UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED: DECEMBER 31, 2005
|_| 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.
(Name of Small Business Issuer in its Charter)
DELAWARE 22-3720962
(State of incorporation or organization) (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, including area code)
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 the filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of February 8, 2006, 16,112,128 shares of Class A Common Stock, $0.001 par
value, and 925,811 shares of Class B Common Stock, $0.001 par value, were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
ACCESS INTEGRATED TECHNOLOGIES, INC.
CONTENTS TO FORM 10-QSB
PART I -- FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheet at March 31, 2005 and
December 31, 2005 3
Consolidated Statements of Operations for the Three and
Nine Months ended December 31, 2004 and 2005 4
Consolidated Statements of Cash Flows for the Nine
Months ended December 31, 2004 and 2005 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Controls and Procedures 27
PART II -- OTHER INFORMATION
Item 6. Exhibits 28
Signatures 29
Exhibit Index 30
2
ACCESS INTEGRATED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except for share data)
March 31, December 31,
2005 2005
------------------ ------------------
ASSETS (Audited) (Unaudited)
Current assets
Cash and cash equivalents................................ $ 4,779 $ 10,105
Accounts receivable, net................................. 947 1,662
Prepaid and other current assets......................... 1,312 1,961
------------------ ------------------
Total current assets 7,038 13,728
Property and equipment, net.............................. 14,261 25,274
Intangible assets, net................................... 3,337 2,228
Capitalized software costs, net.......................... 1,622 1,433
Goodwill................................................. 10,363 9,310
Other assets............................................. 1,156 1,038
------------------ ------------------
Total assets $ 37,777 $ 53,011
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses.................... $ 2,415 $ 8,380
Notes payable, current portion........................... 1,415 1,188
Capital leases, current portion.......................... 432 83
Other current liabilities................................ 1,042 1,157
------------------ ------------------
Total current liabilities 5,304 10,808
Notes payable, net of current portion.................... 12,682 2,072
Capital leases, net of current portion................... 6,058 5,995
Other liabilities........................................ 2,436 2,056
------------------ ------------------
Total liabilities 26,480 20,931
------------------ ------------------
Commitments and contingencies (Note 6)
Redeemable Class A common stock, 53,534 and
0 shares issued and outstanding
at March 31, 2005 and December 31, 2005,
respectively.......................................... 250 -
Stockholders' Equity
Class A common stock, $0.001 par value per
share; 40,000,000 shares authorized;
9,433,328 and 14,658,668 shares issued
and 9,381,888 and 14,607,228 shares
outstanding at March 31, 2005 and
December 31, 2005, respectively........................ 9 15
Class B common stock, $0.001 par value per
share; 15,000,000 shares authorized;
965,811 and 925,811 shares issued and
outstanding, at March 31, 2005 and
December 31, 2005, respectively......................... 1 1
Additional paid-in capital............................... 32,696 67,510
Treasury stock, at cost; 51,440 shares................... (172) (172)
Accumulated deficit...................................... (21,487) (35,274)
------------------ ------------------
Total stockholders' equity 11,047 32,080
------------------ ------------------
Total liabilities and stockholders' equity $ 37,777 $ 53,011
================== ==================
3
ACCESS INTEGRATED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for share data)
(unaudited)
Three months ended Nine months ended
December 31, December 31,
----------------------------- -----------------------------
2004 2005 2004 2005
------------ ------------ ------------ ------------
Revenues:
Media services.................................. $ 1,300 $ 2,751 $ 2,496 $ 7,377
Data center services............................ 1,439 1,660 4,639 4,907
------------ ------------ ------------ ------------
Total revenues 2,739 4,411 7,135 12,284
Costs of revenues (exclusive of depreciation
and amortization):
Media services.................................. 570 1,813 912 5,147
Data center services............................ 1,062 1,298 3,102 3,593
------------ ------------ ------------ ------------
Total costs of revenues 1,632 3,111 4,014 8,740
------------ ------------ ------------ ------------
Gross profit (exclusive of depreciation and
amortization): 1,107 1,300 3,121 3,544
Operating expenses:
Selling, general and administrative............. 1,303 2,164 3,588 5,956
Provision for doubtful accounts................. 23 55 598 90
Research and development........................ 122 37 288 324
Non-cash stock-based compensation............... - - 4 -
Depreciation and amortization................... 895 1,194 2,457 3,647
------------ ------------ ------------ ------------
Total operating expenses 2,343 3,450 6,935 10,017
------------ ------------ ------------ ------------
Loss before other expense (1,236) (2,150) (3,814) (6,473)
Interest income................................. - 97 - 180
Interest expense................................ (90) (313) (279) (1,837)
Non-cash interest expense....................... (43) (32) (155) (1,325)
Debt conversion expense......................... - (125) - (6,208)
Other (expense) income, net..................... (27) 409 17 1,643
------------ ------------ ------------ ------------
Loss before income tax benefit and minority interest (1,396) (2,114) (4,231) (14,020)
Income tax benefit.............................. 77 77 233 233
------------ ------------ ------------ ------------
Net loss before minority interest in subsidiary (1,319) (2,037) (3,998) (13,787)
Minority interest in loss of subsidiary......... - - 10 -
------------ ------------ ------------ ------------
Net loss $ (1,319) $ (2,037) $ (3,988) $ (13,787)
============ ============ ============ ============
Net loss per common share:
Basic and diluted............................... $ (0.13) $ (0.13) $ (0.42) $ (1.07)
============ ============ ============ ============
Weighted average number of common shares outstanding:
Basic and diluted............................... 10,041,879 15,399,530 9,432,380 12,926,709
============ ============ ============ ============
4
ACCESS INTEGRATED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the nine months ended
December 31,
--------------------------------------------------
2004 2005
-------------------- --------------------
Cash flows from operating activities
Net loss $ (3,988) $ (13,787)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................................... 2,457 3,647
Amortization of software development costs............................. 220 434
Amortization of deferred tax liability................................. (233) (233)
Provision for doubtful accounts........................................ 598 90
Non-cash stock-based compensation...................................... 4 -
Non-cash interest expense.............................................. 155 1,325
Minority interest...................................................... (10) -
Gain on exchange of minority interest shares........................... (13) -
Net fair value change of Class A common stock warrants................. (91) (1,660)
Debt conversion expense................................................ - 6,208
Debt issuance costs included in interest expense....................... - 730
Changes in operating assets and liabilities:
Accounts receivable.................................................... (807) (805)
Prepaids and other current assets...................................... (100) (822)
Other assets........................................................... (355) (470)
Accounts payable and accrued expenses.................................. (607) (570)
Other liabilities...................................................... 11 (30)
------------------ ------------------
Net cash used in operating activities (2,759) (5,943)
Cash flows from investing activities
Purchases of property and equipment.................................... (1,637) (7,303)
Purchases of intangible assets......................................... (38) -
Additions to capitalized software costs................................ (302) (245)
Acquisition of FiberSat Global Services LLC, net of cash acquired. (508) -
Restricted short-term investment....................................... - (180)
------------------ ------------------
(2,485) (7,728)
Net cash used in investing activities
Cash flows from financing activities
Repayment of notes payable............................................. (448) (1,505)
Principal payments on capital leases................................... (158) (414)
Repurchase of Class A common stock..................................... (32) -
Net proceeds from issuance of Class A common stock..................... 5,067 20,916
------------------ ------------------
Net cash provided by financing activities 4,429 18,997
------------------ ------------------
Net (decrease) increase in cash and cash equivalents (815) 5,326
Cash and cash equivalents at beginning of period 2,330 4,779
------------------ ------------------
Cash and cash equivalents at end of period $ 1,515 $ 10,105
================== ==================
5
ACCESS INTEGRATED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
($ in thousands, except for per share data)
(Unaudited)
NOTE 1. NATURE OF OPERATIONS
Access Integrated Technologies, Inc. ("AccessIT") was organized on March 31,
2000 and is a leading provider of fully managed storage, electronic delivery and
software services and technology solutions for owners and distributors of
digital content to movie theaters and other venues. In these notes, the terms
"Company", "we," "us," and "our" refer to AccessIT and its subsidiaries unless
the context otherwise requires. To date, we have generated revenues from two
primary businesses, Media Services and Internet Data Center ("IDC" or "data
center") services. Our Media Services business provides software, services and
technology solutions to the television and motion picture industries, primarily
to facilitate the transition from analog (film) to digital cinema. Our nine
leased IDCs provide corporate customers with secure and fail-safe off-site
locations to house their computer and telecommunications equipment, as well as
related services such as equipment monitoring and back-up and protection of
customers' data. These existing businesses have positioned us at what we believe
to be the forefront of an emerging industry opportunity relating to the delivery
and management of digital cinema and other content to entertainment and other
remote venues worldwide. This is currently our primary strategic focus.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted 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.
Our consolidated financial statements include the accounts of AccessIT, Access
Digital Media, Inc. ("AccessDM"), Hollywood Software, Inc. d/b/a AccessIT
Software ("AccessIT SW"), Core Technology Services, Inc. ("Managed Services"),
FiberSat Global Services, Inc. d/b/a AccessIT Satellite and Support Services,
("AccessIT Satellite"), ADM Cinema Corporation ("ADM Cinema") d/b/a the Pavilion
Theatre (the "Pavilion Theatre") and Christie/AIX, Inc. ("Christie/AIX"). We
have eliminated all intercompany transactions and balances.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. The Company's most significant
estimates related to software revenue recognition, capitalization of software
development costs, amortization and impairment testing of intangible assets and
depreciation of fixed assets. On an on-going basis, we evaluate our estimates,
including those related to the carrying values of our fixed assets and
intangible assets, the valuation of deferred tax liabilities, and the valuation
of assets acquired and liabilities assumed in purchase business combinations. 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.
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
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in AccessIT's
Form 10-KSB for the fiscal year ended March 31, 2005 filed with the Securities
and Exchange Commission ("SEC") on June 29, 2005. Certain reclassifications of
prior period data have been made to conform to the current presentation.
6
REVENUE RECOGNITION
MEDIA SERVICES
Our Media Services revenues are generated as follows:
OPERATIONS OF: REVENUES CONSIST OF: ACCOUNTED FOR IN ACCORDANCE WITH:
---------------------- ----------------------------------- -------------------------------------------
AccessIT SW (1) software licensing, Statement of Position ("SOP") 97-2,
including customer licenses and "Software Revenue Recognition"
ASP agreements,
----------------------------------- -------------------------------------------
(2) software maintenance Staff Accounting Bulletin ("SAB") No. 104
contracts, and "Revenue Recognition in Financial
(3) professional consulting Statements" ("SAB No. 104").
services, which includes
systems implementation,
training, custom software
development services and other
professional services
---------------------- ----------------------------------- -------------------------------------------
AccessIT Satellite (1) satellite network SAB No. 104
monitoring and
(2) maintenance fees
---------------------- ----------------------------------- -------------------------------------------
AccessDM (1) satellite delivery revenues, SAB No. 104
(2) data encryption and preparation
fee revenues, and
(3) landing fees for delivery
to each movie theatre
---------------------- ----------------------------------- -------------------------------------------
Pavilion Theatre (1) movie theatre admission SAB No. 104
revenues and
(2) concession food and beverage
revenues
---------------------- ----------------------------------- -------------------------------------------
Christie/AIX (1) virtual print fees and SAB No. 104
other fees
---------------------- ----------------------------------- -------------------------------------------
Software licensing revenue is recognized when the following criteria are met:
(a) persuasive evidence of an arrangement exists, (b) delivery has occurred and
no significant obligations remain, (c) the fee is fixed or determinable and (d)
collection is determined to be probable. Significant upfront fees are received
in addition to periodic amounts upon achievement of contractual events for
licensing of the Company's products. Such amounts are deferred until the revenue
recognition criteria have been met, which typically occurs after delivery and
acceptance.
In instances where the Company develops customized software applications, the
percentage-of-completion method of accounting is followed to recognize revenue.
Deferred revenue is recorded in cases of: (1) a portion or the entire contract
amount cannot be recognized as revenue due to non-delivery or acceptance of
licensed software or custom programming, (2) incomplete implementation of ASP
service arrangements, or (3) unexpired pro-rata periods of maintenance, minimum
ASP service fees or website subscription fees. As license fees, maintenance
fees, minimum ASP service fees and website subscription fees are often paid in
advance, a portion of this revenue is deferred until the contract ends. Such
amounts are classified as deferred revenue and are recognized as revenue in
accordance with the Company's revenue recognition policies described above.
7
DATA CENTER SERVICES
Our Data Center Services revenues are generated as follows:
OPERATIONS OF: REVENUES CONSIST OF: ACCOUNTED FOR IN ACCORDANCE WITH:
---------------------- ----------------------------------- -------------------------------------------
AccessIT (1) license fees for colocation, SAB No. 104
(2) riser access charges,
(3) electric and cross connect
fees, and
(4) non-recurring installation
and consulting fees
---------------------- ----------------------------------- -------------------------------------------
Managed Services (1) network monitoring, SAB No. 104
(2) maintenance fees, and
(3) non-recurring installation
and consulting fees
---------------------- ----------------------------------- -------------------------------------------
AccessIT's revenues are recognized ratably over the term of the contract,
generally one 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 collected prior
to satisfying revenue recognition criteria are classified as deferred revenue.
Amounts satisfying revenue recognition criteria prior to billing are classified
as unbilled revenue. Managed Services' revenues, which consist of monthly
recurring billings pursuant to contracts, are recognized as revenues in the
month earned, and other billings which are recognized on a time and materials
basis are recognized as revenues in the period in which the services were
provided.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs under Statement of Financial
Accounting Standards ("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 until the product is available for general release. Amounts
capitalized as software development costs are amortized periodically using the
greater of revenues during the period compared to the total estimated revenues
to be earned or on a straight-line basis over five years. The Company reviews
capitalized software costs for impairment on a periodic basis. To the extent
that the carrying amount exceeds the estimated net realizable value of the
capitalized software cost, an impairment charge is recorded. No impairment was
recorded for the nine months ended December 31, 2004 and 2005, respectively.
Amortization of capitalized software development costs, included in costs of
revenues, for the three months ended December 31, 2004 and 2005 amounted to $92
and $138, respectively, and $220 and $434 for the nine months ended December 31,
2004 and 2005, respectively. Revenues relating to customized software
development under a contract are recognized on a percentage of completion
method. As of December 31, 2005, unbilled receivables under such contracts
aggregated $1,258.
BUSINESS COMBINATIONS AND INTANGIBLE ASSETS
We have adopted SFAS No. 141, "Business Combinations" ("SFAS No. 141") and SFAS
No. 142, "Goodwill and other Intangible Assets" ("SFAS No. 142"). SFAS No. 141
requires all business combinations to be accounted for using the purchase method
of accounting and that certain intangible assets acquired in a business
combination must be recognized as assets separate from goodwill. SFAS No. 142
addresses the recognition and measurement of goodwill and other intangible
assets subsequent to their acquisition. SFAS No. 142 also addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination, whether acquired individually or with a group of other assets. This
statement provides that intangible assets with indefinite lives and goodwill
will not be amortized but will be tested at least annually for impairment. If
impairment is indicated, then the asset will be written down to its fair value,
typically based upon its future expected discounted cash flows. As of December
31, 2005, our finite-lived intangible assets consisted of customer agreements,
covenants not to compete, Federal Communications Commission licenses for
satellite transmission services, trade names and trademarks, and a liquor
license which are estimated to have useful lives ranging from two to ten years.
In addition, we have recorded goodwill in connection with the acquisitions of
AccessIT SW, Managed Services, AccessIT Satellite, and the Pavilion Theatre.
8
Goodwill related to the acquisition of the Pavilion Theatre was reduced in
September 2005 in connection with the early retirement of the outstanding note
payable (see Note 4).
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 being
amortized over the shorter of the lease term or the estimated useful life of the
improvement. Maintenance and repair costs are charged to expense as incurred.
Major renewals, improvements and additions are capitalized.
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.
NET LOSS PER SHARE
Computations of basic and diluted net loss per share of the Company's Class A
common stock ("Class A Common Stock") and Class B common stock ("Class B Common
Stock", and together with the Class A Common Stock, the "Common Stock") have
been made in accordance with SFAS No. 128, "Earnings Per Share". Basic and
diluted net loss per share have been calculated as follows:
Basic net loss per share = Net loss
---------------------------------------------------------------
Weighted average number of common shares
outstanding during the period
Net loss adjusted for the after-tax amount of interest
Diluted net loss per share = associated with convertible debt
---------------------------------------------------------------
Weighted average number of common shares
outstanding during the period plus the weighted
average of the number of additional common shares that would
have been outstanding if the dilutive potential
common shares had been issued
Shares issued and reacquired during the period are weighted for the portion of
the period that they are outstanding.
The Company has incurred net losses for the nine months ended December 31, 2004
and 2005 and, therefore, the impact of dilutive potential common shares from
outstanding stock options, warrants (prior to the application of the treasury
stock method), and convertible notes (on an as-converted basis) were excluded
from the computation as it would be anti-dilutive.
STOCK-BASED COMPENSATION
The Company has two stock-based employee compensation plans, which are described
more fully in Note 5. The Company accounts for its stock-based employee
compensation plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
Opinion No. 25"), and related interpretations. As such, stock-based compensation
expense 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 -
Transaction and Disclosures", which amends SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), which requires the Company to
provide pro forma net loss and earnings per share disclosures for stock option
9
grants made in 1995 and future years 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 to stock-based compensation:
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------------- ----------------------------
2004 2005 2004 2005
----------- ----------- ----------- -----------
Net loss as reported................... $ (1,319) $ (2,037) $ (3,988) $ (13,787)
Add: Stock-based compensation expense
included in net loss..... - - 4
Less: Stock-based compensation
expense determined under fair-
value based method............... (158) (761) (464) (1,312)
----------- ----------- ----------- -----------
Pro forma net loss..................... $ (1,477) $ (2,798) $ (4,448) $ (15,099)
=========== =========== =========== ===========
Basic and diluted net loss per share:
As reported........................ $ (0.13) $ (0.13) $ (0.42) $ (1.07)
Pro forma.......................... $ (0.15) $ (0.18) $ (0.47) $ (1.17)
The Company estimated the fair value of stock options at the date of each grant
using a Black-Scholes option valuation model with the following assumptions:
Three Months Ended
December 31,
---------------------------
2004 2005
------------ ----------
Weighted-average risk-free interest
rate............................... 4.1% 4.5%
Dividend yield......................... - -
Expected life (years).................. 10 10
Weighted-average expected
volatility......................... 110% 56.5%
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (the "FASB") issued
SFAS 153, "Exchange of Non-Monetary Assets, an Amendment of APB Opinion No. 29"
("SFAS 153"). SFAS 153 addresses the measurement of exchanges of non-monetary
assets and redefines the scope of transactions that should be measured on the
fair value of the assets exchanged. The provisions of this statement are
effective for non-monetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. The Company is evaluating the requirements of SFAS 153 and
has not determined the impact on its financial statements. The effective date
for the Company to adopt SFAS 153 due to its fiscal reporting first interim or
annual reporting period is April 1, 2006.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123(R)"). This statement revises the original guidance
contained in SFAS No. 123 and supersedes APB Opinion No. 25, and its related
implementation guidance. Under SFAS No. 123(R), the Company will be required to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award (with limited
exceptions) and recognize such cost over the period during which an employee is
required to provide service in exchange for the reward (usually the vesting
period). For stock options and similar instruments, grant-date fair value will
be estimated using option-pricing models adjusted for unique characteristics of
instruments (unless observable market prices for the same or similar instruments
are available). For small business issuers, SFAS No. 123(R) is effective at the
beginning of their next fiscal year after December 15, 2005. The effective date
for the Company to adopt SFAS No. 123(R) due to its fiscal reporting first
interim or annual reporting period is April 1, 2006. Upon adoption of this
standard, the actual costs of our stock-based payment plans will be based on
grant-date fair value, which has not yet been determined.
10
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," ("SFAS No. 154"). SFAS No. 154 establishes, unless impracticable,
retrospective application as the required method for reporting a change in
accounting principle in the absence of explicit transition requirements specific
to the newly adopted accounting principle. The statement also addresses the
reporting of a correction of error by restating previously issued financial
statements. SFAS No. 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The Company will
adopt SFAS No. 154 as required.
NOTE 4. NOTES PAYABLE
In November 2003, the Company issued two 5-year, 8% notes payable aggregating
$3,000 (the "HS Notes") to the founders of AccessIT SW as part of the purchase
price for AccessIT SW. During the nine months ended December 31, 2005, the
Company repaid principal of $410 on the HS Notes. As of December 31, 2005, the
outstanding principal balance of the HS Notes was $2,082.
In March 2004, the Company completed an exchange (the "Exchange Offer") of its
previously issued 5-year 8% notes (the "5-Year Notes") totaling $4,405 for
either: (1) 6% convertible notes (the "6% Convertible Notes") or (2) Class A
Common Stock. Pursuant to the Exchange Offer, the Company issued 6% Convertible
Notes with an aggregate principal amount of $1,736 to several investors, of
which $1,400 was payable to certain officers and directors of the Company. The
6% Convertible Notes were convertible into 307,871 shares of its Class A Common
Stock: (1) at any time up to the maturity date at each holder's option or (2)
automatically upon the date that the average closing price on the American Stock
Exchange ("AMEX") of the Class A Common Stock for thirty consecutive trading
days has been equal to or greater than $12.00. In September 2005, the AMEX
30-day average closing price of the Company's Class A Common Stock exceeded
$12.00, and therefore, the Company converted all of the 6% Convertible Notes
into 307,871 shares of Class A Common Stock, of which 248,282 shares of Class A
Common Stock were issued to certain officers and directors of the Company.
Accordingly, the outstanding principal amount of the 6% Convertible Notes of
$1,699, net of $32 of unamortized debt issuance costs, was credited to
additional paid-in capital. As of December 31, 2005, there were no 6%
Convertible Notes outstanding.
The holders of all the HS Notes and certain holders of 5-Year Notes, with an
aggregate outstanding principal amount of $220 (the "Remaining 5-Year Notes") at
the time of the Exchange Offer, elected not to participate in the Exchange
Offer. Through September 2005, we made early principal repayments totaling $138
on the Remaining 5-Year Notes and scheduled principal payments of $12 on the
Remaining 5-Year Notes. As of December 31, 2005, there were no Remaining 5-Year
Notes outstanding.
In March 2004, in connection with the acquisition of certain digital cinema
related assets of the Boeing Company (the "Boeing Digital Asset Acquisition"),
the Company issued a 4-year, non-interest bearing note payable with a face
amount of $1,800 (the "Boeing Note"). The estimated fair value of the Boeing
Note was determined to be $1,367 on the closing date. Interest is being imputed,
at a rate of 12%, over the term of the Boeing Note, and is being charged to
non-cash interest expense. During the nine months ended December 31, 2005,
principal repayments of $450 were made and non-cash interest expense resulting
from the Boeing Note was $97. As of December 31, 2005, the outstanding balance
of the Boeing Note, including imputed interest, was $1,178.
In February 2005, in connection with the purchase of substantially all the
assets of Pritchard Square Cinema, LLC d/b/a Pavilion Theatre in Brooklyn, New
York (the "Pavilion Theatre Acquisition"), ADM Cinema issued to the seller a
5-year, 8% note payable for $1,700 (the "Pavilion Note"). Quarterly principal
payments of $42 were to be made over the next five years, with a balloon
repayment of $893. In September 2005, the Company and the seller agreed to an
early repayment of the Pavilion Note in exchange for a lump sum payment of $500.
Accordingly, the Company decreased goodwill by $1,057 and there was no Pavilion
Note outstanding as of December 31, 2005.
In February 2005, the Company issued 7% convertible debentures (the "Convertible
Debentures") and warrants (the "Convertible Debentures Warrants") to a group of
institutional investors for aggregate proceeds of $7,600. The Convertible
Debentures had a 4-year term, with one third of the unconverted principal
balance repayable in twelve equal monthly installments beginning three years
after the closing. The remaining unconverted principal balance was repayable at
maturity. The Company had the option to pay the interest in cash or, if certain
conditions were met, by issuing shares of its Class A Common Stock. Through
September 2005, the Company issued 17,758 shares of Class A Common Stock as
payment of interest, in lieu of cash, based on 93% of the AMEX 5-day average
closing price of the Company's Class A Common Stock preceding the interest due
date. The Convertible Debentures were initially convertible into 1,867,322
shares Class A Common Stock, based upon a conversion price of $4.07 per share
subject to adjustments from time to time. In addition, there was a beneficial
conversion feature of $605, which the Company recorded to non-cash interest
11
expense during the fiscal year ended March 31, 2005. The offering of the
Convertible Debentures and the Convertible Debentures Warrants was exempt from
the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), under Section 4(2) of the Securities Act and Rule 506
promulgated thereunder. The Company agreed to register the resale of the shares
of Class A Common Stock underlying the Convertible Debentures with the SEC. The
Company filed a Form S-3 on March 11, 2005, which was declared effective by the
SEC on March 21, 2005.
In August 2005, the Company reached an agreement (the "Conversion Agreement")
with the investors holding the Convertible Debentures and Convertible Debenture
Warrants for the investors to: (1) convert all of their Convertible Debentures
into 1,867,322 shares of Class A Common Stock; and (2) exercise all their
Convertible Debenture Warrants for $2,487 into 560,196 shares of Class A Common
Stock, and for the Company to: (1) issue to the investors 760,196 warrants to
purchase Class A Common Stock at an exercise price of $11.39 per share (the "New
Warrants"); and (2) issue to the investors 71,359 shares of Class A Common Stock
(the "New Shares"). Because the issuance of the New Warrants and New Shares,
when combined with the shares of Class A Common Stock underlying the Convertible
Debentures and the Convertible Debentures Warrants, exceeded 20% of the
Company's then-outstanding shares of Class A Common Stock, under the AMEX's
rules, stockholder approval was required to be obtained. The Company obtained
such stockholder approval by written consent of a majority of the holders of
Common Stock and a Schedule 14(C) Information Statement was required, and was
filed with the SEC on October 6, 2005. The Company was required to register the
resale of the New Shares and the Class A Common Stock underlying the New
Warrants on Form S-3 with the SEC. The Company filed a Form S-3 on November 16,
2005, which was declared effective by the SEC on December 2, 2005.
The Company accounted for the Conversion Agreement under the provisions of SFAS
No. 84, "Induced Conversions of Convertible Debt", which requires the value of
the New Warrants and the New Shares to be recorded as an expense. The New
Warrants were valued by an independent appraiser at a value of $4,990, and the
New Shares were valued at $906, based on the AMEX closing price of the Company's
Class A Common Stock on August 26, 2005, the date the Conversion Agreement was
finalized. The value of the New Warrants plus $200 for professional fees and the
value of the New Shares were charged to debt conversion expense. Additionally,
the Company issued 8,780 shares to the placement agent (the "Placement Agent
Shares") involved in the Conversion Agreement, which were valued at $112, based
on the AMEX closing price of the Company's Class A Common Stock on August 26,
2005. The value of the Placement Agent Shares was charged to debt conversion
expense. The remaining accretion on the value of the Convertible Debentures
Warrants of $999 was charged to non-cash interest expense, and the remaining
unamortized debt issuance costs of $730 were charged to interest expense. As a
result of the Conversion Agreement, there were no Convertible Debentures
outstanding as of December 31, 2005.
Notes payable consisted of the following:
March 31, 2005 December 31, 2005
----------------------------- ----------------------------
Long
Current Long Term Current Term
Note Payable Portion Portion Portion Portion
--------------------------------------- ------------ ------------ ------------ ------------
HS Notes............................... $ 696 $ 1,796 $ 738 $ 1,344
6% Convertible Notes................... 70 1,666 - -
Remaining 5-Year Notes................. 29 71 - -
Boeing Note............................ 450 1,081 450 728
Pavilion Note.......................... 170 1,549 - -
Convertible Debentures................. - 6,519 - -
------------ ------------ ------------ ------------
$ 1,415 $ 12,682 $ 1,188 $ 2,072
============ ============ ============ ============
NOTE 5. STOCKHOLDERS' EQUITY
CAPITAL STOCK
In March 2004, in connection with the Boeing Digital Asset Acquisition (see Note
4), the Company issued 53,534 unregistered shares of Class A Common Stock (the
"Boeing Shares") to the Boeing Company ("Boeing"), as part of the purchase
price. At any time during the ninety day period beginning March 29, 2005 to June
29, 2005, Boeing had the option to sell the Boeing Shares to the Company in
exchange for $250 in cash, which the Company classified under commitments and
12
contingencies. The ninety day period expired on June 29, 2005, and Boeing did
not require the Company to repurchase the Boeing Shares. Accordingly, the amount
of $250 was credited to additional paid-in capital.
In June 2004, the Company issued in a private placement (the "June 2004 Private
Placement") 1,217,500 unregistered shares of Class A Common Stock at a sale
price of $4.00 per share and warrants to the investors for gross proceeds of
$4,870. The total net proceeds to the Company of $4,044, including fees and
expenses to subsequently register the securities, were used for capital
investments and for working capital. The Company agreed to register the resale
of the shares of Class A Common Stock issued with the SEC. The Company filed a
Form SB-2 on July 2, 2004, which was declared effective by the SEC on July 20,
2004.
In August 2004, the Company's Board of Directors authorized the repurchase of up
to 100,000 shares of Class A Common Stock, which may be purchased at prevailing
prices from time-to-time in the open market depending on market conditions and
other factors. During the nine months ended December 31, 2005, no Class A Common
Stock was repurchased. As of December 31, 2005, the Company has repurchased
51,440 shares of Class A Common Stock for an aggregate purchase price of $172,
including fees, which shares have been recorded as treasury stock.
In November 2004, the Company entered into a stock purchase agreement (the
"November 2004 Private Placement") with accredited investors in a private
placement to issue and sell 282,776 shares of Class A Common Stock at $3.89 per
share to the investors for gross proceeds of $1,100. These shares carried
piggyback and demand registration rights, at the sole expense of the investor.
The total net proceeds to the Company of $1,023 were used for the purchase of
certain assets and liabilities of FiberSat Global Services, LLC (the "FiberSat
Acquisition") and for working capital. The investors exercised their piggyback
registration rights and the Company registered the resale of the 282,776 shares
of Class A Common Stock by filing a Form S-3 on March 11, 2005, which was
declared effective by the SEC on March 21, 2005.
In November 2004, the Company issued 540,000 shares of Class A Common Stock in
connection with the FiberSat Acquisition, as part of the purchase price. The
Company agreed to register the resale of 405,525 of the shares issued in
connection with the FiberSat Acquisition with the SEC. The Company filed a Form
S-3 on March 11, 2005, which was declared effective by the SEC on March 21,
2005. The Company agreed to register the resale of an additional 99,475 shares
issued in connection with the FiberSat Acquisition with the SEC. The Company
filed a Form S-3 on November 16, 2005, which was declared effective by the SEC
on December 2, 2005.
In February 2005, the Company issued 40,000 unregistered shares of Class A
Common Stock in connection with the Pavilion Theatre Acquisition (see Note 4) as
part of the purchase price. As of December 31, 2005, the Company has not
registered the resale of these shares issued in connection with the Pavilion
Theatre Acquisition under any registration statement filed with the SEC.
In July 2005, the Company entered into a purchase agreement with certain
institutional and other accredited investors in a private placement (the "July
2005 Private Placement") to issue and sell 1,909,115 unregistered shares of
Class A Common Stock at a sale price of $9.50 per share and warrants to the
investors for gross proceeds of $18,137. The Company is using the net proceeds
of $16,721 primarily to fund the capital investments in connection with
Christie/AIX's digital cinema rollout plan (see Note 6) and for working capital
and general corporate purposes. The Company agreed to register the resale of the
shares of Class A Common Stock issued with the SEC. The Company filed a Form S-3
on August 18, 2005, which was declared effective by the SEC on August 31, 2005.
In August 2005, in connection with the Conversion Agreement (see Note 4), all
Convertible Debentures Warrants were exercised for $2,487 and the Company issued
560,196 shares of Class A Common Stock. The Company also issued 71,359 New
Shares to the investors, and another 8,780 Placement Agent Shares. The Company
was required to register the resale of the shares of the Class A Common Stock
underlying the Convertible Debentures Warrants with the SEC. The Company filed a
Form S-3 on March 11, 2005, which was declared effective by the SEC on March 21,
2005. The Company was also required to register the New Shares and the Placement
Agent Shares on Form S-3 with the SEC. The Company filed a Form S-3 on November
16, 2005, which was declared effective by the SEC on December 2, 2005.
In September 2005, in connection with the Exchange Offer completed in March 2004
(see Note 4), the AMEX 30-day average closing price of the Company's Class A
Common Stock exceeded $12.00, and therefore, the Company converted all of the 6%
Convertible Notes into 307,871 shares of Class A Common Stock, of which 248,282
shares of Class A Common Stock were issued to certain officers and directors of
the Company. The Company registered the resale of only 59,589 of theses shares
13
of Class A Common Stock on Form S-3 with the SEC. The Company filed a Form S-3
on November 16, 2005, which was declared effective by the SEC on December 2,
2005.
STOCK OPTION PLAN
AccessIT's stock option plan ("the Plan") currently provides for the issuance of
up to 1,100,000 options to purchase shares of Class A Common Stock to employees,
outside directors and consultants. On June 9, 2005, the Company's Board of
Directors approved the expansion of the Plan from 850,000 to 1,100,000 options,
which was approved by the stockholders at the annual meeting held on September
15, 2005. The Company intends to obtain stockholder approval to expand the Plan
at the Company's next annual meeting.
During the nine months ended December 31, 2005, under the Plan, the Company
granted 573,500 options to its employees and 40,000 options to four members of
our Board of Directors, all at an exercise price range from $5.70 to $13.30 per
share.
Shares Under Option
---------------------
Balance at March 31, 2005.............. 762,897
Granted................................ 613,500
Exercised.............................. (2,667)
Cancelled.............................. (65,583)
---------------------
Balance at December 31, 2005........... 1,308,147
=====================
As of December 31, 2005, AccessDM's separate stock option plan currently
provides for the issuance of up to 2,000,000 options to purchase shares of its
common stock to employees. During the nine months ended December 31, 2005,
AccessDM issued options to purchase 50,000 shares of its common stock to an
employee at an exercise price to be determined following an appraisal of such
options.
Shares Under Option
---------------------
Balance at March 31, 2005.............. 1,005,000
Granted................................ 50,000
Exercised.............................. -
Cancelled.............................. -
---------------------
Balance at December 31, 2005........... 1,055,000
=====================
WARRANTS
In November 2003, in connection with the Company's initial public offering, the
Company issued the underwriter warrants to purchase up to 120,000 shares of
Class A Common Stock at an exercise price of $6.25 per share (the "Underwriter
Warrants"). The Underwriter Warrants were immediately exercisable and expire on
November 7, 2007. The exercise price is subject to adjustment in certain
circumstances, and in 2004 the exercise price was adjusted to $6.03 per share.
During the nine months ended December 31, 2005, 49,085 Underwriter Warrants were
exercised for an aggregate of $296 and the Company issued 49,085 shares of Class
A Common Stock. In addition, 67,140 Underwriter Warrants were exercised on a
cashless basis, which resulted in the issuance of 33,278 shares of Class A
Common Stock. As of December 31, 2005, 3,775 Underwriter Warrants remained
outstanding.
In connection with the issuance of the 5-Year Notes, the Company issued to the
holders of the 5-Year Notes warrants to purchase 440,500 shares of Class A
Common Stock (the "5-Year Notes Warrants"). The 5-Year Notes Warrants were
issued and were ascribed an estimated fair value of $2,202, which was recognized
as issuance cost and therefore was charged against the carrying value of the
related 5-Year Notes. During the nine months ended December 31, 2004, and 2005 a
total of $13 and $43, respectively, was amortized to non-cash interest expense
to accrete the remaining value of the 5-Year Notes Warrants to their face value
over their expected term. In July 2005, in connection with the early repayment
of the Remaining 5-Year Notes, the remaining value of the 5-Year Notes Warrants
totaling $43 was amortized to non-cash interest expense.
In June 2004, in connection with the June 2004 Private Placement, the Company
issued to the investors and to the placement agent warrants to purchase an
aggregate of 304,375 shares of Class A Common Stock at an exercise price of
$4.80 per share (the "June 2004 Private Placement Warrants"). The Company agreed
to register the resale of the shares of the Class A Common Stock underlying the
June 2004 Private Placement Warrants with the SEC. The Company filed a Form SB-2
on July 2, 2004, which was declared effective by the SEC on July 20, 2004.
During the nine months ended December 31, 2005, all of the June 2004 Private
14
Placement Warrants were exercised for $1,461 in cash, and the Company issued
304,375 shares of Class A Common Stock. As of December 31, 2005, there were no
June 2004 Private Placement Warrants outstanding.
In February 2005, in connection with the issuance of the Convertible Debentures
(see Note 4), the Company issued warrants to purchase a total of 560,196 shares
of Class A Common Stock, at an initial exercise price of $4.44 per share (the
"Convertible Debentures Warrants"), which were subject to adjustments from time
to time. Upon the redemption of the Convertible Debentures, the Company may
issue additional warrants to purchase shares of Class A Common Stock. The
Convertible Debenture Warrants were exercisable beginning on September 9, 2005
for a period of five years thereafter. Based on a valuation from an independent
appraiser, the Convertible Debenture Warrants were assigned an estimated fair
value of $1,109, which is accounted for as a debt issuance discount and is being
accreted to non-cash interest expense. The Company agreed to register the Class
A Common Stock underlying the Convertible Debentures Warrants with the SEC. The
Company filed a Form S-3 on March 11, 2005, and the Form S-3 was declared
effective by the SEC on March 21, 2005. In August 2005, in connection with the
Conversion Agreement (see Note 4), all the Convertible Debenture Warrants were
exercised for $2,487 and the Company issued 560,196 shares of Class A Common
Stock. As of December 31, 2005, there were no Convertible Debenture Warrants
outstanding.
In July 2005, in connection with the July 2005 Private Placement, the Company
issued warrants to purchase 477,275 shares of Class A Common Stock at an
exercise price of $11.00 per share (the "July 2005 Private Placement Warrants").
The July 2005 Private Placement Warrants are exercisable beginning on February
18, 2006 for a period of five years thereafter. The July 2005 Private Placement
Warrants are callable by the Company, provided that the closing price of the
Company's Class A Common Stock is $22.00 per share, 200% of the applicable
exercise price, for twenty consecutive trading days. The Company agreed to
register the resale of the shares of the Class A Common Stock underlying the
July 2005 Private Placement Warrants with the SEC. The Company filed a Form S-3
on August 18, 2005, which was declared effective by the SEC on August 31, 2005.
As of December 31, 2005, 477,275 July 2005 Private Placements Warrants remained
outstanding.
In accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed To, and Potentially Settled In, a Company's Own Stock" ("EITF 00-19"),
and the terms of the July 2005 Private Placement Warrants, the fair value of the
July 2005 Private Placement Warrants were initially accounted for as a
liability, with an offsetting reduction to the carrying value of the common
stock. Such liability was reclassified to equity as of the August 31, 2005
effective date of the Form S-3.
The fair value of the July 2005 Private Placement Warrants was estimated to be
$800 on the closing date of the transaction, using the Black-Scholes
option-pricing model with the following assumptions: no dividends, risk-free
interest rate of 3.84%, the contractual life of 5-years and volatility of 55%.
In September 2005, the fair value of the July 2005 Private Placement Warrants
was re-measured and estimated to be $1,050. The increase in the fair value of
$250 was recorded as other expense.
In August 2005, in connection with the Conversion Agreement (see Note 4), all
Convertible Debentures Warrants were exercised for $2,487 and the Company issued
560,196 shares of Class A Common Stock and the Company issued to the investors
the New Warrants to purchase 760,196 shares of Class A Common Stock at an
exercise price of $11.39 per share. The Company was required to register the
resale of the shares of the Class A Common Stock underlying the Convertible
Debentures Warrants with the SEC. The Company filed a Form S-3 on March 11,
2005, which was declared effective by the SEC on March 21, 2005. The New
Warrants were immediately exercisable upon issuance and for a period of five
years thereafter. The Company was required to register the resale of the shares
of Class A Common Stock underlying the New Warrants with the SEC. The Company
filed a Form S-3 on November 16, 2005, which was declared effective by the SEC
on December 2, 2005. As of December 31, 2005, 760,196 New Warrants remained
outstanding.
In accordance with EITF 00-19, and the terms of the New Warrants, the fair value
of the New Warrants is being initially accounted for as a liability, with an
offsetting reduction to the carrying value of the common stock. Such liability
was reclassified to equity as of the December 2, 2005 effective date of the Form
S-3.
The fair value of the New Warrants was estimated to be $4,990 on the closing
date of the transaction, using the Black-Scholes option-pricing model with the
following assumptions: no dividends, risk-free interest rate of 4.01%, the
contractual life of 5-years and volatility of 56%. At September 30, 2005, the
fair value of the New Warrants was re-measured and estimated to be $3,490. The
15
decrease in the fair value of $1,500 was recorded as other income. At December
2, 2005, the fair value of the New Warrants was re-measured and estimated to be
$3,080. The decrease in the fair value of $410 was recorded as other income.
Warrants outstanding consisted of the following:
Outstanding Warrant March 31, 2005 December 31, 2005
----------------------------------------------------- ------------------ ------------------
Underwriter Warrants................................. 120,000 3,775
June 2004 Private Placement Warrants................. 304,375 -
Convertible Debenture Warrants....................... 560,196 -
July 2005 Private Placement Warrants................. - 477,275
New Warrants......................................... - 760,196
------------------ ------------------
984,571 1,241,246
================== ==================
NOTE 6. COMMITMENTS AND CONTINGENCIES
In June 2005, the Company entered into a digital cinema framework agreement (the
"Framework Agreement") with Christie Digital Systems USA, Inc. ("Christie")
through the Company's newly formed wholly-owned subsidiary, Christie/AIX,
whereby, among other things (1) Christie/AIX would seek to raise financing to
purchase 200 of Christie's digital cinema projection systems (the "Systems") at
agreed-upon prices; and (2) Christie/AIX would then seek to raise additional
debt and/or equity financing to purchase an additional 2,300 Systems at
agreed-upon prices. The Framework Agreement allows Christie/AIX to terminate the
agreement for several reasons, including failure to: (1) execute definitive
agreements with certain film distributors by August 31, 2005 to pay virtual
print fees to Christie/AIX for deliveries of digital films made to the Systems,
and (2) execute agreements with certain exhibitors by August 31, 2005 to license
the Systems or to house them in the exhibitor locations.
In August 2005, an amendment to the Framework Agreement extended the termination
provisions through September 30, 2005.
In September 2005, pursuant to a second amendment to the Framework Agreement,
Christie and Christie/AIX agreed to eliminate such termination provisions,
except to allow for termination in the event that financing cannot be obtained
to purchase the Systems. Additionally, the parties agreed to extend the number
of systems which may be ordered, to 4,000 Systems.
In connection with facilitating deployment of the Systems, the Company has
entered into digital cinema deployment agreements with five motion picture
distributors, for distribution of digital movie releases to theaters equipped
with the Systems, and providing for payment of virtual print fees to
Christie/AIX. As of December, 31, 2005, the Company has also entered into master
license agreements with four motion picture exhibitors (including AccessIT's
Pavilion Theatre) for the placement of the Systems in movie theatres covering a
total of 2,453 screens.
As of December 31, 2005, Christie/AIX ordered 200 of the Systems from Christie.
Christie/AIX has agreed to provide financing to certain motion picture
exhibitors upon the billing to the motion picture exhibitors by Christie for the
installation costs associated with the placement of the Systems in movie
theatres, for such installation costs. The motion picture exhibitors would be
required to make monthly interest only payments through October 2007 and
quarterly principal and interest payments thereafter.
In November 2005, the Company received notification from KMC Telecom ("KMC")
that they would not renew the contracts for six out of seven current IDC sites
which were licensed by KMC, which contracts expired on December 31, 2005. From
inception through November 3, 2003, the Company had derived all of its revenues
from monthly license fees and fees from other ancillary services provided by our
IDCs, including fees from various services under the colocation space contract
with KMC. In addition, certain other data center customer contracts will expire
over the next several months, and the Company has not yet received indications
of whether and on which terms these contracts will be renewed. Through December
31, 2005, the average monthly revenue from KMC for the expired contracts was
approximately $144. Additionally, the Company has two other large data center
customer contracts that will expire before July 1, 2006, which currently provide
approximately $108 of total monthly revenue. We anticipate that these contracts
will not be renewed.
In connection with the expiration of the six KMC contracts, the Company has
exited or will exit the six leased IDC's in which KMC was the sole or the
primary IDC customer. These six leases expire between December 31, 2005 and
April 30, 2006 and were intended to terminate in conjunction with the associated
KMC contract. Although there are no assurances, management believes the Company
16
will not incur any significant costs in connection with the exit from the six
IDC's. As of December 31, 2005, the Company had security deposits totaling $36
relating to these six leased IDC's.
In November 2005, the Company retained an investment bank to act as an advisor
to the Company, primarily to assist in raising funds in the form of debt, equity
or both, for the purchase of digital cinema related equipment, as discussed
above, and other corporate purposes. The Company agreed to pay upfront and
monthly fees up to an aggregate of $600, all of which would be applied against
transaction fees to be earned in any fundraising. As of December 31, 2005, the
Company has paid $200 of such fees.
NOTE 7. SUPPLEMENTAL CASH FLOW DISCLOSURE
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- ------------------------------
2004 2005 2004 2005
----------- ---------- -------------- ------------
Interest paid............................. $ 91 $ 331 $ 292 $1,144
Issuance of Class A Common Stock for the
FiberSat Acquisition.................. $1,625 $ - $1,625 $ -
Issuance of warrants to purchase shares
of Class A Common Stock............... $ - $ - $ 706 $ -
Reduction of goodwill and other assets
relating to the early cancellation of
the Pavilion Note ....................... $ - $ - $ - $1,232
Issuance of Class A Common Stock for
conversion of 6% Convertible Notes... $ - $ - $ - $1,699
Issuance of Class A Common Stock for
conversion of Convertible
Debentures............................... $ - $ - $ - $7,600
Issuance of Class A Common Stock in lieu
of redeeming the Boeing Shares... $ - $ - $ - $ 250
Transfer to equity of liability relating
to warrants upon registration statement
effectiveness............................ $ - $3,080 $ - $4,130
Equipment in accounts payable and accrued
expenses purchased from
Christie................................. $ - $6,248 $ - $6,248
NOTE 8. SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Company has two reportable segments: Media Services and Data Center Services.
The segments were determined based on the products and services provided by each
segment. Accounting policies of the segments are the same as those described in
Note 2. Performance of the segments is evaluated on operating income before
interest, taxes, depreciation and amortization.
The Media Services segment consists of the following:
OPERATIONS OF: PRODUCTS AND SERVICES PROVIDED:
------------------------------------ -------------------------------------
AccessIT SW Develops and licenses software
to the theatrical distribution
and exhibition industries,
provides services as an ASP, and
provides software enhancements
and consulting services.
------------------------------------ -------------------------------------
AccessIT Satellite Provides satellite-based
broadband video, data and Internet
transmission and encryption services
for multiple customers in the
broadcast and cable television
and communications industries,
and also operates an outsourced
networks operations center.
------------------------------------ -------------------------------------
AccessDM Stores and distributes digital
content to movie theaters and
other venues.
------------------------------------ -------------------------------------
17
OPERATIONS OF: PRODUCTS AND SERVICES PROVIDED:
------------------------------------ -------------------------------------
Pavilion Theatre A nine-screen movie theatre.
------------------------------------ -------------------------------------
Christie/AIX Financing vehicle and
administrator for the deployment
of digital cinema projection
systems to exhibitors in the
movie entertainment industry (see
Note 6) and collects virtual
print fees from movie
distributors.
------------------------------------ -------------------------------------
The Data Center Services segment consists of the following:
OPERATIONS OF: PRODUCTS AND SERVICES PROVIDED:
------------------------------------ -------------------------------------
AccessIT 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.
------------------------------------ -------------------------------------
Managed Services Provides information technology
consulting services and
managed network monitoring
services through its global
network command center.
------------------------------------ -------------------------------------
Prior to November 3, 2003, the Company operated only in the Data Center Services
segment. All of the Company's revenues were generated inside the United States.
Information related to the segments of the Company and its subsidiaries is
detailed below:
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------- --------------------------
2004 2005 2004 2005
----------- ----------- ----------- -----------
Media Services:
Income (loss) before interest, taxes,
depreciation and amortization........ $ 182 $ (29) $ 376 $ (472)
Depreciation and amortization.......... 426 789 1,025 2,273
----------- ----------- ----------- -----------
Loss before other expense.............. $ (244) $ (818) $ (649) $ (2,745)
Data Center Services:
Income before interest, taxes,
depreciation and amortization........ $ 311 $ 251 $ 1,099 $ 1,042
Depreciation and amortization.......... 443 387 1,355 1,315
----------- ----------- ----------- -----------
Loss before other expense.............. $ (132) $ (136) $ (256) $ (273)
Corporate:
Loss before interest, taxes,
depreciation and amortization........ $ (834) $ (1,178) $ (2,832) $ (3,396)
Depreciation and amortization.......... 26 18 77 59
----------- ----------- ----------- -----------
Loss before other expense.............. $ (860) (1,196) $ (2,909) $ (3,455)
Total Consolidated:
Loss before interest, taxes,
depreciation and amortization........ $ (341) $ (956) $ (1,357) $ (2,826)
Depreciation and amortization.......... 895 1,194 2,457 3,647
----------- ----------- ----------- -----------
Loss before other expense............... $ (1,236) $ (2,150) $ (3,814) $ (6,473)
=========== =========== =========== ===========
As of December 31,
--------------------------
2004 2005
---------- ----------
Total Assets:
Media Services.................... $ 16,089 $ 36,839
Data Center Services.............. 5,752 8,264
Corporate.......................... 1,410 7,908
---------- ----------
Total Consolidated................ $ 23,251 $ 53,011
========== ==========
18
NOTE 9. RELATED PARTY TRANSACTIONS
In connection with the Exchange Offer completed in March 2004 (see Note 4), the
Company issued 6% Convertible Notes with a principal amount of $1,736 to several
investors, of which $1,400 is payable to certain officers and directors of the
Company. In September 2005, the AMEX 30-day average closing price of the
Company's Class A Common Stock exceeded $12.00, and therefore, the Company
converted all of the 6% Convertible Notes into 307,871 shares of Class A Common
Stock, of which 248,282 shares of Class A Common Stock were issued to certain
officers and directors of the Company. The Company registered the resale of only
59,589 of theses shares of Class A Common Stock on Form S-3 with the SEC. The
Company filed a Form S-3 on November 16, 2005, which was declared effective by
the SEC on December 2, 2005.
A non-employee officer of Christie/AIX is also an officer of Christie, from whom
Christie/AIX purchases the Systems for our rollout plan to deploy digital cinema
systems nationwide (see Note 6). Purchases of such Systems from Christie totaled
$11,702 for the nine months ended December 31, 2005. This individual is not
compensated by Christie/AIX.
NOTE 10. SUBSEQUENT EVENTS
In December 2005, the Company filed a shelf registration statement on Form S-3
with the SEC, which was declared effective on January 13, 2006. The filing
provides that the Company may offer and sell in one or more offerings up to
$75,000 of any combination of the following securities: Class A Common Stock,
preferred stock in one or more series and warrants to purchase common stock or
preferred stock. We intend to use the proceeds from sales of securities under
this shelf registration for the purchase, installation and maintenance of
digital cinema projection systems by Christie/AIX, in connection with our
rollout plan to deploy digital cinema systems nationwide (see Note 6), as part
of an effort to advance the movie industry's transition to digital cinema, and
for general working capital and corporate purposes, including, from time to
time, extinguishment of corporate debt and acquisitions in line with our
corporate business plan.
On January 1, 2006, the Company purchased the domain name, website, customer
list and the IP address space for Ezzi.net and certain data center related
computer equipment of R & S International, Inc. (together the "Access Digital
Server Assets"). The purchase price includes a cash payment of $140 and 23,445
shares of unregistered Class A Common Stock to be issued by April 2006. Based on
targeted cash flows associated with the Access Digital Server Assets through
March 31, 2008, the Company may be required to make additional payments up to
the maximum sum of $900. The Company is in the process of evaluating the net
tangible and intangible assets acquired.
On January 4, 2006, Christie/AIX ordered additional Systems from Christie with a
total cost of approximately $19,450.
On January 17, 2006, the Company entered into: (1) a placement agency agreement
in connection with an offering to issue and sell 1,145,000 registered shares of
Class A Common Stock at a sale price of $10.70 per share to certain
institutional and other accredited investors, and (2) a purchase agreement with
an underwriter for 355,000 registered shares of Class A Common Stock at a sale
price of $10.70 per share (together the "January 2006 Offering") for gross
proceeds of $16,050. The securities have been offered by the Company, pursuant
to a shelf registration statement on Form S-3 filed with the SEC, discussed
above. The offering and sale of the 1,500,000 shares was completed on January
25, 2006. The Company intends to use the estimated net proceeds of approximately
$14,739, for the purchase, installation and maintenance of digital cinema
projection systems by Christie/AIX, in connection with our rollout plan to
deploy digital cinema systems nationwide (see Note 6) and for general corporate
purposes.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
($ in thousands, except for per share data)
Various statements contained in this Form 10-QSB or incorporated by reference
into this prospectus constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are based on current expectations and are indicated by words or
phrases such as "believe," "expect," "may," "will," "should," "seek," "plan,"
"intend" or "anticipate" or the negative thereof or comparable terminology, or
by discussion of strategy. Forward-looking statements represent as of the date
of this Form 10-QSB our judgment relating to, among other things, future results
of operations, growth plans, sales, capital requirements and general industry
and business conditions applicable to us. Such forward-looking statements are
based largely on our current expectations and are inherently subject to risks
and uncertainties. Our actual results could differ materially from those that
are anticipated or projected as a result of certain risks and uncertainties,
including, but not limited to, a number of factors, such as:
o our incurrence of losses to date;
o the effect of our indebtedness on our financial condition and
financial flexibility, including, but not limited to, the ability to
obtain necessary financing for our business;
o achieving sufficient volume of business from our customers;
o our subsidiaries conducting business in areas in which we have little
experience;
o economic and market conditions;
o the performance of the data center services and software related
businesses;
o changes in business relationships with our major customers and in the
timing, size and continuation of our customers' programs;
o competitive product and pricing pressures;
o increases in costs that cannot be recouped in product pricing;
o successful integration of acquired businesses;
o successful execution of our business strategy, particularly for new
endeavors;
o 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
SEC.
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
AccessIT was organized on March 31, 2000, and we are in the business of
providing software services and technology solutions to the motion picture
industry and various other clients primarily to facilitate the transition from
analog (film) to digital cinema in part, and operating IDC's and providing
managed information technology services. Recently, we have actively expanded
into interrelated business areas relating to the delivery and management of
digital cinema content to entertainment venues worldwide, and to support the
rollout of digital cinema equipment nationwide. These businesses, supported by
our Internet data center and managed services business, have become our primary
strategic focus.
Our primary business focus is to create a secure, managed and complete system
that consists of software to book, track and perform record keeping functions
for digital content in theatres, electronically deliver digital content to
multiple locations primarily via satellite and provide the content management
software for in-theatre playback system for the digital cinema marketplace. The
system is intended to use all of our businesses.
20
We have two reportable segments: Media Services, which represents the operations
of AccessIT SW, AccessIT Satellite, AccessDM, the Pavilion Theatre and
Christie/AIX, and Data Center Services, which consists of the operations of our
nine IDCs and the operations of Managed Services. Revenues for our reportable
segments are:
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------------------------- ----------------------------------------
2004 2005 2004 2005
------------------- ------------------ ----------------- -------------------
Revenues:
Media Services $ 1,300 47% $ 2,751 62% $ 2,496 35% $ 7,377 60%
Data Center Services 1,439 53% 1,660 38% 4,639 65% 4,907 40%
---------- ---------- ---------- ----------
Total Consolidated $ 2,739 $ 4,411 $ 7,135 $ 12,284
========== ========== ========== ==========
In November 2005, we received notification from KMC that they would not renew
the contracts for six out of seven current IDC sites which were licensed by KMC,
which contracts expired on December 31, 2005. From inception through November 3,
2003, we had derived all of our revenues from monthly license fees and fees from
other ancillary services provided by our IDCs, including fees from various
services under the colocation space contracts with KMC. In addition, certain
other data center customer contracts will expire over the next several months,
and we have not yet received indications of whether and on which terms these
contracts will be renewed. Through December 31, 2005, the average monthly
revenue from KMC for the expired contracts was approximately $144. Additionally,
we have two other large data center customer contracts that will expire before
July 1, 2006, which currently provide approximately $108 of total monthly
revenue. We anticipate that these contracts will not be renewed.
In connection with the expiration of the six KMC contracts, we have exited or
will exit the six leased IDC's in which KMC was the sole or the primary IDC
customer. These six leases expire between December 31, 2005 and April 30, 2006
and were intended to terminate in conjunction with the associated KMC contract.
Although there are no assurances, management believes we will not incur any
significant costs in connection with the exit from the six IDC's.
We have incurred net losses of $3,988 and $13,787 in the nine months ended
December 31, 2004 and 2005, respectively, and we have an accumulated deficit of
$35,274 as of December 31, 2005. We anticipate that, with our recent
acquisitions, the operation of AccessDM, and the future operations of
Christie/AIX our results of operations will improve. As we grow, we expect our
operating costs and general and administrative expenses will also increase for
the foreseeable future, but as a lower percentage of revenue. In order to
achieve and sustain profitable operations, we will need to generate more
revenues than we have in prior years and we may need to obtain additional
financing.
RECENT DEVELOPMENTS
SHELF REGISTRATION STATEMENT
In November 2005, we retained an investment bank to act as an advisor to us,
primarily to assist in raising funds in the form of debt, equity or both, for
the purchase of digital cinema related equipment, as discussed above, and other
corporate purposes. We agreed to pay upfront and monthly fees up to an aggregate
of $600, all of which would be applied against transaction fees to be earned in
any fundraising. As of December 31, 2005, we have paid $200 of such fees.
In December 2005, we filed a shelf registration statement on Form S-3 with the
SEC, which was declared effective on January 13, 2006. The filing provides that
we may offer and sell in one or more offerings up to $75,000 of any combination
of the following securities: Class A Common Stock, preferred stock in one or
more series and warrants to purchase common stock or preferred stock. We intend
to use the proceeds from this shelf registration for the purchase, installation
and maintenance of digital cinema projection systems by Christie/AIX, in
connection with our rollout plan to deploy digital cinema systems nationwide
(see Note 6), as part of an effort to advance the movie industry's transition to
digital cinema, and for general working capital and corporate purposes,
including, from time to time, extinguishment of corporate debt and acquisitions
in line with our corporate business plan.
21
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 AND 2005
The following table sets forth, for the period indicated, the comparative
changes to amounts included in our consolidated statements of operations.
Summary Operating Results
For the Three Months Ended December 31,
-------------------------------------------------------------------
Increase/(Decrease)
-------------------------------
2004 2005 $ %
------------- ------------- ------------- -------------
Revenues:
Media services........................ $ 1,300 $ 2,751 $ 1,451 112%
Data center services.................. 1,439 1,660 221 15%
------------- ------------- ------------- -------------
Total revenues 2,739 4,411 1,672 61%
Costs of revenues (exclusive of
depreciation and amortization):
Media services........................ 570 1,813 1,243 218%
Data center services................. 1,062 1,298 236 22%
------------- ------------- ------------- -------------
Total costs of revenues 1,632 3,111 1,479 91%
------------- ------------- ------------- -------------
Gross profit (exclusive of
depreciation and amortization): 1,107 1,300 193 17%
Costs and expenses:
Selling, general and administrative... 1,303 2,164 861 66%
Provision for doubtful accounts....... 23 55 32 139%
Research and development.............. 122 37 (85) (70)%
Depreciation and amortization......... 895 1,194 299 33%
Interest expense...................... 90 313 223 248%
Non-cash interest expense............. 43 32 (11) (26)%
Debt conversion expense............... - 125 125
------------- ------------- ------------- -------------
Total costs and expenses 2,476 3,920 1,444 58%
Other income:
Interest income....................... - 97 97
Other (expense) income, net........... (27) 409 436 1,615%
Income tax benefit.................... 77 77 - -
------------- ------------- ------------- -------------
Total other income...................... 50 583 533 1,066%
------------- ------------- ------------- -------------
Net loss $ (1,319) $ (2,037) $ 718 54%
============= ============= ============= =============
TOTAL REVENUES
Total revenues were $2,739 and $4,411 for the three months ended December 31,
2004 and 2005, respectively, an increase of $1,672 or 61%. The increase was
primarily in the Media Services segment, driven largely by box office and
concession sales of the Pavilion Theatre which was acquired in February 2005 and
was not part of AccessIT in the three months ended December 31, 2004. The
remaining increase was attributable to our existing Data Center Services'
businesses, mainly Managed Services which experienced year over year growth in
its customer base.
COSTS OF REVENUES
Total costs of revenues were $1,632 and $3,111 for the three months ended
December 31, 2004 and 2005, respectively, an increase of $1,479 or 91%. The
increase was predominantly in the Media Services segment, most of which was
attributable to film rent, concession expenses, payroll and other operating
costs of the Pavilion Theatre, which was acquired in February 2005 and was not
part of AccessIT in the three months ended December 31, 2004. We also
experienced additional costs from the operations of AccessIT Satellite which was
acquired in November 2004 and only had operations for half of the three month
period ended December 31, 2004. In our Data Center Services segment, the
22
increase was due to higher data circuit expenses combined with additional
personnel and other operating costs required to support the additional customers
of Managed Services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general and administrative expenses were $1,303 and $2,164 for
the three months ended December 31, 2004 and 2005, respectively, an increase of
$861 or 66%. The increase was primarily due to increased company-wide staffing
costs, including the acquisitions of the Pavilion Theatre and AccessIT Satellite
and the creation of Christie/AIX to support the digital cinema business. We also
added personnel in our corporate offices, primarily in the areas of finance and
administration. As of December 31, 2004 and 2005 we had 58 and 128 employees,
respectively, of which five and 54, were part-time employees, respectively.
DEPRECIATION AND AMORTIZATION EXPENSE
Total depreciation and amortization expense was $895 and $1,194 for the three
months ended December 31, 2004 and 2005, respectively, an increase of $299 or
33%. The increase was attributable to the depreciation and amortization for the
assets of the Pavilion Theatre and various other asset additions.
INTEREST EXPENSE
Total interest expense was $90 and $313 for the three months ended December 31,
2004 and 2005, respectively, an increase of $223 or 248%. The increase was
attributable to the capital lease associated with the operations of the Pavilion
Theatre, partially offset by reduced interest expense resulting from the
conversion of all the 6% Convertible Notes into shares of Class A Common Stock
in September 2005 (see Note 4).
DEBT CONVERSION EXPENSE
Total debt conversion expense was $0 and $125 for the three months ended
December 31, 2004 and 2005, respectively. The increase was due to additional
professional fees associated with the Conversion Agreement from August 2005 (see
Note 4).
OTHER (EXPENSE) INCOME, NET
Total other expense, net was $(27) for the three months ended December 31, 2004
compared to other income, net of $409 for the three months ended December 31,
2005, an increase of $436 or 1,615%. The increase was due to the fair value
re-measurement of the New Warrants (see Note 5) which resulted in non-cash other
income.
23
FOR THE NINE MONTHS ENDED DECEMBER 31, 2004 AND 2005
The following table sets forth, for the period indicated, the comparative
changes to amounts included in our consolidated statements of operations.
Summary Operating Results
For the Nine Months Ended December 31,
------------------------------------------------------------------
Increase/(Decrease)
------------------------------
2004 2005 $ %
------------- ------------- ------------- -------------
Revenues:
Media services...................... $ 2,496 $ 7,377 $ 4,881 196%
Data center services................ 4,639 4,907 268 6%
------------- ------------- ------------- -------------
Total revenues 7,135 12,284 5,149 72%
Costs of revenues (exclusive of
depreciation and amortization):
Media services...................... 912 5,147 4,235 464%
Data center services................ 3,102 3,593 491 16%
------------- ------------- ------------- -------------
Total costs of revenues 4,014 8,740 4,726 118%
Gross profit (exclusive of
depreciation and amortization): 3,121 3,544 423 14%
Costs and expenses:
Selling, general and administrative. 3,588 5,956 2,368 66%
Provision for doubtful accounts..... 598 90 (508) (85)%
Research and development............ 288 324 36 13%
Non-cash stock-based compensation... 4 - (4) (100)%
Depreciation and amortization....... 2,457 3,647 1,190 48%
Interest expense.................... 279 1,837 1,558 558%
Non-cash interest expense........... 155 1,325 1,170 755%
Debt conversion expense............. - 6,208 6,208
Minority interest in loss of
subsidiary........................ (10) - 10 100%
------------- ------------- ------------- -------------
Total costs and expenses 7,359 19,387 12,028 163%
Other income:
Interest income..................... - 180 180
Other income, net................... 17 1,643 1,626 9,565%
Income tax benefit.................. 233 233 - -
------------- ------------- ------------- -------------
Total other income 250 2,056 1,806 722%
------------- ------------- ------------- -------------
Net loss $ (3,988) $ (13,787) $ 9,799 246%
============= ============= ============= =============
TOTAL REVENUES
Total revenues were $7,135 and $12,284 for the nine months ended December 31,
2004 and 2005, respectively, an increase of $5,149 or 72%. The increase was
primarily in the Media Services segment, driven largely by box office and
concession sales of the Pavilion Theatre which was acquired in February 2005 and
was not part of AccessIT in the nine months ended December 31, 2004, data and
Internet transmission and encryption services of AccessIT Satellite which was
acquired in November 2004 and existing Media Services operations.
COSTS OF REVENUES
Total costs of revenues were $4,014 and $8,740 for the nine months ended
December 31, 2004 and 2005, respectively, an increase of $4,726 or 118%. The
increase was primarily in Media Services most of which was attributable to film
rent, concession expenses, payroll and other operating costs of the Pavilion
Theatre, which was acquired in February 2005 and was not part of AccessIT in the
nine months ended December 31, 2004, payroll and other operating costs of
24
AccessIT Satellite which was acquired in November 2004 and software amortization
and staffing costs for additional resources hired at AccessIT SW. The remaining
increase in cost of revenues was attributable to higher data circuit expenses
combined with additional personnel and other operating costs required to support
the additional customers of our Data Center Services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general and administrative expenses were $3,588 and $5,956 for
the nine months ended December 31, 2004 and 2005, respectively, an increase of
$2,368 or 66%. The increase was primarily due to increased company-wide staffing
costs, including the acquisitions of the Pavilion Theatre and AccessIT Satellite
and the creation of Christie/AIX to support the digital cinema business. We also
added personnel in our corporate offices, primarily in the areas of finance and
administration. As of December 31, 2004 and 2005 we had 58 and 128 employees,
respectively, of which five and 54, were part-time employees, respectively.
DEPRECIATION AND AMORTIZATION EXPENSE
Total depreciation and amortization expense was $2,457 and $3,647 for the nine
months ended December 31, 2004 and 2005, respectively, an increase of $1,190 or
48%. The increase was attributable to the depreciation and amortization of the
assets from the acquisitions of the Pavilion Theatre and AccessIT Satellite and
various other asset additions.
INTEREST EXPENSE
Total interest expense was $279 and $1,837 for the nine months ended December
31, 2004 and 2005, respectively, an increase of $1,558 or 558%. The increase was
attributable to the capital lease associated with the operations of the Pavilion
Theatre, the remaining unamortized debt issuance costs of the Convertible
Debentures which were converted into shares of Class A Common Stock in August
2005 (see Note 4), partially offset by reduced interest expense resulting from
the conversion of all the 6% Convertible Notes into shares of Class A Common
Stock in September 2005 (see Note 4).
NON-CASH INTEREST EXPENSE
Total non-cash interest expense was $155 and $1,325 for the nine months ended
December 31, 2004 and 2005, respectively, an increase of $1,170 or 755%. The
increase was due to the remaining accretion on the debt discount which resulted
from the Convertible Debentures Warrants which were exercised shares of Class A
Common Stock in August 2005.
DEBT CONVERSION EXPENSE
Total debt conversion expense was $0 and $6,208 for the nine months ended
December 31, 2004 and 2005, respectively. The increase represents the value of
the New Shares, the New Warrants, the Placement Agent Shares and professional
fees incurred in connection with the Conversion Agreement in August 2005 (see
Note 4).
OTHER INCOME, NET
Total other income, net was $17 and $1,643 for the nine months ended December
31, 2004 and 2005, respectively, an increase of $1,626. The increase represents
the decreased fair value of the New Warrants, reduced by the increased fair
value of July 2005 Private Placement Warrants (see Note 5).
LIQUIDITY AND CAPITAL RESOURCES
We have incurred operating losses in each year since we commenced our
operations. Since our inception, we have financed our operations substantially
through the private placement of shares of our common and preferred stock, the
issuance of promissory notes, our IPO, notes payable and common stock used to
fund various acquisitions. We have no borrowings or line of credit arrangements
with banks or other financial institutions.
In July 2005, we received gross proceeds of $18,137 from the July 2005 Private
Placement. We are using the net proceeds of $16,721, primarily to fund the
capital investments in connection with Christie/AIX's digital cinema rollout
25
plan (see Note 6) and for working capital and general corporate purposes. As of
December 31, 2005, we have paid $5,454 towards Systems ordered in connection
with Christie/AIX's digital cinema rollout plan.
As of December 31, 2005, we had cash and cash equivalents of $10,105 and our
working capital was $2,920.
Operating activities used net cash of $2,759 and $5,943 for the nine months
ended December 31, 2004 and 2005, respectively. The increase in cash used by
operating activities was primarily due to an increased net loss from operations
offset by the change in accounts payable and accrued expenses along with
adjustments not requiring cash, specifically depreciation and amortization,
non-cash interest expense and debt conversion expense.
Investing activities used net cash of $2,485 and $7,728 for the nine months
ended December 31, 2004 and 2005, respectively. The increase was due to
additional computer related equipment and other assets, primarily in connection
with Christie/AIX's digital cinema rollout plan. We anticipate that we will
experience an increase in our capital expenditures consistent with the
anticipated growth in our operations, infrastructure and personnel.
Financing activities provided net cash of $4,429 for the nine months ended
December 31, 2004 primarily due to the June 2004 Private Placement and the
November 2004 Private Placement, less repayments of notes payable and capital
lease obligations. Net cash provided by financing activities of $18,997 for the
nine months ended December 31, 2005 was primarily due to the net proceeds from
the July 2005 Private Placement and various warrants exercised, offset slightly
by the repayments of notes payable and capital lease obligations.
We have acquired property and equipment under long-term capital lease
obligations that expire at various dates through July 2022. As of December 31,
2005, we had outstanding capital lease obligations of $6,078. Our capital lease
obligations are at the following locations and in the following principal
amounts:
Outstanding
Location Purpose of capital lease Obligation
-------------------------- ------------------------------------------ ----------------------
The Pavilion Theatre For building, land and improvements $6,055
Corporate Office For telephone equipment 18
Managed Services For computer equipment used in IDC's 5
----------------------
$6,078
======================
As of December 31, 2005, minimum future capital lease payments (including
interest) totaling $18,947, are due as follows:
For the twelve months ending December 31,
-------------------------------------------------
2006................................. $ 1,141
2007................................. 1,128
2008................................. 1,128
2009................................. 1,128
2010................................. 1,128
Thereafter........................... 13,294
----------
$ 18,947
==========
As of December 31, 2005, obligations under non-cancelable operating leases
totaled $15,014, are due as follows:
For the twelve months ending December 31,
-------------------------------------------------
2006................................. $ 2,658
2007................................. 2,577
2008................................. 2,589
2009................................. 2,215
2010................................. 1,454
Thereafter........................... 3,521
---------
$ 15,014
=========
As of December 31, 2005, purchase obligations for Systems ordered in connection
with Christie/AIX's digital cinema rollout plan, and not included in our
consolidated financial statements totaled $3,858.
26
Management expects that we will continue to generate operating losses for the
foreseeable future due to depreciation and amortization, interest expense,
software development, 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 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 our intended business objectives.
Our management believes that the net proceeds generated by our recent financing
transactions combined with our cash on hand and cash receipts from existing
operations, will be sufficient to permit us to continue our operations for at
least twelve months from the date of this report.
SUBSEQUENT EVENTS
On January 1, 2006, we purchased the domain name, website, customer list and the
IP address space for Ezzi.net and certain data center related computer equipment
of R & S International, Inc. (together the "Access Digital Server Assets"). The
purchase price includes a cash payment of $140 and 23,445 shares of unregistered
Class A Common Stock to be issued by April 2006. Based on targeted cash flows
associated with the Access Digital Server Assets through March 31, 2008, we may
be required to make additional payments up to the maximum sum of $900. The
acquired assets will be used for web-hosting and is intended to supplement the
existing Data Center Services business.
On January 4, 2006, Christie/AIX ordered additional Systems from Christie with a
total cost of approximately $19,450.
On January 17, 2006, we entered into: (1) a placement agency agreement in
connection with an offering to issue and sell 1,145,000 registered shares of
Class A Common Stock at a sale price of $10.70 per share to certain
institutional and other accredited investors, and (2) a purchase agreement with
an underwriter for 355,000 registered shares of Class A Common Stock at a sale
price of $10.70 per share (together the "January 2006 Offering") for gross
proceeds of $16,050. The securities have been offered by us, pursuant to a shelf
registration statement on Form S-3 filed with the SEC, as discussed above in
Recent Developments. The offering and sale of the 1,500,000 shares was completed
on January 25, 2006. We intend to use the estimated net proceeds of
approximately $14,739, for the purchase, installation and maintenance of digital
cinema projection systems by Christie/AIX, in connection with our rollout plan
to deploy digital cinema systems nationwide (see Note 6) and for general
corporate purposes.
In February 2006, we entered into preliminary discussions for a senior credit
facility to finance the purchase, installation and maintenance of digital cinema
systems in connection with our rollout plan to deploy digital cinema systems
nationwide (see Note 6). The completion of and the availability of funds from
such credit facility can not be assured.
OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any off-balance sheet arrangements.
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 and 15d-15 of the Securities
Exchange Act of 1934 (the "Exchange Act"). Based on this evaluation, our
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms.
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.
27
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS.
The exhibits are listed in the Exhibit Index beginning on page 30 herein.
28
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, 2006 BY: /s/ A. Dale Mayo
--------------------------------------------
A. Dale Mayo
President and Chief Executive Officer
and Director
(Principal Executive Officer)
Date: February 13, 2006 BY: /s/ Brian D. Pflug
---------------------------------------------
Brian D. Pflug
Senior Vice President - Accounting & Finance
(Principal Financial Officer)
29
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
10.1* Digital Cinema Deployment Agreement, dated October 25, 2005 by and
between Universal City Studios LLLP, and Christie/AIX, Inc.
10.2* Master License Agreement, dated December 16, 2005, by and between Carmike
Cinemas, Inc. and Christie/AIX, Inc.
10.3 Amendment No. 3 to the First Amended and Restated Access Integrated
Technologies, Inc. 2000 Stock Option Plan, dated as of September 15,
2005.
31.1 Officers Certificate 15 U.S.C. 7241, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Officers Certificate 15 U.S.C. 7241, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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* Specific portions of this agreement have been omitted and have been filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment in accordance with Rule 24b-2 under
the Securities Exchange Act of 1934