UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2004
( ) 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
(State or other jurisdiction of incorporation or organization)
22-3720962
(I.R.S. Employer Identification No.)
55 MADISON AVENUE, SUITE 300, MORRISTOWN NEW JERSEY 07960
(Address of principal executive offices)
(973-290-0080)
(ISSUER'S TELEPHONE NUMBER, 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 such filing requirements for the past 90 days. [X] Yes [ ]
No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of November 12, 2004, 8,857,722 shares of Class A Common Stock, $.001 par
value, and 1,005,811 shares of Class B Common Stock, $.001 par value, were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
ACCESS INTEGRATED TECHNOLOGIES, INC.
FORM 10-QSB
CONTENTS
PART I -- FINANCIAL INFORMATION
Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet at September 30, 2004
(unaudited) 2
Consolidated Statements of Operations for the
three months ended September 30, 2003 and 2004
(unaudited) 3
Consolidated Statements of Operations for the six
months ended September 30, 2003 and 2004 (unaudited) 4
Consolidated Statements of Cash Flows for the six
months ended September 30, 2003 and 2004 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Controls and Procedures 23
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 25
Item 6. Exhibits 25
Signatures 26
Exhibit Index 27
1
ACCESS INTEGRATED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except for share data)
(unaudited)
SEPTEMBER 30, 2004
------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................... $2,778
Accounts receivable, net.................................................... 775
Prepaid and other current assets............................................ 500
Unbilled revenue............................................................ 38
--
Total current assets........................................................ 4,091
-----
Property and equipment, net................................................. 6,318
Intangible assets, net...................................................... 3,495
Capitalized software costs, net............................................. 1,605
Goodwill.................................................................... 5,371
Deferred costs.............................................................. 199
Unbilled revenue, net of current portion.................................... 82
Security deposits........................................................... 326
---
Total assets................................................................ $21,487
=======
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses....................................... $1,241
Current portion of notes payable............................................ 999
Current portion of customer security deposits............................... 40
Current portion of capital leases........................................... 12
Current portion of deferred revenue......................................... 476
Current portion of deferred rent expense.................................... 41
--
Total current liabilities................................................... 2,809
-----
Notes payable, net of current portion....................................... 4,904
Customer security deposits, net of current portion.......................... 119
Deferred revenue, net of current portion.................................... 243
Capital leases, net of current portion...................................... 25
Deferred rent expense....................................................... 927
Deferred tax liability...................................................... 1,364
-----
Total liabilities........................................................... 10,391
------
COMMITMENTS AND CONTINGENCIES (See Note 6)
Redeemable Class A common stock, issued and outstanding, 53,534 shares...... 244
Stockholders' Equity:
Class A common stock, $0.001 par value per share; 40,000,000 shares
authorized; shares issued and outstanding, 8,530,552 ....................... 9
Class B common stock, $0.001 par value per share; 15,000,000 shares
authorized; shares issued and outstanding, 1,005,811 ....................... 1
Treasury stock, at cost; 9,140 shares....................................... (32)
Additional paid-in capital.................................................. 28,242
Accumulated deficit......................................................... (17,368)
--------
Total stockholders' equity.................................................. 10,852
------
Total liabilities, redeemable stock and stockholders' equity................ $21,487
=======
See accompanying notes to consolidated financial statements.
2
ACCESS INTEGRATED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for share and per share data)
(unaudited)
THREE MONTHS ENDED
------------------
SEPTEMBER 30,
-------------
2003 2004
---- ----
Revenues:
Media services.......................................................... $ -- $661
Data center services.................................................... 1,408 1,524
----- -----
Total revenues........................................................... 1,408 2,185
Costs of revenues (exclusive of depreciation and amortization shown below):
Media services.......................................................... -- 219
Data center services.................................................... 881 1,031
--- -----
Total costs of revenues.................................................. 881 1,250
Gross profit............................................................. 527 935
Operating expenses:
Selling, general and administrative (excludes non-cash stock-based
compensation of $4 in 2003 and $0 in 2004)............................... 595 1,182
Provision for doubtful accounts.......................................... 7 527
Research and development................................................. -- 120
Non-cash stock-based compensation........................................ 4 --
Depreciation and amortization............................................ 619 788
--- ---
Total operating expenses................................................. 1,225 2,617
----- -----
Loss from operations..................................................... (698) (1,682)
Interest income.......................................................... 1 --
Interest expense......................................................... (131) (91)
Non-cash interest expense................................................ (110) (66)
Other income, net........................................................ 12 56
-- --
Net loss before income taxes............................................. (926) (1,783)
Income tax benefit....................................................... -- 78
-- --
Net loss................................................................. (926) (1,705)
Accretion related to redeemable convertible preferred stock.................. (237) --
Accretion of preferred dividends......................................... (91) --
---- --
Net loss available to common stockholders................................ $(1,254) $(1,705)
Net loss available to common stockholders per common share:
Basic and diluted........................................................ $(0.40) $(0.18)
====== ======
Weighted average number of common shares outstanding:
Basic and diluted........................................................ 3,116,437 9,586,018
========= =========
See accompanying notes to consolidated financial statements.
3
ACCESS INTEGRATED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for share and per share data)
(unaudited)
SIX MONTHS ENDED
----------------
SEPTEMBER 30,
-------------
2003 2004
---- ----
Revenues:
Media services.......................................................... $ -- $1,196
Data center services.................................................... 2,829 3,200
----- -----
Total revenues........................................................... 2,829 4,396
Costs of revenues (exclusive of depreciation and amortization shown below):
Media services.......................................................... -- 342
Data center services.................................................... 1,749 2,040
----- -----
Total costs of revenues.................................................. 1,749 2,382
Gross profit............................................................. 1,080 2,014
Operating expenses:
Selling, general and administrative (excludes non-cash stock-based
compensation of $10 in 2003 and $4 in 2004).............................. 1,149 2,286
Provision for doubtful accounts.......................................... 12 576
Research and development................................................. -- 167
Non-cash stock-based compensation........................................ 10 4
Depreciation and amortization............................................ 1,239 1,562
----- -----
Total operating expenses................................................. 2,410 4,595
----- -----
Loss from operations..................................................... (1,330) (2,581)
Interest income.......................................................... 2 --
Interest expense......................................................... (246) (188)
Non-cash interest expense................................................ (191) (113)
Other income, net........................................................ 5 45
- --
Net loss before income taxes and minority interest in subsidiary......... (1,760) (2,837)
Income tax benefit....................................................... -- 156
-- ---
Net loss before minority interest in subsidiary.......................... (1,760) (2,681)
Minority interest in subsidiary.......................................... -- 10
-- --
Net loss................................................................. (1,760) (2,671)
Accretion related to redeemable convertible preferred stock.............. (463) --
Accretion of preferred dividends......................................... (180) --
----- --
Net loss available to common stockholders................................ $(2,403) $(2,671)
======== =======
Net loss available to common stockholders per common share:
Basic and diluted........................................................ $(0.78) $(0.29)
====== ======
Weighted average number of common shares outstanding:
Basic and diluted........................................................ 3,070,862 9,304,008
========= =========
See accompanying notes to consolidated financial statements.
4
ACCESS INTEGRATED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - unaudited)
SIX MONTHS ENDED
----------------
SEPTEMBER 30,
-------------
2003 2004
---- ----
Cash flows from operating activities:
Net loss........................................................................ $(1,760) $(2,671)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................... 1,239 1,562
Amortization of software development costs...................................... -- 126
Amortization of deferred tax liability.......................................... -- (156)
Provision for doubtful accounts................................................. 12 576
Non-cash stock-based compensation............................................... 10 4
Non-cash interest expense....................................................... 191 113
Minority interest............................................................... -- (10)
Gain on exchange of minority interest shares.................................... -- (13)
Decrease in fair value of common stock warrants -- (91)
Changes in operating assets and liabilities:
Accounts receivable............................................................. (95) (343)
Prepaid and other current assets................................................ (606) (204)
Other assets.................................................................... (64) 23
Accounts payable and accrued expenses........................................... (199) (129)
Deferred revenue................................................................ (37) (307)
Other liabilities............................................................... 129 86
--- --
Net cash used in operating activities........................................... (1,180) (1,434)
------- -------
Cash flows from investing activities:
Purchases of property and equipment............................................. (124) (1,273)
Purchase of intangible assets................................................... -- (28)
Additions to capitalized software costs......................................... -- (303)
-- -----
Net cash used in investing activities........................................... (124) (1,604)
----- -------
Cash flows from financing activities:
Net proceeds from issuance of notes payable and warrants........................ 1,230 --
Repayment of notes payable...................................................... -- (448)
Principal payments on capital leases............................................ (216) (113)
Repurchase of common stock...................................................... -- (32)
Proceeds from issuance of common stock.......................................... 21 4,079
-- -----
Net cash provided by financing activities....................................... 1,035 3,486
----- -----
Net (decrease) increase in cash and cash equivalents............................ (269) 448
Cash and cash equivalents at beginning of period................................ 956 2,330
--- -----
Cash and cash equivalents at end of period...................................... $687 $2,778
==== ======
See accompanying notes to consolidated financial statements.
5
ACCESS INTEGRATED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share and per share data)
(unaudited)
NOTE 1. NATURE OF OPERATIONS
Access Integrated Technologies, Inc. ("AccessIT") was incorporated in Delaware
in March 2000. Access Digital Media Inc. ("AccessDM"), a wholly owned subsidiary
of AccessIT, was incorporated in Delaware in February 2003. Hollywood Software,
Inc. ("Hollywood SW") was incorporated in California in October 1997, and was
acquired by AccessIT on November 3, 2003. Core Technology Services, Inc.
("Core") was incorporated in New York in November 1995, and was acquired by
AccessIT on January 9, 2004. In June 2004, we began referring to Core as
AccessIT Managed Services ("Managed Services"). AccessIT, AccessDM, Hollywood SW
and Managed Services are referred to herein collectively as the "Company".
AccessIT operates a national platform of carrier-diverse Internet Data Centers
("IDCs") in which the Company's customers have access to: secure, flexible space
for installing network and server equipment; multiple fiber providers for
connecting to the internet and/or other carrier networks; and a broad range of
value-added data center services including the Company's AccessStorage-on-Demand
managed storage service solutions. The Company's IDCs, called AccessColocenters,
are designed to serve a variety of customers, including traditional voice/data
competitive local exchange carriers, other integrated communication providers,
Internet Service Providers, Application Service Providers ("ASPs"), Streaming
and Content Delivery Service Providers, storage outsourcers, and small and
medium sized enterprises. The Company currently operates nine IDCs located in
eight states: Arkansas, Kansas, Maine, New Hampshire, New Jersey, New York,
Texas and Virginia, plus a dedicated digital delivery site in Los Angeles,
California. AccessDM was formed to utilize AccessIT's existing infrastructure to
store and distribute digital content to movie theaters and other remote venues.
Hollywood SW is a provider of proprietary enterprise software and consulting
services for distributors and exhibitors of filmed entertainment in the United
States and Canada. Its software manages the planning, booking, scheduling,
revenue sharing, cash flow and reporting associated with the distribution and
exhibition of theatrical films. Managed Services is a managed service provider
of information technologies; its primary offering is to provide managed network
services through its global network command center.
BASIS OF PRESENTATION
The accompanying unaudited consolidated interim financial information has been
prepared by AccessIT. The unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States 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.
For the six months ended September 30, 2003 and 2004, the Company incurred net
losses of $1,760 and $2,671 respectively, and negative cash flows from operating
activities of $1,180 and $1,434, respectively. In addition, the Company has an
accumulated deficit of $17,368 as of September 30, 2004. Furthermore, the
Company has debt service requirements (including interest) of $1,325 for the
twelve months beginning in October 2004. Management expects that the Company
will continue to generate operating losses for the foreseeable future due to
depreciation and amortization, the continued efforts related to the
identification of acquisition targets, marketing and promotional activities and
the development of relationships with other businesses. Certain of these costs
could be reduced if working capital decreased. Based on the Company's cash
position at September 30, 2004, and expected cash flows from operations,
management believes that the Company has the ability to meet its obligations for
the foreseeable future. The Company may attempt to raise additional capital from
various sources for future acquisitions or for working capital as necessary.
There is no assurance that such financing will be completed as contemplated or
under terms acceptable to the Company or its existing shareholders. Failure to
generate additional revenues, raise additional capital or manage discretionary
spending could have a material adverse effect on the Company's ability to
continue as a going concern and to achieve its intended business objectives. The
accompanying unaudited consolidated financial statements do not reflect any
adjustments which may result from the outcome of such uncertainties.
6
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
The results of operations for the respective interim periods are not necessarily
indicative of the results to be expected for the full year. The accompanying
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and the notes thereto included in
AccessIT's Form 10-KSB for the fiscal year ended March 31, 2004 filed with the
Securities and Exchange Commission ("SEC"). Certain reclassifications of prior
period data have been made to conform with the current presentation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements include the accounts of
AccessIT, AccessDM, Hollywood SW and Managed Services. All intercompany
transactions and balances have been eliminated.
REVENUE RECOGNITION
Revenues in the Media Services segment primarily consist of software and related
revenues, generated by Hollywood SW. Software revenues are accounted for in
accordance with Statement of Position 97-2, "Software Revenue Recognition" ("SOP
97-2"), and Staff Accounting Bulletin No. 104 "Revenue Recognition in Financial
Statements" ("SAB No. 104"). The Company's software revenues are generated from
the following primary sources: (1) software licensing, including customer
licenses and ASP agreements, (2) software maintenance contracts, and (3)
professional consulting services, which includes systems implementation,
training, custom software development services and other professional services.
Software licensing revenue is recognized when the following criteria are met:
(a) persuasive evidence of an arrangement exists, (b) delivery has occurred and
no significant obligations remain, (c) the fee is fixed or determinable and (d)
collection is determined to be probable. Significant upfront fees are received
in addition to periodic amounts upon achievement of contractual 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.
For arrangements with multiple elements (e.g., delivered and undelivered
products, maintenance and other services), the Company separately negotiates
each element of the arrangement based on the fair value of the elements. The
fair values for ongoing maintenance and support obligations are based upon
separate sales of renewals to customers or upon substantive renewal rates quoted
in the agreements. The fair values for services, such as training or consulting,
are based upon hourly billing rates of these services when sold separately to
other customers. In instances where the Company is not able to determine fair
value of each element and the services are essential to the functionality of the
software, percentage-of-completion accounting is followed to recognize revenue.
Customers not wishing to license and operate the software themselves may use the
software through an ASP arrangement, in which the Company hosts the application
and provides customer access via the internet. Annual minimum ASP service fees
are recognized ratably over the contract term. Overage revenues for usage in
excess of stated minimums are recognized monthly.
Maintenance services and website subscription fees are recognized ratably over
the contract term. Professional consulting services, sales of third party
products and resale hardware revenues are recognized as services are provided.
Software development revenues are recognized when delivery has occurred and no
significant obligations remain.
Deferred revenue is recorded in cases of (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
7
amounts are classified as deferred revenue in the unaudited Consolidated Balance
Sheet and are recognized as revenue in accordance with the Company's revenue
recognition policies described above.
Revenues in the Media Services segment also include digital cinema - related
revenues generated by AccessDM. These revenues consist of (1) satellite delivery
revenues, (2) data encryption and preparation fee revenues and (3) landing fees
for delivery to each movie theatre. These revenues are recognized upon
completion of the related services.
Revenues in the Data Center Services segment consist primarily of license fees
for colocation, riser access charges, electric and cross connect fees, and
non-recurring installation and consulting fees. Revenues from colocation, riser
access charges, electric and cross connect fees are billed monthly and, in
accordance with SAB No. 104, 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 the above revenue recognition criteria are classified as
deferred revenue. Amounts satisfying revenue recognition criteria prior to
billing are classified as unbilled revenue.
In addition, within our Data Center Services segment, Managed Services revenues
consist of network monitoring and maintenance fees. These fees consist of
monthly recurring billings pursuant to contracts, which are recognized as
revenues in the month earned, and other billings which are recognized on a time
and materials basis in the period in which the services were provided.
CAPITALIZED SOFTWARE 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 generally amortized on a
straight-line basis over five years. The Company reviews capitalized software
costs for impairment on an annual basis. To the extent that the carrying amount
exceeds the estimated net realizable value of the capitalized software cost, an
impairment charge is recorded. No impairment was recorded for the six months
ended September 30, 2004. Amortization of capitalized software development
costs, included in costs of revenues, for the three and six months ended
September 30, 2004 amounted to $67 and $126, respectively.
NET LOSS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS
Computations of basic and diluted net loss per share of Class A Common Stock
("Class A Share") and Class B Common Stock (collectively, "Common Stock") have
been made in accordance with SFAS No. 128, "Earnings Per Share". Basic net loss
per share is computed by dividing net loss available to Common Stockholders (the
numerator) by the weighted average number of shares of Common Stock outstanding
(the denominator) during the period. Shares issued during the period are
weighted for the portion of the period that they are outstanding. The
computation of diluted net loss per share is similar to the computation of basic
net loss per share except that the denominator is increased to include the
number of additional shares of Common Stock that would have been outstanding if
the dilutive potential shares of Common Stock had been issued and were
outstanding. The Company has incurred net losses for the three and six months
ending September 30, 2003 and 2004; therefore, the impact of dilutive potential
shares of Common Stock has been excluded from the computation as it would be
anti-dilutive.
The following outstanding stock options, warrants (prior to the application of
the treasury stock method), convertible notes and redeemable convertible
preferred stock (on an as-converted basis) were excluded from the computation of
diluted net loss per share:
SEPTEMBER 30,
2003 2004
---- ----
Stock options.......................................... 306,397 544,897
1-Year Notes Warrants.................................. 7,619 --
8
5-Year Notes Warrants.................................. 32,500 --
2001 Warrants.......................................... 430,205 --
Contingent Warrants A-C................................ 680,092 --
Underwriter warrants................................... -- 120,000
Mandatorily redeemable convertible preferred stock..... 8,202,929 --
Shares issuable related to convertible notes........... -- 307,871
Private Placement Warrants............................. -- 304,375
STOCK-BASED COMPENSATION
The Company has 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", and
related interpretations. As such, compensation is recorded on the date of grant
only if the current fair value of the underlying stock exceeds the exercise
price. The Company has adopted the disclosure standards of SFAS No. 148
"Accounting for Stock-Based Compensation - Transaction and Disclosures", which
amends SFAS No. 123, "Accounting for Stock-Based Compensation", which requires
the Company to provide pro forma net loss and earnings per share disclosures for
stock option 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 SIX MONTHS ENDED
------------------ ----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2004 2003 2004
---- ---- ---- ----
Net loss as reported........................................... $(926) $(1,705) $(1,760) $(2,671)
Stock-based compensation expense included in net loss.......... 4 -- 10 4
Stock-based compensation expense determined under fair value
based method, net of related income tax benefits............... (102) (152) (233) (306)
-------- -------- -------- --------
Pro forma net loss............................................. $(1,024) $(1,857) $(1,983) $(2,973)
======== ======== ======== ========
Basic and diluted net loss available to common stockholders
per share:
As reported.................................................... $(0.40) $(0.18) $(0.78) $(0.29)
Pro forma...................................................... $(0.43) $(0.19) $(0.86) $(0.32)
USE OF ESTIMATES
The preparation of consolidated 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 reported
amounts of assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company's most significant estimates related to revenue
recognition, capitalization of software development costs, amortization of
intangible assets and depreciation of fixed assets. Actual results could differ
from those estimates.
NOTE 3. NOTES PAYABLE
In February 2002, the Company commenced an offering of 5-year 8% subordinated
promissory notes (the "5-Year Notes") with detachable warrants to purchase Class
A Shares (the "5-Year Notes Warrants"). During the six months ended September
30, 2003, the Company raised an aggregate of $1,230 from the issuance of 5-Year
Notes to several investors. Through March 31, 2004 the Company had raised a
total of $4,405 from the issuance of 5-Year Notes and no additional 5-Year Notes
were issued during the six months ended September 30, 2004. As of September 30,
2004, 5-Year Notes Warrants to purchase 440,500 Class A Shares were issued, of
which 5-Year Warrants to purchase 123,000 Class A Shares were issued during the
six months ended September 30, 2003 (see Note 5).
In November 2003, the Company issued two 8% notes payable totaling $3,000 to the
founders of Hollywood SW as part of the purchase price for Hollywood SW (the "HS
Notes"). During the six months ended September 30, 2004, the Company repaid
principal of $378 on the HS Notes.
9
In February 2004, the Company sent a notice to the holders of the 5-Year Notes
and the HS Notes offering to exchange (the "Exchange Offer") the principal and
accrued interest of the outstanding 5-Year Notes and the HS Notes for, at each
note holder's election, either (1) unregistered Class A Shares at an exchange
rate of $3.57 per share (the "Share Option") or (2) Subordinated Convertible
Promissory Notes ("Convertible Notes"), which are convertible into Class A
Shares at a conversion rate of $5.64 per share (the "Convertible Note Option").
On March 24, 2004, the Exchange Offer was completed. Pursuant to the Share
Option, the Company exchanged 5-Year Notes in the aggregate principal amount of
$2,480 plus accrued and unpaid interest of $46 for 707,477 unregistered Class A
Shares. Pursuant to the Convertible Note Option, in exchange for 5-Year Notes in
the aggregate principal amount of $1,705 plus accrued and unpaid interest of
$31, the Company issued Convertible Notes which are, as of September 30, 2004,
convertible into a maximum of 307,871 shares of its Class A Shares (1) at any
time up to the maturity date at each holder's option or (2) automatically on the
date when the average closing price on the American Stock Exchange of the Class
A Shares for 30 consecutive trading days has been equal to or greater than
$12.00. The holders of all the HS Notes and holders of 5-Year Notes totaling
$220 of principal elected not to participate in the Exchange Offer.
In March 2004, in connection with its acquisition of assets of Boeing Digital
from the Boeing Company ("Boeing"), the Company issued a non-interest bearing
note payable with a face amount of $1,800. The estimated fair value of this note
was determined to be $1,367 on the closing date and interest is being imputed
over the 4 year term of the note, to non-cash interest expense in the unaudited
Consolidated Statement of Operations. On September 30, 2004, the value of the
note, (including imputed interest) is $1,449 and is included in notes payable in
the unaudited Consolidated Balance Sheet.
In July 2004, the Company made early repayments totaling $58 for two 5 -Year
Notes, and the remaining value of the underlying 5 - Year Notes Warrants was
amortized to non-cash interest expense, totaling $19.
During the six months ended September 30, 2004, the Company made scheduled
principal payments of $12 on the 5-Year Notes.
NOTE 4. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
PREFERRED STOCK
In October 2001, the Company issued 3,226,538 shares of the Series A 8%
Mandatorily Redeemable Convertible Preferred Stock (the "Series A Preferred
Stock") at approximately $0.62 per share, resulting in gross proceeds of $2,000
before considering expenses of $203. Concurrent with this issuance, the Company
issued warrants to purchase up to 430,205 Class A Shares (the "2001 Warrant").
In November 2002, the Company issued 4,976,391 shares of Series B 8% Cumulative
Convertible Preferred Stock, par value $0.001 (the "Series B Preferred Stock")
the Series A Preferred Stock holder at approximately $0.50 per share, resulting
in gross proceeds of $2,500 before considering expenses of $125. Concurrent with
this issuance, the Company issued three warrants to purchase 381,909, 144,663
and 100,401 Class A Shares ("Contingent Warrant A", "Contingent Warrant B" and
"Contingent Warrant C", respectively). The issuance of the Series A Preferred
Stock resulted in a beneficial conversion feature of $1,078 calculated in
accordance with Emerging Issues Task Force ("EITF") Issue No. 00-27,
"Application of Issue No. 98-5 to Certain Convertible Instruments". The
beneficial conversion feature was reflected as an issuance cost and therefore
was reflected as a charge against the Series A Preferred Stock and an increase
to additional paid-in capital. As described below, in November 2003 the Company
exchanged all of its Series A Preferred Stock, Series B Preferred Stock, related
warrants and accumulated dividends for 2,207,976 Class A Shares.
As of September 30, 2003, the carrying value of the Company's Series A Preferred
Stock was below its liquidation value, as the Company incurred aggregate costs
of $2,000 related to the issuance of the Preferred Stock, of which $203
represents cash payments, $719 represents the estimated fair value of the 2001
Warrants issued as consideration for the issuance of the Series A Preferred
Stock, and $1,078 represents the beneficial conversion feature. Total accretion
for the Series A Preferred Stock to its estimated redemption value was $237 and
$463, respectively, during the three and six months ended September 30, 2003,
respectively of which $67 and $355 related to the accretion to the estimated
redemption amount and $54 and $108, respectively, related to the accretion of
the beneficial conversion feature. There was no accretion recorded for the
Series B Preferred Stock for the six months ended September 30, 2003, as the
estimated redemption amount was below the original carrying amount of the Series
B Preferred Stock.
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In September 2003, the Company entered into an agreement (the "Exchange
Agreement") with the holder of the Series A and Series B Preferred Stock to: (1)
convert all 8,202,929 shares of Series A and Series B Preferred Stock held by it
into 1,640,585 Class A Shares; (2) exchange the 2001 Warrant, Contingent Warrant
A and Contingent Warrant C for 320,000 Class A Shares; (3) exercise Contingent
Warrant B to purchase 143,216 Class A Shares on a cashless-exercise basis; and
(4) accept Class A Shares at a price per share of $5.00 pursuant to the
Company's November 2003 initial public offering (the "IPO"), as consideration
for the conversion of all accumulated dividends on the Series A and Series B
Preferred Stock through the effective date of the IPO. On November 14, 2003, the
Exchange Agreement was finalized, concurrent with the completion of the IPO. The
Company issued 104,175 Class A Shares as consideration for the conversion of all
accumulated dividends on the Series A and B Preferred Stock. As of September 30,
2004, there is no Series A Preferred Stock or Series B Preferred Stock issued or
outstanding.
NOTE 5. STOCKHOLDERS' EQUITY
CAPITAL STOCK
On June 4, 2004, the Company issued in a private placement (the "Private
Placement") 1,217,500 unregistered Class A Shares at a sale price of $4.00 per
share. The total net proceeds to the Company, including fees and expenses to
subsequently register the securities were approximately $4,000. The Company is
using the net proceeds for capital investments and for working capital. The
Company also issued to investors and the investment firm in the Private
Placement, warrants to purchase a total of 304,375 Class A Shares at an exercise
price of $4.80 per share, exercisable upon receipt (the "Private Placement
Warrants"). The Company agreed to register the Class A Shares and the Private
Placement Warrants with the SEC by filing a Form SB-2 on or before July 5, 2004.
The Company filed the Form SB-2 on July 2, 2004, and the Form SB-2 was declared
effective on July 20, 2004.
In May 2004, the Company entered into an agreement with the holder of 750,000
shares of AccessDM's common stock, to exchange all of those shares for 31,300
unregistered Class A Shares. This transaction was consummated in May 2004 and as
a result, AccessIT holds 100% of AccessDM's common stock as of September 30,
2004. In connection with the transaction, the Company recorded a gain of $13,
representing the difference between the fair value of the Class A Shares given
and the AccessDM common stock received. The gain is included in other income,
net in the unaudited Consolidated Statements of Operations.
In August 2004, the Company's Board of Directors authorized the repurchase of up
to 100,000 Class A Shares. The shares will be purchased at prevailing prices
from time-to-time in the open market depending on market conditions and other
factors. As of September 30, 2004, the Company has purchased 9,140 Class A
Shares for a total purchase price of $32, including fees, and has been recorded
as Treasury stock in the unaudited Consolidated Balance Sheet.
STOCK OPTION PLAN
Under AccessIT's stock option plan, AccessIT granted options to purchase 16,000
Class A Shares to its employees, and options to purchase 1,667 Class A Shares to
a vendor in exchange for services, during the six months ended September 30,
2004, all at an exercise price of $5.00 per share. In addition, in July 2004,
AccessIT granted options to purchase 5,000 Class A Shares at an exercise price
of $5.00 per share to each of two non-employee members of its Board of Directors
for their Board member service. Amortization of deferred stock compensation
amounted to $4 and $0 for the three months ended September 30, 2003 and 2004,
respectively, $10 and $4 for the six months ended September 30, 2003 and 2004,
respectively, and has been recorded as non-cash stock-based compensation expense
in the unaudited Consolidated Statements of Operations. Also, in May 2004,
options to purchase 3,334 Class A Shares, previously issued to a vendor were
forfeited following the termination of the underlying services agreement.
As of September 30, 2004, there were options to purchase 55,103 Class A Shares
available for grant under AccessIT's stock option plan.
Under AccessDM's stock option plan, AccessDM issued options to purchase 5,000
shares of its common stock to an employee at an exercise price of $0.25 per
share, during the six months ended September 30, 2004. As of September 30, 2004,
AccessDM has issued options to purchase 1,005,000 of its shares to employees.
As of September 30, 2004 there were options to purchase 995,000 shares of
AccessDM common stock available for grant under AccessDM stock option plan.
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WARRANTS
In connection with the issuance of the 5-Year Notes (see Note 3), the Company
issued 5-Year Notes Warrants to the holders of the 5-Year Notes. During the six
months ended September 30, 2003, the Company issued 5-Year Notes Warrants to
purchase 123,000 Class A Shares to the holders of the 5-Year Notes in the ratio
of one-half of a 5-Year Note Warrant for every dollar principal amount of 5-Year
Notes issued. As of September 30, 2004, 5-Year Notes Warrants to purchase
440,500 Class A Shares have been 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 notes payable. In March 2004, the
Company completed the Exchange Offer covering the majority of the outstanding
5-Year Notes and related warrants (see Note 3), and the remaining $1,421
aggregate amount of underlying 5-Year Notes Warrants was amortized to Non-Cash
Interest Expense. During the three months ended September 30, 2003 and 2004, a
total of $6 and $11, respectively, was amortized to non-cash interest expense to
accrete the value of the notes to their face value over the expected term of the
related notes. During the six months ended September 30, 2004, a total of $110
and $191, respectively, was amortized to non-cash interest expense to accrete
the value of the notes to their face value over the expected term of the related
notes. In addition, in July 2004, the Company made early repayments totaling $58
for two 5 -Year Notes, and the remaining $19 of the underlying 5-Year Notes
Warrants was amortized to non-cash interest expense.
In connection with the Private Placement, the Company issued to the investors
and to the investment firm in the Private Placement, Warrants to purchase
304,375 Class A Shares at an exercise price of $4.00 per share. The Private
Placement Warrants are exercisable from the date of issuance and for a period of
five years thereafter. However, the Private Placement Warrants may be redeemed
by the Company at any time after the date that is one year from the issue date,
upon thirty days advance written notice to the holder, for $0.05 per Private
Placement Warrant to purchase one Class A Share, provided, that (i) a
registration statement with the SEC is then in effect as to such Class A Shares
and will be in effect as of a date thirty days from the date of giving the
redemption notice and (ii) for a period of twenty (20) trading days prior to the
giving of the redemption notice the Class A Shares have closed at a price of
$9.20 per share or higher. The Company agreed to register the Class A Shares and
the Private Placement Warrants with the SEC by filing a Form SB-2 on or before
July 5, 2004. The Company filed the Form SB-2 on July 2, 2004, and the Form SB-2
was declared effective July 20, 2004.
In accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed To, and Potentially Settled In, a Company's Own Stock," and the terms of
the Private Placement Warrants, the fair value of the Private Placement Warrants
were initially accounted for as a liability, with an offsetting reduction to the
carrying value of the common stock. The warrant liability was reclassified to
equity as of the July 20, 2004 effective date of the registration statement.
The fair value of the Private Placement Warrants was estimated to be $797 on the
closing date of the transaction, using the Black-Scholes option-pricing model
with the following assumptions: no dividends: risk-free interest rate 3.94%, the
contractual life of 5 years and volatility of 72%. The fair value of the
warrants was re-measured at June 30, 2004 and estimated to be $776. The decrease
in the fair value of $21 from the transaction date to June 30, 2004 was recorded
as a credit to other income, net in the unaudited Consolidated Statement of
Operations. The fair value of the warrants decreased by $70 from June 30, 2004
to July 20, 2004 and such decrease was recorded as a credit to Other income, net
in the unaudited Consolidated Statement of Operations.
NOTE 6. COMMITMENTS AND CONTINGENCIES
In February 2003, prior to the Company's acquisition of Hollywood SW, Hollywood
SW eliminated the position of an employee and as part of the termination
process, Hollywood SW attempted to secure a general release from liability from
the employee. In March 2003, the Company received a letter from the employee's
attorney seeking unspecified damages to release the Company from any potential
claims, including alleged improper classification as an exempt employee and
unpaid vacation time. In February 2004, the employee's attorney filed a lawsuit
in California seeking unspecified damages. In September 2004, the Company
settled the matter for a cash payment to the former employee of $75 in exchange
for the Company's receipt of a general release from liability from the employee.
On July 2, 2004, the Company received notice that certain creditors of one of
its data center customers filed an involuntary bankruptcy petition against the
customer. On July 14, 2004, the customer agreed to the entry of an order
granting relief under Chapter 11 of the United States Bankruptcy Code and then
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converted the Chapter 11 reorganization to Chapter 7 liquidation. As of
September 30, 2004, the Company had accounts receivable of $121, representing
approximately 2 months of service charges, recorded on the unaudited
Consolidated Balance Sheet related to this customer. In addition, through
September 30, 2004 the Company had $499 of unbilled revenue related to this
customer. The Company has provided an allowance for $499 against the unbilled
revenue, and is shown in the Provision for doubtful accounts in the unaudited
Consolidated Statement of Operations. The Company has a first security interest
in the customer's accounts receivable and the bankruptcy trustee is conducting
an investigation as to the nature and amount of the accounts receivable. Based
on information received to date, the Company believes that the customer's
accounts receivable which are deemed to be collectible are substantially in
excess of the amounts owed to the Company, and recorded on the unaudited
Consolidated Balance Sheet. Therefore, the Company believes that the amounts
owed to the Company, and recorded on the unaudited Consolidated Balance Sheet
will be collected.
In connection with the March 2004 acquisition of the Boeing Digital assets, at
any time during the 90 day period beginning March 29, 2005, Boeing can sell its
53,534 unregistered Class A Shares to the Company in exchange for $250 in cash.
NOTE 7. SUPPLEMENTAL CASH FLOW DISCLOSURE
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
2003 2004 2003 2004
---- ---- ---- ----
Interest paid .................................................. $ 89 $205 $182 $275
Accretion on mandatorily redeemable convertible preferred stock. $237 $ -- $463 $ --
Issuance of warrants to purchase common stock .................. $ -- $ 70 $174 $706
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: Data Center Services and Media 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 Data Center Services segment
provides services through its nine IDC's including the license of data center
space, provision of power, data connections to other businesses, and the
installation of equipment, and the operations of Managed Services. The Media
Services segment consists of Hollywood SW and AccessDM. Hollywood SW develops
and licenses software to the theatrical distribution and exhibition industries,
provides services as an ASP, and provides software enhancements and consulting
services. AccessDM is in the business of storing and distributing digital
content to movie theaters and other venues. 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 subsidiaries is detailed
below:
MEDIA DATA CENTER CONSOLIDATED
SERVICES SERVICES CORPORATE TOTAL
-------- ----------- --------- ------------
For the three months ended September 30, 2003:
Total loss from operations .................... $ -- $ (68) $ (630) $ (698)
Depreciation and Amortization ................. -- 596 23 619
Operating income (loss) before interest, taxes,
depreciation and amortization ................. -- 528 (607) (79)
For the three months ended September 30, 2004:
Total loss from operations .................... $(356) $ (517) $ (809) $ (1,682)
Depreciation and Amortization ................. 309 453 26 788
Operating income (loss) before interest, taxes,
depreciation and amortization ................. (47) (64) (783) (894)
For the six months ended September 30, 2003:
Total loss from operations .................... $ -- $ (113) $ (1,217) $ (1,330)
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Depreciation and Amortization ................. -- 1,193 46 1,239
Operating income (loss) before interest, taxes,
depreciation and amortization ................. -- 1,080 (1,171) (91)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004:
Total income (loss) from operations ........... $(690) $ 637 $ (2,528) $ (2,581)
Depreciation and Amortization ................. 600 912 50 1,562
Operating income (loss) before interest, taxes,
depreciation and amortization ................. (90) 1,549 (2,478) (1,019)
AS OF SEPTEMBER 30,2004:
Total Assets .................................. $ 12,403 $ 6,269 $ 2,815 $ 21,487
NOTE 9. RELATED PARTY TRANSACTIONS
As of September 30, 2003 and 2004, the Company had principal amounts of $1,400
and $4,000, respectively, in notes payable to related parties, including
officers of the Company. During the three months ended September 30, 2003 and
2004, there were $0 and $254, respectively, principal repayments for these notes
payable. During the six months ended September 30, 2003 and 2004, there were $0
and $378, respectively, of principal repayments for these notes payable.
NOTE 10. SUBSEQUENT EVENTS
On October 19, 2004, the Company agreed, subject to certain customary closing
conditions to acquire substantially all of the assets and certain liabilities of
FiberSat Global Services, LLC ("FiberSat"). FiberSat, headquartered in
Chatsworth, California, provides services utilizing satellite ground facilities
and fiber-optic connectivity to receive, process, store, encrypt and transmit
television and data signals globally. FiberSat's Chatsworth facility currently
houses the infrastructure operations of the Company's digital cinema satellite
delivery services. The closing of the FiberSat acquisition is expected to occur
in November 2004.
The initial purchase price for FiberSat consists of 500,000 unregistered Class A
Shares, and the Company has agreed to repay certain liabilities of FiberSat on
or before the closing of the acquisition, with up to $500,000 in cash and
100,000 unregistered Class A Shares. The Company has the option to exchange up
to 50,000 of such 100,000 Class A Shares to increase the cash, and thereby
decrease the Class A Share portion of such repayment based on the ratio of one
Class A Share for each $5.00 of additional cash. In addition, the Company may be
required to pay a contingent purchase price for any of the three years following
the acquisition in which certain earnings targets are achieved. The Company has
also agreed to a one-time issuance of up to additional 100,000 Class A Shares
if, in accordance with an agreed upon formula, the market value of the Company's
Class A Shares is less than 80% of the closing trading price on the closing
date.
On October 26, 2004, AccessIT entered into a stock purchase agreement with an
investor to issue and sell 282,776 unregistered Class A Shares at $3.89 per
share to the investor for gross proceeds of $1,100. These shares carry piggyback
and demand registration rights, at the sole expense of the investor. The net
proceeds to the Company of approximately $1,023 will be used for the FiberSat
acquisition and for working capital.
In connection with the bankruptcy of one of the Company's data center customers
(see Note 6), the bankruptcy trustee has advised the Company that the bankruptcy
trustee is in receipt of certain amounts resulting from paid receivables of the
customer. To date, the bankruptcy trustee has not paid any amounts to the
Company in respect of the Company's claim.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING
STATEMENTS IN THIS REPORT ARE INDICATED BY WORDS SUCH AS "ANTICIPATES,"
"EXPECTS," "BELIEVES," "INTENDS," "PLANS," "ESTIMATES," "PROJECTS" AND SIMILAR
EXPRESSIONS. THESE STATEMENTS REPRESENT OUR EXPECTATIONS BASED ON CURRENT
INFORMATION AND ASSUMPTIONS. FORWARD-LOOKING STATEMENTS ARE INHERENTLY SUBJECT
TO RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
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THOSE WHICH ARE ANTICIPATED OR PROJECTED AS A RESULT OF CERTAIN RISKS AND
UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO A NUMBER OF FACTORS, SUCH AS OUR
INCURRENCE OF LOSSES TO DATE; ACHIEVING SUFFICIENT VOLUME OF BUSINESS FROM OUR
CUSTOMERS; OUR SUBSIDIARIES CONDUCTING BUSINESS IN AREAS IN WHICH WE HAVE LITTLE
EXPERIENCE; ECONOMIC AND MARKET CONDITIONS; THE PERFORMANCE OF THE DATA CENTER
SERVICES AND SOFTWARE RELATED BUSINESSES; CHANGES IN BUSINESS RELATIONSHIPS WITH
OUR MAJOR CUSTOMERS AND IN THE TIMING, SIZE AND CONTINUATION OF OUR CUSTOMERS'
PROGRAMS; COMPETITIVE PRODUCT AND PRICING PRESSURES; INCREASES IN COSTS THAT
CANNOT BE RECOUPED IN PRODUCT PRICING; SUCCESSFUL INTEGRATION OF ACQUIRED
BUSINESSES; AS WELL AS OTHER RISKS AND UNCERTAINTIES, SUCH AS THOSE DESCRIBED
UNDER QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND THOSE
DETAILED HEREIN AND FROM TIME TO TIME IN OUR FILINGS WITH THE 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
operating IDC's. Recently, we have actively expanded into new and interrelated
business areas relating to the delivery and management of digital cinema content
to entertainment venues worldwide. These businesses, supported by our internet
data center business, have become our primary strategic focus.
We have two reportable segments: Data Center Services, which comprise the
operations of our nine IDCs and the operations of Managed Services; and Media
Services, which represents the operations of Hollywood SW and AccessDM,
including Boeing Digital. For the three and six months ended September 30, 2004,
we received 30% and 27%, respectively, of our revenue from the Media Services
segment and 70% and 73%, respectively, of our revenue from the Data Center
Services segment.
From our inception through November 3, 2003, all of our revenues have been
derived from monthly license fees and fees from other ancillary services
provided by us at our IDCs. Hollywood SW generates revenues from software
license fees, ASP fees, enhancements, consulting and maintenance fees. Managed
Services generates revenues primarily from managed network services. AccessDM
generates revenues from the delivery of movies and other content into movie
theaters. We incurred net losses of $1.76 million and $2.67 million in the six
months ended September 30, 2003 and 2004, respectively, and we have an
accumulated deficit of $17.4 million as of September 30, 2004. We anticipate
that, with the acquisitions of Hollywood SW, Managed Services and substantially
all of the assets of Boeing Digital, as well as the operation of AccessDM, 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.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our unaudited Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United States
of America requires our management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. Our
most significant estimates relate to revenue recognition, capitalized software
costs, depreciation of fixed assets and amortization of intangible assets.
Actual results could differ from these estimates. On an on-going basis, we
evaluate our estimates, including those related to the carrying values of our
fixed assets and intangible assets. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances made, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results could differ from these
estimates under different assumptions or conditions.
We believe that the following critical accounting policies and estimates affect
our more significant estimates and judgments used in the preparation of our
unaudited Consolidated Financial Statements.
15
REVENUE RECOGNITION
Through September 30, 2004, most of our Media Services segment revenues have
been generated by Hollywood SW and are accounted for in accordance with
Statement of Position 97-2 ("SOP 97-2") and SAB 104. Our software revenues are
generated from the following primary sources:
o software licensing, including customer licenses and ASP agreements;
o software maintenance contracts; and
o professional consulting services, which includes systems
implementation, training, custom software development services and
other professional services.
Software licensing revenue is recognized when the following criteria are met:
o persuasive evidence of an arrangement exists;
o delivery has occurred and no significant obligations remain;
o the fee is fixed or determinable; and
o collection is determined to be probable.
Significant upfront fees are received in addition to periodic amounts upon
achievement of contractual events for licensing of our products. Such amounts
are deferred until the revenue recognition criteria have been met, which
typically occurs after delivery and acceptance.
For arrangements with multiple elements (e.g., delivered and undelivered
products, maintenance and other services), we separately negotiate each element
of the arrangement based on the fair value of the elements. The fair values for
ongoing maintenance and support obligations are based upon separate sales of
renewals to customers or upon substantive renewal rates quoted in the
agreements. The fair values for services, such as training or consulting, are
based upon hourly billing rates of these services when sold separately to other
customers. In instances where we are not able to determine fair value of each
element and the services are essential to the functionality of the software, we
follow percentage-of-completion accounting to recognize revenue.
Customers not wishing to license and operate our software themselves may use the
software through an ASP arrangement, in which we host the application and
provide customer access via the internet. Annual minimum ASP service fees are
recognized ratably over the contract term. Overage revenues for usage in excess
of stated minimums are recognized monthly.
Maintenance services and website subscription fees are recognized ratably over
the contract term. Professional consulting services, sales of third party
products and resale hardware revenues are recognized as services are provided.
Software development revenues are recognized when delivery has occurred and no
significant obligations remain.
Deferred revenue is recorded in cases of:
o a portion or the entire contract amount cannot be recognized as
revenue due to non-delivery or acceptance of licensed software or
custom programming;
o incomplete implementation of ASP service arrangements; or
o 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
16
revenue in the unaudited Consolidated Balance Sheet and are recognized as
revenue in accordance with our revenue recognition policies described above. In
addition, revenues in the Media Services segment include digital cinema -
related revenues generated by AccessDM. These revenues consist of (1) satellite
delivery revenues, (2) encryption and preparation fee revenues, (3) landing fees
for delivery to each movie theatre. These revenues are recognized upon
completion of the related services.
Within our Data Center Services segment, IDC revenues consist of license fees
for colocation space, riser access charges, electric and cross-connect fees, and
non-recurring equipment installation fees. Revenues from our IDCs, riser access
charges, electric and cross-connect fees are billed monthly and, in accordance
with SAB 104, are recognized ratably over the terms of the contracts, which is
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 such as prepaid
license fees and other amounts, which are collected prior to satisfying the
above revenue recognition criteria, are classified as deferred revenues. Amounts
satisfying revenue recognition criteria prior to billing are classified as
unbilled revenues. In addition, within our Data Center Services segment, Managed
Services revenues consist of network monitoring and maintenance fees. These fees
consist of monthly recurring billings pursuant to contracts, which are
recognized as revenues in the month earned, and other billings which are
recognized on a time and materials basis in the period in which the services
were provided.
CAPITALIZED SOFTWARE COSTS
We account for software costs under 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, and until the product is commercially released, are capitalized.
Amounts capitalized as software development costs are generally amortized on a
straight-line basis over five years. We review capitalized software costs for
impairment on an annual basis. To the extent that the carrying amount exceeds
the estimated net realizable value of the capitalized software cost, an
impairment charge is recorded. No impairment was recorded for the six months
ended September 30, 2004. Amortization of capitalized software development
costs, included in costs of revenues, for the three and six months ended
September 30, 2004 amounted to $67,000 and $126,000, respectively.
BUSINESS COMBINATIONS AND INTANGIBLE ASSETS
We have adopted SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and other Intangible Assets". SFAS No. 141 requires all business
combinations to be accounted for using the purchase method of accounting and
that certain intangible assets acquired in a business combination must be
recognized as assets separate from goodwill. SFAS No. 142 addresses the
recognition and measurement of goodwill and other intangible assets subsequent
to their acquisition. SFAS No. 142 also addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination,
whether acquired individually or with a group of other assets. This statement
provides that intangible assets with indefinite lives and goodwill will not be
amortized but will be tested at least annually for impairment. If an impairment
is indicated, then the asset will be written down to its fair value, typically
based upon its future expected discounted cash flows. As of September 30, 2004,
our finite-lived intangible assets consisted of customer agreements, covenants
not to compete, trade names and trademarks, which are estimated to have useful
lives of ranging from 2 to 10 years. In addition, we have recorded goodwill in
connection with the acquisitions of Hollywood SW and Managed Services.
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.
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IMPAIRMENT OF LONG-LIVED ASSETS
We review the recoverability of our long-lived assets on a periodic basis in
order to identify business conditions, which may indicate a possible impairment.
The assessment for potential impairment is based primarily on our ability to
recover the carrying value of our long-lived assets from expected future
undiscounted cash flows. If the total of expected future undiscounted cash flows
is less than the total carrying value of the assets, a loss is recognized for
the difference between the fair value (computed based upon the expected future
discounted cash flows) and the carrying value of the assets.
DESCRIPTION OF LINE ITEMS
The following is a description of certain line items from our statements of
operations:
o Media Services revenues include charges for software license fees, ASP
service fees, consulting, development and maintenance fees, and
digital movie delivery fees. Media Services revenue are those
generated by Hollywood SW and AccessDM. Our Data Center Services
revenues include charges for monthly license fees for IDC space,
electric fees, riser access charges and installation fees, and managed
network monitoring fees.
o Cost of revenues consists of facility operating costs such as rent,
utilities, real estate taxes, repairs and maintenance, insurance and
other related expenses, direct personnel costs and amortization of
capitalized software development costs.
o Selling, general and administrative expenses consist primarily of
salaries and related personnel costs for management and other
headquarters office employees, professional fees, advertising and
marketing costs and our corporate and Hollywood SW headquarters
facility costs.
o Provision for doubtful accounts represents amounts deemed not probable
of collection from customers.
o Non-cash, stock-based compensation represents the value of employee
and non-employee stock options and restricted stock grants, amortized
over the vesting periods (if any).
o Non-cash interest expense represents the accretion of the value of
warrants attached to our five-year promissory notes.
PRIVATE PLACEMENT
On June 4, 2004, we concluded the Private Placement with several investors
whereby we issued 1,217,500 unregistered Class A Shares at a sale price of $4.00
per share. The total net proceeds, including fees and expenses to register the
securities were approximately $4.0 million, which is being used for capital
investments and working capital. We also issued to investors and to the
investment firm Private Placement Warrants to purchase a total of 304,375 Class
A Shares at an exercise price of $4.80 per share, which became exercisable upon
receipt. We agreed to register these shares and warrants with the SEC by filing
a Form SB-2 on or before July 5, 2004. We filed the Form SB-2 on July 2, 2004,
and the Form SB-2 was declared effective on July 20, 2004.
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2003 AND THE SIX MONTHS ENDED SEPTEMBER
30, 2004
REVENUES. Our total revenues were $2.83 million and $4.4 million for the six
months ended September 30, 2003 and 2004, respectively, an increase of 55%. The
increase was primarily attributable to Hollywood SW, which was acquired in
November 2003, and contributed $1.13 mil1ion of revenues, and Managed Services,
which was acquired in January 2004, which generated $383,000 of revenues.
Additionally, we began to generate revenues from our AccessDM division which
contributed $68,000 of revenues.
COST OF REVENUES. Our cost of revenues was $1.75 million and $2.38 million for
the six months ended September 30, 2003 and 2004, respectively, an increase of
36%. This increase was primarily attributable to the acquisition of Managed
Services and Hollywood SW. Managed Service's operating expenses were $264,000,
primarily representing personnel and utility costs. In addition, Hollywood SW
expenses were $246,000, primarily due to personnel costs and amortization of
18
capitalized software costs. Additionally, we incurred digital cinema-related
delivery costs at AccessDM of $97,000. Also, cost of revenues increased at our
IDC's by $26,000, primarily due to utility cost increases.
GROSS PROFIT. Gross profit was $1.08 million and $2.01 million for the six
months ended September, 30, 2003 and 2004, respectively. The increase was
primarily due to $882,000 of gross profit generated by Hollywood SW, and the
acquisition of Managed Services in January 2004, which generated $119,000 in
gross profit. In addition, a gross profit loss of $29,000 was attributable to
AccessDM's operations and we experienced a decrease in gross profit at our IDC's
of $38,000, which was primarily attributable to higher utility expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses were $1.14 million and $2.28 million for the six months
ended September 30, 2003 and 2004, respectively, an increase of 100%.
Incremental costs associated with Hollywood SW, Managed Services and AccessDM
for the six months ended September 30, 2004, were $593,000, $104,000, and
$184,000, respectively, due primarily to personnel and office expenses. The
remainder of the increase is primarily due to increases in corporate personnel
costs, advertising expenses and, professional fees . As of September 30, 2003
and 2004 we had 11 and 44 employees, respectively, and one and five of whom, are
part-time employees, respectively.
PROVISION FOR DOUBTFUL ACCOUNTS. Our provision for doubtful accounts was $12,000
and $576,000 for the six months ended September 30, 2003 and 2004, respectively.
The increase is primarily due to the provision of $499,000 related to the
bankruptcy of a data center customer. The remainder of the increase is due to
the increase in overall business activity.
RESEARCH AND DEVELOPMENT. We recorded expenses of $0 and $167,000 for the six
months ended September 30, 2003 and 2004, respectively. The increase is
attributable to research and development efforts at Hollywood SW.
NON-CASH, STOCK-BASED COMPENSATION. We recorded non-cash, stock-based
compensation of $10,000 and $4,000 for the six months ended September 30, 2003
and 2004, respectively. These amounts represent the fair value of stock options
granted to non-employees in exchange for goods and services, amortized over the
vesting period, which ranges from immediate vesting to three years. The types of
services performed by non-employees in exchange for stock options included
advisory services on real estate matters, and advertising and marketing. The
fair value of these stock options was determined using the Black-Scholes option
pricing model. The decrease was due to lower amortization expense from
non-employee options, due to the vesting of certain grants made in prior years.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $1.24 million
and $1.56 million for the six months ended September 30, 2003 and 2004,
respectively, an increase of 26%. The acquisition of Hollywood SW and Managed
Services and the addition of AccessDM resulted in $226,000 $74,000 and $374,000,
respectively, of depreciation and amortization for the six months ended
September 30, 2004. Partially offsetting these increases was certain data center
and corporate computer equipment reaching the end of their estimated useful
lives, and becoming fully depreciated.
INTEREST EXPENSE. Interest expense was $246,000 and $188,000 for the six months
ended September 30, 2003 and 2004, respectively. The decrease was primarily due
to the March 2004 exchange of $2.5 million for aggregate principal amount of
5-Year Notes for Class A Shares and $1.7 million aggregate principal amount of
5-Year Notes for Convertible Notes. In addition, in November 2003, we repaid a
1-year 9% note payable for $1.0 million incurred in connection with the November
2002 acquisition of six IDC's.
NON-CASH INTEREST EXPENSE. Non-cash interest expense was $191,000 and $113,000
for the six months ended September 30, 2003 and 2004, respectively. Non-cash
interest expense results from the imputing of interest on the $1.8 million note
payable to Boeing, incurred in the March 2004, and from the accretion of the
value of the 5-Year Notes Warrants attached to the 5-Year Notes (which bear
interest at 8% per year). The decrease is primarily due to one-time accretion of
$1.4 million recorded in connection with the March 2004 exchange of 5-Year Notes
described above.
INCOME TAX BENEFIT. Income tax benefit was $0 and $156,000 for the six months
ended September 30, 2003 and 2004, respectively. The current year amount is
related to the amortization of a deferred tax liability related to our
acquisition of Hollywood SW and Managed Services.
19
NET LOSS. As a result of the foregoing, we had net losses of $1.76 million and
$2.67 million for the six months ended September 30, 2003 and 2004,
respectively.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND THE THREE MONTHS ENDED
SEPTEMBER 30, 2004
REVENUES. Our total revenues were $1.41million and $2.19 million for the three
months ended September 30, 2003 and 2004, respectively, an increase of 55%. The
increase was primarily attributable to Hollywood SW, which was acquired in
November 2003, and contributed $593,000 of revenues, and Managed Services, which
was acquired in January 2004 and generated $188,000 of revenues. Additionally,
we began to generate revenues from our AccessDM division which contributed
$68,000 of revenues. Our Internet data center operations experienced a revenue
decrease of $72,000 primarily due to the loss of one customer.
COST OF REVENUES. Our cost of revenues was $881,000 and $1.25 million for the
three months ended September 30, 2003 and 2004, respectively, an increase of
42%. This increase was primarily attributable to the acquisition of Managed
Services and Hollywood SW operating expenses which were $131,000, primarily
representing personnel and amortization of capitalized software costs. In
addition, Managed Service's operating expenses which were $126,000, primarily
due to personnel and utility costs. Additionally, we incurred digital
cinema-related delivery costs at AccessDM of $89,000. Also, cost of revenues
increased at our IDC's by $23,000, primarily due to utility cost increases.
GROSS PROFIT. Gross profit was $527,000 and $935,000 for the three months ended
September, 30, 2003 and 2004, respectively. The increase was primarily due to
$462,000 of gross profit generated by Hollywood SW, and the acquisition of
Managed Services in January 2004, which generated $62,000 of gross profit. In
addition, a gross profit loss of $20,000 was attributable to AccessDM's
operations and we experienced a decrease in gross profit at our IDC's of $96,000
which was primarily attributable to higher utility expenses and lower revenue
noted above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses were $595,000 and $1.18 million for the three months
ended September 30, 2003 and 2004, respectively, an increase of 99%. Incremental
costs associated with Hollywood SW, Managed Services and AccessDM for the six
months ended September 30, 2004 were $266,000, $52,000, and $103,000,
respectively, due primarily to personnel and office expenses. The remainder of
the increase is primarily due to increases in corporate personnel costs,
advertising expenses and, professional fees. As of September 30, 2003 and 2004
we had 11 and 44 employees, respectively, and one and five of whom, are
part-time employees, respectively.
PROVISION FOR DOUBTFUL ACCOUNTS. Our provision for doubtful accounts was $7,000
and $527,000 for the three months ended September 30, 2003 and 2004,
respectively. The increase is primarily due to the provision of $499,000 related
to the bankruptcy of a data center customer. The remainder of the increase is
due to the increase in overall business activity.
RESEARCH AND DEVELOPMENT. We recorded expenses of $0 and $120,000 for the three
months ended September 30, 2003 and 2004, respectively. The increase is
attributable to research and development efforts at Hollywood SW.
NON-CASH, STOCK-BASED COMPENSATION. We recorded non-cash, stock-based
compensation of $4,000 and $0 for the three months ended September 30, 2003 and
2004, respectively. These amounts represent the fair value of stock options
granted to non-employees in exchange for goods and services, amortized over the
vesting period, which ranges from immediate vesting to three years. The types of
services performed by non-employees in exchange for stock options included
advisory services on real estate matters, and advertising and marketing. The
fair value of these stock options was determined using the Black-Scholes option
pricing model. The decrease was due to lower amortization expense from
non-employee options, due to the vesting of certain grants made in prior years.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $619,000 and
$788,000 for the three months ended September 30, 2003 and 2004, respectively,
an increase of 27%. The acquisition of Hollywood SW and Managed Services and the
addition of AccessDM resulted in $115,000, $38,000, and $195,000, respectively,
of depreciation and amortization for the three months ended September 30, 2004.
Partially offsetting these increases was certain data center and corporate
computer equipment reaching the end of their estimated useful lives, and
becoming fully depreciated.
20
INTEREST EXPENSE. Interest expense was $131,000 and $91,000 for the three months
ended September 30, 2003 and 2004, respectively. The decrease was primarily due
to the March 2004 exchange of $2.5 million aggregate principal amount of 5-Year
Notes for Class A Shares and $1.7 million aggregate principal amount of 5- Year
Notes for Convertible Notes. In addition, in November 2003, we repaid a 1-year
9% note payable for $1.0 million, incurred in connection with the November 2002
acquisition of six IDC's.
NON-CASH INTEREST EXPENSE. Non-cash interest expense was $110,000 and $66,000
for the three months ended September 30, 2003 and 2004, respectively. Non-cash
interest expense results from the imputing of interest on the $1.8 million note
payable to Boeing, incurred in March 2004, and from the accretion of the value
of the 5- Year Notes Warrants attached to the 5-Year Notes (which bear interest
at 8% per year). The decrease is primarily due to one-time accretion of $1.4
million recorded in connection with the March 2004 exchange of 5-Year Notes
described above.
INCOME TAX BENEFIT. Income tax benefit was $0 and $78,000 for the three months
ended September 30, 2003 and 2004, respectively. The current year amount is
related to the amortization of a deferred tax liability related to our
acquisition of Hollywood SW and Managed Services.
NET LOSS. As a result of the foregoing, we had net losses of $926,000 and $1.70
million for the three months ended September 30, 2003 and 2004, respectively.
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 our one-and five-year 8% promissory notes, our IPO, and the Private
Placement. In March 2004, we refinanced $4.2 million aggregate principal amount
(plus accrued and unpaid interest) of 5-Year Notes pursuant to the Exchange
Offer. In exchange for those notes, we issued 707,477 unregistered Class A
Shares and $1.7 million aggregate principal amount of Convertible Notes which,
as of September 30, 2004, were convertible into a maximum of 307,871 Class A
Shares. From inception through September 30, 2004, we had raised cash of $19.6
million, $4.5 million and $4.4 million through sales of our Common Stock,
preferred stock, and promissory notes, respectively. Additionally, we have
issued Common Stock in lieu of cash payments totaling $3.1 million to the
sellers of Hollywood SW, Managed Services and Boeing Digital, and for
construction services at our IDCs. Also, in November 2002, we issued a $1.0
million 9% secured note to a seller in connection with the acquisition of six
IDCs from ColoSolutions. This note was repaid in November 2003. We have no
borrowings or line of credit arrangements with banks or other financial
institutions. We are not party to any material off-balance sheet arrangements.
On July 2, 2004, we received notice that certain creditors of one of our data
center customers filed an involuntary bankruptcy petition against the customer.
On July 14, 2004, the customer agreed to the entry of an order granting relief
under Chapter 11 of the United States Bankruptcy Code and then converted the
Chapter 11 reorganization to Chapter 7 liquidation. As of September 30, 2004, we
had accounts receivable of $121,000 recorded on the unaudited Consolidated
Balance Sheet related to this customer. We have a first security interest in the
customer's accounts receivable and the bankruptcy trustee is attempting to
validate the amount and nature of the accounts receivable. Based on information
received to date, we believe that the customers accounts receivable that are
deemed to be collectible are substantially in excess of the amounts recorded on
our unaudited Consolidated Balance Sheet. Therefore, we believe that the amounts
owed to us, and recorded on the unaudited Consolidated Balance Sheet, will be
collected. We have been advised that the bankruptcy trustee is in receipt of
certain amounts resulting from paid receivables of the customer; however, the
trustee has not paid any amounts to us in respect of our claim.
On June 4, 2004, we concluded the Private Placement with several investors
whereby we issued 1,217,500 unregistered Class A Shares at a sale price of $4.00
per share. The total net proceeds, including fees and expenses to register the
securities were $4.0 million, which is being used for capital investments and
working capital. We also issued to investors and to the investment firm Private
Placement Warrants to purchase a total of 304,375 Class A Shares at an exercise
price of $4.80 per share, which became exercisable upon receipt. We agreed to
register these shares warrants with the SEC by filing a Form SB-2 on or before
July 5, 2004. We filed the Form SB-2 on July 2, 2004, and the Form SB-2 was
declared effective on July 20, 2004.
On November 14, 2003 our IPO was finalized, resulting in the issuance of
1,380,000 Class A Shares. The net proceeds of our IPO were $4.8 million, of
which $1.1 million was used for general business purposes. We agreed upon the
21
completion of the IPO in November 2003 to pay the lead underwriter an advisory
fee of $4,167 per month for the 12-month period beginning upon the completion of
the IPO.
On November 3, 2003, we acquired all of the outstanding capital stock of
Hollywood SW. In connection with this acquisition, we issued $3.0 million
aggregate principal amount of HS Notes, which are secured and senior, with
certain exceptions, to all indebtedness during their five year term. Our
obligations to repay the HS Notes and to pay any additional purchase price is
secured by a pledge of all of Hollywood SW's capital stock and any distributions
and proceeds there from, except that we are permitted to receive cash
distributions from Hollywood SW to the extent that such distributions do not
exceed Hollywood SW's cash flow from operations. In addition, as of September
30, 2004, the principal balance of the HS Notes is $2.62 million.
On March 29, 2004, we acquired certain assets from Boeing for use in AccessDM's
digital cinema business. In connection with this acquisition we issued a 4-year
non-interest bearing note for $1.8 million with equal repayments of $450,000 due
each year beginning in April 2005.In addition, at any time during the 90 day
period beginning March 29, 2005, Boeing can sell its 53,534 unregistered Class A
Shares to us for $250,000 in cash.
As of September 30, 2004, we had cash and cash equivalents of $2.78 million. Our
working capital at September 30, 2004 was $1.28 million.
For the six months ended September 30, 2003, we raised gross proceeds of $1.2
million through sales of our 5-Year Notes.
Our operating activities resulted in net cash outflows of $1.18 million and
$1.43 million for the six months ended September 30, 2003 and 2004,
respectively. The increase was primarily due to lower collection of accounts
receivable.
Investing activities used net cash of $100,000 and $1.6 million for the six
months ended September 30, 2003 and 2004, respectively. The increase was due to
various purchases of computer and other equipment, primarily to support our
digital cinema and managed data storage businesses, and, additions to Hollywood
SW's capitalized software costs. We anticipate that we will experience an
increase in our capital expenditures consistent with the anticipated growth in
our operations, infrastructure and personnel.
Net cash provided by financing activities for the six months ended September 30,
2003 was primarily due to the issuance of $1.23 million of our 5-Year Notes,
less repayments of capital lease obligations. Net cash provided by financing
activities for the six months ended September 30, 2004 was due primarily to the
June 2004 Private Placement, less repayments of notes payable and capital lease
obligations.
We have acquired equipment under long-term capital lease obligations that expire
at various dates through December 2006. As of September 30, 2004, we had an
outstanding balance of $37,000 in capital lease obligations. These capital lease
obligations cover computer and telecom equipment at our data centers and our
corporate office. All our capital lease obligations are secured by equipment at
the following locations and in the following principal amounts: at our executive
offices, telephone equipment in the remaining principal amount of $19,000, and
computer equipment for use in Managed Service's operations of $18,000. As of
September 30, 2004, minimum future capital lease payments (including interest)
for the fiscal years ended September 30, 2005, 2006, and 2007 were $21,000,
$15,000, and $3,000, respectively. During the six months ended September 30,
2003 and 2004, we made early repayments of $159,000 and $70,000 on capital
leases, respectively.
Following the completion of the Exchange Offer in March 2004, the holders of the
$3.0 million of Hollywood SW acquisition notes, and $220,000 aggregate principal
amount of 5-Year Notes, elected not to participate in the Exchange Offer.
Other significant commitments consist of obligations under non-cancelable
operating leases that totaled $16.1 million as of September 30, 2004 and are
payable in varying monthly installments through 2015. As of September 30, 2004,
minimum future operating lease payments for the fiscal years ended September 30,
22
2005, 2006, 2007, 2008, 2009 and thereafter (in total) were $2.3 million, $2.2
million, $2.2 million, $2.2 million, $2.0 million and $5.2 million,
respectively.
In May 2004, we entered into an agreement with the holder of 750,000 shares of
AccessDM's common stock, to exchange all of its shares for 31,300 unregistered
Class A Shares. As a result of the transaction, AccessIT holds 100% of
AccessDM's common stock.
During the fiscal year ended March 31, 2004 and the six months ended September
30, 2004, we have incurred losses of $4.8 million and $2.7 million,
respectively, and cash inflows (outflows) from operating activities of $321,000
and $(1.4) million, respectively. In addition, we have an accumulated deficit of
$17.4 million as of September 30, 2004. Furthermore, we have total debt service
requirements totaling $1.33 million for the twelve months beginning in October
2004.
In July 2004, we made early repayments totaling $58,000 for two 5 -Year Notes,
and the remaining value of the underlying 5 - Year Notes Warrants was amortized
to non-cash interest expense, totaling $19,000.
In August 2004, our Board of Directors authorized the repurchase of up to
100,000 Class A Shares. These shares will be purchased at prevailing prices from
time-to-time in the open market depending on market conditions and other
factors. Through September 30, 2004, we purchased 9,140 Class A Shares for a
total purchase price of $32,000, including fees, and at an average purchase
price of $3.48 per share, and recorded them as treasury stock in the unaudited
Consolidated Balance Sheet. As of September 30, 2004, we may repurchase an
additional 90,860 Class A Shares.
Management expects that we will continue to generate operating losses for the
foreseeable future due to depreciation and amortization, and 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 the IPO and our June
2004 Private Placement and the lower debt service requirements as a result of
the Exchange Offer, combined with our cash on hand and cash receipts will be
sufficient to permit us to continue our operations for the foreseeable future.
RELATED PARTY TRANSACTIONS
As of September 30, 2003 and 2004, we had principal amounts of $1.4 million and
$4.0 million, respectively, in notes payable to related parties, including our
officers. During the three months ended September 30, 2003 and 2004, there were
$0 and $254,000, respectively, principal repayments for these notes payable.
During the six months ended September 30, 2003 and 2004, there were $0 and
$378,000, respectively, of principal repayments for these notes payable.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our business is currently principally in the United States. As a result, our
financial results are not affected by factors such as changes in foreign
currency exchange rates or economic conditions in foreign markets. We do not
engage in hedging transactions to reduce our exposure to changes in currency
exchange rates, although if the geographical scope of our business broadens, we
may do so in the future.
Our exposure to market risk for changes in interest rates relates primarily to
the increase or decrease in the amount of interest income that we may earn on
our invested cash. Because we currently do not have any variable rate debt,
there is no risk associated with fluctuating interest expense. We do not plan to
use any derivative financial instruments. We plan to help ensure the safety and
preservation of invested principal funds by limiting default risks, market risk
and investment risk. We plan to mitigate our default risk by investing generally
in low-risk securities.
23
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 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On July 2, 2004, we received notice that certain creditors of one of our
data center customers filed an involuntary bankruptcy petition against the
customer. On July 14, 2004, the customer agreed to the entry of an order
granting relief under Chapter 11 of the United States Bankruptcy Code and then
converted the Chapter 11 reorganization to Chapter 7 liquidation. As of
September 30, 2004, we had accounts receivable of $121,000 recorded on the
unaudited Consolidated Balance Sheet related to this customer. We have a first
security interest in the customer's accounts receivable and the bankruptcy
trustee is attempting to validate the amount and nature of the accounts
receivable. Based on information received to date, we believe that the customers
accounts receivable that are deemed to be collectible are substantially in
excess of the amounts recorded on our unaudited Consolidated Balance Sheet.
Therefore, we believe that the amounts owed to us, and recorded on the unaudited
Consolidated Balance Sheet, will be collected. We have been advised that the
bankruptcy trustee is in receipt of certain amounts resulting from paid
receivables of the customer; however the trustee has not paid any amounts to us
in respect of our claim.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table summarizes information regarding purchases of our
Class A Shares made by us or on our behalf during the three months ended
September 30, 2004.
TOTAL NUMBER OF
SHARES - PURCHASED AS MAXIMUM NUMBER OF
PART OF PUBLICLY SHARES THAT MAY YET
AVERAGE PRICE PAID ANNOUNCED PLANS OR BE PURCHASED UNDER
PERIOD TOTAL NUMBER OF SHARES PER SHARE PROGRAMS(A) THE PLANS PROGRAMS(a)
------ ---------------------- ------------------ --------------------- ---------------------
July 2004 -- -- -- --
August 2004 9,140 $3.48 9,140 90,860
September 2004 -- -- -- --
Total 9,140 $3.48 9,140 90,860
===== ===== ===== ======
(a) In August 2004, our Board of Directors authorized the repurchase of up to
100,000 Class A Shares. These shares will be purchased at prevailing prices from
time-to-time in the open market depending on market conditions and other
factors. Through September 30, 2004, we purchased 9,140 Class A Shares for a
total purchase price of $32,000 including fees, and at an average purchase price
of $3.48 per share, and recorded them as treasury stock in the unaudited
Consolidated Balance Sheet. As of September 30, 2004, we may repurchase an
additional 90,860 Class A Shares.
24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Our annual meeting of stockholders was held on October 14, 2004.
Proxies for the meeting were solicited pursuant to Regulation 14A under the
Securities Exchange Act of 1934. There was no solicitation of proxies in
opposition to management's nominees as listed in the proxy statement and all of
management's nominees were elected to our Board of Directors. Details of the
voting are provided below:
PROPOSAL 1:
Election of Directors and Directors whose terms continue beyond the 2004
annual meeting:
(Term expiring in 2005) VOTES
VOTES FOR WITHHELD
--------- --------
A. Dale Mayo................................... 12,916,168 28,654
Kevin J. Farrell............................... 12,916,168 28,654
Gary S. Loffredo............................... 12,916,168 28,654
Brett E. Marks................................. 12,914,616 30,206
Wayne L. Clevenger............................. 12,924,822 20,000
Gerald C. Crotty............................... 12,926,822 18,000
Robert Davidoff................................ 12,926,822 18,000
Matthew W. Finlay.............................. 12,924,822 20,000
PROPOSAL 2: VOTES
VOTES FOR WITHHELD ABSTENTIONS
--------- -------- -----------
To amend AccessIT's first amended and restated 2000
stock option plan to increase the total number of
Class A Shares available from the grant of options
thereunder from 600,000 to 850,000 shares 11,913,207 59,969 --
ITEM 5. OTHER INFORMATION.
We currently intend to hold our 2005 annual meeting of stockholders on or about
August 20, 2005. In order for any stockholder proposal submitted pursuant to
Rule 14a-8 under the Exchange Act to be included in our Proxy Statement to be
issued in connection with our 2005 annual meeting of Stockholders, such proposal
must be received by us no later than March 31, 2005. Any notice of a proposal
submitted outside the processes of Rule 14a-8 under the Exchange Act, which a
stockholder intends to bring forth at our 2005 annual meeting of stockholders,
will be untimely for purposes of Rule 14a-4 under the Exchange Act and our
By-laws if received after June 14, 2005.
ITEM 6. EXHIBITS.
The exhibits are listed in the Exhibit Index beginning on page 27
herein.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ACCESS INTEGRATED TECHNOLOGIES, INC.
(Registrant)
Date: November 12, 2004 By: /S/ A. DALE MAYO
----------------------------------
A. Dale Mayo
President and Chief Executive Officer
and Director
(Principal Executive Officer)
Date: November 12, 2004 By: /S/ BRIAN D. PFLUG
-----------------------------------
Brian D. Pflug
Senior Vice President - Accounting & Finance
(Principal Financial Officer)
26
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
31.1 -- Certification Pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934.
31.2 -- Certification Pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934.
32.1 -- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 -- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
All of the above-referenced Exhibits are filed herewith.
27