent Events
On December 22, 2003, the Company signed an agreement to purchase all of the
outstanding common stock of Core Technology Services, Inc. ("Core Tech"), and on
January 9, 2004, the acquisition of Core Tech was completed. Core Tech is a
managed service provider of information technologies; its primary product is
managed network services through their global network command center. The
Company believes that the acquisition of Core Tech will expand the existing
capabilities and services of its IDCs. The initial purchase price consisted of
$250 in cash and 100,000 shares of the Company's Class A Common Stock, which
shares are restricted as to their further sale or transfer. In addition, the
Company may be required to pay a contingent purchase price for any of the three
years following the closing in which certain earnings targets are achieved; any
additional payment is to be made in the same proportionate combination of cash
and shares of the Company's Class A Common Stock as the purchase price payable
at closing. The Company has also agreed to a one-time issuance of additional
shares of its Class A Common Stock to the seller up to a maximum of 20,000
shares if, in accordance with an agreed upon formula, the trading value of the
Company's Class A Common Stock is less than $4.00 during the 90 day period at
the end of the lock-up period. Based on an initial valuation from an independent
appraiser, the restricted stock issued in the Core Tech acquisition was
estimated to have a fair value of $3.45 per share. The total purchase price is
expected to be $620, including $25 of anticipated fees and expenses.
The total purchase price of $620 will be allocated to the net assets acquired,
including tangible and intangible assets, and liabilities assumed, based upon
management's best preliminary estimate of fair value with any excess purchase
price being allocated to goodwill. The preliminary allocation of the purchase
price may be subject to further adjustment as the Company finalizes its
allocation of the purchase price in accordance with accounting principles
generally accepted in the United States of America. The estimate of fair value
of the tangible and intangible assets acquired and liabilities assumed is
expected to be allocated as follows:
Tangible and intangible assets acquired:
Property and equipment, net...........................................$ 20
Intangible assets..................................................... 600
----
Total tangible and intangible assets acquired..........................620
Less liabilities assumed.................................................0
Total purchase price................................................. $620
====
15
The intangible assets are expected to consist of customer relationships and a
non-compete agreement. These assets are expected to be amortized over their
estimated useful lives of 3 and 5 years, respectively.
On February 3, 2004, the Company sent a notice to the holders of its notes
payable, offering to exchange the existing 5-Year Notes for one of two options
(the "Notes Exchange Offer"). One option is to exchange the existing 5-Year
Notes for restricted Class A Common Stock at a proposed exchange rate of $3.57
per share. The other option is to exchange the existing 5-Year Notes for new
convertible notes, (the "Convertible Notes") with proposed terms including (i)
an interest rate of 6.0% per year, payable quarterly, (ii) principal repayments
beginning two years after the date that the current 5-Year Notes are presently
scheduled to begin principal repayments, (iii) principal repayments of 5% of the
Convertible Notes amount would occur in equal quarterly installments for eleven
quarters, with a balloon payment of all remaining principal and interest in the
twelfth quarter, and (iv) the Convertible Notes will be convertible into Class A
Common Stock anytime, at the option of the holder, at 120% of the closing price
of the Company's publicly traded Class A Common Stock on the date of the
exchange. It is anticipated that any shares of Class A Common Stock that are
issued pursuant to either of the Notes Exchange Offer options will be subject to
the same lock-up provisions that currently apply to the Company's restricted
common stock. The Exchange Offer was also made to the holders of the $3,000 of
notes payable issued in connection with the HS acquisition. The anticipated
deadline for responding to the Notes Exchange Offer is February 27, 2004. The
Notes Exchange Offer is subject to, among other things, definitive documents
with mutually agreeable terms and conditions to be entered into by the parties.
The main purpose of the Exchange Offer is to reduce or eliminate the Company's
debt service requirements in the near term. The proposed terms described above
may be different than the definitive terms.
In addition to the Notes Exchange Offer, the Company is offering to its existing
note holders and to holders of its restricted common stock, $1,000 of new
Convertible Notes.
11. Recent Accounting Pronouncements
On December 17, 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which supercedes
SAB No. 101, "Revenue Recognition in Financial Statements." SAB No. 104's
primary purpose is to rescind accounting guidance contained in SAB No. 101
related to multiple element revenue arrangements, superceded as a result of
the issuance of EITF 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." Additionally, SAB No. 104 rescinds the "Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers"
issued with SAB No. 101 that had been codified in SEC Topic 13, "Revenue
Recognition." The adoption of SAB No. 104 did not have any impact on the
Company's Consolidated Statement of Operations.
16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(in thousands, except share and per share data)
THIS REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING
STATEMENTS IN THIS REPORT ARE INDICATED BY WORDS SUCH AS "ANTICIPATES,"
"EXPECTS," "BELIEVES," "INTENDS," "PLANS," "ESTIMATES," "PROJECTS" AND SIMILAR
EXPRESSIONS. THESE STATEMENTS REPRESENT OUR EXPECTATIONS BASED ON CURRENT
INFORMATION AND ASSUMPTIONS. FORWARD-LOOKING STATEMENTS ARE INHERENTLY SUBJECT
TO RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE WHICH ARE ANTICIPATED OR PROJECTED AS A RESULT OF CERTAIN RISKS AND
UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO A NUMBER OF FACTORS, SUCH AS OUR
INCURRENCE OF LOSSES TO DATE; ACHIEVING SUFFICIENT VOLUME OF BUSINESS FROM OUR
CUSTOMERS; OUR SUBSIDIARIES CONDUCTING BUSINESS IN AREAS IN WHICH WE HAVE LITTLE
EXPERIENCE; ECONOMIC AND MARKET CONDITIONS; THE PERFORMANCE OF THE DATACENTERS
AND SOFTWARE RELATED BUSINESSES; CHANGES IN BUSINESS RELATIONSHIPS WITH OUR
MAJOR CUSTOMERS AND IN THE TIMING, SIZE AND CONTINUATION OF OUR CUSTOMERS'
PROGRAMS; COMPETITIVE PRODUCT AND PRICING PRESSURES; INCREASES IN COSTS THAT
CANNOT BE RECOUPED IN PRODUCT PRICING; SUCCESSFUL INTEGRATION OF ACQUIRED
BUSINESSES; AS WELL AS OTHER RISKS AND UNCERTAINTIES, SUCH AS THOSE DESCRIBED
UNDER QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND THOSE
DETAILED HEREIN AND FROM TIME TO TIME IN OUR FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION. THOSE FORWARD-LOOKING STATEMENTS ARE MADE ONLY AS OF THE
DATE HEREOF, AND WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE THE
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
INCLUDED ELSEWHERE IN THIS FORM 10-QSB.
Overview
We were incorporated on March 31, 2000 as AccessColo, Inc. In 2001, we changed
our name to Access Integrated Technologies, Inc., or AccessIT. We have been in
the business of operating Internet data centers ("IDCs"), and on November 3,
2003 we acquired Hollywood Software, Inc. ("HS"). IDCs are facilities that, for
monthly and other fees, provide our customers with: a secure environment for
their computer and telecommunications equipment; access to voice and data
transmission services from a choice of network providers; and managed services
to monitor their computer and telecommunications equipment and to store, back-up
and protect their programs and data. HS is a leading provider of proprietary
enterprise software and consulting services for distributors and exhibitors of
filmed entertainment in the United States and Canada. Its software manages the
planning, booking scheduling, revenue sharing, cash flow and reporting
associated with the distribution and exhibition of theatrical films. We have two
reportable segments: datacenters, which comprise its IDC operations, and
software, which represents the operations of HS and AccessDM.
We currently operate nine IDCs, or AccessColocentersSM, located in eight states:
Arkansas, Kansas, Maine, New Hampshire, New Jersey, New York, Texas and
Virginia. We developed our first two data centers, located in Jersey City, New
Jersey and Brooklyn, New York in the second half of 2000. We subsequently
acquired seven additional IDCs: we acquired one IDC, located in Manhattan, New
York City in December 2001; and we acquired the other six in one transaction in
November 2002. The seven IDCs that we acquired were accounted for as business
combinations under Statement of Financial Accounting Standards No. 141,
"Business Combinations." From our inception through November 3, 2003, all of our
revenues have been derived from monthly license fees and fees from other
ancillary services provided by us at these IDCs. We do not intend to build any
additional IDCs. Instead, we intend to continue expanding our IDC footprint by
acquiring additional, operational IDCs from third parties. HS generates revenues
from software license fees, Application Service Provider ("ASP") fees,
enhancements, consulting and maintenance fees. We incurred net losses of $3,404,
3,610 and $2,880 in the fiscal years ended March 31, 2003, 2002 and 2001,
respectively, and a net loss of $2,333 in the nine months ended December 31,
2003, which resulted in an accumulated deficit of $12,227 as of December 31,
2003. We anticipate that, with the acquisitions of HS and Core Tech, and the
operation of Access Digital Media, Inc., our results of operations will improve.
As we grow, however, our operating costs and general and administrative expenses
will also increase for the foreseeable future. In order to achieve and sustain
profitable operations, we will need to generate more revenues than we have in
prior years.
Critical accounting policies and use of estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires our management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Our most
significant estimates relate to revenue recognition, capitalized software,
depreciation of fixed assets and amortization of intangible assets. Actual
results could differ from these estimates. On an on-going basis, we evaluate our
estimates, including those related to the carrying values of our fixed assets
and intangible assets. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances made, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from these estimates
under different assumptions or conditions.
We believe that the following critical accounting policies and estimates affect
our more significant estimates and judgments used in the preparation of our
consolidated financial statements.
17
Revenue recognition
Datacenter revenues consist of license fees for colocation space, riser access
charges, electric and cross-connect fees, and non-recurring equipment
installation fees. Revenues from colocation, riser access charges, electric and
cross-connect fees are billed monthly and, in accordance with Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," are recognized
ratably over the terms of the contracts, generally two to nine years. Certain
customer contracts contain periodic increases in the amount of license fees to
be paid, and those amounts are recognized as license fee revenues on a
straight-line basis over the term of the contracts. Installation fees are
recognized on a time and materials basis in the period in which the services
were provided and represent the culmination of the earnings process as no
significant obligations remain. Amounts such as prepaid license fees and other
amounts, which are collected prior to satisfying the above revenue recognition
criteria are classified as deferred revenues. Amounts satisfying the above
revenue recognition criteria prior to billing are classified as unbilled
revenues.
Software revenues are accounted for in accordance with Statement of Position
97-2, "Software Revenue Recognition," ("SOP 97-2"). Our software revenues are
generated from the following primary sources: i) software licensing, including
customer licenses and Application Service Provider ("ASP") agreements, ii)
software maintenance contracts, and iii) professional consulting services, which
includes systems implementation, training, custom software development services
and other professional services.
Software licensing revenue is recognized when the following criteria are met:
a) persuasive evidence of an arrangement exists, b) delivery has occurred and no
significant obligations remain, c) the fee is fixed or determinable and d)
collection is determined to be probable. Significant upfront fees are received
in addition to periodic amounts upon achievement of contractual milestones for
licensing of our products. Such amounts are deferred until the revenue
recognition criteria has been met, which typically occurs after delivery and
acceptance.
For arrangements with multiple elements (e.g. delivered and undelivered
products, maintenance and other services), we separately negotiate each element
of the arrangement based on the fair value of the elements. The fair values for
ongoing maintenance and support obligations are based upon separate sales of
renewals to customers or upon substantive renewal rates quoted in the
agreements. The fair values for services, such as training or consulting, are
based upon hourly billing rates of these services when sold separately to other
customers. In instances where we are not able to determine fair value of each
element and the services are essential to the functionality of the software, we
follow percentage-of-completion accounting to recognize revenue.
Customers not wishing to license and operate the our software themselves may use
the software through an ASP arrangement, in which the we host the application
and provide customer access via the internet. Annual minimum ASP service fees
are recognized ratably over the contract term. Overage revenues for usage in
excess of stated minimums are recognized monthly.
Maintenance services and website subscription fees are recognized ratably over
the contract term. Professional consulting services, sales of third party
products and resale hardware revenues are recognized as services are provided.
Software development revenues are recognized when delivery has occurred and no
significant obligations remain.
Deferred revenue is recorded in cases of i) a portion or the entire contract
amount cannot be recognized as revenue due to non-delivery or acceptance of
licensed software or custom programming, ii) incomplete implementation of ASP
service arrangements, or iii) 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 in the Consolidated Balance Sheet and
are recognized as revenue in accordance with our revenue recognition policies
described above.
The adoption of Staff Accounting Bulletin No. 104, "Revenue Recognition", did
not affect our revenue recognition policies.
Capitalized Software Costs
We have adopted SFAS No. 86, "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed." Software development costs that are
incurred subsequent to establishing technological feasibility are capitalized.
Amounts capitalized as software development costs are generally amortized on a
straight-line basis over five years. We review capitalized software costs for
impairment on an annual basis. To the extent that the carrying amount exceeds
the estimated net realizable value of the capitalized software cost, an
impairment charge is recorded. No impairment was recorded during the three
months ended December 31, 2003. Amortization of capitalized software development
costs, included in costs of revenues, for the three months ended December 31,
2003 amounted to $43.
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Business combinations and intangible assets
We have adopted SFAS No. 141 and SFAS No. 142, "Goodwill and other Intangible
Assets." SFAS No. 141 requires all business combinations to be accounted for
using the purchase method of accounting and that certain intangible assets
acquired in a business combination must be recognized as assets separate from
goodwill. SFAS No. 142 addresses the recognition and measurement of goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 also
addresses the initial recognition and measurement of intangible assets acquired
outside of a business combination, whether acquired individually or with a group
of other assets. This statement provides that intangible assets with indefinite
lives and goodwill will not be amortized but will be tested at least annually
for impairment. If an impairment is indicated, then the asset will be written
down to its fair value, typically based upon its future expected discounted cash
flows. As of December 31, 2003, our finite-lived intangible assets consisted of
a customer agreement, non-compete agreements, and corporate trade name, which
are estimated to have useful lives of 3, 5, and 10 years, respectively.
Additionally, we have recorded goodwill resulting from the HS acquisition.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the respective assets. Leasehold improvements are 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.
Impairment of long-lived assets
We review the recoverability of our long-lived assets on a periodic basis in
order to identify business conditions, which may indicate a possible impairment.
The assessment for potential impairment is based primarily on our ability to
recover the carrying value of our long-lived assets from expected future
undiscounted cash flows. If the total of expected future undiscounted cash flows
is less than the total carrying value of the assets, a loss is recognized for
the difference between the fair value (computed based upon the expected future
discounted cash flows) and the carrying value of the assets.
Description of line items
The following is a description of certain line items from our statements of
operations:
Our datacenter revenues include charges for monthly license fees for
colocation space, electric fees, riser access charges and installation fees. Our
software revenues include charges for software license fees, ASP service fees,
consulting, development and maintenance fees.
Our cost of revenues consists of facility operating costs such as rent,
utilities, real estate taxes, repairs and maintenance, insurance and other
related expenses, and amortization of capitalized software development costs.
Selling, general and administrative expenses consist primarily of salaries
and related personnel costs, professional fees, advertising and marketing costs,
and our corporate and HS headquarters facility costs.
Non-cash, stock-based compensation represents the value of employee and
non-employee stock options and restricted stock grants, amortized over the
vesting periods (if any).
Non-cash interest expense represents the accretion of the value of warrants
attached to our one- and five-year promissory notes.
Initial Public Offering
On November 10, 2003, our registration statement on Form SB-2 was declared
effective by the Securities and Exchange Commission. On November 14, 2003, in
connection with the completion of the initial public offering of shares of our
Class A Common Stock (the "IPO"), we issued 1,380,000 shares of Class A Common
Stock, 180,000 of which shares were issued in connection with the lead
underwriter's exercise of its over-allotment option, at $5.00 per share (the
"IPO Price"). The net proceeds from the initial public offering, after deducting
all offering expenses, including underwriting discounts and commissions, the
cash portion of the purchase price of HS, and the repayment of a note payable,
was approximately $1,074. We are listed on the American Stock Exchange under the
symbol "AIX".
New subsidiary
Access Digital Media, Inc., or AccessDM, a Delaware corporation, was formed in
February 2003 as a wholly owned subsidiary. AccessDM has completed development
of its proprietary software enabling the delivery of digital content -- such as
movies, advertising, trailers and alternative content such as concerts, seminars
and sporting events -- to movie theaters and other venues equipped with digital
projection equipment.
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AccessDM has been, and will continue in the foreseeable future to be, financed
principally by AccessIT, which owned 80% of AccessDM's capital stock at December
31, 2003. In March 2003, we engaged The Casey Group, Inc., a software consulting
company, to help develop software designed to enable the delivery of digital
content. As compensation for assisting us in the development of the software,
the cost of which was agreed to be $174, we issued to The Casey Group 750,000
shares of AccessDM common stock in September 2003 and 8,700 shares of AccessIT
Class A Common Stock in November 2003. The AccessDM shares issued to The Casey
Group represent 20% of AccessDM's outstanding capital stock after giving effect
to such issuance.
The operations of AccessDM will be controlled by AccessIT, and certain members
of the senior management of AccessIT are also members of the senior management
of AccessDM. All intercompany transactions between AccessIT and AccessDM are
intended to be conducted as transactions on competitive terms, including the
terms of any future investments by AccessIT in AccessDM and the terms of any
intercompany sales. As of December 31, 2003 AccessDM had no sales or significant
operating expenses.
Recent acquisitions
On July 17, 2003, we signed a stock purchase agreement with HS and its two
selling stockholders. On November 3, 2003, we acquired HS, after amending the
agreement to complete the acquisition on that date, by issuing secured
promissory notes (the "Initial Notes"), each in the principal amount of $3,625,
or the Notes, to the two selling stockholders. On November 10, 2003, we
completed the IPO and (i) the Initial Notes were exchanged for the consideration
described in clauses (ii) and (iii) below and cancelled and returned to us by
HS's selling stockholders, (ii) the lead underwriter in the IPO transmitted, in
the aggregate, $2,450 to the selling stockholders and (iii) we issued to the
selling stockholders $3,000 in 8% promissory notes and 400,000 shares of our
Class A Common Stock.
We may pay an additional purchase price in each of the three years following the
closing of the HS acquisition if certain annual earnings targets are achieved.
We also have agreed to issue additional shares of our Class A Common Stock if
the value of our Class A Common Stock declines below $3.60 per share.
On December 22, 2003, we signed an agreement to purchase all of the outstanding
common stock of Core Technology Services, Inc. ("Core Tech"), and on January 9,
2004, the acquisition of Core Tech was completed. Core Tech is a managed service
provider of information technologies; its primary product is managed network
services through their global network command center. We believe that the
acquisition of Core Tech will expand the existing capabilities and services of
its IDCs. The initial purchase price consisted of $250 in cash and 100,000
shares of our Class A Common Stock, which shares are restricted as to their
further sale or transfer. In addition, we may be required to pay a contingent
purchase price for any of the three years following the closing in which certain
earnings targets are achieved; any additional payment is to be made in the same
proportionate combination of cash and shares of our Class A Common Stock as the
purchase price payable at closing. We have also agreed to a one time issuance of
additional shares of our Class A Common Stock to the seller up to a maximum of
20,000 shares if, in accordance with an agreed upon formula, the market value of
our Class A Common Stock is less than $4.00 during the ninety day period at the
end of the lock up period.
Results of operations
Nine months ended December 31, 2003 and 2002
REVENUES. Our total revenues were $4,872 for the nine months ended December 31,
2003 compared to $2,774 for the comparable period in 2002, an increase of 76%.
This increase was primarily attributable to the $1,244 in incremental revenues
derived from the six additional data centers that we acquired in November 2002.
Additionally, HS contributed $637 of revenues for the period from November 3,
2003 to December 31, 2003. The remainder of the increase in revenues was
primarily from one IDC customer, due to expansion of their space.
COST OF REVENUES. Our cost of revenues was $2,643 for the nine months ended
December 31, 2003 compared to $2,267 for the nine months ended December 31,
2002, an increase of 17%. This increase was primarily attributable to $294 of
additional rent, utilities, real estate taxes and other operating expenses of
the six locations acquired by us in November 2002. The remaining increase was
due to $58 of expense from HS, primarily the amortization of capitalized
software costs, and an increase in repairs and maintenance of $30 at our
Brooklyn, NY AccessColocenterSM.
GROSS PROFIT. Gross profit was $2,229 and $507 for the nine months ended
December 31, 2003 and 2002, respectively. The increase was related to $952 of
gross profit generated at the six IDC locations we acquired in November 2002,
and to $579 of gross profit generated by HS. Additionally, gross profit at our
Jersey City, NJ IDC increased by $190. Due to the fixed nature of most of the
datacenter operating expenses, increases in revenue generally result in
increased profitability.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses were $2,076 and $1,708 for the nine months ended
December 31, 2003 and 2002, respectively, an increase of 22%. Incremental costs
associated with HS operations totaled $150, consisting primarily of personnel
and headquarters office expenses. Advertising and marketing expenses increased
by $54 due to attendance at trade shows and advertising related to AccessDM.
Professional fees increased by $44 due to the related costs associated with our
public filing requirements, and bad debt expense increased by $30 to reserve for
doubtful accounts. Additionally, AccessDM incurred $35 of expenses, mostly
personnel-related, in the three months ended December 31, 2003. As of December
31, 2003 and 2002, we had 23 and 11 employees, respectively, one of whom was
part-time in each period. The increase is due to the acquisition of HS, which
has 11 employees at December 31, 2003. Additionally, AccessDM employs one person
at December 31, 2003.
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NON-CASH STOCK-BASED COMPENSATION. We recorded non-cash stock-based compensation
of $10 and $90 for the nine months ended December 31, 2003 and 2002,
respectively. These amounts represent amortization of the fair value of stock
options granted to non-employees in exchange for goods and services, over the
three-year vesting period of the options, and $48 for the fair value of shares
of Class A Common Stock granted to certain employees in 2002. The types of
services performed by non-employees in exchange for stock options included
advisory services on real estate matters, as well as advertising and marketing.
The fair value of these stock options was determined using the Black-Scholes
option-pricing model. The decrease is due to the expense related to the prior
year employee stock grants and the completion of vesting of certain non-employee
options.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $1,915 and
$1,003 for the nine months ended December 31, 2003 and 2002, respectively, an
increase of 91%. The increase is primarily attributable to the acquisition of
six additional IDC's in November 2002 which included $863 of property and
equipment and $2,710 of intangible assets. The HS acquisition added $73 of
depreciation from November 3, 2003 through December 31, 2003.
INTEREST EXPENSE. Interest expense was $389 and $253 for the nine months ended
December 31, 2003 and 2002, respectively. The increase of 54% was due to the
$1,230 principal amount of five-year promissory notes that we issued in June and
July 2003, and $1,360 principal amount of such notes issued during the nine
months ended December 31, 2002. The five-year promissory notes bear interest at
8% per year, with interest payable quarterly. Additionally, we issued a secured
$1,000 note payable in connection with our November 2002 acquisition of six
IDCs. This 9% note was repaid on its due date of November 26, 2003. Partially
offsetting these items was interest savings resulting from our payoff of two
capital leases in July and October, 2003.
NON-CASH INTEREST EXPENSE. Non-cash interest expense was $302 and $204 for the
nine months ended December 31, 2003 and 2002, respectively. Non-cash interest
expense results from the accretion of the value of warrants attached to our one-
and five-year 8% promissory notes. The increase in non-cash interest expense is
due to the issuance of $1,360 of such notes with attached warrants during the
nine months ended December 31, 2003, and an additional $1,230 during the nine
months ended December 31, 2002.
INCOME TAX BENEFIT. Income tax benefit was $127 and $185 for the nine months
ended December 31, 2003 and 2002, respectively, resulting from the sale of our
New Jersey net operating losses to a third party under a state-run program. The
decrease in the income tax benefit is due to a lower NJ net operating loss and
also a lower allocation of losses to NJ, as we began operations in other states
with its November 2002 acquisition of six IDC's.
NET LOSS. As a result of the foregoing, we had net losses of $2,333 and $2,553
for the nine month periods ended December 31, 2003 and 2002, respectively.
Three months ended December 31, 2003 and 2002
REVENUES. Our revenues were $2,043 for the three months ended December 31, 2003
as compared to $1,013 for the corresponding period of 2002, an increase of 102%.
The increase was mainly due to the $637 revenue contribution from HS. Another
major component of the increase was the $306 in incremental revenues derived
from the six additional data centers that we acquired in November 2002. The
remainder of the increase in revenues was primarily from one IDC customer due to
expansion of their space.
COST OF REVENUES. Our cost of revenues was $894 for the three months ended
December 31, 2003 compared to $843 for the corresponding period of 2002, an
increase of 6%. The increase was primarily attributable to $67 of operating
expense from the six additional IDC's we acquired in November 2002, and $58 from
HS, primarily the amortization of capitalized software costs. Offsetting these
items was a $60 decrease in utilities at our Brooklyn, NY IDC due to large
landlord billings in 2002 from earlier periods.
GROSS PROFIT. Gross profit was $1,149 and $170 for the three months ended
December 31, 2003 and 2002, respectively, an increase of 575%. The increase was
attributable primarily to the $579 gross profit generated by HS, and the $239 of
incremental gross profit at the six IDC locations that we acquired in November
2002. Additionally, our three other IDC's generated an additional $162 of gross
profit, due to higher revenues at two locations and lower utility expenses at
one location.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses were $914 and $590 for the three months ended December
31, 2003 and 2002, respectively, an increase of 55%. Incremental costs
associated with HS operations totaled $150, mostly personnel and headquarters
office related expenses. Professional fees increased by $39 due to the related
costs associated with our public filing requirements, bad debt expense increased
by $20 due to increased reserve activity and advertising and marketing expenses
increased by $13 due to purchases of promotional items and print advertising.
Additionally, AccessDM incurred $35 of expenses, mostly personnel-related, in
the three months ended December 31, 2003. As of December 31, 2003 and 2002, we
had 23 and 11 employees, respectively, one of whom was part-time in each period.
The increase is due to the acquisition of HS, which has 11 people at December
31, 2003. Additionally, AccessDM employs one person at December 31, 2003.
21
NON-CASH STOCK-BASED COMPENSATION. We recorded non-cash stock-based compensation
of $0 and $56 for the three months ended December 31, 2003 and 2002,
respectively. These amounts primarily represent the fair value of stock options
granted to non-employees in exchange for goods and services, amortized over the
three-year vesting period of the options, and $48 for the fair value of shares
of Class A Common Stock granted to certain employees in 2002. The decrease is
due to the expense related to the prior year employee stock grants and the
completion of vesting of the majority of these stock options. The services
performed by non-employees in exchange for such stock options included advisory
services on real estate matters, and advertising and marketing. The fair value
of these stock options was determined using the Black-Scholes option-pricing
model.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $676 and $407
for the three months ended December 31, 2003 and 2002, respectively, an increase
of 66%. The increase is primarily attributable to the acquisition of six
additional IDC's in November 2002, which included $863 of property and equipment
and $2,710 of intangible assets. The HS acquisition added $73 of depreciation
from November 3, 2003 through December 31, 2003.
INTEREST EXPENSE. Interest expense was $143 and $100 for the three months ended
December 31, 2003 and 2002, respectively. The increase was due to the $1,230 of
five-year promissory notes that we issued in June and July 2003. The five-year
promissory notes bear interest at 8% per year, with interest payable quarterly.
Additionally, we issued a secured $1,000 note payable in connection with our
November 2002 acquisition of six IDCs. This 9% note was repaid on its due date
of November 26, 2003. Partially offsetting these items was interest savings
resulting from our payoff of two capital leases in July and October, 2003.
NON-CASH INTEREST EXPENSE. Non-cash interest expense was $111 and $80 for the
three months ended December 31, 2003 and 2002, respectively. Non-cash interest
expense resulted from the accretion of the value of warrants attached to our
one- and five-year promissory notes (which bear interest at 8% per year). The
increase in non-cash interest expense is due to the issuance of an additional
$1,230 of such notes in June and July 2003.
INCOME TAX BENEFIT. Income tax benefit was $127 and $185 for the three months
ended December 31, 2003 and 2002, respectively, resulting from the sale of our
New Jersey net operating losses to a third party under a state-run program. The
decrease in the income tax benefit is due to a lower NJ net operating loss and
also a lower allocation of losses to NJ, as we began operations in other states
with its November 2002 acquisition of six IDC's.
NET LOSS. As a result of the foregoing, we had net losses of $572 and $872 for
the three months ended December 31, 2003 and 2002, respectively.
Liquidity and capital resources
We have incurred operating losses and negative cash flows 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 our one- and five-year promissory notes (which
bear interest at 8% per year), and in November 2003, through our initial public
offering. From inception through December 31, 2003, we had raised $19,346, and
$4,405 through sales of our common stock and promissory notes, respectively.
Additionally, in November 2002, we issued a $1,000 secured note (which bears
interest at 9% per year) to a seller in connection with the acquisition of six
IDCs which was repaid in November 2003. We also have a $3,000 note payable to
the founders of HS, as part of the purchase price. We also have capital leases
on certain equipment used in our IDCs and our corporate office, in the principal
amount of $155 at December 31, 2003. We have no other borrowings or line of
credit arrangements with banks or other financial institutions.
On November 3, 2003, we acquired all of the outstanding capital stock of HS. In
connection with the acquisition of HS, we issued $3,000 of 8% promissory notes
to the sellers, which notes are secured and senior, with certain exceptions, to
all indebtedness during the five-year term of those notes. Our obligations to
repay our promissory notes and to pay any additional purchase price are secured
by a pledge of all of HS's capital stock.
As of December 31, 2003, we had cash and cash equivalents of $2,417 and our
working capital was $1,153.
During the nine months ended December 31, 2003, we raised $1,230 through sales
of 5-year promissory notes (which bear interest at 8% per year), $277 of which
was used to pay capital lease obligations between July and October 2003. During
the nine months ended December 31, 2002, we raised $125 and $1,360 through
issuances of Class A Common Stock and promissory notes, respectively, and we
repaid promissory notes of $333 in principal.
Our operating activities resulted in net cash outflows of $599 and $1,114 for
the nine months ended December 31, 2003 and 2002, respectively. The decrease in
our net use of cash was primarily due to the $952 of additional gross profit
realized at the six IDC's we acquired in November 2002, The HS gross profit of
$579, and improved performance at our other three IDC's. These items were
partially offset by a $368 increase in selling, general and administrative
expenses due to the inclusion of HS and increases in other corporate expenses.
Investing activities used net cash of $2,600 and $2,323 for the nine months
ended December 31, 2003 and 2002, respectively. The current year's amount is due
to the acquisition of HS, which cost $2,354, net of cash acquired, including
$191 in related expenses. We also spent $136 in additions and improvements to
our IDCs. In the prior year, we spent $2,258 in cash to acquire six IDC's,
settled a dispute with a contractor for a cash payment of $750, and invested
$266 for additions and improvements to our IDC's. This was partially offset by
the release of $951 of restricted cash that was funded for a lien in connection
with the aforementioned contractor dispute. We anticipate that we will
22
experience an increase in our capital expenditures consistent with the
anticipated growth in our operations, infrastructure and personnel. However, we
currently do not have any significant commitments for purchases.
Financing activities contributed cash of $4,660 and $3,479 for the nine months
ended December 31, 2003 and 2002, respectively. Cash contributed during the nine
months ended December 31, 2003 was used for repayment of capital lease
obligations, IPO related expenses, repayment of a note payable and for general
working capital purposes. A portion of the cash contributed during the nine
months ended December 31, 2002 was used to repay our remaining one-year
promissory notes totaling $333 in principal. Net cash provided by financing
activities in 2003 was from the IPO proceeds, and in both the 2003 and 2002
periods, was from the sales of promissory notes. In 2003, an additional $23 was
provided from the exercise of 1-Year Notes Warrants and 5-Year Notes Warrants,
and in 2002, $125 was provided from the issuance of Class A Common Stock to one
investor.
We have acquired equipment under long-term capital lease obligations that expire
at various dates through December 2006. As of December 31, 2003, we had an
outstanding balance of $155 in capital lease obligations. These capital lease
obligations covered power generating equipment at our data centers and
telecommunications equipment at our corporate office. All of our capital lease
obligations were secured by equipment at the following locations and in the
following principal amounts: telephone equipment at our executive offices in the
remaining principal amount of $26; and Caterpillar generators at six of our IDCs
in the remaining principal amount of $129. As of December 31, 2003, minimum
future capital lease payments (including interest) for the years ended December
31, 2004, 2005, and 2006 were $113, $40, and $9, respectively. In July 2003, we
repaid the capital lease covering generators at our Manhattan, New York
AccessColocenterSM for $49. In August 2003, we entered into an agreement to pay
a capital lease covering certain storage equipment at our Jersey City, New
Jersey AccessColocenterSM for payments totaling $228 including all principal and
interest currently due. Payments of $48 and $62 were made in August 2003 and
September 2003, respectively, and a final payment of $118 was made in October
2003. In connection with the repayment of these leases, we recorded gains
totaling $27 to the Other income/expense, net line of the unaudited Consolidated
Statements of Operations.
In September 2003, in connection with our IPO and in order to simplify our
capital structure, we entered into an agreement, the Exchange Agreement, under
which the holder of our outstanding Series A and Series B Preferred Stock agreed
to (1) convert all 8,202,929 shares of Series A and Series B Preferred Stock
held by it into 1,640,585 shares of Class A Common Stock; (2) exchange warrants
exercisable, subject to certain future conditions, for up to 951,041 shares of
Class A Common Stock, for 320,000 shares of Class A Common Stock; (3) exercise
warrants currently exercisable for up to 144,663 shares of our Class A Common
Stock (143,216 shares on a cashless-exercise basis); and (4) accept 104,175
shares of our Class A Common Stock as payment of all accrued dividends on shares
of Series A and Series B Preferred Stock held by the holder through November 10,
2003, the effective date of the IPO. The transactions contemplated by the
Exchange Agreement were subject to and contingent upon the completion of the
offering. On November 14, 2003, the Exchange Agreement was finalized, concurrent
with the completion of the IPO.
On February 3, 2004, we sent a notice to the holders of our notes payable,
offering to exchange the existing 5-Year Notes for one of two options (the
"Notes Exchange Offer"). One option is to exchange the existing 5-Year Notes for
restricted Class A Common Stock at a proposed exchange rate of $3.57 per share.
The other option is to exchange the existing 5-Year Notes for new convertible
notes, (the "Convertible Notes") with proposed terms including (i) an interest
rate of 6.0% per year, payable quarterly, (ii) principal repayments beginning
two years after the date that the current 5-Year Notes are presently scheduled
to begin principal repayments, (iii) principal repayments of 5% of the
Convertible Notes amount would occur in equal quarterly installments for eleven
quarters, with a balloon payment of all remaining principal and interest in the
twelfth quarter, and (iv) the Convertible Notes will be convertible into Class A
Common Stock anytime, at the option of the holder, at 120% of the closing price
of our publicly traded Class A Common Stock on the date of the exchange. Any
shares of Class A Common Stock that are issued pursuant to either of the Notes
Exchange Offer options will be subject to the same lock-up provisions that
currently apply to our restricted common stock. The Exchange Offer was also made
to the holders of the $3,000 of notes payable issued in connection with the HS
acquisition. In addition to the Notes Exchange Offer we are offering to our
existing note holders and to holders of our restricted common stock, $1,000 of
new Convertible Notes. The deadline for responding to the Notes Exchange Offer
is February 27, 2004. The Notes Exchange Offer is subject to, among other
things, definitive documents with mutually agreeable terms and conditions to be
entered into by the parties. The purpose of the Exchange Offer is to reduce or
eliminate our debt service requirements in the near term.
Other significant commitments consist of obligations under non-cancelable
operating leases that totaled $18,694 as of December 31, 2003 and are payable in
varying monthly installments through 2015. As of December 31, 2003, minimum
future operating lease payments for the years ended December 31, 2004, 2005,
2006, 2007, 2008 and thereafter (in total) were $2,355, $2,280, $2,178, $2,160,
$2,189 and $7,532, respectively.
During the year ended March 31, 2003 and the nine months ended December 31,
2003, our operations have been financed primarily through equity and debt
financing, most recently the completion of our initial public offering in
November 2003 that generated net cash receipts of $1,074. However, we have
incurred substantial losses and negative cash flows from operations since
inception. During the year ended March 31, 2003 and the nine months ended
December 31, 2003, we have incurred losses of $3,404 and $2,333 respectively,
and negative cash flows from operating activities of $760 and $599,
respectively. In addition, we have an accumulated deficit of $12,227 as of
December 31, 2003. Furthermore, we have debt service requirements of $2,500 for
the twelve months beginning in March 2004, of which $1,900 of principal and
interest payments are due by December 31, 2004. Management expects that we will
23
continue to generate operating losses and negative cash flows for the
foreseeable future due to the continued efforts related to the identification of
acquisition targets, marketing and promotional activities and the development of
relationships with other businesses. Certain of these costs could be reduced if
working capital decreased. We may attempt to raise additional capital from
various sources for future acquisitions or for working capital as necessary, but
there is no assurance. There is no assurance that such financing will be
completed as contemplated or under terms acceptable to us or our existing
shareholders. Failure to generate additional revenues, raise additional capital
or manage discretionary spending could have a material adverse effect on our
ability to continue as a going concern and to achieve its intended business
objectives
Our management believes that the net proceeds generated from the IPO, combined
with our cash on hand and cash receipts from existing and acquired operations,
will be sufficient to permit us to continue our operations for at least 12
months from the date of this Form 10-QSB.
Related party transactions
A. Dale Mayo and Brett E. Marks invested $250 and $125, respectively, in our
offering of one-year 8% notes and received warrants to purchase 4,601 and 2,301
shares, respectively, of our Class A Common Stock at $0.05 per share. These
notes were repaid prior to March 31, 2002. Messrs. Mayo and Marks invested $250
and $125, respectively, in our offering of five-year 8% promissory notes and
received warrants to purchase 25,000 and 12,500 shares, respectively, of Class A
Common Stock at $0.05 per share. In September 2003, all of the warrants that
were attached to our one-year and five-year promissory notes held by Messrs.
Mayo and Marks were exercised. As of December 31, 2003, the principal due to
these executive officers of $375 is included in notes payable.
Warren H. Colodner, a former director of our company, is a partner in the law
firm of Kirkpatrick & Lockhart LLP, which provides legal services to us,
including handling legal matters related to our IPO. For the nine months ended
December 31, 2003 and 2002, we paid approximately $606 and $85, respectively, to
this firm. Mr. Colodner was granted options to purchase 4,000 shares of our
Class A Common Stock.
Robert Davidoff, a director of our company, is the general partner of CMNY
Capital II, L.P., which holds 157,927 shares of our Class A Common Stock, and a
director of Sterling/Carl Marks Capital, Inc., which holds 51,025 shares of our
Class A Common Stock. CMNY Capital II, L.P. also invested $1,000 in our offering
of one-year promissory notes, which was repaid in March 2002, and invested
$1,000 in our offering of five-year promissory notes. The warrants attached to
such one-year and five-year notes were exercised in August 2003 and are included
in the share numbers above. Mr. Davidoff has also been granted options to
purchase 4,000 shares of Class A Common Stock.
Wayne Clevenger and Matthew Finlay, two of our directors, are directors of
MidMark Equity Partners II, L.P., or MidMark. MidMark purchased our Series A
Preferred Stock, Series B Preferred Stock and contingent warrants, all of which
were exchanged for 2,207,976 shares of Class A Common Stock in November 2003
pursuant to the Exchange Agreement. See "--Liquidity and capital resources."
MidMark also purchased $333 of one-year notes, which was repaid in April 2002,
and was issued 6,902 of the one-year notes warrants, which were exercised in
October 2003. In addition, we paid MidMark a $75 investment banking fee in
connection with the issuance of the Series A and Series B Preferred Stock
financings.
John L. O'Hara, a member of our board of advisors, is the President of John
O'Hara Contracting, Inc., which performs construction and other work at our
IDCs. Mr. O'Hara has invested $50 in our five-year notes, and holds 5,000
five-year note attached warrants. This contractor has been paid $10 and $5 for
the nine months ended December 31, 2003 and 2002, respectively. In addition,
John O'Hara Contracting, Inc. owns 8,000 shares of our Class A Common Stock,
issued as partial consideration for work performed during the fiscal year ended
March 31, 2001.
Edward H. Herbst, a member of our board of advisors, is a partner in Herbst-
Musciano Architects/Planners, an architectural services firm that performs work
at our IDCs. This firm was paid $1 for the nine months ended December 31, 2003.
In addition, Mr. Herbst holds options to purchase 600 shares of our Class A
Common Stock at an exercise price of $12.50 per share.
In connection with the HS acquisition, we purchased all of the outstanding
capital stock of HS from its stockholders, David Gajda, Robert Jackovich, and
certain employees of HS who held stock options on November 3, 2003. Messrs.
Gajda and Jackovich will continue as executive officers of HS under new
employment agreements and together with the optionees, received an aggregate of
400,000 shares of our Class A Common Stock.
HS and Hollywood Media Center, LLC, a limited liability company that is 95%
owned by David Gajda, one of the sellers, and the President of HS, entered into
a Commercial Property Lease, dated January 1, 2000, for 2,115 square feet of
office space at 1604 Cahuenga Blvd., Hollywood, CA. Under the terms of our
acquisition of HS, we have assumed HS's obligations under this lease, including
the monthly rental payments of $2. The term of the lease expired on December 31,
2003 and was renewed on a month-to-month basis on the same terms.
24
In connection with Russell J. Wintner's employment arrangement with AccessDM, in
November 2003, AccessIT paid Mr. Wintner a finder's fee of $20, in connection
with his efforts related to the HS acquisition.
We entered into a consulting agreement with Kevin A. Booth, a co-founder and
director of our Company, following the termination of his employment with us as
of July 5, 2003. Under the terms of the agreement, Mr. Booth agreed to provide
consulting services to us in connection with the IPO and our acquisition of HS,
for which we paid him $10 per month (plus any reasonable out-of-pocket expenses)
for the period beginning on July 5, 2003 through September 30, 2003. We also
paid Mr. Booth a $20 bonus in November 2003 in connection with the completion of
the IPO. After September 30, 2003, we may, in our sole discretion, retain Mr.
Booth's services for future projects on mutually agreed to terms. Mr. Booth has
agreed that the term of his confidentiality, non-solicitation and non-compete
agreement, which he entered into as of April 10, 2000, will remain in effect
through July 4, 2004.
Quantitative and qualitative disclosures about market risk
Our business is currently principally in the United States. As a result, our
financial results are not affected by factors such as changes in foreign
currency exchange rates or economic conditions in foreign markets. We do not
engage in hedging transactions to reduce our exposure to changes in currency
exchange rates, although if the geographical scope of our business broadens, we
may do so in the future.
Our exposure to market risk for changes in interest rates relates primarily to
the increase or decrease in the amount of interest income that we can earn on
our invested cash. Because we currently do not have any variable rate debt,
there is no risk associated with fluctuating interest expense. We do not plan to
use any derivative financial instruments. We plan to help ensure the safety and
preservation of invested principal funds by limiting default risks, market risk
and investment risk. We plan to mitigate our default risk by investing generally
in low-risk securities.
Recent Accounting Pronouncements
On December 17, 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which supercedes
SAB No. 101, "Revenue Recognition in Financial Statements." SAB No. 104's
primary purpose is to rescind accounting guidance contained in SAB No. 101
related to multiple element revenue arrangements, superceded as a result of
the issuance of EITF 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." Additionally, SAB No. 104 rescinds the "Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers"
issued with SAB No. 101 that had been codified in SEC Topic 13, "Revenue
Recognition." The adoption of SAB No. 104 did not have any impact on our
Consolidated Statement of Operations.
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Item 3. Controls and Procedures.
As of the end of the period covered by this report, we conducted an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15 and15d-15 of the Exchange
Act). Based on this evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission rules and forms. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.
There was no change in our internal control over financial reporting during our
most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
PART II. OTHER INFORMATION
Item 2. Changes in Securities.
(c) On December 22, 2003, we signed an agreement to purchase all of the
outstanding common stock of Core Technology Services, Inc., and on January 9,
2004, the acquisition was consummated. The initial purchase price included
100,000 shares of our Class A Common Stock, which shares are restricted as to
their further sale or transfer. The issuance of this stock was exempt from
registration in reliance on Section 4(2) of the Securities Act of 1933. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for additional information regarding such acquisition.
Item 5. Other Information.
On February 3, 2004, we sent a notice to the holders of our notes payable,
offering to exchange the existing 5-Year Notes for one of two options (the
"Notes Exchange Offer"). One option is to exchange the existing 5-Year Notes for
restricted Class A Common Stock at a proposed exchange rate of $3.57 per share.
The other option is to exchange the existing 5-Year Notes for new convertible
notes, (the "Convertible Notes") with proposed terms including (i) an interest
rate of 6.0% per year, payable quarterly, (ii) principal repayments beginning
two years after the date that the current 5-Year Notes are presently scheduled
to begin principal repayments, (iii) principal repayments of 5% of the
Convertible Notes amount would occur in equal quarterly installments for eleven
quarters, with a balloon payment of all remaining principal and interest in the
twelfth quarter, and (iv) the Convertible Notes will be convertible into Class A
Common Stock anytime, at the option of the holder, at 120% of the closing price
of our publicly traded Class A Common Stock on the date of the exchange. It is
anticipated that any shares of Class A Common Stock that are issued pursuant to
either of the Notes Exchange Offer options will be subject to the same lock-up
provisions that currently apply to our restricted common stock. The Exchange
Offer was also made to the holders of the $3,000 of notes payable issued in
connection with the HS acquisition. The anticipated deadline for responding to
the Notes Exchange Offer is February 27, 2004. The Notes Exchange Offer is
subject to, among other things, definitive documents with mutually agreeable
terms and conditions to be entered into by the parties. The proposed terms
described above may be different than the definitive terms. The main purpose of
the Exchange Offer is to reduce or eliminate our debt service requirements in
the near term.
In addition to the Notes Exchange Offer, we are offering to our existing note
holders and to holders of its restricted common stock, $1,000 of new Convertible
Notes.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The exhibits are listed in the Exhibit Index beginning on page 28 herein.
(b) Reports on Form 8-K.
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ACCESS INTEGRATED TECHNOLOGIES, INC.
(Registrant)
Date: February 13, 2004 By: /s/ A. Dale Mayo
----------------------------------
A. Dale Mayo
President and Chief Executive
Officer and Director
(Principal Executive Officer)
Date: February 13, 2004 By: /s/ Brian D. Pflug
----------------------------------
Brian D. Pflug
Senior Vice President-Accounting &
Finance
(Principal Financial Officer)
27
EXHIBIT INDEX
Exhibit Number Description
2.4 -- Stock Purchase Agreement, dated December 22, 2003, between the
Registrant, Core Technology Services, Inc., a New York
corporation, and Core Technology Services, Inc.'s stockholders.
3.3 -- Fourth Amended and Restated Certificate of Incorporation of the
Registrant.
4.10 -- Registration Rights Agreement, dated as of January 9, 2004,
between Registrant and Erik B. Levitt.
10.33 -- Employment Agreement, dated as of January 9, 2004, between Core
Technology Services, Inc. and Erik B. Levitt
10.34 -- Confidentiality, Inventions And Noncompete Agreement, dated as of
January 9, 2004, made by Erik B. Levitt in favor of Registrant.
31.1 -- Officer's Certificate Pursuant to 15 U.S.C. Section 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. Section 7241, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 -- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 -- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
All of the above-referenced Exhibits are filed herewith.
28