UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: March 31, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-31810
ACCESS INTEGRATED TECHNOLOGIES, INC.
(Name of Small Business Issuer in its Charter)
DELAWARE 22-3720962
(State of Incorporation or (I.R.S. Employer Identification No.)
Organization or Other Jurisdiction)
55 MADISON AVENUE, SUITE 300, MORRISTOWN, NEW JERSEY 07960
(Address of principal executive offices)
(973) 290-0080
(ISSUER'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, PAR VALUE $.001 PER SHARE
Check whether the Issuer: (1) 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 Issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the Company 's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ ].
Issuer's revenues for the fiscal year ended March 31, 2005 were $10,651,431.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the issuer based on a price of $8.99 per share, as of June 28,
2005, the closing price of such common equity on the American Stock Exchange,
was approximately $50,135,774. For purposes of the foregoing calculation, all
directors, officers and shareholders who beneficially own 10% of the shares of
such common equity have been deemed to be affiliates, but the Company disclaims
that any of such persons are affiliates.
As of June 28, 2005, 9,433,328 shares of Class A Common Stock, $.001 par value,
and 965,811 shares of Class B Common Stock, $.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 9, 10, 11, 12, and 13 of Form 10-KSB is
incorporated by reference into Part III hereof from the registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held September 15, 2005.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES NO X.
------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
FORWARD-LOOKING STATEMENTS.................................................. 2
PART I
ITEM 1. Business...................................................... 3
ITEM 2. Property...................................................... 19
ITEM 3. Legal Proceedings............................................. 20
ITEM 4. Submission of Matters to a Vote of Security Holders........... 20
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters...... 20
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 23
ITEM 7. Consolidated Financial Statements............................. 35
ITEM 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 69
ITEM 8A. Controls and Procedures....................................... 69
ITEM 8B. Other Information............................................. 70
PART III
ITEM 9. Directors, Executive Officers and Control Persons; Compliance with
Section 16(a) of the Exchange Act............................. 70
ITEM 10. Executive Compensation........................................ 70
ITEM 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters................................... 70
ITEM 12. Certain Relationships and Related Transactions................ 70
ITEM 13. Exhibits...................................................... 71
ITEM 14. Principal Accountant Fees and Services........................ 75
SIGNATURES.................................................................. 76
1
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
federal securities laws. These include statements about our expectations,
beliefs, intentions or strategies for the future, which are indicated by words
or phrases such as "believes," "anticipates," "expects," "intends," "plans,"
"will," "estimates, "and similar words. These forward-looking statements are
based on our current expectations and are subject to certain risks,
uncertainties and assumptions, including those set forth in the discussion under
Item 1, "Description of Business" and Item 6, "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Our actual results
may differ materially from results anticipated in these forward-looking
statements. These forward-looking statements are based on information currently
available to us, and we assume no obligation to update them, except as otherwise
required by law.
In this report, "AccessIT," "we," "us," "our" and the "Company" refers to Access
Integrated Technologies, Inc. and its subsidiaries unless the context otherwise
requires.
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PART I
ITEM 1. BUSINESS
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 Internet data centers. We are actively expanding 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.
Our business focus is to create a secure, managed and complete system that
consists of software to book, track and perform accounting functions for digital
content in theatres, deliver digital content to multiple locations and provide
the content management software for in-theatre playback system for the digital
cinema marketplace. The system is intended to use all of our businesses:
MEDIA SERVICES
o DIGITAL MEDIA DELIVERY - digital media managed electronic delivery
services and in-theatre management software for use in theatres from
Access Digital Media, Inc. ("AccessDM"), our wholly owned subsidiary
and satellite delivery services from FiberSat Global Services, Inc.,
our wholly owned subsidiary. The Pavilion Theatre (as defined below)
is utilizing the digital media managed electronic delivery services
and in-theatre management software products;
o MOVIE DISTRIBUTION AND EXHIBITOR SOFTWARE - Hollywood Software, Inc.
("Hollywood SW"), our wholly owned subsidiary, develops and licenses
distribution and exhibitor software products and services;
DATA CENTER SERVICES
o DATA CENTERS - AccessIT's Internet data centers ("IDCs" or "data
centers"), including redundant sites in Los Angeles and New York City;
and
o MANAGED SERVICE OFFERINGS- managed storage and network and systems
management services by Core Technology Services, Inc. ("Managed
Services"), our wholly owned subsidiary, and AccessIT.
Our system provides a digital content owner with the secure delivery of multiple
files to multiple locations with proactive notification and security management.
Our system also provides the digital content exhibitor with access to digital
content, freedom to choose what to play and when to play it with proactive
notifications and management software. We have created a system whereby digital
content is delivered where it is supposed to go, is played when it is supposed
to be played along with the ability to act upon and report back management and
financial information.
We have two reportable segments: Media Services, which represents the operations
of AccessDM (including Boeing Digital (as defined below)), Pavilion Theatre,
FiberSat (as defined below) and Hollywood SW; and Data Center Services, which
are comprised of our IDC operations and Managed Service Offerings.
In February 2003, we organized AccessDM, which in May 2004 became our
wholly-owned subsidiary. AccessDM has developed proprietary software, Digital
Express e-Courier, capable of worldwide delivery of digital data -- including
movies, advertisements and alternative content such as concerts, seminars and
sporting events -- to movie theaters and other venues having digital projection
equipment. Also, in April 2005 we completed the development of in-theatre
management software for use by digitally - equipped movie theaters, called the
Theatre Command Center.
In November 2003, we acquired all of the capital stock of Hollywood SW, a
leading provider of proprietary transactional support software and consulting
services for distributors and exhibitors of filmed entertainment in the United
States and Canada (the "Hollywood SW Acquisition"). Its licensed software
records and manages information relating to the planning, scheduling, revenue
sharing, cash flow and reporting associated with the distribution and exhibition
of theatrical films. In addition, Hollywood SW's software complements, and is
integrated with, AccessDM's digital content delivery software by enabling
Hollywood SW's customers to seamlessly plan and schedule delivery of digital
content to entertainment venue operators as well as to manage the related
financial transactions.
In an effort to increase the competitive advantage of the IDCs, on January 9,
2004, we acquired Managed Services, a managed service provider of information
technologies. As an information technology outsourcing organization, Managed
Services manages clients' networks and systems in over 35 countries in Europe,
Asia, North and South America and more than 20 states in the United States.
Managed Services operates a 24x7 Global Network Command Center ("GNCC"), capable
of running the
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networks and systems of large corporate clients. The four largest customers of
Managed Services accounted for approximately 77% of its revenues. The managed
services capabilities of Managed Services have been integrated with our IDCs and
now operate under the name of AccessIT Managed Services.
In March 2004, we acquired certain assets of Boeing Digital Cinema ("Boeing
Digital"), a division of The Boeing Company ("Boeing"). These assets were
purchased to further our strategy of becoming a leader in the delivery of movies
and other digital content to movie theaters. The acquired assets consist of
digital projectors, satellite dishes and other equipment installed at 28 screens
within 21 theaters in the United States and equipment stored at other locations,
and satellite transmission equipment located in Los Angeles, California. Since
the acquisition, we have used the stored equipment (and added new equipment) in
an additional 3 screens within 2 theaters in the United States.
Also in March 2004, we refinanced approximately $4.2 aggregate principal amount
(plus accrued and unpaid interest) of our promissory notes pursuant to an
exchange offer. In exchange for these promissory notes, we issued 707,477
unregistered shares of our Class A common stock and $1.7 million aggregate
principal amount of new convertible notes which as of March 31, 2005 were
convertible into a maximum of 312,425 shares of our Class A common stock.
In May 2004, we entered into an agreement with the holder of 750,000 shares of
AccessDM's common stock, to exchange all of the holders's shares for 31,300
unregistered shares of AccessIT's Class A common stock. As a result of the
transaction, which was consummated on May 26, 2004, AccessIT now holds 100% of
AccessDM's common stock.
In June 2004, we consummated a $4.87 million private placement of 1,217,500
unregistered shares of our Class A common stock with institutional and other
accredited investors. Pursuant to the private placement, we also issued to the
investors and the placement agent warrants to purchase up to 243,500 and 60,875
shares of our Class A common stock, respectively, at an exercise price of $4.80
per share, exercisable upon receipt. We registered the resale of all of the
1,217,500 shares and the 304,375 shares underlying the warrants on a
registration statement on Form SB-2 with the SEC on July 2, 2004, which was
declared effective by the SEC on July 20, 2004.
In November 2004, we consummated a $1.1 million private placement of 282,776
unregistered shares of our Class A common stock at $3.89 per share with certain
accredited investors. The net proceeds of approximately $1.023 million from such
private placement were used for the FiberSat Acquisition and for working
capital. These shares carry piggyback and demand registration rights, at the
sole expense of the investors. The investors exercised their piggyback
registration rights and we registered the resale of all of the 282,776 shares on
a regisration statement on Form S-3, which was declared effective by the SEC on
March 21, 2005.
Also in November 2004, we acquired substantially all of the assets of FiberSat
Global Services, LLC (the "FiberSat") through FiberSat Global Services, Inc.,
our wholly owned subsidiary (the "FiberSat Acquisition"). 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 our digital cinema
satellite delivery services. By completing the FiberSat Acquisition, we gained
extensive satellite distribution and networking capabilities provided by
FiberSat's fully operational data storage and uplink facility located in Los
Angeles, California. FiberSat has the ability to provide broadband video, data
and Internet transmission and encryption services for the broadcast and cable
television and communications industries.
In February 2005, we consummated a private placement of $7.6 million, 4-year
convertible debentures (the "Convertible Debentures"). The Convertible
Debentures bear interest at the rate of 7% per year and are convertible into
shares of our Class A common stock at the price of $4.07 per share, subject to
possible adjustments from time to time. In connection with the Convertible
Debenture offering, we issued the participating institutional investors warrants
(the "Convertible Debentures Warrants") exercisable for up to 560,197 shares of
Class A common stock at an initial exercise price of $4.44 per share, subject to
adjustments from time to time. The Convertible Debentures Warrants may be
exercised beginning on September 9, 2005 until five years thereafter. We
registered the resale of all of the shares underlying the Convertible Debentures
and the Convertible Debentures Warrants with the SEC on March 11, 2005, which
was declared effective by the SEC on March 21, 2005.
Also in February 2005, through ADM Cinema Corporation, our wholly owned
subsidiary ("ADM Cinema"), we consummated the acquisition of substantially all
of the assets of the Pavilion Movie Theatre located in Park Slope section of
Brooklyn, New York ("Pavilion Theatre")from Pritchard Square Cinema, LLC. The
Pavilion Theatre is an eight-screen movie theatre and cafe and is a component of
the Media Services segment. Continuing to operate as a fully functional
multiplex, the Pavilion Theatre will also become our showplace to demonstrate
our integrated digital cinema solutions to the movie entertainment industry.
We offer interrelated services that use each of our business units for the
planning, purchasing, delivery and management of digital content -- such as
movies, advertising, trailers and alternative content, including concerts,
seminars and sporting events -- to
4
movie theater and other venue operators. We believe that our ability to offer a
wide range of fully managed services will differentiate us from other service
providers, including distributors of other types of digital media.
During the fiscal year ended March 31, 2005, we received 62% of our revenue from
the Data Center Services segment and 38% of our revenue from the Media Services
segment. During the fiscal year ended March 31, 2004, we received 81% of our
revenue from the Data Center Services segment and 19% of our revenue from the
Media Services segment. For the fiscal year ended March 31, 2005, KMC Telecom,
an IDC customer, comprised approximately 18.2% of our revenues. Our contract
with KMC Telecom expires on December 15, 2005 and we have received an indication
from KMC Telecom that they will not renew the contract for at least some of the
current sites that they are licensing under such contract. No other single
customer accounted for greater than 10% of revenues during the fiscal year ended
March 31, 2005. 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.
Our principal executive offices are at 55 Madison Avenue, Suite 300, Morristown,
NJ 07960, and our telephone number at such offices is (973) 290-0080. Our e-mail
address is investor@accessitx.com and our web site address is www.accessitx.com.
Information accessed on or through our web site does not constitute a part of
this report.
MEDIA SERVICES
The Media Services segment of our business consists of two units: the Digital
Media Delivery Services and the Hollywood SW business. Digital Media Delivery
Services comprises AccessDM, FiberSat, and the Pavilion Theatre.
DIGITAL MEDIA DELIVERY SERVICES
AccessDM, our wholly-owned subsidiary, provides software and systems worldwide
that enable the delivery of digital content to movie theaters and other venues
having digital projection equipment. We believe the demand for systems that
deliver digital content will increase as the movie, advertising and
entertainment industries continue to convert to a digital format in order to
achieve cost savings, greater flexibility and/or improved image quality. We
intend to use our IDCs and managed data storage services together with our
digital content delivery software to deliver digital content using satellite and
land-based transmission providers. As a result of the acquisition of the assets
of Boeing Digital, we currently have an installed base of twenty eight digital
projection systems located in certain movie theaters throughout the United
States that are available to receive digital content delivered by AccessDM.
Based on customer needs and preferences, we may adapt or tailor the developed
software and related services to such customer needs or industry demands.
FiberSat, headquartered in Chatsworth, California, was acquired by FiberSat
Global Services, Inc., our wholly-owned subsidiary, on November 17, 2004.
FiberSat 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 AccessDM's digital cinema satellite delivery
services. By completing the FiberSat Acquisition, we gained extensive satellite
distribution and networking capabilities provided by FiberSat's fully
operational data storage and uplink facilities located in Los Angeles,
California. FiberSat has the ability to provide broadband video, data and
Internet transmission and encryption services for the broadcast and cable
television and communications industries.
ADM Cinema, our wholly owned subsidiary, purchased the Pavilion Theatre on
February 11, 2005. The Pavilion Theatre is an eight-screen movie theatre and
cafe and is a component of the Media Services segment. Continuing to operate as
a fully functional multiplex, the Pavilion Theatre has also become a showplace
for the Company to demonstrate its integrated digital cinema solutions to the
movie entertainment industry.
MARKET OPPORTUNITY
We believe that digital content delivery eventually will replace, or at least
become more prevalent than, the current method used for film delivery. Existing
film delivery generally involves the time-consuming, somewhat expensive and
cumbersome process of receiving bulk printed film, rebuilding the film into
shipping reels, packaging the film reels into canisters and physically
delivering the reels (by traditional ground modes of transportation) to movie
theaters. We believe that the expanding use of digital movie projection
equipment will lead to an increasing need for digital content delivery services.
The movie exhibition industry now has the capability to present advertisements,
trailers and alternative entertainment in a digital format and in a commercially
viable manner. We believe the presentation of alternative entertainment at movie
theaters may both expand their hours of operation and increase their occupancy
rates. Movie theater owners may also be able to profit from the presentation of
new and/or additional advertising in their theaters.
5
Digital Cinema Initiatives, LLC, a consortium of seven major Hollywood studios,
was created to develop and set universal standards and to develop a business
model designed to allow the movie industry to effect a general transition to
digital presentations. Toward the end of 2004 the studio members declared the
work of the group to be substantially complete and worked to finalize the
remaining open items. Investment banks are working with studios to develop a
business model for digital cinema.
We believe the market opportunity for our digital media delivery services is
directly related to the number of movie releases each year, the number of movie
screens those movies are shown upon and the transition to digital presentations
in those movie theatres. According to the Motion Picture Association, on
average, there are approximately 200 major movie releases and 250 independent
movie releases per year. The average major movie is released to approximately
4,000 screens in the United States and 8,000 screens worldwide. According to
National Association of Theatre Owners ("NATO"), there are approximately 105,000
screens worldwide that play major movie releases, with approximately 36,000
screens located in the United States. According to ReelSource, Inc., the average
film print costs $1,300 per print. We believe that the cost to deliver digital
movies to movie theatres will be much less than the cost to print and deliver
analog movie prints, and such lesser cost will provide the economic model to
drive the conversion from analog to digital cinema.
PRODUCTS AND SERVICES
AccessDM's products and services are able to provide and securely deliver, via
electronic transmission (through copper wire, fiber optics or satellite),
digital content, including movies, advertisements, alternative content and
educational products.
Our principal digital media delivery service offering, which we refer to as
"Digital Express e-Courier Services," is the distribution of digital content
through our IDC platform. Our Digital Express e-Courier Services requires us to
obtain a digital master of an audio and/or visual presentation from the content
owner, store and deliver the digital content and track and confirm its delivery.
We expect to offer our delivery service to the owners of digital content through
a broad choice of bandwidth providers within each platform (i.e., copper wire,
fiber optics or satellite). We intend to use our existing IDCs to accommodate
the services we will provide.
We expect to charge our customers:
o a one-time set-up fee based on the size of the customer's content
file;
o a distribution or delivery fee based on the size of its content file
and the number of destinations to which the content file will be
delivered;
o a customization fee, if required; and
o a fee for changes to the content file or the destination(s) to which
the content file is to be delivered.
INTELLECTUAL PROPERTY
AccessDM has applied for service mark registrations in respect of the name
AccessDM, Access Digital Media and the phrases "Digital Express e-Courier
Services," "Theatre Command Center" and "The courier for the digital era."
AccessDM has not yet received U.S. servicemark registration for any
servicemarks.
TARGET CUSTOMERS
We intend to provide our digital media delivery services to major movie studios,
particularly through relationships that we have developed or may develop with
these studios. We also intend to focus on independent studios and distributors,
alternative content providers and advertising agencies, which may not have
high-quality delivery services currently available. We believe that major movie
studios will begin to expand beyond their traditional distribution methods,
involving the physical delivery of digital files, to include electronic digital
content delivery for the reasons discussed above.
COMPETITION
Companies that have developed forms of digital content delivery to entertainment
venues include:
o Regal Entertainment Group, which has developed a system for delivering
certain digital content to its own theaters, including non-motion
picture content and advertising;
6
o National Cinema Network, a wholly owned subsidiary of AMC
Entertainment, that has developed a system known as Digital Theatre
Distribution System for delivering advertising to movie theaters; and
o Technicolor Digital Cinema, an affiliate of the Thomson Company, which
has concentrated on an in-theater system to manage content file(s)
that are delivered physically, and not electronically, to theatres.
The competitors referenced above have significantly greater financial,
technical, marketing and managerial resources than we do. These competitors also
generate greater revenue and are better known than we are. However, we believe
that AccessDM, through its technology and management experience, its development
of software capable of delivering digital data worldwide, its development of its
Theatre Command Center software for the management of digital content, and the
complement of Hollywood SW's software, may differentiate itself from the above
companies by providing a competitive alternative to their forms of digital
content delivery.
MARKETING AND BUSINESS DEVELOPMENT
We intend to market our digital media delivery services primarily through
networking and relationship-building activities, supported by presentations at
industry trade shows and similar events. We believe that the entertainment
business is largely based on and driven by personal and business relationships.
We have, therefore, selected three individuals -- A. Dale Mayo, Russell J.
Wintner and David Gajda -- each of whom has significant experience and
relationships in the movie and emerging entertainment markets -- to lead
AccessDM's marketing efforts.
A. Dale Mayo, AccessDM's Chief Executive Officer, is a co-founder and the
Chairman, President and Chief Executive Officer of AccessIT, and previously
co-founded and developed Clearview Cinema Group, Inc. ("Clearview"), a large
theater circuit in the New York metropolitan area which was later sold to
Cablevision Cinemas, LLC. In his tenure as the Chief Executive Officer of
Clearview, Mr. Mayo developed close working relationships with many of the top
theater operators in the United States, as well as heads of distribution in
Hollywood and New York. Mr. Mayo is on the advisory board of the Will Rogers
Motion Picture Pioneers Foundation.
Russell J. Wintner, AccessDM's President and Chief Operating Officer, is a
member of the Society of Motion Picture and Television Engineers, and serves on
the Digital Cinema Group standards committee, and is a board member of NATO and
a member of its Technical Committee that is working directly with Digital Cinema
Initiatives, a consortium of seven major Hollywood studios created to develop
standards and a business model for the digital cinema industry. Mr. Wintner was
a founder of, as well as President of, WinterTek, Inc., a digital media
consultant to various clients. He also served as Principal, Exhibitor Relations,
Alternative Programming and Marketing for Technicolor Digital Cinema, LLC.
Previous to such provisions, Mr. Wintner was a founder of CineComm Digital
Cinema, LLC and also served as its President of Exhibition and Alternative
Programming and Chief Operating Officer. Mr. Wintner frequently sits on industry
panels at seminars and conventions.
David Gajda, Hollywood SW's President and Chief Operating Officer, was a
co-founder of Hollywood SW. Mr. Gajda was the Chief Executive Officer for
Hollywood SW from its inception until our November 2003 acquisition. Prior to
co-founding Hollywood SW, Mr. Gajda owned and managed a strategic consulting
company, DWG International Inc. ("DWG"). At DWG, he helped many entertainment
companies develop their three-to-five-year strategic systems plans. In April
2005, we promoted Mr. Gajda to Senior Vice President of International Marketing,
in order to focus on marketing our product and services, principally those of
Hollywood SW. We also promoted Jim Miller, the former Chief Financial Officer of
Hollywood SW to the role of President and Chief Operating Officer of Hollywood
SW.
We expect to co-market our digital media delivery services to the current and
prospective customers of Hollywood SW, using marketing and sales efforts and
resources of both companies. Although the services of each may be used
independently, using our digital media delivery service in conjunction with the
services of Hollywood SW would enable owners of digital content to deliver
securely such content to their customers and, thereafter, to manage and track
data regarding the presentation of the digital content, including different
forms of audio and/or visual entertainment. As the digital content industry
continues to develop, we may engage in other marketing methods, such as
advertising and service bundling, and may hire additional sales personnel.
HOLLYWOOD SOFTWARE
Hollywood SW's principal objective is to provide its transactional software and
film distribution services to film industry customers and, through AccessDM's
digital content delivery software, to the expanding digital entertainment
industry.
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Hollywood SW's software products enable its customers to record and manage
information relating to the planning, booking, scheduling and performance of
movies in movie theaters, and to track the related financial operating results
and commitments.
MARKET OPPORTUNITY
The customers for Hollywood SW's existing software and consulting services
consist principally of worldwide feature film distributors and North American
movie theater chains. We are currently developing a new application with similar
functionality for distributing films internationally that is expected to be
completed by the end of 2005.
Our goal is to make Hollywood SW's products the industry standard method by
which film distributors and exhibitors plan, manage and monitor operations and
data regarding the presentation of theatrical entertainment. Currently, based
upon our calculations and certain industry figures, distributors using Hollywood
SW's distribution software system, called TDS, cumulatively managed, for the
period 1999 through 2002, approximately 36% of U.S. theater box office revenues.
In addition to providing its system currently to analog film industry customers,
Hollywood SW has also adapted this system to serve the expanding digital
entertainment industry. We believe that Hollywood SW's products and services
will be accepted as an important component in the digital content delivery and
management business.
We believe that the continued transition to digital content delivery will
require a high degree of coordination among content providers, customers and
intermediary service providers. Producing, buying and delivering media content
through worldwide distribution channels is a highly fragmented and inefficient
process that we expect to become increasingly streamlined, automated and
enhanced through technologies created by Hollywood SW and the continuing
development of and general transition to digital forms of media.
PRODUCTS AND SERVICES
Hollywood SW provides proprietary software applications and services to support
customers of varying sizes, through software licenses, its Application Service
Provider ("ASP") service in which the Company hosts the application within a
secure AIT colo-center and provides client access via the internet and through a
fully outsourced distribution option, called, Indie Direct. Current proprietary
software products of Hollywood SW consist of the:
o TDS -- Theatrical Distribution System, which manages key operational
and financial elements of film distribution for film distributors;
o TDSi - Theatrical Distribution System (International), which manages
key operational and financial elements of film distribution for
international film distributors;
o EMS -- Exhibition Management System, which manages key operational and
financial elements of film exhibition for theater circuits;
o MPPS -- Motion Picture Planning System, which uses various film
criteria and historical performance data to plan and initiate film
release strategies;
o Media Manager System -- which facilitates the planning and tracking of
newspaper advertising campaigns; and
o Digi-Central -- online marketplace for digital content in which buyers
can search for available digital content, initiate transactions and
coordinate delivery via Access DM.
Hollywood SW generates revenues from its software products through various fees:
software license fees, ASP service fees, software maintenance fees, software
development fees, consulting service fees and outsourced distribution service
fees. Under its software license arrangements, up-front fees are paid and
periodic payments are generally made upon the occurrence of certain events: for
example, execution of the license agreement, delivery of the software and
acceptance on use of the software by the customer. Software maintenance fees are
paid under separate annual support agreements, under which Hollywood SW provides
maintenance services and technical support. Under Hollywood SW's ASP service,
periodic payments are made for the right to access and use Hollywood SW's
software through the Internet, based on the occurrence of certain events.
Maintenance services are included as part of the annual service agreement for
Hollywood SW's ASP service. Customers that license Hollywood SW's products also
may pay for product feature enhancements, which include software developments;
Hollywood SW has generated a significant portion of its revenues from consulting
fees that it charges (on an hourly basis) for implementation of the applicable
product and training of the personnel of the licensed or ASP service customers.
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INTELLECTUAL PROPERTY
Hollywood SW currently has intellectual property consisting of:
o licensable software products, including TDS, TDSi, EMS, MPPS and the
Media Manager System;
o domain names, including EPayTV.com, EpayTV.net, HollywoodSoftware.com,
HollywoodSoftware.net, Indie-Coop.com, Indie-Coop.net, Indiedirect.com,
IPayTV.com; PersonalEDI.com, RightsMart.com, RightsMart.net,
TheatricalDistribution.com and Vistapos.com;
o unregistered trademarks and service marks, including Coop Advertising
V1.04, EMS, EMS ASP, Exhibitor Management System, Hollywood SW, Inc.,
HollywoodSoftware.com, Indie Co-op, Media Manager, On-Line Release
Schedule, RightsMart, TDS and TheatricalDistribution.com.; and
o logos, including those in respect of Hollywood SW, TDS and EMS.
DISTRIBUTED SOFTWARE
In addition to Hollywood SW's proprietary software products, the Company also
distributes theatre ticketing software developed by Vista Entertainment
Solutions ("Vista"). Vista is a leading provider of theatre ticketing solutions
based in New Zealand and Hollywood SW is currently the only U.S.-based
distributor of their products to the U.S. theatre market. Under our distribution
agreement with Vista, Hollywood SW earns a percentage of license fees,
maintenance fees and consulting fees generated from each sale of Vista products.
CUSTOMERS
Hollywood SW's customers include 20th Century Fox, Paramount Pictures, Universal
Studios, MGM, Lions Gate Films, Newmarket Films, Magnolia Pictures, Gold Circle
Films, IFC Films, First Look/Overseas Film Group, Regent Releasing, Brenden
Theatres, and Flagship Theatres, among others.
DOMESTIC THEATRICAL DISTRIBUTION
Hollywood SW's TDS product enables U.S. film distributors to plan, book and
account for theatrical film releases. It also allows distributors to collect and
analyze related financial operations data. TDS is currently licensed to several
distributors, including 20th Century Fox, MGM ,Universal Studios and Paramount
Pictures; these distributors comprised approximately 34.9%, 16.3%, 10.4% and
9.6%, respectively, of Hollywood SW's revenues for the fiscal year ended March
31, 2005. Also, several distributors access Hollywood SW's products through its
ASP service, including IFC Films, Newmarket Films, Magnolia Pictures, Gold
Circle Films, MAC Releasing and IFS. In addition, Hollywood SW licenses to
customers other distribution-related software, including MPPS and MMS, which
further automate and manage related aspects of film distribution, including
advertising, strategic theater selection and competitive release planning.
Hollywood SW also provides outsourced film distribution services through a
division known as Indie Direct. The Indie Direct staff uses the TDS distribution
software to provide back office film booking and receivables management services
to independent film distributors and producers. Current customers include Arenas
Entertainment and Regent Releasing,
INTERNATIONAL THEATRICAL DISTRIBUTION
In 2004, Hollywood SW began developing an international version of its
successful TDS application to support worldwide theatrical film distribution. In
December 2004, Hollywood SW signed an agreement with the international
distribution subsidiary of 20th Century Fox, to license and implement the
software in 14 overseas territories, encompassing 18 foreign offices over
approximately 18 months. As with its North American TDS solution, this worldwide
application will interface with Access DM's digital delivery service,
significantly enhancing Access DM's international market opportunities.
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FILM EXHIBITION
Hollywood SW also has developed EMSa web-enabled theater management application
designed to manage all key aspects of film planning, scheduling, booking and
distributor payment for theatrical exhibitors. This head office solution
consolidates daily transactional data from each theatre's box office ticketing
and concession system, supports negotiations with film distributors and passes
necessary revenue, cash and payment information on to the client's accounting
system. EMS also receives and reports digital film delivery status information
from Access DM systems at each theatre.
COMPETITION
Within the major movie studios and exhibition circuits, Hollywood SW's principal
competitors for its products are in-house development teams, which generally are
assisted by outside contractors and other third-parties. Most distributors that
do not use the TDS software use their own systems. Internationally, Hollywood SW
is aware of one vendor based in the Netherlands providing similar software,
although on a smaller scale. Hollywood SW's film exhibition product, EMS,
competes principally with customized solutions developed by the large exhibition
circuits and at least one other competitor that has been targeting mid- to
small-sized exhibitors. We believe that Hollywood SW, through its technology and
management experience, may differentiate itself from such competitors by
providing a competitive alternative to their forms of digital content delivery
and management business.
MARKETING AND BUSINESS DEVELOPMENT
Hollywood SW's senior management team manages its sales and business development
efforts. Hollywood SW intends to co-market its products and services with the
services of AccessDM, although each will be able to market their products and
services independently. Although new customers are generated usually through
referrals and the cross-promotion of Hollywood SW and Vista products Hollywood
SW also selectively advertises in trade journals and its representatives
regularly attend trade shows, such as ShowEast and ShowWest.
DATA CENTER SERVICES
The Data Center Services segment of our business consists of two units: our Data
Centers and Managed Services.
MARKET OPPORTUNITY/INDUSTRY BACKGROUND
We believe that the overall market for IDC services has been largely driven by
the rapid growth in Internet usage and a significant shift by companies to
outsourcing or engaging third parties to provide, their data center services.
These services are not the principal focus of these companies, divert them from
their core businesses and require significant investment.
Growth in data use is driving complex data management services. We believe that
the demand for services that store data will continue to grow as a result of
increasing amounts of stored data, increasing storage complexity, increasing
value of certain information and a potential shortage of in-house information
technology personnel. In February 2003, Gartner Dataquest estimated that
aggregate revenues generated by providers of outsourced managed data storage
services in North America could approach $17 billion by 2006, up from $12.2
billion in 2001, representing a 7% compounded annual growth rate.
OUR DATA CENTERS
Our IDCs provide fail-safe environments for our customers' equipment by using
back-up power generators as well as back-up battery power and specialized air
conditioning systems. Our IDC customers include major and mid-level network and
Internet service providers, such as KMC Telecom, AT&T, OnFiber Communications,
and Zone Telecom, as well as various users of network services, traditional
voice and data transmission providers, long distance carriers and commercial
businesses. Our contract with KMC Telecom expires on December 15, 2005 and we
have received an indication from KMC Telecom that they will not renew the
contract for at least some of the current sites that they are licensing under
such contract. Our IDC services are enhanced by the network managed services
available as a result of the acquisition of Managed Services. We have installed
our computer equipment for our digital media delivery software and services unit
in our AccessColocenters.
We operate nine IDCs in the following eight states: Arkansas, Kansas, Maine, New
Hampshire, New Jersey, New York, Texas and Virginia. In addition, we maintain an
Internet data center in Los Angeles, California that is dedicated to delivery of
motion pictures and other digital content to movie theatres worldwide. Internet
data centers are facilities leased by us through which we, for monthly and
variable fees, provide our customers with:
o secure and fail- safe locations for their computer and
telecommunications equipment by using back-up power generators as well
as back-up battery power and specialized air conditioning systems;
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o access to voice and data transmission services from a choice of
network providers; and
o services to monitor their computer and telecommunications equipment;
and services, to store, back-up and protect their programs and data,
including our AccessStorage-On-Demand managed storage services, which
store and copy data.
We provide our customers with flexible space in our IDCs to house data and voice
transmission equipment, as well as their computer equipment. Our customers may
choose from a variety of space offerings, including a single-locking cabinet, a
private cage (under 500 square feet) or a private suite (over 500 square feet).
IDC services require an initial installation fee and a monthly charge based on
the size of the space offering selected by the customer.
Our overall IDC utilization rate as of March 31, 2005 was approximately 25%. The
purchase prices that we paid for our acquired IDCs reflected their respective
utilization rates and, therefore, we believe present us with an opportunity to
increase significantly our results of operations, largely because the variable
costs in adding new customers are relatively low.
We also offer additional services for which our customers pay additional monthly
service charges. These services include: additional power availability; access
to our IDC staff for a variety of tasks such as equipment rebooting, power
cycling, card swapping and performing emergency equipment replacements; the
ability to connect cables (both fiber and copper) directly to another IDC
customer for voice and data transmission services and the ability to use our
risers, which are pipes used to connect cables (both fiber optic and copper)
from our customers' computer equipment to other companies' computer equipment
located outside of our IDCs but within the building that our IDC is located.
We provide IDC services under agreements generally having terms of from one to
ten years. As of March 31, 2005, we had 75 contracts, with 62 separate
customers, each requiring payment of monthly fees, with a weighted average
remaining term of 12 months.
In an effort to increase the competitive advantage of the IDCs, on January 9,
2004, we acquired Managed Services, a managed service provider of information
technologies. As an information technology outsourcing organization, Managed
Services manages clients' networks and systems in over 35 countries in Europe,
Asia and North and South America and more than 20 states in the United States.
Managed Services operates a 24x7 GNCC, capable of running the networks and
systems of large corporate clients. The capabilities of Managed Services have
been integrated with our IDCs and now operate under the name of AccessIT Managed
Services.
MANAGED SERVICES OFFERINGS
We believe that the breadth of services in the IDCs is a critical competitive
advantage. We have developed two distinct Managed Services offerings:
o Network and Systems Management; and
o Managed Storage Services.
NETWORK AND SYSTEMS MANAGEMENT
We offer our customers the economies of scale of the GNCC and access to our
advanced engineering staff. We believe this low-cost and customizable
alternative to designing, implementing, and maintaining a large scale network
infrastructure enables our customers to focus on information technology business
development, rather than the underlying communications infrastructure. Our
service features include network architecture and design, systems and network
monitoring and management, data and voice integration, project management,
auditing and assessment and managed carrier services.
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MANAGED STORAGE SERVICES
We offer managed storage services that use hardware and software from such
industry leaders as EMC, Brocade, StorageTek and Veritas. We presently have
three customers for such services. Our managed storage services Xiotech, known
as AccessStorage-on-Demand, are generally priced on a per gigabyte of usage
basis and provide customers with reliable primary data storage that is connected
to their computers. We may also provide customers that have their computers
located within one of our IDCs with a tape back-up copy of their data that may
then be sent to the customer's computer if the customer's data is lost, damaged
or inaccessible.
All managed storage services are available separately or may be bundled together
with other services. Monthly pricing is based on the type of storage (tape or
disk), the capacity used and the level of the access required.
OUR DATA CENTER SERVICES CUSTOMERS
Our AccessColocenters provide services to a variety of customers, including
traditional voice and data transmission providers, long distance carriers and
commercial businesses.
Our principal data services customers include KMC Telecom and AT&T, which
comprised approximately 18.2% and 8.3%, respectively, of our consolidated
revenues for the fiscal year ended March 31, 2005. Our contract with KMC Telecom
expires on December 15, 2005 and we have received an indication from KMC Telecom
that they will not renew the contract for at least some of the current sites
that they are licensing under such contract.
SALES AND BUSINESS DEVELOPMENT
We market our services through a program using a variety of media and channels,
including a small direct sales force, sales channels and referral programs.
Our IDC direct sales force presently consists of our President and six other
employees. This team is supported by both our operations and legal personnel.
INTELLECTUAL PROPERTY
AccessIT has applied for U.S. service mark registration for the following
service marks: AccessManaged Storage; Access Digital Media; AccessDM; Digital
Express E-Courier Services; The Courier for the Digital Era; Vortex Solutions
Engine; ADM Capstore: Digi-Central; Theater Command Center and Digi-Central.
AccessIT has received U.S. service mark registration for the following service
marks: Access Integrated Technologies, AccessSecure; AccessSafe; AccessBackup;
AccessBusiness Continuance; AccessVault; AccessContent; AccessColocenter;
AccessDataVault; AccessColo; and AccessStore.
COMPETITORS
Our data center services compete with neutral colocation providers, as well as
traditional colocation providers, including local phone companies, long distance
phone companies, Internet service providers and web hosting facilities and
carrier-owned data centers. There are also many data centers owned and operated
by smaller data center companies, landlords and communications carriers. The
larger operators of data centers include Switch and Data, Inc., Equinix, Inc.,
Globix Corporation and AboveNet, Inc. Many data center operators offer managed
services to clients who co-locate servers in the operator owned data center. Our
focus is to deliver managed services inside the data center as a lead product
for primary data center services, but to also offer those services to clients
who have servers outside our data centers allowing us to offer remote server and
network monitoring, server and network management and disaster recovery
services.
A number of the competitors mentioned above have greater financial, technical,
marketing and managerial resources than we do. These competitors also generate
greater revenue and are better known than we are. However, we believe that our
data center services, by offering IDCs along with related data center services,
may differentiate us from the above companies by providing a competitive
alternative to their forms of digital content delivery.
EMPLOYEES
As of March 31, 2005, we have 93 employees, 34 of whom are part-time, primarily
at the Pavilion Theatre. Of our full-time employees, 10 are in sales and
marketing, 32 are in research and development and technical services, and 17 are
in finance and administration. The Pavilion Theatre has a collective bargaining
agreement with one union which covers five employees, one of whom is a full-time
employee.
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RISK FACTORS
An investment in our Class A common stock involves a high degree of risk and
uncertainty. You should carefully consider the risks described below before
deciding to invest in our Class A common stock. The risks described below are
not the only ones facing our company. Additional risks not presently known to us
or that we presently consider immaterial may also adversely affect our company.
If any of the following risks occur, our business, financial condition, results
of operations and prospects could be materially adversely affected. In that
case, the trading price of our Class A common stock could decline, and you could
lose all or part or your investment. In assessing these risks, you should also
refer to the other information included or incorporated by reference in this
report, including the consolidated financial statements and notes thereto of our
company included elsewhere in this report.
WE HAVE INCURRED LOSSES SINCE OUR INCEPTION.
We have incurred losses since our inception in March 2000 and have financed our
operations principally through equity investments and borrowings. We incurred
net losses of $4.8 million and $6.8 million in the fiscal years ended March 31,
2004 and 2005, respectively. As of March 31, 2005, we had working capital of
$1.7 million and cash and cash equivalents of $4.8 million; we had an
accumulated deficit of $21.5 million; and, from inception through such date, we
had used $8.5 million in cash for operating activities. Our net losses are
likely to continue for the foreseeable future.
Our profitability is dependent upon us achieving a sufficient volume of business
from our customers. If we cannot achieve a high enough volume, we likely will
incur additional net and operating losses. We may be unable to continue our
business as presently conducted unless we obtain funds from additional
financings.
Our net losses and negative cash flows may increase as and to the extent that we
increase the size of our business operations, increase our sales and marketing
activities, enlarge our customer support and professional services and acquire
additional businesses. These efforts may prove to be more expensive than we
currently anticipate which could further increase our losses. We must
significantly increase our revenues in order to become profitable. We cannot
reliably predict when, or if, we will become profitable. Even if we achieve
profitability, we may not be able to sustain it. If we cannot generate operating
income or positive cash flows in the future, we will be unable to meet our
working capital requirements.
WE HAVE LIMITED EXPERIENCE IN OUR BUSINESS OPERATIONS, WHICH MAY NEGATIVELY
AFFECT OUR ABILITY TO GENERATE SUFFICIENT REVENUES TO ACHIEVE PROFITABILITY.
We were incorporated on March 31, 2000. Our first IDC became operational in
December 2000. In addition to our data center operations, we have expanded into
the following new business areas: (a) providing back office transactional
software for distributors and exhibitors of filmed and digital entertainment
through our wholly owned subsidiary, Hollywood SW; (b) providing software and
systems for the delivery of digital entertainment, such as movies, to movie
theaters and other venues through our wholly owned subsidiary, AccessDM; (c)
providing information technologies, secure system monitoring of
telecommunications and data network outsourcing through our wholly owned
subsidiary, Managed Services, and (d) providing satellite delivery services
through our wholly owned subsidiary FiberSat; and (e) operation of a movie
theatre, through our wholly owned subsidiary ADM Cinema. Although we have
retained the senior management of Hollywood SW, Managed Services, and FiberSat,
we have little experience in these new areas of business and cannot assure you
that we will be able to develop and market the services provided thereby. None
of these new businesses is directly related to our data center operations and we
cannot assure you that any of them will complement our data center operations,
or vice versa. We also cannot assure you that we will be able to successfully
operate these businesses. Our efforts to expand into these five new business
areas may prove costly and time-consuming and may divert a considerable amount
of resources from our data center operations.
Our lack of operating experience in the digital cinema industry and providing
transactional software for movie distributors could result in:
o increased operating and capital costs;
o an inability to effect a viable growth strategy;
o service interruptions for our customers; and
o an inability to attract and retain customers.
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We may not be able to generate sufficient revenues to achieve profitability
through the operation of our data centers, our digital cinema business or our
movie distribution software business. We cannot assure you that we will be
successful in marketing and operating these new businesses or, even if we are
successful in doing so, that we will not experience additional losses.
OUR RECENT ACQUISITIONS INVOLVE RISKS, INCLUDING OUR INABILITY TO INTEGRATE
SUCCESSFULLY THE NEW BUSINESSES AND OUR ASSUMPTION OF CERTAIN LIABILITIES.
We have recently made meaningful acquisitions to expand into new business areas.
However, we may experience costs and hardships in integrating the new
acquisitions into our current business structure. On November 3, 2003, we
acquired Hollywood SW and on January 9, 2004, we acquired Managed Services. On
March 29, 2004, we acquired assets used in the operations of Boeing Digital, a
business unit of Boeing, which we integrated into the business of AccessDM. On
November 17, 2004, we acquired assets of FiberSat. Most recently, on February
11, 2005, we acquired the Pavilion Theatre through ADM Cinema, our wholly owned
subsidiary. We may not be able to integrate successfully the acquired businesses
and assets into our existing business. We cannot assure you that we will be able
to effectively market the services provided by Hollywood SW, AccessDM, Managed
Services, FiberSat and the Pavilion Theatre along with our data centers.
Further, these new businesses and assets may involve a significant diversion of
our management time and resources and be costly. Our acquisition of these
businesses and assets also involves the risks that the businesses and assets
acquired may prove to be less valuable than we expected and/or that we may
assume unknown or unexpected liabilities, costs and problems. In addition, we
assumed certain liabilities in connection with these acquisitions and we cannot
assure you that we will be able to adequately pay off such assumed liabilities.
Other companies that offer similar products and services may be able to market
and sell their products and services more cost-effectively than we can.
BECAUSE THE USE OF ACCESSDM'S SERVICES LARGELY DEPENDS ON THE EXPANDED USE OF
DIGITAL PRESENTATIONS REQUIRING ELECTRONIC DELIVERY, IF SUCH EXPANDED USE DOES
NOT OCCUR, NO VIABLE MARKET FOR ACCESSDM'S SERVICES MAY DEVELOP.
Even if we are among the first to develop software and systems for the delivery
of digital content to movie theaters and other venues, the demand for them will
largely depend on a concurrent expansion of digital presentations at theaters,
which may not occur for several years. There can be no assurance, however, that
major movie studios that currently rely on traditional distribution networks to
provide physical delivery of digital files will adopt a different method,
particularly electronic delivery, of distributing digital content to movie
theaters. If the development of digital presentations and changes in the way
digital files are delivered does not occur, there may be no viable market for
AccessDM's delivery systems and software.
IF WE DO NOT MANAGE OUR GROWTH, OUR BUSINESS WILL BE HARMED.
We may not be successful in managing our rapid growth. Since February 2003, we
acquired five businesses and in connection with those acquisitions, we formed
three more subsidiaries. These subsidiaries operate in business areas different
from our data center operations business. The number of our employees has grown
from 11 in March 2003 to 34 in March 2004 and to 93 in March 2005. Past growth
has placed, and future growth will continue to place, a significant challenge to
our management and resources, related to the successful integration of the newly
acquired businesses. To manage the expected growth of our operations, we will
need to improve our existing and implement new operational and financial
systems, procedures and controls. We may also need to expand our finance,
administrative, client services and operations staff and train and manage our
growing employee base effectively. Our current and planned personnel, systems,
procedures and controls may not be adequate to support our future operations.
Our business, results of operations and financial position will suffer if we do
not effectively manage our growth.
WE MAY NOT BE ABLE TO GENERATE THE AMOUNT OF CASH NEEDED TO FUND OUR FUTURE
OPERATIONS.
Our ability either to make payments on or to refinance our indebtedness, or to
fund planned capital expenditures and research and development efforts, may
depend on our ability to generate cash in the future. Our ability to generate
cash is in part subject to general economic, financial, competitive, regulatory
and other factors that are beyond our control.
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Based on our current level of operations, we believe our cash flow from
operations and available cash financed through the issuance of common stock and
promissory notes will be adequate to meet our future liquidity needs for at
least one year from the date of this prospectus. Significant assumptions
underlie this belief, including, among other things, that there will be no
material adverse developments in our business, liquidity or capital
requirements. If we are unable to service our indebtedness, we will be forced to
adopt an alternative strategy that may include actions such as:
o reducing capital expenditures;
o reducing research and development efforts;
o selling assets;
o restructuring or refinancing our remaining indebtedness; and
o seeking additional funding.
We cannot assure you, however, that our business will generate sufficient cash
flow from operations, or that we will be able to make future borrowings in
amounts sufficient to enable us to pay the principal and interest on our current
indebtedness or to fund our other liquidity needs. We may need to refinance all
or a portion of our indebtedness on or before maturity. We cannot assure you
that we will be able to refinance any of our indebtedness on commercially
reasonable terms or at all.
WE MAY CONTINUE TO HAVE CUSTOMER CONCENTRATION IN OUR BUSINESS, AND THE LOSS OF
ONE OR MORE OF OUR LARGEST CUSTOMERS COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
We expect that we will rely, at least in the near future, upon a limited number
of customers for a substantial percentage of our revenues and may continue to
have customer concentration company-wide. For fiscal years ended 2004 and 2005,
our four largest customers accounted for approximately 54% and 40% of our
revenues, respectively (our largest customer, KMC Telecom, accounted for
approximately 27% and 18%, respectively of our revenues for such fiscal years).
Our contract with KMC Telecom expires on December 15, 2005 and we have received
an indication from KMC Telecom that they will not renew the contract for at
least some of the current sites that they are licensing under such contract. The
revenues generated from our IDC business constituted approximately 62% of our
total revenue for the fiscal year ended March 31, 2005.
To date, AccessDM has generated revenues of $260,000 for the fiscal year ended
March 31, 2005, and we anticipate that AccessDM's revenues will grow
significantly although there can be no assurances of this. For the fiscal year
ended March 31, 2005, the five largest customers of Hollywood SW accounted for
approximately 78% of its revenues (its largest customer, 20th Century Fox,
accounted for approximately 35% of its revenues for such period). For the fiscal
year ended March 31, 2005, the four largest customers of Managed Services and
FiberSat accounted for approximately 54% and 73% of their respective revenues. A
loss of or decrease in business from one or more of our largest customers for
any reason could have a material adverse effect on our business, financial
position and results of operations.
OUR SUBSTANTIAL DEBT AND LEASE OBLIGATIONS COULD IMPAIR OUR FINANCIAL
FLEXIBILITY AND OUR COMPETITIVE POSITION.
We now have, and will continue to have, significant debt obligations. We
currently have notes payable to third parties with principal amounts aggregating
$14.1 million as of March 31, 2005. We also have capital lease obligations with
principal amounts aggregating $6.5 million as of March 31, 2005.
These obligations could have important consequences for us, including:
o limiting our ability to obtain necessary financing in the future and
make it more difficult for us to satisfy our lease and debt
obligations;
o requiring us to dedicate a substantial portion of our cash flow to
payments on our lease and debt obligations, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures and other corporate requirements;
o making us more vulnerable to a downturn in our business and limit our
flexibility to plan for, or react to, changes in our business; and
o placing us at a competitive disadvantage compared to competitors that
might have stronger balance sheets or better access to capital by, for
example, limiting our ability to enter into new markets.
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o If we are unable to meet our lease and debt obligations, we could be
forced to restructure or refinance our obligations, to seek additional
equity financing or to sell assets, which we may not be able to do on
satisfactory terms or at all. As a result, we could default on those
obligations.
AN INABILITY TO OBTAIN NECESSARY FINANCING MAY HAVE A MATERIAL ADVERSE EFFECT ON
OUR FINANCIAL POSITION, OPERATIONS AND PROSPECTS IF UNANTICIPATED CAPITAL NEEDS
ARISE.
Our capital requirements may vary significantly from what we currently project
and be affected by unforeseen delays and expenses. We may experience problems,
delays, expenses and difficulties frequently encountered by similarly-situated
companies, as well as difficulties as a result of changes in economic,
regulatory or competitive conditions. If we encounter any of these problems or
difficulties or have underestimated our operating losses or capital
requirements, we may require significantly more financing than we currently
anticipate. We cannot assure you that we will be able to obtain any required
additional financing on terms acceptable to us, if at all. We will be restricted
on the type and amount of additional indebtedness that we may incur as a result
of our acquisition of Hollywood SW. In connection with the acquisition of
Hollywood SW, we issued secured promissory notes to the sellers that will be
senior to all indebtedness during the term of those notes other than any debt
provided by a bank or institutional lender, which is less than $1 million in
aggregate principal amount, unsecured or secured by the assets of Hollywood SW
and its subsidiaries. We will also be restricted on the type of additional
indebtedness that we may incur as a result of our Convertible Debentures. An
inability to obtain necessary financing could have a material adverse effect on
our financial position, operations and prospects.
OUR PLAN TO ACQUIRE ADDITIONAL BUSINESSES INVOLVES RISKS, INCLUDING OUR
INABILITY SUCCESSFULLY TO COMPLETE AN ACQUISITION, OUR ASSUMPTION OF
LIABILITIES, DILUTION OF YOUR INVESTMENT AND SIGNIFICANT COSTS.
We intend to make further acquisitions of similar or complementary businesses or
assets, although there are no acquisitions identified by us as probable at this
time. Even if we identify appropriate acquisition candidates, we may be unable
to negotiate successfully the terms of the acquisitions, finance them, integrate
the acquired business into our then existing business and/or attract and retain
customers. Completing an acquisition and integrating an acquired business,
including our recently acquired businesses, may require a significant diversion
of management time and resources and involves assuming new liabilities. Any
acquisition also involves the risks that the assets acquired may prove less
valuable than expected and/or that we may assume unknown or unexpected
liabilities, costs and problems. If we make one or more significant acquisitions
in which the consideration consists of our capital stock, your equity interest
in our company could be diluted, perhaps significantly. If we were to proceed
with one or more significant acquisitions in which the consideration included
cash, we could be required to use a substantial portion of our available cash,
or obtain additional financing to consummate them.
WE EXPECT COMPETITION TO BE INTENSE: IF WE ARE UNABLE TO COMPETE SUCCESSFULLY,
OUR BUSINESS AND RESULTS OF OPERATIONS WILL BE SERIOUSLY HARMED.
The market for the IDC facilities and managed services business, the digital
cinema business and the movie distribution software business, although
relatively new, are competitive, evolving and subject to rapid technological and
other changes. We expect the intensity of competition in each of these areas to
increase in the future. Companies willing to expend the necessary capital to
create facilities and/or software similar to ours may compete with our business.
Increased competition may result in reduced revenues and/or margins and loss of
market share, any of which could seriously harm our business. In order to
compete effectively in each of these fields, we must differentiate ourselves
from competitors.
Many of our current and potential competitors have longer operating histories
and greater financial, technical, marketing and other resources than us, which
may permit them to adopt aggressive pricing policies. As a result, we may suffer
from pricing pressures that could adversely affect our ability to generate
revenues and our results of operations. Many of our competitors also have
significantly greater name and brand recognition and a larger customer base than
us. We may not be able to compete successfully with our competitors. If we are
unable to compete successfully, our business and results of operations will be
seriously harmed.
WE FACE THE RISKS OF AN EARLY-STAGE COMPANY IN A NEW AND RAPIDLY EVOLVING MARKET
AND MAY NOT BE ABLE SUCCESSFULLY TO ADDRESS SUCH RISKS AND EVER BE SUCCESSFUL OR
PROFITABLE.
We have encountered and will continue to encounter the challenges, uncertainties
and difficulties frequently experienced by early-stage companies in new and
rapidly evolving markets, including:
o lack of operating experience;
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o net losses;
o lack of sufficient customers;
o insufficient revenues and cash flow to be self-sustaining;
o necessary capital expenditures;
o an unproven business model;
o a changing business focus; and
o difficulties in managing potentially rapid growth.
This is particularly the case with respect to our newly acquired businesses. We
cannot assure you that we will ever be successful or profitable.
MANY OF OUR CORPORATE ACTIONS MAY BE CONTROLLED BY OUR OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS; THESE ACTIONS MAY BENEFIT THESE PRINCIPAL STOCKHOLDERS
MORE THAN OUR OTHER STOCKHOLDERS.
As of March 31, 2005, our directors, executive officers and principal
stockholders beneficially own, directly or indirectly, in the aggregate,
approximately 41% of our outstanding common stock. In particular, A. Dale Mayo,
our President and Chief Executive Officer, beneficially holds 965,811 shares of
Class B common stock, 9,601 shares of Class A common stock, and notes which are
convertible into 45,810 shares of Class A common stock, which collectively
represent approximately 10% of our outstanding common stock, but due to the
supervoting Class B common stock, represent approximately 51% of the voting
power. These stockholders, and Mr. Mayo himself, will have significant influence
over our business affairs, with the ability to control matters requiring
approval by our security holders, including elections of directors and approvals
of mergers or other business combinations. Our Class B common stock entitles the
holder to ten votes per share. The shares of Class A common stock have one vote
per share. Also, certain corporate actions directed by our officers may not
necessarily inure to the proportional benefit of other stockholders of our
company; under his employment agreement, for example, Mr. Mayo is entitled to
receive cash bonuses based on our revenues, regardless of our earnings, if any.
OUR SUCCESS WILL SIGNIFICANTLY DEPEND ON OUR ABILITY TO HIRE AND RETAIN KEY
PERSONNEL.
Our success will depend in significant part upon the continued services of our
key technical, sales and senior management personnel. If we lose one or more of
our key employees, we may not be able to find a suitable replacement(s) and our
business and results of operations could be adversely affected. In particular,
our performance depends significantly upon the continued service of A. Dale
Mayo, our President and Chief Executive Officer, whose experience and
relationships in the movie theater industry are integral to our business,
particularly in the business areas of Hollywood SW and AccessDM. Although we
have obtained two $5 million key-man life insurance policies in respect of Mr.
Mayo, the loss of his services would have a material and adverse effect on our
business, operations and prospects. Each policy carries a death benefit of $5
million, and while we are the beneficiary of each policy, under one of the
policies the proceeds will be used to repurchase, after reimbursement of all
premiums paid by us some, or all, of the shares of our capital stock held by Mr.
Mayo's estate at the then-determined fair market value. We also rely on the
experience and expertise of Russell J. Wintner, AccessDM's President and Chief
Operating Officer, the two co-founders of Hollywood SW, David Gajda and Robert
Jackovich, and Ravi Patel, FiberSat's President and Chief Operating Officer. In
addition, our future success will depend upon our ability to hire, train,
integrate and retain qualified new employees.
IF WE ARE NOT SUCCESSFUL IN PROTECTING OUR INTELLECTUAL PROPERTY, OUR BUSINESS
WILL SUFFER.
We depend heavily on technology to operate our business. Our success depends on
protecting our intellectual property, which is one of our most important assets.
Although we do not currently hold any copyrights, patents or registered
trademarks, we do have intellectual property consisting of:
o licensable software products;
o rights to certain domain names;
17
o registered service marks on certain names and phrases;
o various unregistered trademarks and service marks;
o know-how; and
o rights to certain logos.
If we do not adequately protect our intellectual property, our business,
financial position and results of operations would be harmed. Our means of
protecting our intellectual property may not be adequate. Unauthorized parties
may attempt to copy aspects of our intellectual property or to obtain and use
information that we regard as proprietary. In addition, competitors may be able
to devise methods of competing with our business that are not covered by our
intellectual property. Our competitors may independently develop similar
technology, duplicate our technology or design around any intellectual property
that we may obtain.
The success of some of our business operations depends on the proprietary nature
of certain software. We do not, however, have any patents with respect to such
software. Because there is no patent protection in respect of our software,
other companies are not prevented from developing and marketing similar
software. We cannot assure you, therefore, that we will not face more
competitors or that we can compete effectively against any companies that
develop similar software. We also cannot assure you that we can compete
effectively or not suffer from pricing pressure with respect to our existing and
developing products that could adversely affect our ability to generate
revenues.
Although we hold rights to various web domain names, regulatory bodies in the
United States and abroad could establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names. The relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is unclear. We may be
unable to prevent third parties from acquiring domain names that are similar to
or diminish the value of our proprietary rights.
SERVICE AND OTHER INTERRUPTIONS COULD POTENTIALLY REDUCE OUR REVENUES AND HARM
OUR REPUTATION AND FINANCIAL RESULTS.
Our facilities and our customers' equipment are vulnerable to damage from human
error, physical or electronic security breaches, power loss, other facility
failures, fire, earthquake, water damage, sabotage, vandalism and similar
events. In addition, our customers would be adversely affected by the failure of
carriers to provide network access to our facilities as a result of any of these
events. Any of these events or other unanticipated problems could interrupt our
customers' ability to provide services from our facilities. This could damage
our reputation, make it difficult to attract new and retain customers and cause
our customers to terminate their contracts with us and to seek damages. Any of
these events could have a material adverse effect on our business, financial
position and prospects.
WE DEPEND ON RELATIONSHIPS WITH THIRD PARTIES, WHICH, IF NOT MAINTAINED, MAY
ADVERSELY AFFECT OUR ABILITY TO PROVIDE SERVICES TO OUR CUSTOMERS.
We are not a communications carrier and, therefore, we rely substantially on
third parties to provide our customers with access to voice, data and Internet
networks. We must maintain relationships with third-party network providers in
order to offer our data center customers access to a choice of networks. Many
carriers have their own data center facilities and may be reluctant to provide
network services at our data centers. As a result, some carriers may choose not
to connect their services to our data centers. We do not own any real property
and depend on our ability to negotiate favorable lease terms with the owners of
our data center facilities. The use of our IDCs is limited to the extent that we
do not extend or renew our leases, in which case we might not be able to
accommodate our customers, particularly if we were unable to relocate timely to
a comparable facility.
The availability of an adequate supply of electrical power and the
infrastructure to deliver that power is critical to our ability to attract and
retain customers and achieve profitability. We rely on third parties to provide
electrical power to our data centers, and cannot be certain that these parties
will provide adequate electrical power or that we will have the necessary
infrastructure to deliver such power to our customers. If the electrical power
delivered to our facilities is inadequate to support our customers' requirements
or if delivery is not timely, our results of operations and financial position
may be materially and adversely affected.
WE MAY HAVE DIFFICULTY COLLECTING PAYMENTS FROM SOME OF OUR CUSTOMERS AND INCUR
COSTS AS A RESULT.
A number of our customers are early stage companies. In addition, many of our
customers are telecommunications companies, and many telecommunications
companies have been experiencing significant financial difficulties. There is a
risk that these
18
companies will experience difficulty paying amounts owed to us, and we might not
be able to collect on a timely basis all monies owed to us by some of them.
Although we intend to remove customers that do not pay us in a timely manner, we
may experience difficulties and costs in collecting from or removing these
customers.
IF WE DO NOT RESPOND TO FUTURE ADVANCES IN TECHNOLOGY AND CHANGES IN CUSTOMER
DEMANDS, OUR FINANCIAL POSITION, PROSPECTS AND RESULTS OF OPERATIONS MAY BE
ADVERSELY AFFECTED.
The demand for our digital cinema business, movie distribution software and data
centers will be affected, in large part, by future advances in technology and
changes in customer demands. Our success will also depend on our ability to
address the increasingly sophisticated and varied needs of our existing and
prospective customers.
We cannot assure you that there will be a demand for the digital cinema software
and delivery services provided by AccessDM. AccessDM's profitability depends
largely upon the general expansion of digital presentations at theaters, which
may not occur for several years. There can be no assurance that major movie
studios relying on traditional distribution networks to provide physical
delivery of digital files will adopt a different method, particularly electronic
delivery, of distributing digital content to movie theaters. If the development
of digital presentations and changes in the way digital files are delivered does
not occur, there may be no viable market for AccessDM's software and systems.
WE MAY BE SUBJECT TO ENVIRONMENTAL RISKS RELATING TO THE ON-SITE STORAGE OF
DIESEL FUEL AND BATTERIES.
Our data centers contain tanks for the storage of diesel fuel for our generators
and significant quantities of lead acid batteries used to provide back-up power
generation for uninterrupted operation of our customers' equipment. We cannot
assure you that our systems will be free from leaks or that use of our systems
will not result in spills. Any leak or spill, depending on such factors as the
nature and quantity of the materials involved and the environmental setting,
could result in interruptions to our operations and the incurrence of
significant costs; particularly to the extent we incur liability under
applicable environmental laws. This could have a material adverse effect on our
business, financial position and results of operations.
ITEM 2. PROPERTY
Our executive offices are located in Morristown, New Jersey. Our nine IDC
facilities are located in Jersey City, New Jersey; the Manhattan and Brooklyn
Boroughs of New York City; Portland, Maine; Manchester, New Hampshire; Roanoke,
Virginia; Wichita, Kansas; Little Rock, Arkansas; and Waco, Texas. FiberSat's
two facilities in Los Angeles, California also contains a data center which we
use as a dedicated digital content delivery site. Our executive offices and all
of our IDC facilities are leased. We do not own any real property.
In connection with our acquisition of Hollywood SW, we have assumed the
obligations of Hollywood SW under a Commercial Property Lease, dated January 1,
2000, between Hollywood SW and Hollywood Media Center, LLC ("HMC"), the
landlord. The lease is for the executive offices of Hollywood SW, has a monthly
rent of $2,335 and covers 2,115 square feet. The lease expired on December 31,
2003 and is currently a month to month tenancy with the same monthly rent. On
May 1, 2004, an additional 933 square feet was rented on a month-to-month basis
for additional monthly rental payments of $1,000. HMC is a limited liability
company 95% owned by David Gajda, a security holder of HMC and a key employee of
AccessIT.
In connection with our acquisition of the assets of FiberSat, we have assumed
the obligations of FiberSat under a Standard Industrial/Commercial Single-Tenant
Lease, dated December 2, 1996, between FiberSat and David L. McNamara Family
Trust, the landlord. The lease is for the administrative offices, technical
operations center, and warehouse of FiberSat, has a monthly rent of $9,845 and
covers 13,455 square feet. The lease expires on March 31, 2007. We have
additionally assumed the obligations of FiberSat under a Lease for Communication
Equipment Space, dated July 1, 2004, between FiberSat and Time Warner Cable, the
landlord. The lease is for space to house certain communication equipment of
FiberSat and has a monthly rent of $1,722. The lease expires on June 30, 2009.
In connection with our acquisition of the Pavilion Theatre, we have assumed the
obligations of Pritchard Square Cinema LLC under a commercial lease dated August
9, 2002, between Pritchard Square Cinema LLC and OLP Brooklyn Pavilion LLC, the
landlord, as amended. The lease is for a movie theatre, and cafe, has a monthly
initial rent of $94,000 and covers approximately 31,120 square feet. The lease
expires July 31, 2022 and has two options to renew for additional ten-year
terms. This lease also contains a provision for the payment of additional rent
if box office revenues exceed certain levels.
We are a party to separate leases for each of our nine IDC facilities. These
leases cover an aggregate square footage of 67,200, under which we are paying an
aggregate monthly rent of $192,000. The rental periods remaining on these leases
range from month-to month (under our Roanoke, Virginia facility lease, the term
of which we intend to extend if our customer at that facility
19
renews its agreement with us) to 12 years and, with the exception of our leases
for the Jersey City, New Jersey and Brooklyn, New York facilities, which expire
in 2009 and 2016, respectively, the leases include options to renew the leases.
The lease of our executive offices expires on May 31, 2009, has a four-year
renewal option, covers 5,237 square feet and has a monthly rent of $10,910. We
believe that we have sufficient space to conduct our business for the
foreseeable future. All of our leased properties are, in the opinion of our
management, in satisfactory condition and adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
On July 2, 2004, we received notice that certain creditors of one of our data
center customers named NorVergence filed an involuntary bankruptcy petition
against NorVergence. On July 14, 2004, NorVergence 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. We also
have a first security interest in NorVergence accounts receivable.
On November 1, 2004, Diversified Aerospace Services, LLC ("DAS") commenced an
adversary proceeding (Adv. Pro. No. 04-2862)(the "Adversary Proceeding") against
the chapter 7 trustee for the NorVergence case and us. DAS and NorVergence
entered into a number of leases (the "DAS Leases") whereby NorVergence leased
certain equipment to DAS and DAS was obligated to make lease payments. Through
the Adversary Proceeding, DAS is seeking to, among other things, void the DAS
Leases and obtain an order enjoining any party from collecting any amounts due
under the DAS Leases. Because we had a first priority lien on all of
NorVergence's accounts receivable, including, but not limited to, some or all of
the payments due under the DAS Leases, we may not be able to recover on account
of its lien any proceeds from DAS.
On January 26, 2005 the bankruptcy court in the matter of NorVergence approved a
motion for the trustee to pay us $121,000 for past due accounts receivable, and
on February 25, 2005 we were paid this amount. Additionally, we have been
granted the right to pursue collection of NorVergence's customer accounts
receivable. Any amounts collected will be retained by us in settlement of its
claim against NorVergence.
On March 11, 2005, we filed an answer to the Adversary Proceeding.
On June 9, 2005, Soriano, Henkel, Biehl & Mtthews ("SHB") filed a complaint
(case no. 04-32079/RG) (the "Complaint") against the chapter 7 trustee for the
NorVergence case and us. SHB and NorVergence entered into a number of equipment
leases (the "SHB Leases") whereby NorVergence leased certain equipment to SHB
and SHB was obligated to make lease payments. Through the Compalint, SHB is
seeking to, among other things, void the SHB Leases and obtain an order
enjoining any party from collecting any amounts due under the SHB Leases. As
with the Adversary Proceeeding, because we had a first priority lien on all of
the NorVergence's accounts receivable, including, but not limited to, some or
all of the payments due under the SHB Leases, we may not be able to recover on
account of its lien any proceeds from SHB.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
PRICE RANGE OF COMMON STOCK
Our Class A common stock trades publicly on the American Stock Exchange under
the trading symbol "AIX." The following table shows the high and low sales
prices per share of our Class A common stock as reported by the American Stock
Exchange for the periods indicated:
FISCAL YEAR ENDED MARCH 31, 2004 HIGH LOW
---- ---
Third Quarter (from November 10, 2003).......$ 6.95 $ 5.00
Fourth Quarter...............................$ 5.30 $ 4.09
FISCAL YEAR ENDED MARCH 31, 2005
First Quarter (through June 30, 2004)........$ 5.20 $ 4.10
Second Quarter ..............................$ 5.15 $ 3.20
Third Quarter ...............................$ 4.17 $ 3.75
Fourth Quarter (through June 24, 2005).......$ 8.11 $ 3.25
The last reported sale price of our Class A common stock on the American Stock
Exchange on June 28, 2005 was $8.99 per share. As of June 28, 2005, there were
approximately 168 holders of record of our Class A common stock.
DIVIDEND POLICY
20
We have never paid any cash dividends on our common stock or preferred stock and
do not anticipate paying any on our common stock in the foreseeable future. Any
future payment of dividends on our common stock will be in the sole discretion
of our board of directors.
EQUITY COMPENSATION PLANS
The following table sets forth certain information, as of March 31, 2005,
regarding the shares of AccessIT's Class A common stock and AccessDM's common
stock authorized for issuance under their respective equity compensation plans.
Number of shares
Number of shares of of common stock
common stock issuable Weighted average remaining
upon exercise of of exercise price available FOR
---
OUTSTANDING OPTIONS of OUTSTANDING FUTURE ISSUANCE
-------------------- -------------- ---------------
PLAN (#) OPTIONS ($) (#)
---- --- ----------- ---
AccessIT Amended and
Restated 2000 Stock
Option Plan approved by
stockholders............ 762,897(1) $5.50 87,103(1)
AccessIT compensation
plans not approved by
stockholders............ N/A N/A N/A
AccessDM compensation plan
approved by stockholders 1,005,000(2) $0.21 995,000(2)
AccessDM compensation
plans not approved by
stockholders............ N/A N/A N/A
(1) Shares of AccessIT Class A common stock
(2) Shares of AccessDM common stock
ACCESSIT STOCK OPTION PLAN
Our board of directors adopted our 2000 Stock Option Plan (the "Plan"), on June
1, 2000 and, in July 2000, our stockholders approved the Plan by written
consent. Under the Plan, which was amended and restated in January 2003 and
further amended in September 2003 and October 2004, we grant both incentive and
non-statutory stock options to our employees, non-employee directors and
consultants. The primary purpose of the Plan is to enable us to attract, retain
and motivate our employees, non-employee directors and consultants. The Plan, as
amended, authorizes up to 850,000 shares of our Class A common stock for
issuance upon the exercise of options granted under the Plan. As of March 31,
2005, there were options to purchase 87,103 shares of our Class A common stock
available for grant under the Plan.
Under the Plan, stock options covering no more than 100,000 shares may be
granted to any participant in any single calendar year and no participant may be
granted incentive stock options with an aggregate fair market value, as of the
date on which such options were granted, of more than $100,000 becoming
exercisable for the first time in any given calendar year. Options granted under
the Plan expire 10 years following the date of grant (or such shorter period of
time as may be provided in a stock option agreement or five years in the case of
incentive stock options granted to stockholders who own greater than 10% of the
total combined voting power of our company) and are subject to restrictions on
transfer. Options granted under the Plan vest generally over periods up to three
years. The Plan is administered by our board of directors.
The Plan provides for the granting of incentive stock options with exercise
prices of not less than 100% of the fair market value of our common stock on the
date of grant. Incentive stock options granted to holders of more than 10% of
the total combined voting power of our company must have exercise prices of not
less than 110% of the fair market value of our common stock on the date of
grant. Incentive and non-statutory stock options granted under the Plan are
subject to vesting provisions, and exercise is subject to the continuous service
of the optionee. The exercise prices and vesting periods (if any) for
non-statutory options are set in the discretion of our board of directors. Upon
a change of control of our company, all options (incentive and non-statutory)
that have not previously vested will become immediately and fully exercisable.
In connection with the grants of options under the Plan, we and the participants
have executed stock option agreements setting forth the terms of the grant.
21
ACCESSDM STOCK OPTION PLAN
AccessDM's board of directors adopted its stock option plan on May 13, 2003 and
its stockholders approved the plan on May 13, 2003. Under the plan, AccessDM
grants stock options to its employees, non-employee directors and consultants.
The plan authorizes up to 2,000,000 shares of AccessDM common stock for issuance
upon the exercise of options granted under the plan. As of March 31, 2005,
AccessDM has issued options to purchase 1,005,000 of its shares to employees,
and there were options to purchase 995,000 shares of AccessDM common stock
available for grant under the plan.
Under the plan, stock options covering no more than 500,000 shares may be
granted to any participant in any single calendar year and no participant may be
granted incentive stock options with an aggregate fair market value, as of the
date on which such options were granted, of more than $100,000 becoming
exercisable for the first time in any given calendar year. Options granted under
the plan expire 10 years following the date of grant (or such shorter period of
time as may be provided in a stock option agreement or five years in the case of
incentive stock options granted to stockholders who own greater than 10% of the
total combined voting power of AccessDM) and are subject to restrictions on
transfer. Options granted under the plan vest generally over periods up to three
years. The plan is administered by AccessDM's board of directors.
The plan provides for the granting of incentive stock options with exercise
prices of not less than 100% of the fair market value of AccessDM's common stock
on the date of grant. Incentive stock options granted to holders of more than
10% of the total combined voting power of AccessDM must have exercise prices of
not less than 110% of the fair market value of AccessDM common stock on the date
of grant. Incentive and non-statutory stock options granted under the plan are
subject to vesting provisions, and exercise is subject to the continuous service
of the optionee. The exercise prices and vesting periods (if any) for
non-statutory options are set in the discretion of AccessDM's board of
directors. Upon a change of control of AccessDM, all options (incentive and
non-statutory) that have not previously vested will become immediately and fully
exercisable. In connection with the grants of options under the plan, AccessDM
and the participants have executed stock option agreements setting forth the
terms of the grant.
SALES OF UNREGISTERED SECURITIES IN FISCAL YEAR ENDED MARCH 31, 2005
All of our equity securities sold by us during the fiscal year ended March 31,
2005, that were not registered under the Securities Act of 1933, as amended
(the" Securities Act"), have been previously reported in our quarterly reports
on Form 10-QSB and current reports on Form 8-K.
PURCHASE OF EQUITY SECURITIES
The following table summarizes information regarding purchases of shares of our
Class A common stock made by us or on our behalf during the three months ended
March 31, 2005.
Total number
of shares -
purchased as Maximum number
part of of shares that
publicly may yet be
announced purchased
Total number Average price plans or under the plans
PERIOD of SHARES paid PER SHARE PROGRAMS(A) PROGRAMS(A)
------ ------ --------- ----------- ------------
1/1/2005 - 42,300 $3.35 42,300 48,560
1/31/2005
2/1/2005 -
2/28/2005 - - - -
3/1/2005 -
3/31/2005 - - - -
------ ----- ------ ------
Total 42,300 $3.35 42,300 48,560
====== ===== ====== ======
(A) In August 2004, our Board of Directors authorized the repurchase of up to
100,000 shares of Class A common stock. The shares will be purchased at
prevailing prices from time-to-time in the open market depending on market
conditions and other factors. Through March 2005 the Company has purchased
51,440 shares for a total purchase price of $172,000 at an average purchase
price of $3.34 per share. As of March 31, 2005, an additional 48,560 shares of
Class A common stock may be repurchased.
22
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS
REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. THAT INVOLVE RISKS
AND UNCERTAINTIES. FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE INDICATED BY
WORDS SUCH AS "ANTICIPATES," "EXPECTS," "BELIEVES," "INTENDS," "PLANS,"
"ESTIMATES," "PROJECTS" AND SIMILAR EXPRESSIONS. THESE STATEMENTS REPRESENT OUR
EXPECTATIONS BASED ON CURRENT INFORMATION AND ASSUMPTIONS. FORWARD-LOOKING
STATEMENTS ARE INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE WHICH ARE ANTICIPATED OR PROJECTED AS A
RESULT OF CERTAIN RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO A
NUMBER OF FACTORS, SUCH AS OUR INCURRENCE OF LOSSES TO DATE; ACHIEVING
SUFFICIENT VOLUME OF BUSINESS FROM OUR CUSTOMERS; OUR SUBSIDIARIES CONDUCTING
BUSINESS IN AREAS IN WHICH WE HAVE LITTLE EXPERIENCE; ECONOMIC AND MARKET
CONDITIONS; THE PERFORMANCE OF THE 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.
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: Media Services, which represents the operations
of Hollywood SW, AccessDM (including Boeing Digital), the Pavilion Theatre and
FiberSat, and the Data Center Services, which comprise the operations of our
nine IDCs and the operations of Managed Services. For the fiscal year ended
March 31, 2005, we received 38% and 62%, respectively, of our revenue from the
Media Services and Data Center Services segments.
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, including fees from various services under the
collocation space contract with KMC Telecom, which contract expires on December
15, 2005 and we have received an indication from KMC Telecom that they will not
renew the contract for at least some of the current sites that they are
licensing under such contract. 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 $4.8 million and $6.8 million in the fiscal
years ended March 31, 2004 and 2005, respectively, and we have an accumulated
deficit of $21.5 million as of March 31, 2005. We anticipate that, with our
recent acquisitions, 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 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 software revenue recognition, capitalized
software costs, depreciation of fixed assets and amortization of intangible
assets, recoverability of goodwill and long-lived assets and intangible assets,
the valuation of deferred tax liabilities, and the valuation of assets acquired
and liabilities assumed in purchase business combinations. 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
23
that are not readily apparent from other sources. Actual results could differ
from these estimates under different assumptions or conditions.
We believe that the following critical accounting policies and estimates affect
our more significant estimates and judgments used in the preparation of our
Consolidated Financial Statements.
REVENUE RECOGNITION
Media Services
Revenues are accounted for in accordance with Statement of Position 97-2 ("SOP
97-2") and Staff Accounting Bulletin ("SAB") No. 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), 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
vendor specific objective evidence. 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 develops
customized software application the percentage-of-completion accounting is
followed 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.
24
As license fees, maintenance fees, minimum ASP service fees and website
subscription fees are often paid in advance, this revenue is deferred and
amortized over the contract term, or in the case of license fees, recognized in
accordance with SOP 97-2 once the Company's commitments to provide the software
and other related services to the customer are satisfied. Such amounts are
classified as deferred revenue in the Consolidated Balance Sheet and are
recognized as revenue in accordance with the Company's revenue recognition
policies described above.
FiberSat revenues consist of satellite network monitoring and maintenance fees.
These fees consist of monthly recurring billings pursuant to contracts with
terms ranging from month to month, and a maximum of six years including
renewals, 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.
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.
Data Center 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 Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed". Software development costs that are incurred
subsequent to establishing technological feasibility are capitalized until the
product is available for general release. Amounts capitalized as software
development costs are amortized periodically using the greater of revenues
during the period compared to the total estimated revenues to be earned or on a
straight-line basis over five years. 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 fiscal years
ended March 31, 2004 and 2005. Amortization of capitalized software development
costs, included in costs of revenues, for fiscal years ended March 31, 2004 and
2005 amounted to $118,000 and $369,000, 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 March 31, 2005, our
finite-lived intangible assets consisted of customer agreements, covenants not
to compete, Federal Communications Commission licenses for satellite
transmission services, trade names and trademarks, and a liquor license which
are estimated to have useful lives of ranging from 2 to 10 years. In addition,
we have recorded goodwill in connection with the acquisitions of Hollywood SW,
Managed Services, FiberSat, and the Pavilion Theatre.
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 and assets under
capital lease are being
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amortized over the shorter of the lease term or the estimated useful life of the
improvement. Maintenance and repair costs are charged to expense as incurred.
Major renewals, improvements and additions are capitalized.
IMPAIRMENT OF LONG-LIVED ASSETS
We review the recoverability of our long-lived assets on a periodic basis in
order to identify business conditions, which may indicate a possible impairment.
The assessment for potential impairment is based primarily on our ability to
recover the carrying value of our long-lived assets from expected future
undiscounted cash flows. If the total of expected future undiscounted cash flows
is less than the total carrying value of the assets, a loss is recognized for
the difference between the fair value (computed based upon the expected future
discounted cash flows) and the carrying value of the assets. No impairment was
recorded for the fiscal years ended March 31, 2004 and 2005.
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, digital
movie delivery fees and satellite delivery services. Media Services
revenue are those generated by Hollywood SW, AccessDM, FiberSat and
the Pavilion Theatre. 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 divisional 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, and the imputing
of interest on a non-interest bearing note payable.
PRIVATE PLACEMENTS
On June 4, 2004, we concluded a private placement with several investors whereby
we issued 1,217,500 unregistered shares of our Class A common stock at a sale
price of $4.00 per share ("June 2004 Private Placement"). 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 in the
June 2004 Private Placement warrants to purchase a total of 304,375 shares of
our Class A common stock at an exercise price of $4.80 per share, which became
exercisable upon receipt. We agreed to file a registration statement for the
resale of these shares and the shares underlying the 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 October 26, 2004, we entered into a private placement with certain investors
whereby we issued 282,776 unregistered shares of our Class A common stock at
$3.89 per share to certain accredited investors for gross proceeds of
$1.1million. ("October 2004 Private Placement"). These shares carry piggyback
and demand registration rights, at the sole expense of the investors. We
realized net proceeds of approximately $1.023 million, which were used for the
FiberSat Acquisition and for working capital. The investors exercised their
piggyback registration rights and we registered the resale of all of the 282,776
shares of Class A common stock on a Form S-3 which was declared effective by the
SEC on March 21, 2005.
On February 10, 2005, we completed a private placement of $7.6 million, of the
Convertible Debentures. The Convertible Debentures bear interest at the rate of
7% per year and are convertible into shares of our Class A common stock at the
price of $4.07 per share, subject to possible adjustments from time to time. In
connection with the Convertible Debenture offering, we
26
issued the participating institutional investors the Convertible Debentures
Warrants, exercisable for up to 560,197 shares of Class A common stock at an
initial exercise price of $4.44 per share, subject to adjustments from time to
time. The Convertible Debentures Warrants may be exercised beginning on
September 9, 2005 until five years thereafter. We agreed to file a registration
statement for the resale of the shares underlying the Convertible Debentures and
the Convertible Debentures Warrants with the SEC on or before March 14, 2005. We
filed such a registration statement on March 11, 2005 and it was declared
effective by the SEC on March 21, 2005.
ACQUISITIONS
On July 17, 2003, we signed a stock purchase agreement with Hollywood SW and its
two selling stockholders. On November 3, 2003, we acquired Hollywood SW, after
amending the agreement to complete the acquisition on that date, by issuing
secured promissory notes (the "Initial Notes"), each in the principal amount of
$3.6 million, to the two selling stockholders. On November 10, 2003, we
completed our initial public offering of shares of our Class A common stock
("IPO") and (1) the Initial Notes were exchanged for the consideration described
in clauses (2) and (3) below and cancelled and returned to us by Hollywood SW's
selling stockholders, (2) the lead underwriter in the IPO transmitted, in the
aggregate, $2.45 million to the selling stockholders and (3) we issued to such
selling stockholders $3 million in 8% promissory notes and 400,000 unregistered
shares of our Class A common stock.
We may pay an additional purchase price in each of the three years following the
closing of the Hollywood SW acquisition if certain annual earnings targets are
achieved. In the first such year, the earnings targets were not achieved. We
also have agreed to issue additional unregistered shares of our Class A common
stock if, during the 90 days following the applicable lock-up period, the
average value of our Class A common stock during such 90 days declines below an
average of $3.60 per share.
On December 22, 2003, we signed an agreement to purchase all of the outstanding
common stock of Managed Services, and on January 9, 2004, the acquisition of
Managed Services was completed. Managed Services is a provider of information
technologies; its primary product is managed network services through its global
network command center. We believe that the acquisition of Managed Services will
expand the existing capabilities and services of our IDCs. The initial purchase
price consisted of $250,000 in cash and 100,000 unregistered shares of our Class
A common stock. In addition, we may be required to pay a contingent purchase
price for any of the three years following the closing in which certain earnings
targets are achieved; any additional payment is to be made in the same
proportionate combination of cash and unregistered shares of our Class A common
stock as the purchase price payable at closing. In the first such year, the
earnings targets were not achieved. We have also agreed to a one time issuance
of additional unregistered shares of our Class A common stock to the seller up
to a maximum of 20,000 shares if, in accordance with an agreed upon formula, the
market value of our Class A common stock is less than an average of $4.00 during
the final 90 days of the lock up period.
On March 29, 2004, we consummated an acquisition of certain assets of Boeing
Digital, a division of Boeing, pursuant to an asset purchase agreement of same
date. The acquired assets consist of digital projectors, satellite dishes and
other equipment installed at 28 screens within 21 theatres in the United States
and equipment stored at other locations, and satellite transmission equipment
which we installed in Los Angeles, California. The initial purchase price
consisted of: $250,000 in cash; 53,534 unregistered shares of our Class A common
stock; and a non-interest bearing promissory note payable for $1.8 million
payable in equal installments over 4 years. In addition, we agreed to make
payments totaling a maximum of $1 million over 4 years, which payments are
comprised of 20% of the gross receipts generated by the acquired assets during
the 4 year period after the closing. For the fiscal year ended March 31, 2005, a
payment of approximately $52,000 was due to Boeing based on such gross receipts.
Additionally, at any time during the 90 day period immediately following the
first 12 months after the closing, Boeing may sell its 53,534 unregistered
shares of our Class A common stock to AccessIT in exchange for $250,000 in cash.
Boeing has also agreed to purchase from AccessIT a minimum of $450,000 managed
storage services per year for four years from the date of the agreement.
On October 19, 2004, we entered into an agreement to purchase substantially all
of the assets and assume certain specified liabilities of FiberSat Seller. On
November 17, 2004, the FiberSat Acquisition was completed. 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 initial purchase price for FiberSat
consisted of 500,000 unregistered shares of our Class A common stock, and we
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 shares of our
Class A common stock. We had the option to exchange up to 50,000 of such 100,000
unregistered shares of Class A common stock to increase the cash, and thereby
decrease the Class A common stock portion of such repayment based on the ratio
of one Class A common stock for each $5.00 of additional cash. We repaid these
liabilities by paying approximately $381,000 and issuing 40,000 shares of our
Class A common stock. In addition, we may be required to pay a contingent
purchase price for any of the three years following the
27
acquisition in which certain earnings targets are achieved. We have also agreed
to a one-time issuance of additional unregistered shares to the sellers in
accordance with a formula if, during the 90 days following the applicable
lock-up period, the average value of our Class A common stock during such 90
days declines below an average of $3.17 per share.
In February 2005, we, through ADM Cinema, consummated the acquisition of
substantially all of the assets of the Pavilion Theatre. The Pavilion Theatre is
an eight-screen movie theatre and cafe and is a component of the Media Services
segment. Continuing to operate as a fully functional multiplex, the Pavilion
Theatre has also become our showplace to demonstrate our integrated digital
cinema solutions to the movie entertainment industry. The purchase price
included a cash payment of $3.3 million (less $500,000 held in escrow pending
completion of certain construction) and a five-year 8% promissory note for $1.7
million. In addition, we assumed the lease covering the land, building and
improvements which is classified as a capital lease on the consolidated balance
sheet. Also, we issued 40,000 shares of unregistered Class A common stock to the
landlord of the Pavilion Theatre.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS
150), which became effective July 1, 2003, which establishes standards for the
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. There was no impact on AccesIT
financial statements due to the adoption of this standard.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment." This statement revises the original guidance contained in SFAS No. 123
and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees, and its related implementation guidance. Under
SFAS No. 123 (revised 2004), a publicly traded entity such as AccessIT will be
required to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions) and recognize such cost over the period during which
an employee is required to provide service in exchange for the reward (usually
the vesting period). For stock options and similar instruments, grant-date fair
value will be estimated using option-pricing models adjusted for unique
characteristics of instruments (unless observable market prices for the same or
similar instruments are available). For small business issuers, including
AccessIT, this is effective as of the beginning of the first interim or annual
reporting period that begins after December 15, 2005, which is our fiscal year
beginning April 1, 2006.
Upon adoption of this standard, the actual costs of our stock-based payment
plans will be based on grant-date fair value, which has not yet been determined.
RESULTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED MARCH 31, 2004 AND THE FISCAL YEAR ENDED MARCH 31,
2005
REVENUES. Our total revenues were $7.2 million and $10.6 million for the fiscal
years ended March 31, 2004 and 2005, respectively, an increase of 47%. The
increase was primarily attributable to incremental revenues from the fiscal 2004
acquisitions of Hollywood SW and Managed Services, and revenues from AccessDM ,
in the aggregate amount of $2.2 million, and $1.1 million resulting from the
2005 acquisitions of FiberSat and the Pavilion Theatre (the "2005
Acquisitions"). Our Internet data center business experienced a slight revenue
increase, primarily due to various new customers, offset by the loss of one
large data center customer.
COST OF REVENUES. Our cost of revenues was $3.7 million and $5.8 million for the
fiscal years ended March 31, 2004 and 2005, respectively, an increase of 57%.
This increase was primarily attributable to costs associated with increased
revenues from our fiscal 2004 activity referenced above, and the 2005
Acquisitions, which resulted in added costs of $1.3 million and $800,000,
respectively, and slightly increased utility costs at our IDC's.
GROSS PROFIT. Gross profit was $3.5 million and $4.8 million for the fiscal
years ended March, 31, 2004 and 2005, respectively, an increase of 37%. Our
fiscal 2004 transactions provided an additional $927,000 in gross profit, while
the 2005 Acquisitions contributed $350,000 while the IDC's were comparable to in
line with the prior year gross profit results.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses were $3.2 million and $5.6 million for the fiscal years
ended March 31, 2004 and 2005, respectively, an increase of 75%. The increase is
primarily due to higher personnel costs associated with additional headcount
compared to the prior year, and increased advertising expenses and professional
fees. As of March 31, 2004 and 2005, we had 34 and 93 employees, respectively,
and one and 34 of whom were part-time employees, respectively.
28
PROVISION FOR DOUBTFUL ACCOUNTS. Our provision for doubtful accounts was $73,000
and $640,000 for the fiscal years ended March 31, 2004 and 2005, respectively.
The increase is primarily due to the recording of a provision of $499,000
related to the bankruptcy of a data center customer in July 2004. The remainder
of the increase is due to the increase in overall business activity.
RESEARCH AND DEVELOPMENT. We recorded expenses of $55,000 and $666,000 for the
fiscal years ended March 31, 2004 and 2005, respectively. The increase is
attributable to research and development efforts at Media Services related to
the development of TDS International software application and various products
including TDS, ITDS and EMS.
NON-CASH, STOCK-BASED COMPENSATION. We recorded non-cash, stock-based
compensation of $15,000 and $4,000 for the fiscal years ended March 31, 2004 and
2005, 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 $2.7 million
and $3.6 million for the fiscal years ended March 31, 2004 and 2005,
respectively, an increase of 33%. Fiscal 2004 acquisitions resulted increased
depreciation and amortization of $1.2 million, while the 2005 Acquisitions
resulted in increased deprecation and amortization of $370,000. Partially
offsetting these increases was certain data center and corporate computer
equipment which became fully depreciated during the year ended March 31, 2005.
INTEREST EXPENSE. Interest expense was $542,000 and $605,000, for the fiscal
years ended March 31, 2004 and 2005, respectively. The increase was primarily
due to the March 2004 exchange of $2.5 million for aggregate principal amount of
our 5-Year 8% subordinated promissory notes (the "5-Year Notes") for shares of
our Class A common stock and $1.7 million aggregate principal amount of the
5-Year Notes for our 6% subordinated convertible promissory notes (the
"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.
LOSS ON EARLY EXTINGUISHMENT OF DEBT. The loss on early extinguishment of debt
was $126,000 and $0 for the fiscal years ended March 31, 2004 and 2005,
respectively. This loss on early extinguishment of debt was due to the March
2004 exchange of the 5-Year Notes for our Class A common stock and the
Convertible Notes.
NON-CASH INTEREST EXPENSE. Non-cash interest expense was $1.8 million and
$832,000 for the fiscal years ended March 31, 2004 and 2005, 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 warrants to purchase shares of our Class A common
stock (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 $212,000 and $311,000 for the fiscal
years ended March 31, 2004 and 2005, 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 $4.8 million and
$6.8 million for the fiscal years ended March 31, 2004 and 2005, 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 promissory notes, our IPO, and notes payable and common stock used
to fund various acquisitions. We have no borrowings or line of credit
arrangements with banks or other financial institutions.
On February 10, 2005, we issued the Convertible Debentures and the Convertible
Debentures Warrants to a group of institutional investors for aggregate proceeds
of $7.6 million. The Convertible Debentures have a four year term, with one
third of the unconverted principal balance repayable in twelve equal monthly
installments beginning three years after the closing. The remaining unconverted
principal balance is repayable at maturity. We may pay the interest in cash or,
if certain conditions are
29
met, by issuing shares of our Class A common stock. If we are eligible to issue
Class A common stock to repay interest, the number of shares issuable is based
on 93% of the 5-day average closing price preceding the interest due date. The
Convertible Debentures are initially convertible into 1,867,322 shares of our
Class A common stock, based upon a conversion price of $4.07 per share subject
to adjustments from time to time. We may redeem the Convertible Debentures, and
if we do, we must issue additional warrants exercisable for shares of our Class
A common stock. Additionally, we issued to the investors the Convertible
Debentures Warrants to purchase up to 560,197 shares of our Class A common
stock, at an initial exercise price of $4.44 per share, subject to adjustments
from time to time. The Convertible Debentures Warrants are exercisable beginning
on September 9, 2005 until 5 years thereafter. The offering of the Convertible
Debentures and the Convertible Debentures Warrants was exempt from the
registration requirements of the Securities Act, under Section 4(2) of the
Securities Act and Rule 506 promulgated thereunder.
We agreed to register, among other things, the resale of shares of the Class A
common stock underlying the Convertible Debentures and Convertible Debentures
Warrants within 30 days from the closing. We filed such a registration statement
on March 11, 2005 and it was declared effective by the SEC on March 21, 2005.
On December 23, 2004, ADM Cinema entered into an asset purchase agreement with
Pritchard Square Cinema, LLC, a New York limited liability company (the
"Seller"), and Norman Adie, the Seller's managing member, to purchase
substantially all of the assets and assume certain liabilities of the Seller's
Pavilion Theatre. On February 11, 2005, the acquisition of the Pavilion Theatre
was completed. The total purchase price is approximately $5.2 million, including
transaction fees. The purchase price included a cash payment of $3.3 million
(less $500,000 held in escrow pending the completion of certain construction)
and a five-year 8% promissory note for $1.7 million, among other things. The
Pavilion Theatre is an eight-screen movie theatre and cafe and will be a
component of the Media Services segment. Continuing to operate as a fully
functional multiplex, the Pavilion Theatre has also become a showplace for us to
demonstrate our integrated digital cinema solutions to the movie entertainment
industry. In addition, we issued 40,000 unregistered shares of Class A common
stock to the landlord of the Pavilion Theatre.
On November 17, 2004, we acquired substantially all of the assets and assumed
certain specified liabilities of FiberSat. The initial purchase price for
FiberSat consisted of 500,000 unregistered shares of our Class A common stock,
and we 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 shares
of our Class A common stock. We had the option to exchange up to 50,000 of such
100,000 shares of Class A common stock to increase the cash, and thereby
decrease the Class A common stock portion of such repayment based on the ratio
of one Class A common stock for each $5.00 of additional cash. We repaid these
liabilities by paying approximately $381,000 and issuing 40,000 shares of our
Class A common stock. In addition, we 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. We have also agreed to a one-time
issuance of additional unregistered shares to the sellers in accordance with a
formula if, during the 90 days following the applicable lock-up period, the
average value of our Class A common stock during such 90 days declines below an
average of $3.17 per share.
On October 26, 2004, we entered into the October 2004 Private Placement with an
investor whereby we issued 282,776 unregistered shares of Class A common stock
at $3.89 per share to the investors for gross proceeds of $1.1million. These
shares carry piggyback and demand registration rights. We realized net proceeds
of approximately $1.023 million, which were used for the FiberSat Acquisition
and for working capital. The investors exercised their piggyback registration
rights and we registered the resale of all of the 282,776 shares of Class A
common stock on a Form S-3 which was declared effective by the SEC on March 21,
2005.
On July 2, 2004, we received notice that certain creditors of one of our data
center customers named NorVergence filed an involuntary bankruptcy petition
against NorVergence. On July 14, 2004, NorVergence 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. We also
have a first security interest in NorVergence accounts receivable. On January
26, 2005 the bankruptcy court approved a motion for the trustee to pay us
$121,000 for past due accounts receivable, and on February 25, 2005 we received
the payment. We are attempting to collect certain accounts receivable of the
bankruptcy customer in partial settlement of our claim.
On June 4, 2004, we concluded the June 2004 Private Placement with several
investors whereby we issued 1,217,500 unregistered shares of our Class A common
stock 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 in the June 2005 Private Placement warrants to purchase a
total of 304,375 shares of our Class A common stock at an exercise price of
$4.80 per share, which became exercisable upon receipt. We agreed to file a
registration statement for the resale of these shares and the shares underlying
the 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 by
the SEC on July 20, 2004.
30
On March 24, 2004, we refinanced $4.2 million aggregate principal amount (plus
accrued and unpaid interest) of 5-Year Notes pursuant to an exchange offer (the
"Exchange Offer"). In exchange for those notes, we issued 707,477 unregistered
shares of our Class A common stock and $1.7 million aggregate principal amount
of Convertible Notes which, as of March 31, 2005, were convertible into a
maximum of 312,425 shares of our Class A common stock.
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 shares
of our Class A common stock to us for $250,000 in cash.
On November 14, 2003 our IPO was finalized, resulting in the issuance of
1,380,000 shares of Class A common stock. 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 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. In November 2004 the lead underwriter received the final
payment for its advisory service fees.
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 8% promissory notes to the sellers ("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. As of
March 31, 2005, the principal balance of the HS Notes is $2.36 million.
As of March 31, 2004 and 2005, we had cash and cash equivalents of $2.3 million
and $4.8 million, respectively. Our working capital at March 31, 2004 and 2005
was $212,000 and $1.7 million, respectively.
For the fiscal year ended March 31, 2004, we raised gross proceeds of $6.9
million and $1.2 million through sales of our common stock from our IPO and
promissory notes, respectively, and we repaid capital lease obligations of
$363,000 and an acquisition note payable of $1 million. For the fiscal year
ended March 31, 2005, we raised gross proceeds of $13.6 million through sales of
our common stock, warrants and convertible debentures. We used the net proceeds
for acquisitions, capital investments and to provide working capital for general
corporate purposes.
Our operating activities resulted in net cash inflow (outflows) of $321,000 and
($3.3) million for the fiscal years ended March 31, 2004 and 2005, respectively.
The increase in cash outflow was primarily due to an increased net loss from
operations.
Investing activities used net cash of $3.6 million and $5.9 million for the
fiscal years ended March 31, 2004 and 2005, respectively. The increase was
primarily due to the acquisition of the Pavilion Theatre and due to various
purchases of computer and other equipment, primarily to support our digital
cinema and managed data storage businesses. Also, we made 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 of $4.6 million for the fiscal year
ended March 31, 2004 was primarily due to proceeds from issuance of shares of
our Class A common stock of $4.8 million and the issuance of $1.2 million of our
5-Year Notes, less $1.4 million repayments of notes payable and capital lease
obligations. Net cash provided by financing activities of $11.6 million for the
fiscal year ended March 31, 2005 was primarily due to the June 2004 Private
Placement, October 2004 Private Placement, and the February 2005 Private
Placement, less repayments of notes payable and capital lease obligations.
We have acquired property and equipment under long-term capital lease
obligations that expire at various dates through July 2022. As of March 31, 2004
and 2005, we had an outstanding balance of $150,000 and $6.4 million,
respectively in capital lease obligations. The increase in capital lease
obligations of $6.1 million and $368,000 is primarily due to the acquisition of
the Pavilion Theatre in February 2005 and the acquisition of FiberSat in
November 2004, respectively. All our capital lease obligations are secured by
equipment at the following locations and in the following principal amounts: at
the Pavilion Theatre, building, land and improvements for $6.1 million; at
FiberSat, certain computer and Satellite equipment for $368,000; at our
executive offices, telephone equipment in the remaining principal amount of
$17,000, and computer equipment for use in Managed Service's operations of
$11,000. As of March 31, 2005, minimum future capital lease payments (including
interest) for the fiscal year ending March 31, 2006 was $1.6 million, at March
31, 2007 through March 31, 2010 was $1.1 million for each respective year and
$8.0 million thereafter (in total). During the fiscal years ended March 31, 2004
and 2005, we
31
made early repayments of $159,000 and $70,000 on capital leases, respectively,
in order to achieve interest savings and aid future cash flow.
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 totaled $15.2 million as of March 31, 2005 and are payable in
varying monthly installments through 2015. As of March 31, 2005, minimum future
operating lease payments for the fiscal years ending March 31, 2006, 2007, 2008,
2009, 2010 and thereafter (in total) were $2.4 million, $2.3 million, $2.2
million, $2.2 million, $1.8 million and $4.3 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.
In July 2004, we made early repayments totaling $58,000 for two of the 5 -Year
Notes that did not participate in the March 2004 Exchange Offer, 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 shares of Class A common stock. The shares will be purchased at
prevailing prices from time-to-time in the open market depending on market
conditions and other factors. Through March 2005 the Company has purchased
51,440 shares for a total purchase price of $172,000 at an average purchase
price of $3.34 per share. As of March 31, 2005, an additional 48,560 shares of
Class A common stock may be repurchased.
During the fiscal year ended March 31, 2004 and 2005, we have incurred losses of
$4.8 million and $6.8 million, respectively, and cash inflows (outflows) from
operating activities of $321,000 and $(3.3) million, respectively. In addition,
we have an accumulated deficit of $21.5 million as of March 31, 2005.
Furthermore, we have total debt service requirements totaling $2.3 million for
the twelve months beginning in March 2005.
Management expects that we will continue to generate operating losses for the
foreseeable future due to depreciation and amortization, research and
development, the continued efforts related to the identification of acquisition
targets, marketing and promotional activities and the development of
relationships with other businesses. Certain of these costs could be reduced if
working capital decreased. We may attempt to raise additional capital from
various sources for future acquisitions or for working capital as necessary, but
there is no assurance that such financing will be completed as contemplated or
under terms acceptable to us, or our existing shareholders. Failure to generate
additional revenues, raise additional capital or manage discretionary spending
could have a material adverse effect on our ability to continue as a going
concern and to achieve our intended business objectives.
Our management believes that the net proceeds generated by our financing
transaction in February 2005 combined with our cash on hand and cash receipts
from existing and the acquired operations of the Pavilion Theatre will be
sufficient to permit us to continue our operations for at least twelve months
from the date of this report.
OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any off-balance sheet arrangements.
SUBSEQUENT EVENTS
On June 15, 2005, we entered into a digital cinema framework agreement (the
"Framework Agreement") with Christie Digital Systems USA, Inc. ("Christie")
through our newly formed wholly-owned subsidiary, Christie/AIX, Inc., a Delaware
corporation ("Christie/AIX"), whereby, among other things (1) Christie/AIX will
seek to raise financing to purchase 200 of Christie's digital cinema projection
systems (the "Systems") at agreed-upon prices; (2) Christie/AIX would then seek
to raise additional debt and/or equity financing to purchase an additional 2,300
Systems at agreed-upon prices. The Framework Agreement allows Christie/AIX to
terminate the agreement for several reasons, including failure to: (1) execute
definitive agreements with certain film distributors by August 31, 2005 to pay
virtual print fees to Christie/AIX for deliveries of digital films made to the
Systems, (2) execute agreements with certain exhibitors by August 31, 2005 to
license the Systems, to house them in the exhibitor locations, and (3) obtain
Christie/AIX's final commitment to purchase at least 100 Systems by July 31,
2005.
32
In connection with the execution of the Framework Agreement, we have engaged a
third party to assist in raising funds to purchase the equipment associated with
the Framework Agreement, and for general corporate purposes. We have no
assurance of the nature and amount of the securities to be issued, and that the
transaction will be completed on acceptable terms.
On June 9, 2005, our Board of Directors approved the expansion of our stock
option pool to 1,100,000 options from the prior amount of 850,000 options. This
approval is subject to the approval of stockholders at our 2005 stockholder
meeting, which is scheduled to take place in September 2005. Subsequent to March
31, 2005, we issued 140,000 stock options to an employee and four directors.
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.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Access Integrated Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Access Integrated
Technologies, Inc. and subsidiaries (the "Company") as of March 31, 2005 and the
related consolidated statements of operations, cash flows and stockholders'
equity for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Access Integrated
Technologies, Inc. and subsidiaries as of March 31, 2005, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ Eisner LLP
Florham Park, New Jersey
June 10, 2005
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Access Integrated Technologies, Inc:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Access
Integrated Technologies, Inc. and its subsidiaries at March 31, 2004, and the
results of their operations and their cash flows for the year ended March 31,
2004 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
June 9, 2004
34
ACCESS INTEGRATED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
MARCH 31,
2004 2005
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................. $2,330 $4,779
Accounts receivable, net................... 509 947
Prepaid and other current assets........... 296 762
Unbilled revenue........................... 8 550
--- ---
Total current assets......................... 3,143 7,038
----- -----
Property and equipment, net................ 5,865 14,261
Intangible assets, net..................... 4,200 3,337
Capitalized software costs, net............ 1,430 1,622
Goodwill................................... 5,378 10,363
Deferred costs............................. 91 726
Unbilled revenue, net of current portion... 596 69
Security deposits.......................... 472 361
--- ---
Total assets................................. $21,175 $37,777
======= =======
LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses...... $1,371 $2,415
Current portion of notes payable........... 650 1,415
Current portion of customer security deposits 38 116
Current portion of capital leases.......... 115 432
Current portion of deferred revenue........ 755 884
Current portion of deferred rent expense... 2 42
- --
Total current liabilities.................... 2,931 5,304
----- -----
Notes payable, net of current portion...... 5,589 12,682
Customer security deposits, net of current portion 117 161
Deferred revenue, net of current portion... 271 95
Capital leases, net of current portion..... 35 6,058
Deferred rent expense...................... 884 970
Minority interest in subsidiary............ 10 --
Deferred tax liability..................... 1,520 1,210
------- -----
Total liabilities.......................... 11,357 26,480
COMMITMENTS AND CONTINGENCIES (See Note 7)
Redeemable Class A common stock, issued
and outstanding, 2004 and 2005- 53,534
shares, respectively 238 250
Stockholders' Equity:
Class A common stock, $0.001 par value per
share; 40,000,000 shares authorized; shares
issued and outstanding, 2004 - 7,281,730 and
2005 shares issued 9,433,328 and shares
outstanding 9,381,888, respectively 7 9
Class B common stock, $0.001 par value per share;
15,000,000 shares authorized; shares issued
and outstanding, 2004 and 2005
1,005,811 and 965,811 shares 1 1
Additional paid-in capital................... 24,271 32,696
Treasury stock, at cost 51,440 shares........ -- (172)
Accumulated deficit.......................... (14,699) (21,487)
-------- --------
Total stockholders' equity................... 9,580 11,047
----- ------
Total Liabilities, Redeemable Stock and
Stockholders' Equity......................... $21,175 $37,777
======= =======
See accompanying Notes to Consolidated Financial Statements.
35
ACCESS INTEGRATED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for share and per share data)
FOR THE FISCAL YEARS ENDED
MARCH 31,
2004 2005
---- ----
Revenues:
Media services................................... $1,356 $4,043
Data center services............................. 5,845 6,608
----- -----
Total revenues.................................... 7,201 10,651
Costs of revenues (exclusive of depreciation
and amortization of $2,692 in 2004 and $3,623
in 2005 shown below):
Media services................................... 152 1,696
Data center services............................. 3,515 4,115
----- ------
Total costs of revenues........................... 3,667 5,811
Gross profit (exclusive of depreciation and
amortization of $2,692 in 2004 and $3,623
in 2005).......................................... 3,534 4,840
Operating expenses:
Selling, general and administrative (excludes
non-cash stock-based compensation of $15 in 2004
and $4 in 2005)................................... 3,204 5,607
Provision for doubtful accounts................... 73 640
Research and development.......................... 55 666
Non-cash stock-based compensation................. 15 4
Depreciation and amortization..................... 2,692 3,623
----- -----
Total operating expenses.......................... 6,039 10,540
------ ------
Loss before other income/ expense................. (2,505) (5,700)
Interest income................................... 6 5
Interest expense.................................. (542) (605)
Loss on early extinguishment of debt.............. (126) --
Non-cash interest expense......................... (1,823) (832)
Other expense, net................................ (52) 23
--- ------
Loss before income tax benefit and minority interest. (5,042) (7,109)
Income tax benefit................................ 212 311
--- ---
Net loss before minority interest in subsidiary... (4,830) (6,798)
Minority interest in loss of subsidiary........... 25 10
-- --
Net loss.......................................... (4,805) (6,788)
Accretion related to redeemable convertible
preferred stock................................... (1,588) --
Accretion of preferred dividends.................. (220) --
----- --
Net loss available to common stockholders......... (6,613) $(6,788)
======== ========
Net loss available to common stockholders per
common share:
Basic and diluted................................. $(1.37) $(0.70)
======= =======
Weighted average number of common shares outstanding:
Basic and diluted................................. 4,826,776 9,668,876
========= =========
See accompanying Notes to Consolidated Financial Statements.
36
ACCESS INTEGRATED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FOR THE FISCAL YEARS ENDED
MARCH 31,
2004 2005
---- ----
Cash flows from operating activities:
Net loss............................................... $(4,805) $(6,788)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization.......................... 2,692 3,623
Amortization of software development costs............. 118 369
Amortization of deferred tax liability................. (85) (311)
Provision for doubtful accounts........................ 29 550
Non-cash stock-based compensation...................... 15 4
Non-cash interest expense.............................. 1,823 832
Minority interest...................................... (25) (10)
Decrease in fair value of common stock warrants........ -- (91)
Loss on early extinguishment of debt................... 126 --
Changes in operating assets and liabilities:
Accounts receivable.................................... (312) (455)
Prepaid and other current assets....................... 4 (422)
Other assets........................................... (24) (1,034)
Accounts payable and accrued expenses.................. 292 387
Deferred revenue....................................... 237 (52)
Other liabilities...................................... 236 140
--- ---
Net cash provided by (used in) operating activities.... 321 (3,258)
--- -------
Cash flows from investing activities:
Purchases of property and equipment.................... (279) (1,932)
Purchase of intangible assets.......................... (50) (38)
Additions to capitalized software costs................ (198) (561)
Acquisition of Hollywood Software, net of cash acquired (2,387) --
Acquisition of Core Technology Services................ (275) --
Acquisition of Boeing Digital Cinema assets............ (405) --
Acquisition of Pavilion Theatre, net of cash acquired.. -- (2,886)
Acquisition of FiberSat, net of cash acquired ......... -- (508)
-- -----
Net cash used in investing activities.................. (3,594) (5,925)
------- -------
Cash flows from financing activities:
Net proceeds from issuance of notes payable and warrants 1,230 7,600
Repayment of notes payable............................. (1,000) (579)
Principal payments on capital leases................... (363) (284)
Repurchase of common stock............................. -- (172)
Proceeds from issuance of common stock................. 4,780 5,067
----- -----
Net cash provided by financing activities.............. 4,647 11,632
----- ------
Net increase in cash and cash equivalents.............. 1,374 2,449
Cash and cash equivalents at beginning of year......... 956 2,330
--- -----
Cash and cash equivalents at end of year............... $2,330 $4,779
====== ======
See accompanying Notes to Consolidated Financial Statements.
37
ACCESS INTEGRATED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except for share data)
Class A Class B
Common Stock Common Stock Treasury Stock
------------ ------------ --------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
Balances as of March 31, 2003.................. 2,015,770 $2 1,005,811 $1 -- $--
Issuance of common stock, net.................. 1,380,000 1 -- -- -- --
Issuance of warrant to purchase common stock -- -- -- -- -- --
Issuance of common stock in exchange for
preferred stock and contingent warrants 2,207,976 2 -- -- -- --
Issuance of warrants to purchase common stock
(attached to notes payable).................... -- -- -- -- -- --
Issuance of common stock for the purchase
of Hollywood Software, Inc..................... 400,000 -- -- -- -- --
Issuance of common stock for the purchase
of Core Technology Services, Inc............... 100,000 -- -- -- -- --
Issuance of common stock upon completion
of notes exchange 707,477 1 -- -- -- --
Issuance of common stock for goods and services. 9,700 -- -- -- -- --
Exercise of warrants to purchase common stock
(attached to notes payable).................... 460,807 1 -- -- -- --
Amortization of stock-based compensation....... -- -- -- -- --
Accretion of preferred stock to redemption
amount......................................... -- -- -- -- -- --
Gain on sale of stock by subsidiary............ -- -- -- -- -- --
Net loss....................................... -- -- -- -- -- --
-- -- -- -- -- --
Balances as of March 31, 2004.................. 7,281,730 $7 1,005,811 $1 -- $--
========= == ========= == == ===
Issuance of common stock, net.................. 1,500,298 2 -- -- -- --
Repurchase of common stock..................... (51,440) (1) -- -- 51,440 (172)
Issuance of common stock in exchange for
AccessDM common stock.......................... 31,300 -- -- -- -- --
Issuance of common stock for the purchase
of FiberSat 540,000 1 -- -- -- --
Issuance of common stock for goods and services -- -- -- -- -- --
Issuance of warrants attached to convertible
notes payable.................................. -- -- -- -- -- --
Beneficial conversion feature on convertible
notes payable.................................. -- -- -- -- -- --
Conversion of Class B shares to Class A........ 40,000 -- (40,000) -- -- --
Issuance of common stock in connection
with the Pavilion acquisition.................. 40,000 -- -- -- -- --
Net loss....................................... -- -- -- -- -- --
-- -- -- -- -- --
Balances as of March 31, 2005.................. 9,381,888 $9 965,811 $1 51,440 $(172)
========= == ======= == ====== ======
See accompanying Notes to Consolidated Financial Statements.
38
ACCESS INTEGRATED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (CONTINUED)
(In thousands, except for share data)
Additional Deferred Stock- Total
Paid-In Based Accumulated Stockholders'
CAPITAL COMPENSATION DEFICIT EQUITY
------- ------------ ------- ------
Balances as of March 31, 2003................. $11,530 $(11) $(9,894) $1,628
Issuance of common stock, net................. 4,372 -- -- 4,373
Issuance of warrant to purchase common stock.. 385 -- -- 385
Issuance of common stock in exchange for
preferred stock and contingent warrants....... 4,498 -- -- 4,500
Issuance of warrants to purchase common
stock (attached to notes payable)............. 615 -- -- 615
Issuance of common stock for the purchase
of Hollywood Software, Inc.................... 1,380 -- -- 1,380
Issuance of common stock for the purchase
of Core Technology Services, Inc.............. 345 -- -- 345
Issuance of common stock upon completion of
notes exchange................................ 2,566 -- -- 2,567
Issuance of common stock for goods and
services...................................... 7 (4) -- 3
Exercise of warrants to purchase common
stock (attached to notes payable)............. 22 -- -- 23
Amortization of stock-based compensation...... -- 15 -- 15
Accretion of preferred stock to redemption
amount........................................ (1,588) -- -- (1,588)
Gain on sale of stock by subsidiary........... 139 -- -- 139
Net loss...................................... -- -- (4,805) (4,805)
-- -- ------- -------
Balances as of March 31, 2004................. $24,271 $-- $(14,699) $9,580
======= === ========= ======
Issuance of common stock , net................ 4,951 -- -- 4,953
Repurchase of common stock.................... -- -- -- (173)
Issuance of common stock in exchange for
AccessDM common stock......................... -- -- -- --
Issuance of common stock for the purchase
of FiberSat................................... 1,624 -- -- 1,625
Issuance of common stock for goods and
services...................................... 4 -- -- 4
Issuance of warrants attached to
convertible notes payable..................... 1,109 -- -- 1,109
Beneficial conversion feature on
convertible notes payable..................... 605 -- -- 605
Conversion of Class B shares to Class A....... -- -- -- --
Issuance of common stock in connection
with the Pavilion acquisition................ 132 -- -- 132
Net loss...................................... -- -- (6,788) (6,788)
-- -- ------- -------
Balances as of March 31, 2005................. $32,696 $-- $(21,487) $11,047
======= === ========= =======
See accompanying Notes to Consolidated Financial Statements.
39
ACCESS INTEGRATED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share and per share data)
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.
("Managed Services") was incorporated in New York in November 1995, and was
acquired by AccessIT on January 9, 2004. FiberSat Global Services, Inc.,
("FiberSat") a wholly-owned subsidiary of AccessIT was incorporated in Delaware
in October 2004, and acquired certain assets and liabilities of FiberSat Global
Services LLC on November 17, 2004. ADM Cinema Coporation ("ADM Cinema"), a
wholly owned subsidiary of AccessIT, was incorporated in Delaware on December21,
2004, and on February 11, 2005 acquired substantially all the assets of the
Pavilion Theatre in Brooklyn, New York. AccessIT, AccessDM, Hollywood SW,
Managed Services, FiberSat and ADM Cinema 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 is in the business of
storing and distributing 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 provider
of information technology consulting services; its primary offering is to
provide managed network monitoring services through its global network command
center. FiberSat provides satellite-based broadband video, data and Internet
transmission and encryption services for multiple customers in the broadcast and
cable television and communications industries, and also operates an outsourced
network operations center. ADM Cinema operates the Pavilion Movie
Thaeatre/Entertainment Complex,an eight-screen movie theatre and cafe located in
Brooklyn, New York (the "Pavilion Theatre").
BASIS OF PRESENTATION
For the fiscal years ended March 31, 2004 and 2005, the Company incurred net
losses of $4,805 and $6,788 respectively, and positive and negative cash flows
from operating activities of $321 and ($3,258), respectively. In addition, the
Company has an accumulated deficit of $21,487 as of March 31, 2005. The Company
also has debt service requirements (including interest) of $2,307 for the twelve
months beginning in March 2005. Management expects that the Company will
continue to generate operating losses for the foreseeable future due to
depreciation and amortization, research and development, the continued efforts
related to the identification of acquisition targets, marketing and promotional
activities and the development of relationships with other businesses. Certain
of these costs could be reduced if working capital decreased. Based on the
Company's cash position at March 31, 2005, and expected cash flows from
operations; management believes that the Company has the ability to meet its
obligations through March 31, 2006. 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 Consolidated Financial Statements do not
reflect any adjustments which may result from the outcome of such uncertainties.
Certain reclassifications of prior period data have been made to conform to the
current presentation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
40
The Consolidated Financial Statements include the accounts of AccessIT,
AccessDM, Hollywood SW, Managed Services, FiberSat and ADM Cinema. All
intercompany transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity from the
date of purchase of three months or less to be cash equivalents. Cash
equivalents consist of money market mutual funds.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist of cash and cash equivalents to the extent these exceed
federal insurance limits and accounts receivable. Risks associated with cash and
cash equivalents are mitigated by the Company's investment policy, which limits
the Company's investing of excess cash and cash equivalents to only money market
mutual funds.
The Company places its cash with high credit quality financial institutions.
These balances, as reflected in the financial institution's records, are insured
in the U.S. by the Federal Deposit Insurance Corporation for up to $100. As of
March 31, 2005, uninsured cash balances in the U.S. aggregated $4,399 with two
financial institutions.
The Company's customer base is primarily composed of businesses throughout the
United States. For the fiscal year ended March 31, 2004, three customers
accounted for 27%, 12%, and 10% of revenues, respectively, and as of March 31,
2004 four customers accounted for 17%, 15%, 12% and 12% of accounts receivable,
respectively. For the fiscal year ended March 31, 2005, one customer accounted
for 18% of revenues, and as of March 31, 2005 three customers accounted for 13%,
12%, and 10% of accounts receivable, respectively. As of March 31, 2004 and
2005, the Company had established an allowance for uncollectable accounts
against accounts receivable of $64 and $131, respectively. The Company records a
general allowance for uncollectible accounts monthly, based on review of aged
accounts receivable.
PROPERTY AND EQUIPMENT
Property and equipment are stated at original cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the respective
assets as follows:
Computer equipment 3-5 years
Machinery and equipment 3-6 years
Furniture and fixtures 3-6 years
Leasehold improvements and assets under capital leases are being amortized over
the shorter of the lease term or the estimated useful life of the underlying
assets. Maintenance and repair costs are charged to expense as incurred. Major
renewals, betterments and additions are capitalized. Included in property and
equipment as of March 31, 2004 and 2005 was $100 of construction services for
which the Company issued Common Stock (as defined below) as consideration (See
note 12).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, which include cash
and cash equivalents, accounts receivable, accounts payable, accrued expenses
and other obligations, approximate their fair value due to the short-term
maturities of the related instruments. Based on borrowing rates currently
available to the Company for loans with similar terms, the carrying value of
notes payable and capital lease obligations approximates fair value.
41
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" as of
April 1, 2002. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and of Long-Lived Assets to be Disposed Of", and
portions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," and
amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements".
SFAS No. 144 generally conforms, among other things, impairment accounting for
assets to be disposed of, including those in discontinued operations. The
Company reviews the recoverability of its long- lived assets on a periodic basis
in order to identify business conditions, which may indicate a possible
impairment. The assessment for potential impairment is based primarily on the
Company's ability to recover the carrying value of its long-lived assets from
expected future undiscounted cash flows. If the total expected future
undiscounted cash flows is less than the carrying amount 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.
INTANGIBLE ASSETS
The Company has 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 addressed 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. Intangible assets of the
Company as of March 31, 2004 consist of customer contracts, trade names,
trademarks and covenants not to compete. These were determined to be
finite-lived intangibles assets and are being amortized over their useful lives
ranging from 2 to 10 years. In addition, during the fiscal year ended March 31,
2005, the Company acquired intangible assets related to customer contracts, a
corporate trade name, FCC broadcast licenses, and a liquor license. These were
determined to be finite-lived intangibles assets and are being amortized over
their useful lives of 5 years each. In addition the Company recorded goodwill in
connection with the acquisitions of Hollywood SW, Core, FiberSat and the
Pavilion Theatre.
REVENUE RECOGNITION
Media Services revenues generated by Hollywood SW, FiberSat and the Pavilion
Theatre are revenues generated from the following sources and are in accordance
as follows: Software 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. FiberSat revenues consist of satellite network
monitoring and maintenance fees. These fees revenues consist of monthly
recurring billings pursuant
42
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. Fibersat revenues are accounted for in
accordance with SAB 104. Additionally, the Pavilion Theatre consists of the sale
of movie theatre admissions and concession food and beverages, which are made,
either in cash or via customer credit cards at the time of the transaction.
Revenues are recognized at the time the transaction is complete, as the earnings
process has been culminated, in accordance with SAB No. 104.
Software licensing revenue is recognized when the following criteria are met:
(a) persuasive evidence of an arrangement exists, (b) delivery has occurred and
no significant obligations remain, (c) the fee is fixed or determinable and (d)
collection is determined to be probable. Significant upfront fees are received
in addition to periodic amounts upon achievement of contractual events for
licensing of the Company's products. Such amounts are deferred until the revenue
recognition criteria have been met, which typically occurs 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
vendor specific objective evidence. 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 develops
customized software appliaation the 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
amounts are classified as deferred revenue in the Consolidated Balance Sheet and
are recognized as revenue in accordance with the Company's revenue recognition
policies described above.
43
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.
In addition, revenues in the Media Services segment include FiberSat, which
consist of satellite transmission and 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, in accordance with SAB No. 104.
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 amortized periodically using the
greater of revenues during the period compared to the total estimated revenues
to be earned or on a straight-line basis over five years. The Company reviews
capitalized software costs for impairment on a periodic basis. To the extent
that the carrying amount exceeds the estimated net realizable value of the
capitalized software cost, an impairment charge is recorded. No impairment was
recorded for the fiscal years ended March 31, 2004 and 2005, respectively.
Amortization of capitalized software development costs, included in costs of
revenues, for the fiscal years ended March 31, 2004 and 2005 amounted to $118
and $369, respectively. Revenues relating to customized software development
under a contract is recognized on a percentage of completion method. As of March
31, 2005, unbilled receivables under such contracts aggregated $517.
44
INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized based upon the differences arising from the carrying amounts of the
Company's assets and liabilities for tax and financial reporting purposes using
enacted tax rates in effect for the year in which the differences are expected
to reverse. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period when the change in tax rates is
enacted. A valuation allowance is established when it is determined that it is
more likely than not that some portion of the deferred tax assets will not be
realized.
The Company has a tax net operating loss ("NOL"). A full valuation allowance has
been applied against this NOL and its other deferred tax assets.
NET LOSS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS
Computations of basic and diluted net loss per share of the Company's Class A
common stock ("Class A Common Stock") and Class B Common Stock (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 numerator is adjusted for the impact of interest expense
associated with potentially dilutive shares issuable upon conversion of
convertible notes. The Company has incurred net losses for the fiscal years
ended March 31, 2004 and 2005; 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:
MARCH 31,
2004 2005
---- ----
Stock options................................ 520,564 762,897
Underwriter warrants......................... 120,000 120,000
Shares issuable related to convertible notes. 308,225 2,175,193
Private Placement Warrants................... -- 304,375
Convertible notes warrants................... -- 560,196
ISSUANCE OF STOCK BY SUBSIDIARIES
Sales of stock by a subsidiary are accounted for in accordance with Staff
Accounting Bulletin No. 51, topic 5H, "Accounting for Sales of Stock of a
Subsidiary." At the time a subsidiary sells its stock to unrelated parties at a
price different from the Company's book value per share, the Company's share of
the subsidiary's net equity changes. If, at that time, the subsidiary is not a
newly-formed, non-operating entity, nor a research and development, start-up or
development stage company, nor is there question as to the subsidiary's ability
to continue in existence, the Company records the change in its share of the
subsidiary's net equity as a gain or loss in its Consolidated Statement of
Operations. Otherwise, the increase is reflected in "subsidiaries' equity
transactions" in the Company's Consolidated Statements of Shareholders' Equity.
45
STOCK-BASED COMPENSATION
The Company has stock based employee compensation plans, which are described
more fully in Note 8. 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 for the fiscal years ended March 31, 2004 and 2005:
MARCH 31,
---------
2004 2005
---- ----
Net loss as reported................................ $(4,805) $(6,788)
Add: Stock-based compensation expense included
in net loss......................................... 15 4
Less: Stock-based compensation expense determined
under fair value based method....................... (489) (647)
----- -----
Pro forma net loss.................................. $(5,279) $(7,431)
======= ========
Basic and diluted net loss available to common stockholders
per share:
As reported......................................... $(1.37) $(0.70)
Pro forma........................................... $(1.47) $(0.77)
The fair value of each stock option granted during
the year is estimated on the date of grant using the
Black-Scholes option pricing model with the following
assumptions:
2004 2005
---- ----
Expected life (years)..................................... 10 10
Expected volatility....................................... 110% 110%
Expected dividend yield................................... 0% 0%
Weighted average risk-free interest rate.................. 4.32% 4.24%
Weighted average fair value per share of employee options
granted during the year................................... $3.93 $7.94
RESEARCH AND DEVELOPMENT
AccessIT recorded research and development expenses, comprised mainly of
personnel costs and outside services, of $55 and $666, respectively, for the
fiscal years ended March 31, 2004 and 2005. The increase is attributable to
research and development efforts at Hollywood SW related to the development of
TDS International software application and various products including TDS, ITDS
and EMS.
ADVERTISING COSTS
The Company has incurred advertising costs of $19 and $28, respectively, during
the fiscal years ended March 31, 2004 and 2005. Advertising costs are expensed
as incurred.
46
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 and contingent 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 software revenue recognition, capitalization of software development
costs, amortization and impairment testing of intangible assets and depreciation
of fixed assets. Actual results could differ from those estimates.
RISK AND UNCERTAINTIES
The Company is subject to all of the risks inherent in business in software
development, colocation, and managed storage. These risks include, but are not
limited to, limited operating history, limited senior management resources,
rapidly changing technology business environments, the need for substantial cash
investments to fund its operations, reliance on third parties, the competitive
nature of the industry, development and maintenance of efficient information
technologies, and uncertainty regarding the protection of proprietary
intellectual properties.
NOTE 3. ACQUISITIONS
HOLLYWOOD SOFTWARE
On November 3, 2003, the Company completed the acquisition of all of the capital
stock of Hollywood SW, after amending the agreement it had entered into on July
17, 2003 (the "Hollywood SW Acquisition"). To complete the acquisition of
Hollywood SW, the Company issued collateralized promissory notes to the two
holders of all of the capital stock of Hollywood SW, each in the principal
amount of $3,625 (the "Notes"). The amount of the Notes represented the original
purchase price of $7,300 (based on the IPO price less the underwriter's
discount), less $50 that had already been paid by the Company. The Notes were
due no later than five business days after the date that the Company's
registration statement was declared effective by the Securities and Exchange
Commission.
On November 14, 2003, four business days after the registration statement was
declared effective, the Notes were exchanged for $2,500 in cash of which $50 had
already been paid, promissory notes in the aggregate principal amount of $3,000
and 400,000 unregistered shares of Class A Common Stock. For purchase accounting
purposes, the purchase price is $7,102, consisting of $2,722 of cash (including
$222 of expenses); $1,380 of Class A Common Stock (400,000 shares valued at
$3.45 per share, as determined by a valuation from an independent appraiser);
and $3,000 of promissory notes. In addition, a contingent purchase price is
payable each year for the three years following the closing if certain earnings
targets are achieved. The Company has also agreed to a one-time issuance of
additional unregistered shares to the sellers in accordance with a formula if,
during the 90 days following the applicable lock-up period, the average value of
Class A Common Stock during such 90 days declines below an average of $3.60 per
share. The results of operations of Hollywood SW have been included in the
Company's consolidated financial statements since the acquisition date.
The total purchase price of $7,102, including fees and expenses of the
acquisition, has been allocated to the net assets acquired, including tangible
and intangible assets and liabilities assumed, based upon the results of an
independent appraisal of fair value, with the excess purchase price being
allocated to goodwill. The goodwill recorded on the acquisition is not
deductible for income tax purposes. The fair value of the tangible and
intangible assets acquired and liabilities assumed has been reflected in the
Consolidated Balance Sheet as follows:
47
Tangible and intangible assets acquired:
Current assets............................................ $535
Property and equipment.................................... 25
Capitalized software cost................................. 1,350
Intangible assets......................................... 2,170
Goodwill.................................................. 5,184
-----
Total tangible and intangible assets acquired............. 9,264
Less liabilities assumed:
Current liabilities....................................... 733
Deferred tax liability................................... 1,429
-----
Total liabilities assumed................................. 2,162
-----
Total purchase price......................................$7,102
======
The intangible assets consist of customer contracts, covenants not to compete
agreements and corporate trade names. These assets are being amortized over
their estimated useful lives of 5, 5 and 10 years, respectively.
Amortization of these assets in future years is expected to be as follows:
Fiscal Year ended March 31,
2006...................................................... 422
2007...................................................... 422
2008...................................................... 422
2009...................................................... 252
2010...................................................... 12
Thereafter................................................ 43
MANAGED SERVICES
On December 22, 2003, the Company signed an agreement to purchase all of the
outstanding common stock of Managed Services (the "Managed Services
Acquisition"), and on January 9, 2004, the acquisition of Managed Services was
completed. Managed Services is a managed service provider of information
technologies; its primary product is managed network services through their
global network command center. The Company believes that the acquisition of
Managed Services will expand the existing capabilities and services of its IDCs.
The purchase price consisted of $250 in cash and 100,000 unregistered shares of
Class A Common Stock. In addition, the Company may be required to pay a
contingent purchase price for any of the three years following the closing in
which certain earnings targets are achieved; any additional payment is to be
made in the same proportionate combination of cash and unregistered shares of
Class A Common Stock as the purchase price payable at closing. The Company has
also agreed to a one-time issuance of additional unregistered shares of Class A
Common Stock to the seller up to a maximum of 20,000 shares if, in accordance
with an agreed upon formula, the trading value of the Company's Class A Common
Stock is less than $4.00 during the 90 day period at the end of the lock-up
period. Based on a valuation from an independent appraiser, the restricted stock
issued in the Managed Services Acquisition was estimated to have a fair value of
$3.45 per share.
The total purchase price of $620, including $25 of fees and expenses, was
allocated to the net assets acquired, including tangible and intangible assets,
based upon the results of an independent appraisal of Fair value, with the
excess purchase price being allocated to goodwill. The gooodwill recorded on the
acquisition is not deductible for income tax purposes. The fair value of the
tangible and intangible assets acquired has been reflected in the Consolidated
Balance Sheet as follows:
Tangible and intangible assets acquired:
Property and equipment........................ $152
Intangible assets............................. 450
Goodwill...................................... 194
---
Total tangible and intangible assets acquired. 796
Deferred tax liability........................ 176
----
Total purchase price.......................... $620
====
The intangible assets consist of customer contracts, covenants not to compete
agreements and corporate trade names. These assets are being amortized over
their estimated useful lives of 5, 5 and 10 years, respectively.
48
Amortization of these assets in future years is expected to be as follows:
Fiscal Year ended March 31,
2006...................................................... 87
2007...................................................... 87
2008...................................................... 87
2009...................................................... 66
2010...................................................... 3
Thereafter................................................ 11
BOEING DIGITAL
On March 29, 2004 the Company acquired certain assets of Boeing Digital, a
division of Boeing (the "Boeing Digital Acquisition"). These assets were
purchased to further the Company's strategy of becoming a leader in the delivery
of movies and other digital content to movie theaters. The acquired assets
consist of digital projectors, satellite dishes and other equipment installed at
28 screens within 21 theaters in the United States and at one theater in London,
England, and satellite transmission equipment located in Los Angeles,
California. The initial purchase price consisted of: $250 in cash; 53,534
unregistered shares of Class A Common Stock; and a non-interest bearing note
payable for $1,800 payable in equal installments over 4 years. In addition, the
Company has agreed to make payments totaling a maximum of $1,000 over 4 years,
representing 20% of the gross receipts generated by the acquired assets (the
"Future Revenue Share"). Additionally, at any time during the 90 day period
immediately following the first 12 months after the closing, Boeing can sell its
53,534 unregistered shares of Class A Common Stock to the Company in exchange
for $250 in cash (the "Boeing Put Option").
Based on a valuation from an independent appraiser, for purchase accounting
purposes the total purchase price is $2,010, including estimated fees and setup
costs of $155. The unregistered stock issued in the Boeing Digital Acquisition
was estimated to have a fair value of $238. Due to the Boeing Put Option, the
Class A Common Stock issued to Boeing has been reflected on the consolidated
balance sheet as redeemable shares of Class A Common Stock, until such time as
the Boeing Put Option expires or is exercised. The fair value of the assets
acquired has been reflected in the consolidated balance sheet as follows:
Property & equipment............................................ $1,645
Intangible assets............................................... 365
--------
Total $2,010
======
The intangible assets consist of customer contracts and covenants not to compete
agreements. These assets are being amortized over their estimated useful lives
of 4 and 2 years, respectively.
Amortization of these assets in future years is expected to be as follows:
Fiscal Year ended March 31,
2006............................................ 116
2007............................................ 76
2008............................................ 76
2009............................................ 4
49
FIBERSAT
On October 19, 2004, the Company and its wholly-owned subsidiary, FiberSat,
entered into an agreement to purchase substantially all of the assets and
certain specified liabilities of FiberSat Global Services, LLC ("FiberSat
Seller") (the "FiberSat Acquisition"). On November 17, 2004, the FiberSat
Acquisition was completed. 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 initial purchase price for the FiberSat Acquisition consisted of 500,000
unregistered shares of Class A Common Stock, and the Company agreed to repay
certain liabilities of FiberSat Seller on or before the closing of the FiberSat
Acquisition, with up to $500 in cash and 100,000 unregistered shares of Class A
Common Stock. The Company had the option to exchange up to 50,000 of such
100,000 shares of Class A Common Stock to increase the cash, and thereby
decrease the Class A Common Stock portion
of such repayment based on the ratio of one Class A Common Stock for each $5.00
of additional cash. The Company repaid these liabilities by paying approximately
$381 and issuing 40,000 shares of Class A Common Stock. 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 additional unregistered shares
to the sellers in accordance with a formula if, during the 90 days following the
applicable lock-up period, the average value of the Company's Class A Common
Stock during such 90 days declines below an average of $3.17 per share.
Based on a valuation from an independent appraiser, for purchase accounting
purposes the total purchase price is $2,177, including estimated transaction
costs of $ 169. The goodwill recorded on the acquisition is deductible for
income tax purpose, to the extent the Company has any taxable income in future
periods.
The fair values of assets and liabilities acquired have been reflected in the
Consolidated Balance Sheet as follows:
Current assets........................................................... $214
Property and equipment...... ....................... 2,164
Intangible assets ....................................................... 550
Goodwill ................................................................ 24
Noncurrent assets ....................................................... 16
--
Total tangible and intangible assets acquired............................ 2,968
Less: liabilities assumed:
Current liabilities...................................................... 711
Long-term liabilities.................................................... 80
--
Total Liabilities........................................................ 791
---
Total Purchase Price.................................................... $2,177
======
The intangible assets consist of FCC broadcast licenses, corporate trade name
and customer contracts. These assets are being amortized over their estimated
useful lives of 5 years each.
Amortization of these assets in future years is expected to be as follows:
Fiscal Year ended March 31,
2006............................................ 110
2007............................................ 110
2008............................................ 110
2009............................................ 110
2010............................................ 107
50
PAVILION THEATRE
On December 23, 2004, ADM Cinema entered into an asset purchase agreement with
Pritchard Square Cinema, LLC, a New York limited liability company (the
"Seller"), and Norman Adie, the Seller's managing member, to purchase
substantially all of the assets and certain liabilities of the Seller's Pavilion
Theatre (the "Pavilion Acquisition"). On February 11, 2005 the acquisition of
the Pavilion was completed. The purchase price included a cash payment of $3,300
(less $500 held in escrow pending the completion of certain construction) and a
five-year 8% promissory note for $1,700. In addition, ADM Cinema assumed the
lease covering the land, building and improvements which is classified as a
capital lease on the consolidated balance sheet. Also, in connection with
renegotiating the lease, the Company issued 40,000 unregistered shares of Class
A Common Stock to the landlord of the Pavilion Theatre, which was valued by an
independent appraiser at $132.
The Pavilion Theatre is an eight-screen movie theatre and cafe and is a
component of the Media Services segment. Continuing to operate as a fully
functional multiplex, the Pavilion Theatre has also become a showplace for the
Company to demonstrate its integrated digital cinema solutions to the movie
entertainment industry.
Based on a preliminary valuation from an independent appraiser, for purchase
accounting purposes the total purchase price is $5,248, including estimated
transaction costs of $ 106. The preliminary allocation of purchase price may be
subject to further adjustment. The goodwill recorded on the acquisition is
deductible for income tax purposes, to the extent the Company has any taxable
income in future periods.
The fair values of assets and liabilities acquired have been reflected in the
Consolidated Balance Sheet as follows:
Current assets.......................................................... $10
Property and equipment, net............................................. 6,402
Intangible assets ...................................................... 50
Goodwill ............................................................... 4,886
-----
Total tangible and intangible assets acquired........................... 11,348
Less: liabilities assumed:
Current liabilities..................................................... 52
Long-term liabilities................................................... 6,048
-----
Total Liabilities....................................................... 6,100
Total Purchase Price.................................................... $5,248
======
The intangible asset consists of a liquor license and is being amortized over an
estimated useful life of 5 years.
Amortization of this asset in future years is expected to be as follows:
Fiscal year ended March 31,
2006............................................ 10
2007............................................ 10
2008............................................ 10
2009............................................ 10
2010............................................ 9
51
The following pro-forma information shows the results of operations for the
years ended March 31, 2005 and 2004, as though the acquisitions of FiberSat and
the Pavilion had occurred at the beginning of each respective fiscal year. In
addition, the fiscal 2004 pro forma financial information reflects the results
of operations of Hollywood SW as if that acquisition occurred at the beginning
of that fiscal year. The pro forma information reflects adjustments for (i)
depreciation and amortization of acquired tangible and intangible assets from
the acquisitions of Hollywood SW, FiberSat and the Pavilion (ii) interest
expense for the 8% notes payable in the amount of $3 million issued to the two
sellers of Hollywood SW in November 2003, the 7% convertible notes and warrants
in the amount of $7.6 million issued in February 2005, and the February 2005
issuance of the 8% note for $1.7 million issued to the seller in the Pavilion
acquisition, (iii) the full year impact of the issuance of 400,000 shares for
Hollywood SW in fiscal 2004 and 540,000 and 40,000 for FiberSat and Pavilion
acquisitions in fiscal 2004 and 2005, and (iv) additional non-cash interest
associated with the beneficial conversion feature and warrant accretion related
to the 7% convertible notes issued in February 2005. The pro forma adjustments
related to the acquisition of the Pavilion are based on a preliminary purchase
price allocation. Differences between the preliminary and final purchase price
allocations could have an impact on the pro forma financial information
presented. The pro forma financial information below is presented for
illustrative purposes only and is not necessarily indicative of the operating
results that would have been achieved had the acquisition been completed as of
the dates indicated above or the results that may be obtained in the future.
MARCH 31,
---------
2004 2005
(unaudited)
Revenues..................................... 16,286 17,645
Net loss..................................... 8,620 8,463
Basic and diluted loss per share............ ($1.85) ($0.84)
NOTE 4. CONSOLIDATED BALANCE SHEET COMPONENTS
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following as of March 31, 2004 and
2005:
2004 2005
Bank balances..................................... $1,248 $4,779
52
Money market fund................................. 1,082 --
----- --
Total cash and cash equivalents................... $2,330 $4,779
====== ======
As of March 31, 2004 and 2005, cost approximated market value of cash and cash
equivalents.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following as of March
31, 2004 and 2005:
2004 2005
---- ----
Insurance......................................... $81 $215
Deposits.......................................... 11 10
Deferred costs, current........................... 97 321
Concession - inventory............................ -- 5
Other............................................. 107 211
--- ---
$296 $762
==== ====
PROPERTY AND EQUIPMENT, NET
Property and equipment, net was comprised of the following as of March 31, 2004
and 2005:
2004 2005
---- ----
Land.............................................. $-- $1,500
Building and improvements......................... -- 4,600
Leasehold improvements............................ 3,911 4,158
Computer equipment and software................... 2,945 2,642
Machinery and equipment........................... 2,591 5,254
Furniture and fixtures............................ 306 474
----- -----
9,753 18,628
Less - Accumulated depreciation...................(3,888) (4,367)
------- -------
Total property and equipment, net.................$5,865 $14,261
===== =======
53
Land and building and improvements represent the Company's capital lease of the
Pavilion Theater. Leasehold improvements consist primarily of costs incurred in
the construction of the Company's Jersey City, New Jersey and Brooklyn, New York
IDCs, and from the other IDC acquisitions. Included in leasehold improvements as
of March 31, 2004 and 2005 was $100 of construction services for which the
Company issued Common Stock as consideration. Computer equipment and software
consists primarily of costs incurred for equipment and related software used in
the Company's Managed Storage Services business and from the Hollywood SW,
Managed Services and Boeing Digital acquisitions (See Note 3). Machinery and
Equipment consists primarily of costs incurred for equipment used at the IDC's,
and from the Boeing Digital and FiberSat acquisitions. For the years ended March
31, 2004 and 2005, depreciation expense amounted to $1.6 and $2.1 million,
respectively.
INTANGIBLE ASSETS, NET
Intangible assets, net was comprised of the following as of March 31, 2004 and
2005:
2004 2005
Trademarks...................................... $45 $68
Corporate trade names........................... 150 180
Customer contracts.............................. 3,691 4,236
Covenants not to compete........................ 1,852 1,909
----- -----
5,738 6,393
Less - accumulated amortization.................(1,538) (3,056)
------- -------
Total intangible assets, net.................... $4,200 $3,337
====== ======
For the years ended March 31, 2004 and 2005 amortization expense amounted to
$1.1 and $1.5 million, respectively.
CAPITALIZED SOFTWARE COST, NET
Capitalized software costs, net was comprised of the following as of March 31,
2004 and 2005:
2004 2005
Capitalized software............................ $1,548 $2,109
Less - accumulated amortization................. (118) (487)
----- -----
Total capitalized software costs, net........... $1,430 $1,622
====== ======
For the years ended March 31, 2004 and 2005, amortization of software costs
amounted to $118 and $369, respectively.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following as of March 31,
2004 and 2005:
2004 2005
Accounts payable.................................. $541 $1,118
Accrued compensation and benefits................. 178 392
Accrued taxes payable............................. 162 9
Interest payable.................................. 97 134
Other............................................. 393 762
--- ---
Total accounts payable and accrued expenses.......$1,371 $2,415
====== ======
54
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity" SFAS
150, which became effective July 1, 2003, which establishes standards for the
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. There was no impact on AccesIT
financial statements due to the adoption of this standard.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment." This statement revises the original guidance contained in SFAS No. 123
and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees, and its related implementation guidance. Under
SFAS No. 123 (revised 2004), a publicly entity such as AccessIT will be required
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award (with limited
exceptions) and recognize such cost over the period during which an employee is
required to provide service in exchange for the reward (usually the vesting
period). For stock options and similar instruments, grant-date fair value will
be estimated using option-pricing models adjusted for unique characteristics of
instruments (unless observable market prices for the same or similar instruments
are available). For small business issuers on a calendar reporting year this is
effective as of the beginning of the first interim or annual reporting period
that begins after December 15, 2005. The effective date for AccessIT to adopt
this standard due to its fiscal reporting first interim or annual reporting
period is April 1, 2006.
Upon adoption of this standard, the actual costs of our stock-based payment
plans will be based on grant-date fair value, which has not yet been determined.
NOTE 6. 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
shares of Class A Common Stock (the "5-Year Notes Warrants"). 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 fiscal year ended March
31, 2005. As of March 31, 2004, 5-Year Notes Warrants to purchase 440,500 shares
of Class A Common Stock were issued.
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 fiscal year ended March 31, 2005, the Company repaid
principal of $512 on the HS Notes.
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 shares of Class A Common Stock
at an exchange rate of $3.57 per share (the "Share Option") or (2) Subordinated
Convertible Promissory Notes ("Convertible Notes"), which are convertible into
shares of Class A Common Stock 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 shares of Class A Common Stock. 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 March 31, 2005, convertible into a maximum of 307,871
shares of its Class A Common Stock (1) at any time up to the maturity date at
each holder's option or (2) automatically on the date when the average closing
price on the American Stock Exchange of the Class A Common Stock 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.
55
In March 2004, in connection with the Boeing Digital Acquisition, 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 Consolidated Statement of Operations. On March 31, 2005,
the value of the note, (including imputed interest) is $1,531 and is included in
notes payable in the Consolidated Balance Sheet. For the fiscal year ended March
31, 2005, non-cash interest expense resulting from this note was $164.
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.
On February 10, 2005, the Company issued 7% convertible debentures (the
"Convertible Debentures") and warrants ("the Convertible Debentures Warrants")
to a group of institutional investors for aggregate proceeds of $7.6 million.
The Convertible Debentures have a four year term, with one third of the
unconverted principal balance repayable in twelve equal monthly installments
beginning three years after the closing. The remaining unconverted principal
balance is repayable at maturity. The Company may pay the interest in cash or,
if certain conditions are met, by issuing shares of its Class A Common Stock. If
the Company is eligible to issue Class A Common Stock to pay interest, the
number of shares issuable is based on 93% of the 5-day average closing price
preceding the interest due date. The Convertible Debentures are initially
convertible into 1,867,322 shares Class A Common Stock, based upon a conversion
price of $4.07 per share subject to adjustments from time to time. Upon the
redemption of the Convertible Debentures, the Company may issue additional
warrants exercisable for Class A Common Stock. Additionally, the Company issued
to the investors Convertible Debentures Warrants to purchase up to 560,197
shares of Class A Common Stock, at an initial exercise price of $4.44 per share,
subject to adjustments from time to time. The Convertible Debentures Warrants
are exercisable beginning on September 9, 2005 until 5 years thereafter, and
have been valued at $1.1 million which is accounted for as a debt issuance
discount. As a result, there is a beneficial conversion feature and the company
recognized a $605 charge, which is included in non-cash interest expense. The
offering of the Convertible Debentures and the Convertible Debentures Warrants
was exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), under Section 4(2) of the Securities Act and
Rule 506 promulgated thereunder.
The Company has agreed to register, among other things, the Class A Common Stock
underlying the Convertible Debentures and Convertible Debentures Warrants with
the SEC within 30 days from the closing. If, among other things, the
registration statement is not filed within 30 days or is not declared effective
within 90 days (120 days in the event of an SEC review), then cash delay
payments equal to 1% of the offering proceeds per month will apply. The Company
filed such a registration statement on March 11, 2005 and it was declared
effective by the SEC on March 21, 2005.
During the fiscal year ended March 31, 2005, the Company made scheduled
principal payments of $12 on the 5-Year Notes.
In connection with the acquisition of the Pavilion Theatre, on February 10, 2005
we issued to the seller a 5-year, 8% note payable for $1,700. Principal payments
are to be made quarterly for five years in the amount of $42, with a ballon
repayment of the remainder after five years.
The aggregate principal repayments on the Company's notes payable are scheduled
to be as follows:
56
Fiscal Year ending March 31,
2006.............................................$1,137
2007............................................. 1,449
2008............................................. 1,795
2009............................................. 9,368
2010............................................. 1,161
NOTE 7. 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 shares of Class A Common Stock.
Total accretion for the Series A Preferred Stock to its estimated redemption
value was $1,121 during the fiscal year ended March 31, 2004, of which $990
related to the accretion to the estimated redemption amount. In addition, $131
related to the accretion of the beneficial conversion feature, respectively.
Accretion for the Series B Preferred Stock to its redemption value was $467 for
the fiscal year ended March 31, 2004.
In September 2003, the Company entered into an agreement (the "Exchange
Agreement") with the holder of the Series A and Series B Preferred Stock to: (1)
convert all 8,202,929 shares of Series A and Series B Preferred Stock held by it
into 1,640,585 shares of Class A Common Stock; (2) exchange the 2001 Warrant,
Contingent Warrant A and Contingent Warrant C for 320,000 shares of Class A
Common Stock; (3) exercise Contingent Warrant B to purchase 143,216 shares of
Class A Common Stock on a cashless-exercise basis; and (4) accept Class A Stock
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
shares of Class A Common Stock as consideration for the conversion of all
accumulated dividends on the Series A and B Preferred Stock. As of March 31,
2004 and 2005, there is no Series A Preferred Stock or Series B Preferred Stock
issued or outstanding.
57
NOTE 8. STOCKHOLDERS' EQUITY
CAPITAL STOCK
In August 2004, the Company's Board of Directors authorized the repurchase of up
to 100,000 shares of Class A Common Stock. The shares will be purchased at
prevailing prices from time-to-time in the open market depending on market
conditions and other factors During the year ended March 31, 2005, the Company
repurchased 51,440 Class A shares for a total purchase price of $172, including
fees, which has been recorded as Treasury Stock. As of March 31, 2005, an
additional 48,560 shares of Class A Common Stock may be repurchased.
In November 2004, the Company issued 540,000 unregistered shares of Class A
Common Stock in connection with the FiberSat Acquisition.
In February 2005, the Company issued 40,000 unregistered shares of Class A
Common Stock in connection with the Pavilion Acquisition.
In October 2004, the Company entered into a stock purchase agreement with
investors to issue and sell 282,776 unregistered shares of Class A Common Stock
at $3.89 per share to the investors for gross proceeds of $1,100 (the "October
2004 Private Placement"). 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 were used for the FiberSat Acquisition and for working
capital. The investors exercised the piggyback registration rights and the
Company registered the resale of all of the 282,776 shares of Class A Common
Stock on a registration statement which registration statement was declared
effective by the SEC on March 21, 2005.
In June 2004, the Company issued in a private placement (the "June 2004 Private
Placement") 1,217,500 unregistered shares of Class A Common Stock at a sale
price of $4.00 per share. 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
June 2004 Private Placement, warrants to purchase a total of 304,375 shares of
Class A Common Stock at an exercise price of $4.80 per share, exercisable upon
receipt (the "June 2004 Private Placement Warrants"). The Company agreed to
register the Class A Common Stock issued and to be issued upon exercising of the
June 2004 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 shares of Class A Common Stock. This transaction was consummated in
May 2004 and as a result, AccessIT holds 100% of AccessDM's common stock.
58
STOCK OPTION PLAN
In June 2000, the Company adopted the 2000 Stock Option Plan, as amended (the
"Plan") under which incentive and nonstatutory stock options may be granted to
employees, outside directors, and consultants. The purpose of the Plan is to
enable the Company to attract, retain and motivate employees, directors,
advisors and consultants. The Company initially reserved a total of 400,000
shares of Class A Common Stock of the Company for issuance upon the exercise of
options granted in accordance with the Plan. In September 2003, the amount of
stock options available for grant under the Plan was increased to 600,000. At
the annual stockholders' meeting held in October 2004, the stockholders voted to
approve an increase in the number of AccessIT stock options available for grant
from 600,000 shares of Class A Common Stock to 850,000 shares of Class A Common
Stock .Options granted under the Plan expire 10 years following the date of
grant (five years for stockholders who own greater than 10% of the outstanding
stock) and are subject to limitations on transfer. Options granted under the
Plan vest generally over three-year periods. The Plan is administered by the
Company's Board of Directors.
The Plan provides for the granting of incentive stock options at not less than
100% of the fair value of the underlying stock at the grant date. Option grants
under the Plan are subject to various vesting provisions, all of which are
contingent upon the continuous service of the optionee. Options granted to
stockholders who own greater than 10% of the outstanding stock must be issued at
prices not less than 110% of the trading value of the stock on the date of grant
as determined by the Company's Board of Directors. The exercise price and
vesting period of nonstatutory options is at the discretion of the Company's
Board of Directors. Upon a change of control, all shares granted under the Plan
shall immediately vest.
The following table summarizes the activity of the Plan:
Options Outstanding
------------------- Weighted-
Shares Average
Available Exercise
For Number of Price Per
GRANT SHARES SHARE
Balances, March 31, 2003.......... 93,603 306,397 $6.90
Increase in authorized options.... 200,000 -- --
Options granted...................(214,167) 214,167 $5.01
--------- ------- -----
Balances, March 31, 2004.......... 79,436 520,564 $6.12
------ ------- -----
Increase in authorized options.... 250,000 -- --
Options forfeited................. 9,334 (9,334) $5.27
Options granted...................(251,667) 251,667 $4.21
--------- ------- -----
Balances, March 31, 2005.......... 87,103 762,897 $5.50
====== ======= =====
59
The following table summarizes information about stock options outstanding as of
March 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Weighted-
Average Weighted- Number Weighted-
Number Remaining Average of Average
of Contractual Exercise Shares Exercise
Exercise Prices SHARES LIFE PRICE EXERCISABLE PRICE
$2.50 50,000 7.72 $2.50 33,333 $2.50
$3.60 139,000 9.79 $3.60 -- $3.60
$4.81 20,000 9.92 $4.81 -- $4.81
$5.00 356,897 8.52 $5.00 142,231 $5.00
$5.05 25,000 8.71 $5.05 8,333 $5.05
$7.50 117,400 5.63 $7.50 110,400 $7.50
$12.50 54,600 5.58 $12.50 54,600 $12.50
------- ---- ------ ------- ------
762,897 5.76 $5.50 348,897 $6.73
======= ==== ====== ======= ======
In May 2003, AccessDM adopted the 2003 Stock Option Plan (the "AccessDM Plan")
under which incentive and nonstatutory stock options may be granted to
employees, outside directors, and consultants. The purpose of the AccessDM Plan
is to enable AccessDM to attract, retain and motivate employees, directors,
advisors and consultants. AccessDM reserved a total of 2,000,000 shares of
AccessDM's common stock for issuance upon the exercise of options granted in
accordance with the AccessDM Plan. During the fiscal year ended March 31, 2004
and 2005, AccessDM granted stock options to purchase 1,000,000 shares and 5,000
shares, respectively, of its common stock to employees of AccessDM. Options
granted under the AccessDM Plan expire 10 years following the date of grant
(five years for stockholders who own greater than 10% of the outstanding stock)
and are subject to limitations on transfer. Options granted under the AccessDM
Plan vest generally over three-year periods. The AccessDM Plan is administered
by AccessDM's Board of Directors.
The AccessDM Plan provides for the granting of incentive stock options at not
less than 100% of the fair value of the underlying stock at the grant date.
Option grants under the AccessDM Plan are subject to various vesting provisions,
all of which are contingent upon the continuous service of the optionee. Options
granted to stockholders who own greater than 10% of the outstanding stock must
be issued at prices not less than 110% of the trading value of the stock on the
date of grant as determined by the AccessDM's Board of Directors. The exercise
price of such options range from $0.20 to $0.25 and have a weighted average
remaining contractual life of 8.42 years.
NON-EMPLOYEE STOCK-BASED COMPENSATION
The Company uses the fair value method to value options granted to
non-employees. In connection with its grant of options to non-employees, the
Company has recorded deferred stock-based compensation of $4 and $0 for the
fiscal years ended March 31, 2004 and 2005, respectively. The Company has
amortized $15 and $4 for the fiscal years ended March 31, 2004 and 2005,
respectively, to stock-based compensation expense on an accelerated basis.
The Company's calculations for non-employee grants were made using the
Black-Scholes option pricing model with the following weighted average
assumptions:
FOR THE FISCAL YEARS ENDED
MARCH 31,
2004 2005
Dividend yield.................................. 0% 0%
Expected volatility............................. 110% 110%
Risk-free interest rate.........................5.91% 5.94%
Expected life (in years)........................ 10 10
60
WARRANTS
In connection with the issuance of the 5-Year Notes (see Note 6), the Company
issued 5-Year Notes Warrants to the holders of the 5-Year Notes. During the
fiscal year ended March 31, 2004, the Company issued 5-Year Notes Warrants to
purchase 123,000 shares of Class A Common Stock 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. In total, 5-Year Notes Warrants to
purchase 440,500 shares of Class A Common Stock were issued and were ascribed an
estimated fair value of $2,202, which was recognized as issuance cost and
therefore was charged against the carrying value of the related 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 6), and the
remaining $1,421 aggregate amount of underlying 5-Year Notes Warrants was
amortized to non-cash interest expense. During the fiscal years ended March 31,
2004, and 2005 a total of $402 and $17, 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 June 2004 Private Placement, the Company issued to the
investors and to the investment firm in the June 2004 Private Placement,
Warrants to purchase 304,375 shares of Class A Common Stock at an exercise price
of $4.80 per share. The June 2004 Private Placement Warrants are exercisable
from the date of issuance and for a period of five years thereafter. However,
the June 2004 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 the June 2004 Private
Placement Warrant to purchase one Class A Common Stock, provided, that (i) a
registration statement with the SEC is then in effect as to such Class A Common
Stock 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 Common Stock have closed at a price
of $9.20 per share or higher. The Company agreed to register the Class A Common
Stock issued and to be issued upon exercising of the June 2004 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 June 2004 Private Placement Warrants, the fair value of the June 2004
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 June 2004 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 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 Consolidated Statement of Operations.
61
In February 2005, the Company issued the Convertible Debenture Warrants to
purchase 560,197 shares of Class A Common Stock. The Convertible Debenture
Warrants have an initial exercise price of $4.44 per share, and are exercisable
beginning on September 9, 2005 until 5 years thereafter. Based on a valuation
from an independent appraiser, the Convertible Debenture Warrants were assigned
an estimated fair value of $1,109, which is included in additional paid-in
capital on the Consolidated Balance Sheet and will be amortized to Notes Payable
over the term of the warrants.
NOTE 9. COMMITMENTS AND CONTINGENCIES
On July 2, 2004, we received notice that certain creditors of one of our data
center customers named NorVergence filed an involuntary bankruptcy petition
against NorVergence. On July 14, 2004, NorVergence 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. We also
have a first security interest in NorVergence accounts receivable. As of the
bankruptcy date, the Company had accounts receivable of $121, representing
approximately 2 months of service charges, recorded on the Consolidated Balance
Sheet related to this customer. On January 26, 2005 the bankruptcy court
approved a motion for the trustee to pay the Company $121, for the past due
accounts receivable, and on February 25, 2005, the Company was paid this amount.
In addition, the Company had $499 of unbilled revenue related to this customer.
The Company has provided an allowance for $499 against the unbilled revenue,
which is shown in the provision for doubtful accounts in the Consolidated
Statements of Operations. Also, the Company has a first security interest in the
customer's accounts receivable. The Company has been granted the right to pursue
collection of the customer accounts receivable. Any amounts collected will be
retained by the Company in settlement of its claim against the customer accounts
receivable.
In March 2004, the Company acquired certain digital cinema - related assets from
the Boeing Company. The purchase price for the assets included 53,534
unregistered shares of Class A Common StockShares. At any time during the 90 day
period beginning March 29, 2005, Boeing can sell its 53,534 unregistered shares
of Class A Common Stock to the Company in exchange for $250 in cash.
LEASES
The Company leases its IDCs and corporate office under noncancelable operating
lease agreements expiring through 2015. The IDCs lease agreements provide for
base rental rates which increase at defined intervals during the term of the
lease. The Company accounts for rent abatements and increasing base rentals
using the straight-line method over the life of the lease. The difference
between the straight-line expense and the cash payment is recorded as deferred
rent expense.
The Company leases certain equipment for use in its IDCs and corporate
headquarters under noncancelable capital lease agreements that expire through
2006.
Minimum future operating and capital lease payments as of March 31, 2005 are
summarized as follows:
Capital Operating
LEASES LEASES
Fiscal Year ending March 31,
2006.............................................. $1,563 $2,383
2007.............................................. 1,137 2,293
2008.............................................. 1,128 2,209
2009.............................................. 1,128 2,238
2010.............................................. 1,128 1,792
Thereafter........................................ 7,997 4,320
------- -------
Total minimum lease payments......................$14,081 $15,235
------- =======
Less amount representing interest................. 7,591
-------
Present value of net minimum lease payments, including
current maturities of $432........................ $6,490
=======
62
Total rent expense was approximately $2,461 and $2,192 for the fiscal years
ended March 31, 2004 and 2005, respectively.
Assets recorded under capitalized lease agreements included in property and
equipment consists of the following:
MARCH 31,
---------
2004 2005
---- ----
Land.......................................... $ -- $1,500
Building...................................... -- 4,600
Computer equipment............................ 369 70
Machinery and equioment....................... 413 1,062
---- -----
782 7,232
---- ------
Less: Accumulated amortization................ (459) (691)
Net assets under capital lease................ $323 $6,541
===== =======
NOTE 10. SUPPLEMENTAL CASH FLOW DISCLOSURE
MARCH 31,
---------
2004 2005
---- ----
Interest paid................................ $513 $556
Assets acquired under capital leases......... 31 $6,542
Accretion on mandatorily redeemable
convertible preferred stock.................. $1,588 $--
Notes converted/exchange for Class A
common stock................................. $2,526 $--
Issuance of notes for the following
acquisitions:
Hollywood Software, Inc...................... $3,000 $--
Boeing Digital .............................. $1,366 $--
Pavilion Theatre (and working capital)....... $-- $9,300
NOTE 11. 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, AccessDM and FiberSat. 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. FiberSat is in the business
of providing satellite-based broadband video, data and Internet transmission and
encryption services for multiple customers in the broadcast and cable television
and communications industries, and also operates
63
an outsourced networks operations center. Prior to November 3, 2003, the Company
operated only in the Data Center Services segment. All of the Company's revenues
were generated inside the United States.
Information related to the segments of the Company and its subsidiaries is
detailed below:
DATA
MEDIA CENTER TOTAL
SERVICES SERVICES CORPORATE CONSOLIDATED
FOR THE FISCAL YEAR ENDED MARCH 31,
2004:
Total income (loss) from
operations...................... $414 $(124) $(2,795) $(2,505)
Depreciation and 207 2,394 91 2,692
Amortization....................
Operating income (loss) before
interest, taxes, depreciation and
amortization..................... 621 2,270 (2,704) 187
FOR THE FISCAL YEAR ENDED MARCH 31,
2005:
Total (loss) from operations..... $(1,961) $(156) $(3,583) $(5,700)
Depreciation and
Amortization..................... 1,715 1,807 101 3,623
Operating income (loss) before
interest, taxes, depreciation and
amortization..................... (246) 1,651 (3,482) (2,077)
AS OF MARCH 31,2005:
Total Assets..................... $27,029 $5,302 $5,446 $37,777
AS OF MARCH 31,2004:
Total Assets..................... $12,174 $6,777 $2,224 $21,175
NOTE 12. RELATED PARTY TRANSACTIONS
As of March 31, 2004 and 2005, the Company had principal amounts of $1,400 and
$3,891, respectively, in notes payable to related parties, including officers of
the Company. During the fiscal year ended March 31, 2004 and 2005, there were $0
and $512, respectively, of principal repayments for these notes payable.
The Company granted to two executives 400,000 shares of Class A Common Stock in
April 2000, upon formation of AccessColo, Inc. and in connection with their
employment and status as co-founders. At the time of their receipt of such
shares, we were a subsidiary of Fibertech & Wireless, Inc. In July 2003, one of
the executives left our employ and also resigned from our Board of Directors.
In connection with the execution of one of our long-term real property leases,
two executives posted a letter of credit in the aggregate amount of $525 in June
2000. This letter of credit was reduced by one-third in each of the three
successive years and terminated in June 2003. We reimbursed such two executives
for the issuance costs of approximately $10,000 for the letter of credit.
64
Two of our directors, are directors of MidMark, which previously held all of our
outstanding Series A and Series B preferred stock and related contingent
warrants. In connection with its purchase of shares of our Series A and Series B
preferred stock, we paid MidMark a $75 investment banking fee. In September
2003, we entered into an exchange agreement with MidMark, under which we agreed
to issue 2,207,976 additional shares of Class A Common Stock to MidMark in
exchange for all of our outstanding shares of Series A and Series B preferred
stock, including accrued dividends thereon, and through the exercise and
exchange of certain warrants. Upon the IPO, MidMark (i) converted all 8,202,929
shares of its Series A and Series B preferred stock into 1,640,585 shares of
Class A common stock; (ii) exchanged warrants that were exercisable, subject to
certain future conditions, for up to 951,041 shares of Class A Common Stock, for
320,000 shares of Class A Common Stock; (iii) exercised a warrant exercisable
for up to 144,663 shares of Class A Common Stock (143,216 shares on a
cashless-exercise basis); and (iv) accepted 104,175 shares of Class A Common
Stock as payment of all accrued dividends on shares of Series A and Series B
preferred stock held by such stockholder. The number of shares of Class A Common
Stock issued as payment of accrued dividends was calculated at the offering
price of $5.00. Additionally, MidMark also purchased $333 of one-year notes,
which was repaid in April 2002, and was issued 6,902 of the one-year notes
warrants. Each of these directors have been granted options to purchase 5,000
shares of our Class A Common Stock. We paid MidMark a management fee of $50 per
year until November 2003.
On March 24, 2004, pursuant to the Exchange Offer, we exchanged $2.5 million and
$1.7 million aggregate principal amount of five-year promissory notes for shares
of Class A Common Stock and for longer term 6% convertible notes, respectively.
We issued 707,477 unregistered shares of Class A Common Stock and $1.7 aggregate
principal amount of convertible notes convertible into a maximum of 308,225
shares of Class A Common Stock (i) at any time up to the maturity date at each
holder's option or (ii) automatically on the date when the average closing price
on the American Stock Exchange of the Class A Common Stock for 30 consecutive
trading days has been equal to or greater than $12.00.
Two executives of the Company invested $250, and $125, respectively, in our
offering of one-year 8% notes and received warrants to purchase 4,601 and 2,301
shares, respectively, of Class A Common Stock at $0.05 per share. These notes
were repaid prior to March 31, 2002. Both executives also, invested $250 and
$125, respectively, in our offering of five-year 8% promissory notes and
received warrants to purchase 25,000 and 12,500 shares, respectively, of Class A
Common Stock at $0.05 per share. In September 2003, all of the warrants that
were attached to our one-year and five-year promissory notes held by both
executives were exercised. In March 2004, both executives participated in the
Exchange Offer and exchanged their 5-year notes and accrued interest totaling
$382 for Convertible Notes, convertible into 67,713 shares of Class A Common
Stock. As of March 31, 2004 and 2005, the principal due to these executive
officers included in notes payable was $382.
One of our former directors is a partner in the law firm of Kirkpatrick &
Lockhart LLP, which provided legal services to us, including handling legal
matters related to the IPO. For the fiscal years ended March 31, 2005 and March
31, 2004, we purchased approximately $39 and $639, respectively, of legal
services from this firm. Our former director was granted options to purchase
4,000 shares of Class A Common Stock.
65
One of our directors is the general partner of CMNY Capital II, L.P., which
holds 157,927 shares of Class A Common Stock, and a director of Sterling/Carl
Marks Capital, Inc., which holds 51,025 shares of Class A Common Stock. CMNY
Capital II, L.P. also invested $1 million in our offering of one-year promissory
notes, which was repaid in March 2002, and invested $1 million in our offering
of five-year promissory notes. The warrants attached to such one-year and
five-year notes were exercised in August 2003 and are included in the share
numbers above. The Ddirector has also been granted options to purchase 9,000
shares of Class A Common Stock. In March 2004 CMNY Capital II, LP participated
in the Exchange Offer and exchanged its five-year promissory notes and accrued
interest totaling $1.0 million for Convertible Notes, convertible into 180,569
shares of Class A Common Stock. As of March 31, 2004 and 2005, the principal due
to CMNY Capital II, LP included in notes payable was $1.0 million in each of
those years, respectively.
A member of our board of advisors is the father of one of our founders and
executive officers, and is a partner in an entity that has performed real estate
services for us. The member of our board of advisors also has been granted
options to purchase 41,025 shares of Class A Common Stock at a weighted average
exercise price of $6.83 per share.
A member of our board of advisors is the President of John O'Hara Contracting,
Inc., which performs construction and other work at our IDCs. Also, the member
of our board of advisors has invested $50 in our five-year notes, and holds
5,000 five-year note attached warrants. This contractor has been paid $10 and $0
for the fiscal years ended March 31, 2004 and 2005, respectively. John O'Hara
Contracting, Inc. also, owns 8,000 shares of Class A Common Stock, issued as
partial consideration for work performed during the fiscal year ended March 31,
2001. In September 2003, the member of our board of advisor exercised the
five-year warrants. In addition, in March 2004, the member of our board of
advisors participated in the Exchange Offer and exchanged his 5 year notes and
accrued interest totaling $51 for 14,264 shares of Class A Common Stock.
One of the members of our board of advisors is a partner in an architectural
services firm, Herbst Musciano, which has performed work at our IDCs. His firm
was paid $1 and $0 for the fiscal years ended March 31, 2004, and March 31,
2005, respectively. In addition, the member of our board of advisors holds
options to purchase 600 shares of our Class A Common Stock.
In January 2003, the board of directors approved the purchase of two separate
ten-year, term life insurance policies on the life of one of its executive. Each
policy carries a death benefit of $5 million, and we are the beneficiary of each
policy. Under one of the policies, however, the proceeds will be used to
repurchase, after reimbursement of all premiums paid by us some, or all of the
shares of our capital stock held by the estate of A. Dale Mayo,our President and
Chief Executive Officer, at the then-determined fair market value.
In connection with the Hollywood SW Acquisition, we purchased all of the
outstanding capital stock of Hollywood SW from two of its security holders, on
November 3, 2003. The two security holders have continued as executive officers
of Hollywood SW under new employment agreements and have received an aggregate
of 400,000 unregistered shares of our Class A Common Stock, less 40,444
unregistered shares of Class A Common Stock that were issued to certain
optionees of Hollywood SW.
Hollywood SW and Hollywood Media Center, LLC, a limited liability company that
is 95% owned by David Gajda, Senior Vice President of International Marketing,
one of the sellers of Hollywood SW, entered into a Commercial Property Lease,
dated January 1, 2000, for 2,115 square feet of office space. We have assumed
Hollywood SW's obligations under this lease pursuant
66
to the acquisition, including the monthly rental payments of $2. The lease is
currently a month-to-month tenancy with the same monthly rent. On May 1, 2004 an
additional 933 square feet were rented on a month-to-month basis for monthly
additional rental payments of $1.
In connection with one of our executive's employment arrangement with AccessDM,
we paid a finder's fee of $25 during the fiscal year ended March 2004, in
connection with his efforts related to the Hollywood SW Acquisition.
We entered into a consulting agreement with a former employee of the Company,
one of our co-founders and directors, following the termination of his
employment with us as of July 5, 2003. Under the terms of the agreement, the
former employee agreed to provide consulting services to us in connection with
the IPO and our acquisition of Hollywood SW, for which we paid him $10 per month
(plus reasonable out-of-pocket expenses) for the period beginning on July 5,
2003 through September 30, 2003. We also paid the former employee $20 in
November 2003 in connection with the completion of the IPO. After September 30,
2003, we may, in our sole discretion, retain the former employee services for
future projects on mutually agreed to terms. The former employee has agreed that
the term of his confidentiality, non-solicitation and non-compete agreement,
which he entered into as of April 10, 2000, remained in effect through July 4,
2004.
In connection with the Managed Services Acquisition, we purchased all of the
outstanding capital stock of Managed Services from its sole security holder, on
January 9, 2004. The sole security holder continued as an executive officer of
Managed Services under a new employment agreement and as consideration for the
sale of Managed Services capital stock, received $250, and 100,000 unregistered
shares of Class A Common Stock.
In connection with the FiberSat Acquisition, we purchased substantially all of
the assets and certain specified liabilities of FiberSat Global Services, LLC
from its members, on November 17, 2004. One of the members has continued as an
executive officer of FiberSat under a new employment agreement and as
consideration for the sale of FiberSat capital stock has received 35,000
unregistered shares of Class A Common Stock. Also, we agreed to pay this
executive and annual base salary of $175 which shall be increased five percent
annually, plus a bonus, if and as determined in the sole discretion of
FiberSat's board of directors.
NOTE 13. INCOME TAXES
The benefit from income taxes for the years ended March 31, 2004 and 2005
consisted of the following:
2004 2005
---- ----
Current.........................................$127 $ -
Deferred........................................ 85 311
--- ---
Total...........................................$212 $311
==== ====
67
Net deferred tax assets / (liabilities) consist of the following as of March 31,
2004 and 2005:
2004 2005
---- ----
Deferred tax assets
Net operating loss carryforwards..................$3,082 $5,689
Depreciation and Amortization..................... 1,100 854
Deferred rent expense............................. 381 435
Stock based compensation.......................... 208 201
Revenue deferral.................................. 347 115
Other............................................. 71 129
----- -----
Total deferred tax assets......................... 5,189 7,423
----- -----
Deferred tax liabilities
Intangibles....................................... 1,720 1,497
----- -----
Total deferred tax liabilities.................... 1,720 1,497
----- -----
Net deferred tax assets before valuation
allowance........................................ 3,469 5,926
Valuation allowance............................. (4,989) (7,136)
------- -------
Net deferred tax assets / (liabilities)......... (1,520) $(1,210)
======= ========
The Company has provided a valuation allowance for either all or most of its
deferred tax assets since realization of future benefits from deductible
temporary differences and net operating loss carryovers cannot be sufficiently
assured at March 31, 2004 or March 31, 2005. The change in the valuation
allowance in the current year is approximately $2,050.
As of March 31, 2005, the Company has federal and state net operating loss
carryforwards of approximately $13,300 available to reduce future taxable
income. The federal net operating loss carryforwards will begin to expire in
2020. Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may result in a limitation on the amount of
net operating loss carryforwards that can be used in future years. Depending on
a variety of factors this limitation, if applicable, could cause a portion
and/or all of these net operating losses to expire before utilization occurs.
The differences between the United States federal statutory tax rate and the
Company's effective tax rate are as follows as of fiscal year ended March 31,
2004 and March 31, 2005:
2004 2005
---- ----
Tax benefit at the U.S. Statutory Federal Rate..... (34.0%) (34.0%)
State tax benefit.................................. (2.9%) (0.3%)
Change in valuation allowance...................... 18.9% 33.0%
Disallowed interest................................ 12.4% 4.5%
Other.............................................. 1.4% 1.1%
------ ------
Effective tax rate................................. (4.2%) (4.5%)
====== ======
68
NOTE 14. SUBSEQUENT EVENTS
On June 15, 2005, the Company entered into a digital cinema framework agreement
(the "Framework Agreement") with Christie Digital Systems USA, Inc. ("Christie")
through the Company's newly formed wholly-owned subsidiary, Christie/AIX, Inc.,
a Delaware corporation ("Christie/AIX"), whereby, among other things (1)
Christie/AIX will seek to raise financing to purchase 200 of Christie's digital
cinema projection systems (the "Systems") at agreed-upon prices; (2)
Christie/AIX would then seek to raise additional debt and/or equity financing to
purchase an additional 2,300 Systems at agreed-upon prices. The Framework
Agreement allows Christie/AIX to terminate the agreement for several reasons,
including failure to: (1) execute definitive agreements with certain film
distributors by August 31, 2005 to pay virtual print fees to Christie/AIX for
deliveries of digital films made to the Systems, (2) execute agreements with
certain exhibitors by August 31, 2005 to license the Systems, to house them in
the exhibitor locations, and (3) obtain Christie/AIX's final commitment to
purchase at least 100 Systems by July 31, 2005.
In connection with the execution of the Framework Agreement, the Company has
engaged a third party to assist in raising funds to purchase the equipment
associated with the Framework Agreement, and for general corporate purposes. We
have no assurance of the nature and amount of the securities to be issued, and
that the transaction will be completed on acceptable terms.
On June 9, 2005, the Company's Board of Directors approved the expansion of the
Company's stock option Plan to 1,100,000 options from the prior amount of
850,000 options. This approval is subject to the approval of stockholders at the
Company's 2005 stockholder meeting, which is scheduled to take place in
September 2005. Subsequent to March 31, 2005, the Company issued 140,000 stock
options to an employee and four directors.
PART II. OTHER INFORMATION
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. 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 Securities and Exchange
Commission 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.
69
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT
Except as set forth below, the information required by this item will appear in
our Proxy Statement for the Annual Meeting of Stockholders to be held on
September 15, 2005, which will be filed pursuant to Regulation 14A under the
Exchange Act (the "Proxy Statement") and is incorporated by reference in this
report pursuant to General Instruction E(3) of Form 10-KSB (other than the
portions thereof not deemed to be "filed" for the purpose of Section 18 of the
Exchange Act).
CODE OF ETHICS
We have adopted a code of ethics that applies to the principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, as contemplated by Section
406 of the Sarbanes-Oxley. Such code of ethics is included on our website,
www.accessitx.com. We will disclose any amendment to, or waiver of, a provision
of our code of ethics on a Form 8-K filed with the Securities and Exchange
Commission.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this item will appear in the Proxy Statement and is
incorporated by reference in this report pursuant to General Instruction E(3) of
Form 10-KSB (other than the portions thereof not deemed to be "filed" for the
purpose of Section 18 of the Exchange Act).
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this item will appear in the Proxy Statement and is
incorporated by reference in this report pursuant to General Instruction E(3) of
Form 10-KSB (other than the portions thereof not deemed to be "filed" for the
purpose of Section 18 of the Securities Exchange Act of 1934).
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will appear in the Proxy Statement and is
incorporated by reference in this report pursuant to General Instruction E(3) of
Form 10-KSB (other than the portions thereof not deemed to be "filed" for the
purpose of Section 18 of the Exchange Act).
70
ITEM 13. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
1.1 -- Form of Underwriting Agreement between the Company and the underwriter
to the Company's November 10, 2003 Public Offering. (1)
2.1 -- Stock Purchase Agreement, dated July 17, 2003, between the Company and
Hollywood Software, Inc. and its stockholders. (2)
2.2 -- Exchange Agreement, dated as of September 17, 2003, between the
Company and MidMark Equity Partners II, L.P. (3)
2.3 -- Amendment No. 1 to Stock Purchase Agreement, dated as of November 3,
2003, between and among the Company, Hollywood Software, Inc., the
selling stockholders and Joseph Gunnar & Co., LLC. (1)
2.4 -- Stock Purchase Agreement, dated as of December 22, 2003, among the
Company, Concurrent Technologies, Inc. and Erik B. Levitt. (4)
2.5 -- Asset Purchase Agreement, dated as of March 29, 2004, between the
Company and The Boeing Company. (5)
2.6 -- Form of Exchange Agreement (debt for equity), dated as of March 24,
2004, between the Company and each Investor taking part in the March
24, 2004 exchange offering. (6)
2.7 -- Form of Exchange Agreement (debt for debt), dated as of March 24,
2004, between the Company and each investor taking part in the March
24, 2004 exchange offering. (6)
2.8 -- Securities Purchase Agreement, dated as of June 2, 2004, among the
Company and certain investors. (7)
2.9 -- Asset Purchase Agreement, dated as of October 19, 2004, among the
Company, FiberSat Global Services, Inc., FiberSat Global Services LLC,
Richard Wolfe, Ravi Patel, McKebben Communications, Globecomm Systems,
Inc., Timothy Novoselski, Scott Smith and Farina. (11)
2.10 -- Asset Purchase Agreement, dated as of December 23, 2004, among ADM
Cinema Corporation, Pritchard Square Cinema, LLC and Norman Adie. (13)
2.11 -- Stock Purchase Agreement, dated as of October 26, 2004, among the
Company and the purchasers identified therein. (13)
2.12 -- Securities Purchase Agreement, dated as of February 9, 2005, among the
Company and certain investors. (12)
3.1 -- Fourth Amended and Restated Certificate of Incorporation of the
Company. (4)
3.2 -- Bylaws of the Company. (2)
4.1 -- Form of Warrant Agreement (with Warrant Certificates) between the
Company and the lead underwriter. (1)
4.2 -- Specimen certificate representing Class A common stock. (1)
4.3 -- Promissory note issued by the Company to ColoSolutions, Inc., dated
November 27, 2002. (2)
4.4 -- Promissory note issued by the Company to holders of ten-year warrants.
(2)
4.5 -- Form of note to be issued by the Company to the selling stockholders
of Hollywood Software, Inc. (2)
4.6 -- Form of Pledge and Security Agreement between the Company, the selling
stockholders of Hollywood Software, Inc. and the pledge agent. (2)
4.7 -- Promissory note dated November 3, 2003 issued by the Company to David
Gajda. (1)
4.8 -- Promissory note dated November 3, 2003 issued by the Company to Robert
Jackovich. (1)
4.9 -- Pledge and Security Agreement, dated as of November 3, 2003,
between the Company and the selling stockholders of Hollywood
Software, Inc.
(1)
4.10 -- Registration Rights Agreement, dated as of January 9, 2004, between
the Company and Erik B. Levitt. (4)
4.11 -- Promissory note dated March 29, 2004 issued by the Company to The
Boeing Company. (5)
4.12 -- Registration Rights Agreement, dated as of March 29, 2004, between the
Company and The Boeing Company. (5)
71
4.13 -- Form of Subordinated Convertible Promissory Note, dated March 24,
2004, issued by the Company to each investor taking part in the March
24, 2004 exchange offering. (6)
4.14 -- Form of Registration Rights Agreement, dated as of March 24, 2004,
between the Company and each investor taking part in the March 24,
2004 exchange offering. (6)
4.15 -- Form of Warrant, dated June 2004, issued to purchasers pursuant to
Securities Purchase Agreement, dated as of June 1, 2004, among the
Company and certain investors. (7)
4.16 -- Form of Warrant, dated June 2004, issued to placement agent in
connection with Securities Purchase Agreement, dated as of June 1,
2004, among the Company and certain investors. (7)
4.17 -- Registration Rights Agreement, dated as of June 2004, among the
Company and certain investors. (7)
4.18 -- Promissory Note, dated November 14, 2003, issued by the Company to
David Gajda. (8)
4.19 -- Promissory Note, dated November 14, 2003, issued by the Company to
Robert Jackovich.(8)
4.20 -- Registration Rights Agreement, dated as of November 8, 2004, among the
Company and certain investors. (13)
4.21 -- Form of Subsidiary Guarantee to be entered into by certain
subsidiaries of the Company pursuant to the Securities Purchase
Agreement, dated as of February 9, 2005 among the Company and the
several investors party thereto. (12)
4.22 -- Form of Debenture to be issued to the purchasers pursuant to the
Securities Purchase Agreement, dated as of February 9, 2005 among the
Company and the several investors party thereto. (12)
4.23 -- Form of Warrant to be issued to the purchasers pursuant to the
Securities Purchase Agreement, dated as of February 9, 2005 among the
Company and the several investors party thereto. (12)
4.24 -- Form of Registration Rights Agreement, among the registrant and
certain investors pursuant to the Securities Purchase Agreement, dated
as of February 9, 2005 among the Company and the several investors
party thereto. (12)
10.1 -- Employment Agreement, dated as of July 1, 2000 (as amended), between
the Company and A. Dale Mayo. (2)
10.2 -- Employment Agreement, dated as of April 10, 2000, between the Company
and Kevin Farrell. (2)
10.3 -- Form of Employment Agreements between Hollywood Software, Inc. and
David Gajda/Robert Jackovich. (2)
10.4 -- First Amended and Restated 2000 Stock Option Plan of the Company. (2)
10.5 -- Amendment to No. 1 to the First Amended and Restated 2000 Stock Option
Plan of the Company. (3)
10.6 -- Asset Purchase Agreement, dated as of November 16, 2001, between the
Company and BridgePoint International (USA), Inc. (2)
10.7 -- Asset Purchase Agreement, dated as of October 10, 2002, between the
Company, R.E. Stafford, Inc. d/b/a ColoSolutions and Cob Solutions
Global Services, Inc. (2)
10.8 -- Services Distribution Agreement, dated July 17, 2001, between the
Company and Managed Storage International, Inc. (2)
10.9 -- License Agreement between the Company and AT&T Corp., dated July 31,
2001. (2)
10.10 -- Master Agreement for Colocation Space between the Company (by
assignment from Cob Solutions Global Services, Inc.) and KMC Telecom
VI LLC dated April II, 2002. (2)
10.11 -- License Agreement between the Company (by assignment from Bridgepoint
International (USA), Inc.) and Zone Telecom, Inc. dated February 27,
2001. (2)
10.12 -- Lease Agreement, dated as of May 23, 2000, between the Company
(formerly Fibertech & Wireless, Inc.) and 55 Madison Associates, LLC.
(2)
72
10.13 -- Agreement of Lease, dated as of July 18, 2000, between the Company and
1-10 Industry Associates, LLC. (2)
10.14 -- Lease Agreement, dated as of August 28, 2000, between the Company
(formerly Fibertech & Wireless, Inc.) and RFG Co. Ltd. (2)
10.15 -- Letter Amendment to the Lease Agreement, dated August 28, 2000,
between the Company (formerly Fibertech & Wireless, Inc.) and RFG Co.
Ltd. (2)
10.16 -- First Amendment to the Lease, dated August 28, 2000 between the
Company (formerly Fibertech & Wireless, Inc.) and RFG Co. Ltd. dated
October 27, 2000. (2)
10.17 -- Agreement of Lease, dated as of January 18, 2000, between the Company
(by assignment from BridgePoint International (Canada), Inc.) and 75
Broad, LLC. (2)
10.18 -- Additional Space and Lease Modification to the Agreement of Lease,
dated as of January 18, 2000, between the Company (by assignment from
BridgePoint International (Canada), Inc.) and 75 Broad, LLC dated May
16, 2000. (2)
10.19 -- Second Additional Space and Lease Modification to the Agreement of
Lease, dated as of January 18, 2000, between the Company (by
assignment from BridgePoint International (Canada), Inc.) and 75
Broad, LLC dated August 15, 2000. (2)
10.20 -- Lease Agreement, dated as of January 17, 2001, as amended, between the
Company (by assignment from R. E. Stafford, Inc. d/b/a ColoSolutions)
and Union National Plaza I, Inc. (2)
10.21 -- Lease Agreement, dated as of February 6, 2001, between the Company (by
assignment from R. E. Stafford, Inc. d/b/a ColoSolutions) and Granite
-- Wall Street Limited Partnership (successor in interest to Duffy
Wall Street L.L.C.). (2)
10.22 -- Indenture Agreement, dated as of May 22, 2001, between the Company (by
assignment from R. E. Stafford, Inc. d/b/a ColoSolutions) and Research
Boulevard Partnership. (2)
10.23 -- Lease Agreement, dated as of January 22, 2001, between the Company (by
assignment from ColoSolutions L.L.C.) and 340 Associates, L.L.C. (2)
10.24 -- Lease Agreement, dated as of September 29, 2002, between the Company
(by assignment from R. E. Stafford, Inc. d/b/a ColoSolutions) and
Jerry J. Howard and Eddy D. Howard. (2)
10.25 -- Office Lease, dated as of February 22, 2001, between the Company (by
assignment from R. E. Stafford, Inc. d/b/a ColoSolutions) and One
Liberty Place, L.C. (2)
10.26 -- Commercial Property Lease between Hollywood Software, Inc. and
Hollywood Media Center, LLC, dated January 1, 2000. (2)
10.27 -- Lease, dated as of February 1, 1999, between Hollywood Software, Inc.
and Spieker Properties, L. P. (2)
10.28 -- First Amendment to Lease, dated as of February 1, 1999, between
Hollywood Software, Inc. and Spieker Properties, L.P. dated May 10,
2000. (2)
10.29 -- Second Amendment to Lease, dated as of February 1, 1999, between
Hollywood Software, Inc. and Spieker Properties, L.P. dated February
16, 2001. (2)
10.30 -- Third Amendment to Lease, dated as of February 1, 1999, between
Hollywood Software, Inc. and EOP-BREA Park Centre, L.P. (successor in
interest to Spieker Properties, L.P.), dated June 27, 2002. (2)
10.31 -- Consulting Agreement between the Company (formerly Fibertech &
Wireless, Inc.) and Harvey Marks dated June 2000. (2)
10.32 -- Independent Contractor Agreement, dated July31, 2003, between the
Company and Kevin Booth. (2)
10.33 -- Universal Transport Exchange License and Option Agreement,
dated August 13, 2003, by and between the Company and Universal
Access, Inc.
(3)
10.34 -- Employment Agreement, dated as of January 9, 2004, between the Company
and Erik B. Levitt. (4)
10.35 -- Confidentiality, Inventions and Noncompete Agreement, dated as of
January 9, 2004, between the Company and Erik B. Levitt. (4)
10.36 -- Employment Agreement, dated as of November 21, 2003, between the
Company and Russell Wintner. (8)
10.37 -- Fourth Amendment to Lease Agreement, dated as of February 11, 2005,
between ADM Cinema Corporation and OLP Brooklyn Pavilion LLC. (16 )
73
10.38 -- Amendment No. 2 to First Amended and Restated 2000 Stock Option Plan
of the Company. (16)
16.1 -- Letter from PricewaterhouseCoopers LLP, dated September 10, 2004
regarding
change in certifying accountants. (13)
21.1 -- List of Subsidiaries.*
23.1 -- Consent of PricewaterhouseCoopers LLP.*
23.2 -- Consent of Eisner LLP.*
24.1 -- Power of Attorney.* (contained on signature page)
31.1 -- Officer's Certificate Pursuant to 15 U.S.C. Section 7241, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2 -- Officer's Certificate Pursuant to 15 U.S.C. Section 7241, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1 -- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2 -- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
* Filed herewith.
Documents Incorporated Herein by Reference:
(1) Previously filed with the Securities and Exchange Commission on November 4,
2003 as an exhibit to the Company's Amendment No. 3 to Registration Statement on
Form SB-2 (File No. 333-107711).
(2) Previously filed with the Securities and Exchange Commission on August 6,
2003 as an exhibit to the Company's Registration Statement on Form SB-2 (File
No. 333-107711).
(3) Previously filed with the Securities and Exchange Commission on September
22, 2003 as an exhibit to the Company's Amendment No. 1 to Registration
Statement on Form SB-2 (File No. 333-107711).
(4) Previously filed with the Securities and Exchange Commission on February 17,
2004 as an exhibit to the Company's Form 10-QSB for the quarter ended December
31, 2003 (File No. 001-31810).
(5) Previously filed with the Securities and Exchange Commission on April 2,
2004 as an exhibit to the Company's Form 8-K (File No. 001-31810).
(6) Previously filed with the Securities and Exchange Commission on April 29,
2004 as an exhibit to the Company's Form 8-K (File No. 001-31810).
(7) Previously filed with the Securities and Exchange Commission on June 2, 2004
as an exhibit to the Company's Form 8-K (File No. 001-31810).
(8) Previously filed with the Securities and Exchange Commission on June 25,
2004 as an exhibit to the Company's Form 10-KSB for the fiscal year ended March
31, 2004 (File No. 001-31810).
(9) Previously filed with the Securities Exchange Commission on July 2, 2004 as
an exhibit to the Company's Registration Statement on Form SB-2 (File No.
333-117115).
(10) Previously filed with the Securities Exchange Commission on September 14,
2004 as an exhibit to the Company's Form 8-K (File No. 001-31810).
(11) Previously filed with the Securities Exchange Commission on November 8,
2004 as an exhibit to the Company's Form 8-K (File No. 001-31810).
(12) Previously filed with the Securities Exchange Commission on February 10,
2005 as an exhibit to the Company's Form 8-K (File No. 001-31810).
(13) Previously filed with the Securities Exchange Commission on February 14,
2005 as an exhibit to the Company's Form 10-QSB for the quarter ended December
31, 2004 (File No. 001-31810).
(14) Previously filed with the Securities Exchange Commission on March 14, 2005
as an exhibit to the Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form SB-2 (File No. 333-117115).
(15) Previously filed with the Securities Exchange Commission on April 25, 2005
as an exhibit to the Company's Registration Statement on Form S-8 (File No.
333-124290)
(16) Previously filed with the Securities Exchanged Commission on April 29, 2005
as an exhibit to the Company's Form 8-K (File No. 001-31810)
74
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT AND NON-AUDIT FEES
On September 9, 2004, our audit committee dismissed PwC as the our independent
registered public accounting firm and engaged Eisner as our new independent
registered public accounting firm.
Our audit committee has also adopted policies and procedures for pre-approving
all non-audit work performed by PwC, for fiscal year ended March 31, 2004, and
by Eisner for the fiscal year ended March 31, 2005. Specifically, the committee
has pre-approved the use of Eisner for detailed, specific types of services
within the following categories of non-audit services: acquisition due diligence
and audit services; tax services; and reviews and procedures that we request
Eisner to undertake on matters not required by laws or regulations. In each
case, the committee has required management to obtain specific pre-approval from
the committee for any engagements.
The aggregate fees billed for professional services by PwC and Eisner for the
fiscal years ended March 31, 2004 and March 31, 2005 for these various services
were:
Type of Fees 2004 2005
---- ----
Audit Fees $190,380 $102,400
Audit-Related Fees 26,308 71,605
Tax Fees 15,875 66,060
All Other Fees 1,400 1,500
----- -----
Total $233,963 $241,565
======== ========
In the above table, in accordance with the Securities and Exchange Commission's
definitions and rules, "audit fees" are fees AccessIT paid PwC and Eisner for
professional services for the audit of AccessIT's consolidated financial
statements included in Form SB-2 and Form 10-KSB and review of consolidated
financial statements included in Form SB-2 and Form 10-QSBs, and for services
that are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for the fiscal years ended March 31, 2004 and
2005; "audit-related fees" are fees for assurance and related services that are
reasonably related to the performance of the audit or review of AccessIT's
consolidated financial statements; "tax fees" are fees for tax compliance, tax
advice and tax planning; and "all other fees" are fees for any services not
included in the first three categories.
75
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ACCESS INTEGRATED TECHNOLOGIES, INC.
Date: JUNE 29, 2005 BY: /S/ A. DALE MAYO
------------- --------------------
A. Dale Mayo
President and Chief Executive Officer and Director
(Principal Executive Officer)
Date: JUNE 29, 2005 BY: /S/ BRIAN D. PFLUG
------------- ----------------------
Brian D. Pflug
Senior Vice President - Accounting & Finance
(Principal Financial Officer)
We, the undersigned directors and officers of Access Integrated Technologies,
Inc., do hereby constitute and appoint, A. Dale Mayo and Gary S. Loffredo, or
either of them, our true and lawful attorneys and agents, to do any and all acts
and things in our name and on our behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorneys and agents, or either of them,
may deem necessary or advisable to enable said corporation to comply with the
Securities Act of 1933, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission, in connection with the aforesaid
annual report on Form 10-KSB, including specifically, but without limitation,
the power and authority to sign for us or any of us in our names in the
capacities indicated below, any and all amendments (including any post-effective
amendment(s)) hereto and we do hereby ratify and confirm all that said attorneys
and agents, or either of them, shall do or cause to be done by virtue hereof. In
accordance with the requirements of the Securities Act of 1933, as amended, this
report was signed by the following persons in the capacities and on the date(s)
stated:
SIGNATURE(S) TITLE(S) DATE
/s/ A. Dale Mayo President, Chief June 29, 2005
------------------------ Executive Officer
A. Dale Mayo and Chairman of the
Board of Directors
/s/ Kevin J. Farrell Senior Vice President-- June 29, 2005
------------------------- Data Center Operations
Kevin J. Farrell and Director
/s/ Brett E. Marks Senior Vice President-- June 29, 2005
------------------------- Business Development
Brett E. Marks and Director
/s/ Gary S. Loffredo Senior Vice President-- June 29, 2005
------------------------- Business Affairs, General
Gary S. Loffredo Counsel, Secretary and
Director
/s/ Brian D. Pflug Senior Vice President-- June 29, 2005
------------------------- Accounting and Finance
Brian D. Pflug
/s/ Robert Davidoff Director June 29, 2005
-------------------------
Robert Davidoff
/s/ Wayne L. Clevenger Director June 29, 2005
-------------------------
Wayne L. Clevenger
76
/s/ Matthew W. Finlay Director June 29, 2005
-------------------------
Matthew W. Finlay
/s/ Gerald C. Crotty Director June 29, 2005
-------------------------
Gerald C. Crotty
76
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
21.1 -- List of Subsidiaries.
23.1 -- Consent of PricewaterhouseCoopers LLP.
23.2 -- Consent of Eisner LLP.
24.1 -- Powers of Attorney. (Contained on signature page)
31.1 -- Officer's Certificate Pursuant to 15 U.S.C. Section 7241, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 -- Officer's Certificate Pursuant to 15 U.S.C. Section 7241, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 -- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 -- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
77