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Access Integrated Technologies, Inc. d/b/a Cinedigm Digital Cinema Corp.
form-10k_1358264.htm
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As of June 8, 2009, 27,600,060 shares of Class A Common Stock, $0.001 par value and 733,811 shares of Class B Common Stock, $0.001 par value, were outstanding.
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d/b/a CINEDIGM DIGITAL CINEMA CORP.
Various statements contained in this report or incorporated by reference into this report constitute "forward-looking statements" within the meaning of the federal securities laws. Forward-looking statements are based on current expectations and are indicated by words or phrases such as "believe," "expect," "may," "will," "should," "seek," "plan," "intend" or "anticipate" or the negative thereof or comparable terminology, or by discussion of strategy. Forward-looking statements represent as of the date of this report our judgment relating to, among other things, future results of operations, growth plans, sales, capital requirements and general industry and business conditions applicable to us. Such forward-looking statements are based largely on our current expectations and are inherently subject to risks and uncertainties. Our actual results could differ materially from those that are anticipated or projected as a result of certain risks and uncertainties, including, but not limited to, a number of factors, such as:
Except as otherwise required to be disclosed in periodic reports required to be filed by public companies with the Securities and Exchange Commission ("SEC") pursuant to the SEC's rules, we have no duty to update these statements, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking information contained in this report will in fact transpire.
In this report, "Cinedigm," "we," "us," "our" and the "Company" refers to Access Integrated Technologies, Inc. d/b/a Cinedigm Digital Cinema Corp. and its subsidiaries unless the context otherwise requires.
Access Integrated Technologies, Inc. d/b/a Cinedigm Digital Cinema Corp. was incorporated in Delaware on March 31, 2000 and began doing business as Cinedigm Digital Cinema Corp. on November 25, 2008 ("Cinedigm", and collectively with its subsidiaries, the "Company"). The Company provides technology solutions, software services, electronic delivery and content distribution services to owners and distributors of digital content to movie theatres and other venues. The Company has three segments, media services ("Media Services"), media content and entertainment ("Content & Entertainment") and other ("Other"). The Company's Media Services segment provides technology solutions, software services and digital content delivery services via satellite and hard drive to the motion picture and television industries, primarily to facilitate the conversion from analog (film) to digital cinema and has positioned the Company at what it believes to be the forefront of an industry relating to the delivery and management of digital cinema and other content to theatres and other remote venues worldwide. The Company's Content & Entertainment segment provides content distribution services to theatrical exhibitors, in-theatre advertising and motion picture exhibition to the general public. The Company's Other segment provides hosting services and network access for other web hosting services ("Access Digital Server Assets"). Overall, the Company's goal is to aid in the transformation of movie theatres to entertainment centers by providing a platform of hardware, software and content choices. Additional information related to the Company's reporting segments can be found in Note 9 to the Company's Consolidated Financial Statements.
The Media Services segment consists of the following:
Christie/AIX, Inc. d/b/a AccessIT Digital Cinema ("AccessIT DC") and Access Digital Cinema Phase 2 Corp. ("Phase 2 DC")
Financing vehicles and administrators for our 3,724 digital cinema projection systems (the "Systems") installed nationwide (our "Phase I Deployment") and our second digital cinema deployment, through Phase 2 DC (our "Phase II Deployment") to theatrical exhibitors
Collect virtual print fees ("VPFs") from motion picture studios and distributors and alternative content fees ("ACFs") from alternative content providers and theatrical exhibitors
Develops and licenses software to the theatrical distribution and exhibition industries as well as intellectual property rights and royalty management
Provides services as an Application Service Provider
Provides software enhancements and consulting services
Distributes digital content to movie theatres and other venues having digital projection equipment and provides satellite-based broadband video, data and Internet transmission, encryption management services, key management, video network origination and management services
Provides a virtual booking center to outsource the booking and scheduling of satellite and fiber networks
Provides forensic watermark detection services for motion picture studios and forensic recovery services for content owners
Provides information technology consulting services and managed network monitoring services through its global network command center ("GNCC")
In January 2004, we acquired all of the capital stock of Managed Services, a managed service provider of information technologies (the "Managed Services Acquisition") which operates a 24x7 GNCC, capable of running the networks and systems of large corporate clients. The three largest customers of Managed Services accounted for approximately 60% of its revenues.
In June 2005, we formed AccessIT DC, a wholly-owned subsidiary of AccessDM, to purchase up to 4,000 Systems for our Phase I Deployment, under an amended framework agreement (the "Framework Agreement") with Christie Digital Systems USA, Inc. ("Christie"). In December 2007, AccessIT DC completed its Phase I Deployment with 3,724 Systems installed.
In June 2006, we, through an indirectly wholly-owned subsidiary, PLX Acquisition Corp. ("PLX"), purchased substantially all the assets of PLX Systems Inc. ("PLX Acquisition") and Right Track Solutions Incorporated ("Right Track"). PLX provides technology, expertise and core competencies in intellectual property ("IP") rights and royalty management, expanding the Company's ability to bring alternative forms of content, such as non-traditional feature films. PLX's and Right Track's assets have been integrated into the operations of AccessIT SW.
In October 2007, we formed Phase 2 DC to purchase up to 10,000 additional Systems for our Phase II Deployment, of which a portion of such Systems will be purchased through an indirectly wholly-owned subsidiary, Access Digital Cinema Phase 2 B/AIX Corp. ("Phase 2 B/AIX").
In October 2007, AccessDM launched CineLiveSM, a hardware product that enables live 2-D and 3-D streaming broadcasts to be converted from satellite feeds into on-screen entertainment, which can then be delivered to and exhibited in digital cinema equipped theatres. CineLiveSM was developed exclusively for AccessDM by International Datacasting Corporation and SENSIO Technologies Inc.
The business of AccessIT DC and Phase 2 DC consists of the ownership and licensing of digital systems to theatrical exhibitors and the collection of VPFs from motion picture studios and distributors and ACFs from alternative content providers and theatrical exhibitors, when content is shown on exhibitors' screens. We have licensed the necessary software and technology solutions to the exhibitor and have facilitated the industry's transition from analog (film) to digital cinema. As part of AccessIT DC's Phase I Deployment of digital systems, AccessIT DC has agreements with nine motion picture studios, certain smaller independent studios and exhibitors, allowing AccessIT DC to collect VPFs and ACFs when content is shown in theatres, in exchange for having facilitated the deployment, and providing management services, on 3,724 Systems. AccessIT DC has agreements with sixteen theatrical exhibitors that license our Systems in order to show digital content distributed by the motion picture studios and other providers, including a Cinedigm subsidiary, Cinedigm Content and Entertainment Group (see Content and Entertainment section below). Phase 2 DC also entered into master license agreements with three exhibitors covering a total of 493 screens which will allow Phase 2 DC to collect VPFs and ACFs once Phase 2 DC arranges suitable financing for the purchase of Systems and once the Systems are installed and ready for content. As of March 31, 2009, Phase 2 DC has supply agreements with three equipment vendors. As of March 31, 2009, Phase 2 DC had 54 Systems deployed.
VPFs are earned pursuant to the contracts with movie studios and distributors, whereby amounts are payable to AccessIT DC and to Phase 2 DC according to fixed fee schedules, when movies distributed by the studio are displayed on screens utilizing our Systems installed in movie theatres. One VPF is payable for every movie title displayed per System. The amount of VPF revenue is therefore dependent on the number of movie titles released and displayed on the Systems. For the fiscal year ended March 31, 2009, VPF revenues earned by AccessIT DC and Phase 2 DC was $48.2 million and $0.1 million, respectively.
Phase 2 DC's agreements with distributors require the payment of VPF's for 10 years from the date each system is installed, however, Phase 2 DC may no longer collect VPF's once "cost recoupment", as defined in the agreements, is achieved. Cost recoupment will occur once the cumulative VPF's and other cash receipts collected by Phase 2 DC have equaled the total of all cash outflows, including the purchase price of all Systems, all financing costs, all "overhead and ongoing costs", as defined, subject to maximum agreed upon amounts during the three-year rollout period and thereafter, plus a compounded return on any billed but unpaid overhead and ongoing costs, of 15% per year. Further, if cost recoupment occurs before the end of the 8th contract year, a one-time "cost recoupment bonus" is payable by the studios to Phase 2 DC. Any other cash flows, net of expenses, received by Phase 2 DC following the achievement of cost recoupment are required to be returned to the distributors on a pro-rata basis. At this time, the Company cannot estimate the timing or probability of the achievement of cost recoupment.
In February 2006, AccessIT DC entered into an agreement with Philips Electronics Nederland B.V. ("Philips") for a non-exclusive, worldwide right to use software license for Philips' software Cinefence (the "Cinefence License"). The Cinefence License is for an initial period of twelve years and renews automatically each year unless terminated by either party upon written notice. Cinefence is a watermarking detector of audio and video watermarks in content distributed through digital cinema. Christie incorporates Cinefence into the Systems deployed with theatrical exhibitors participating in AccessIT DC's Phase I Deployment, and Systems deployed in Phase 2 DC's Phase II Deployment will also contain this technology.
The Digital Express e-Courier Services SM software makes interaction between the content originator (such as the motion picture studio) and the theatrical exhibitor easier:
Programming is viewed, booked, scheduled and electronically delivered through Digital Express e-Courier ServicesSM.
Once received, digital cinema distribution masters are prepared for distribution employing wrapper technology, including the application of an additional layer of Advanced Encryption Standard encryption, for added security.
Designed to provide transparent control over the delivery process, Digital Express e-Courier ServicesSM provides comprehensive, real-time monitoring capabilities including a fully customizable, automatic event notification system, delivering important status information to customers through a variety of connected devices including cell phones, e-mail or pagers.
According to the Motion Picture Association of America (the "MPAA"), on average, there were approximately 600 new movie releases for each of the past two years. The average major movie is released to approximately 4,000 screens in the United States and 8,000 screens worldwide. According to the National Association of Theatre Owners, there are approximately 107,000 screens worldwide that play major movie releases, with approximately 38,000 screens located in the United States.
theatrical exhibitors may be able to profit from the presentation of new and/or additional advertising in their movie theatres and that alternative entertainment at movie theatres may both expand their hours of operation and increase their occupancy rates;
digital content delivery will help reduce the cost of illegal off-the-screen recording of movies with handheld camcorders due to the watermark technology being utilized in content distributed through digital cinema (according to the MPAA, this costs the worldwide movie exhibition industry an estimated $6.1 billion annually).
AccessDM has received United States service mark registrations for the following: AccessDM® and The Courier For The Digital Era®. Cinedigm has received United States service mark registration for Access Digital Media® and Digi-Central®.
DMS currently has intellectual property consisting of unregistered trademarks and service marks, including Digital Express e-Courier ServicesSM, e-Courier ServicesSM and CineLiveSM.
Digital Cinema customers are mainly motion picture studios and theatrical exhibitors. For the fiscal year ended March 31, 2009, AccessIT DC's customers comprised 83% of Media Services' revenues. Six customers, 20th Century Fox, Disney Worldwide Services, Paramount Pictures, Sony Pictures Releasing Corporation, Universal Pictures and Warner Brothers, each represented 10% or more of AccessIT DC's revenues and together generated 78%, 69% and 49% of AccessIT DC's, Media Services' and consolidated revenues, respectively, and are also customers for digital content delivery and entertainment software. For the fiscal year ended March 31, 2009, DMS's customers comprised 9% of Media Services' revenues. Two customers, Universal Pictures and Ideacast, Inc. each represented 10% or more of DMS's revenues and together generated 37% and 4% of DMS's and Media Services' revenues, respectively, and Universal Pictures is also a customer for entertainment software. We expect to continue to conduct business with each of these customers in fiscal 2010.
Technicolor Digital Cinema, an affiliate of the Thomson Company, which has developed distribution technology and support services for the physical delivery of digital movies to theatrical exhibitors and is currently testing a rollout plan; and
DELUXE Laboratories, a wholly owned subsidiary of the MacAndrews & Forbes Holdings, Inc., which has developed distribution technology and support services for the physical delivery of digital movies to theatrical exhibitors.
These competitors have significantly greater financial, marketing and managerial resources than we do, have generated greater revenue and are better known than we are. However, we believe that DMS, through its technology and management experience, its development of software capable of delivering digital content electronically worldwide, and the complement of AccessIT SW's software including the Theatre Command Center® software, differentiate us from our competitors by providing a competitive alternative to their forms of digital content delivery.
We co-market Digital Media Delivery to the current and prospective customers of AccessIT SW, using marketing and sales efforts and resources of both companies, which would enable owners of digital content to securely deliver such digital 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.
Theatre Command Center® ("TCC")
Provides in-theatre management for use by digitally–equipped movie theatres and interfaces with DMS' Digital Express e-Courier Services SM software.
Theatrical Distribution System® ("TDS")
Enables domestic motion picture studios to plan, book and account for movie releases and to collect and analyze related financial operations data and interfaces with DMS' Digital Express e-Courier Services SM software.
Theatrical Distribution System (Global) ("TDSG ")
Enables international motion picture studios to plan, book and account for movie releases and to collect and analyze related financial operations data and interfaces with DMS' Digital Express e-Courier Services SM software.
Manages all key aspects of the theatrical exhibitor for film planning, scheduling, booking and the payment to the motion picture studios.
Our TCC system provides in-theatre management for digitally–equipped movie theatres, enabling an exhibitor to control all the screens in a movie theatre, manage content and version review, show building, program scheduling and encryption security key management from a central terminal, whether located in the projection booth, the theatre manager's office or both.
AccessIT SW's TDS product is currently licensed to several motion picture studios and the TDS product comprised 54% and 65% of AccessIT SW's revenues for the fiscal year ended March 31, 2008 and 2009, respectively. AccessIT SW also provides outsourced movie distribution services, specifically for independent film distributors and producers, through IndieDirect. The IndieDirect staff uses the TDS distribution software to provide back office movie booking, tracking, reporting, settlement, and receivables management services.
In 2004, AccessIT SW began developing TDSG, an international version of our successful TDS application, to support worldwide movie distribution and has the capability to run either from a single central location or multiple locations. In December 2004, AccessIT SW signed an agreement to license TDSG to 20th Century Fox, who has begun the implementation of the software, targeting fourteen overseas territories, encompassing eighteen foreign offices. As with our North American TDS solution, the TDSG system seamlessly integrates with Cinedigm's digital content delivery, significantly enhancing our international market opportunities. In December 2008, AccessIT SW reached an agreement with 20th Century Fox regarding TDSG whereby AccessIT SW will cease development efforts on the TDSG product and 20th Century Fox will complete the development of the product going forward at their sole expense and deliver the completed TDSG product back to AccessIT SW. AccessIT SW will continue to own the product at all times and retains the rights to market the finished product to others.
We believe that our EMS™ system is one of the most powerful and comprehensive systems available to manage all key elements of theatrical exhibition. This fully supported solution can exchange information with financial, ticketing, point-of-sale, distributor and data systems to eliminate manual processes. Also, EMS™ is designed to create innovative revenue opportunities for theatrical exhibitors from the presentation of new and/or additional advertising and alternative entertainment in their movie theatres due to the expanding use of digital content delivery.
AccessIT SW also provides software for the management of IP rights and royalties, called RTS, which was part of the PLX Acquisition.
The Company's research and development was approximately $0.3 million, $0.2 million and $0.2 million for the fiscal years ended March 31, 2007, 2008 and 2009, respectively, and was comprised mainly of personnel costs and third party contracted services attributable to research and development efforts at AccessIT SW related to the development of our digital software applications and various product enhancements to TDS and EMS™.
AccessIT SW's products are becoming the industry standard method by which motion picture studios and theatrical exhibitors plan, manage and monitor operations and data regarding the presentation of theatrical entertainment. Based upon certain industry figures, distributors using AccessIT SW's TDS software cumulatively managed over one-third of the United States theatre box office revenues each year since 1999;
licensable software products, including TCC, TDS, TDSG, EMS™, and RTS;
registered trademarks for the Theatre Command Center®, Theater Command Center®, and Theatrical Distribution System®;
unregistered trademarks and service marks, including Coop Advertising V1.04, EMS ASP, Exhibitor Management System, Hollywood SW, Inc., HollywoodSoftware.com, Indie Co-op, Media Manager, On-Line Release Schedule, RightsMart, and TheatricalDistribution.com; and
20th Century Fox and Universal Studios, each represented 10% or more of AccessIT SW's revenues and together generated 32% of AccessIT SW's revenues. 20th Century Fox and Universal Studios are also customers for Digital Cinema. We expect to continue to conduct business with each of these customers in fiscal 2010.
Within the major domestic motion picture studios and exhibition circuits, AccessIT SW's principal competitors for its products are in-house development teams, which generally are assisted by outside contractors and other third-parties. Most domestic motion picture studios that do not use the TDS software use their own in-house developed systems. Internationally, AccessIT SW is aware of one vendor based in the Netherlands providing similar software. AccessIT SW's movie exhibition product, EMS™, competes principally with at least one other competitor offering a similar stand-alone application, customized solutions developed by the large exhibition circuits and point of sale system modules attempting to provide comparable functionality. We believe that AccessIT SW, through its technology and management experience, may differentiate itself by providing a competitive alternative to their forms of digital content delivery and management business.
on site support for hardware installation and repair, software installation and update, a 24x7 user help desk;
a disaster recovery plan for customers that have their computers located within an internet data center ("IDC") by providing them 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.
Cinedigm has received United States service mark registration for the following service marks: Access Integrated Technologies®, AccessSecure®; AccessSafe®; AccessBackup®; AccessBusinessContinuance®; AccessVault®; AccessContent®; AccessColocenter®; AccessDataVault®; AccessColo®; AccessColo, Inc.®; and AccessStore®.
Our Managed Services customers mainly include major and mid-level networks and ISPs, various users of network services, traditional voice and data transmission providers, long distance carriers and commercial businesses and the motion picture studio customers of our Media Services. For the fiscal year ended March 31, 2009, three customers, Kelley Drye & Warren LLP ("KDW"), Rothschild, Inc. and the Weinstein Company, each represented 10% or more of Managed Service revenues and together generated 62% of Managed Service's revenues. Other than KDW, who is also outside legal counsel for the Company and the Weinstein Company, who is also a customer of Digital Cinema and AccessIT SW, we do not have any other relationships with these customers. We expect to continue to conduct business with these customers in fiscal 2010.
Many data center operators offer managed services to clients who co-locate servers in the operator owned data center. Our focus is on delivery of managed services inside the IDCs, now operated by FiberMedia AIT, LLC and Telesource Group, Inc. (together, "FiberMedia"), unrelated third parties, as a lead product for primary data center services and to also offer those services to clients who have servers outside the IDCs allowing us to offer remote server and network monitoring, server and network management and disaster recovery services.
Our competitors 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, offering managed services inside the IDCs, now operated by FiberMedia, along with related data center services, may differentiate us from our competition by providing a competitive bundled solution.
The distribution of movies is in large part regulated by federal and state antitrust laws and has been the subject of numerous antitrust cases. Motion picture studios offer and license movies to theatrical exhibitors, on a movie-by-movie and theatre-by-theatre basis. Consequently, theatrical exhibitors cannot assure themselves of a supply of movies by entering into long-term arrangements with motion picture studios, but must negotiate for licenses on a movie-by-movie basis. AccessIT Satellite maintains Federal Communications Commission ("FCC") broadcast licenses related to our satellite transmission of content and should we violate any FCC laws, we may be subject to fines and or forfeiture of our broadcast licenses.
The Content & Entertainment segment consists of the following:
A nine-screen digital movie theatre and showcase to demonstrate our integrated digital cinema solutions
UniqueScreen Media, Inc. ("USM")
Provides cinema advertising services and entertainment
Vistachiara Productions, Inc., f/k/a The Bigger Picture currently d/b/a Cinedigm Content and Entertainment Group ("CEG")
Acquires, distributes and provides the marketing for programs of alternative content to theatrical exhibitors
In July 2006, we purchased all of the outstanding capital stock of USM from USM's stockholders (the "USM Acquisition").
In January 2007, through our wholly owned subsidiary, Vistachiara Productions, Inc., we purchased substantially all of the assets of BP/KTF, LLC (the "CEG Acquisition").
There is no intellectual property related to our Content & Entertainment segment.
For the fiscal year ended March 31, 2009, USM and our Pavilion Theatre comprised 71% and 24% of Content & Entertainment revenues, respectively. Our advertising business consists mainly of local advertisers, with no one customer representing 10% of in-theatre advertising revenues and all the customers of our Pavilion Theatre are the general public. A growing percentage of our advertising business are derived from a subcontracting agreement with Screenvision Exhibition, Inc. ("Screenvision"), whereby Screenvision sells national advertising on USM's screen base. For the fiscal year ended March 31, 2009, the revenues from this agreement comprised 13% and 9% of USM revenues and Content & Entertainment revenues, respectively. The CEG business consists of owners of alternative content such as sporting events, concerts, children's programming and other content. We expect CEG to contribute a larger percentage of our overall revenues in the future.
The Company views the following as its principal competition in its content and entertainment segment:
These competitors have significantly greater financial, marketing and managerial resources than we do and have generated greater revenue and are better known than we are. However, we believe this is somewhat mitigated by the exclusive, and to a lesser degree non-exclusive, long and short-term contractual rights we have with our theatrical exhibitor partners, the proprietary nature of certain alternative programming, and the ability to provide cost effective turn-key solutions for intellectual property holders through digital preparation, digital delivery services through DMS, and advertising and marketing services in contracted theatrical exhibitor's theatres.
Our Content & Entertainment segment is also subject to federal, state and local laws governing such matters as wages, working conditions, citizenship and health and sanitation requirements. We believe that we are in substantial compliance with all of such laws.
The nature of our Content & Entertainment segment does not subject us to environmental laws in any material manner.
The Other segment consists of the following:
Provides services through its three IDCs (see below)
Provides hosting services and provides network access for other web hosting services
In January 2006, the Company purchased the domain name, website, customer list and the IP address space for Ezzi.net and certain data center related computer equipment of R & S International, Inc. (together the "Access Digital Server Assets") and the acquired assets are used for web-hosting.
Since May 1, 2007, our IDCs have been operated by FiberMedia pursuant to a master collocation agreement. Although we are still the lessee of the IDCs, substantially all of the revenues and expenses are being realized by FiberMedia and not the Company and since May 1, 2008, 100% of the revenues and expenses are being realized by FiberMedia.
As of March 31, 2009, we had 242 employees, of which 42, working primarily at the Pavilion Theatre, are part-time and 200 are full-time. Of our full-time employees, 55 are in sales and marketing, 85 are in operations, 8 are in research and development, 22 are in technical services, and 30 are in finance and administration. The Pavilion Theatre has a collective bargaining agreement with one union which covers three union projectionists, one of whom is a full-time employee.
The Company's Internet website address is www.cinedigmcorp.com. The Company will make available, free of charge at the "For Our Shareholders" section of its website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and all amendments to those reports and statements filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC.
In addition, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding companies that file electronically with the Commission. This information is available at www.sec.gov.
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. An inability to obtain necessary financing could have a material adverse effect on our financial position, operations and prospects. The agreement for a credit facility (the "GE Credit Facility") with General Electric Capital Corporation ("GECC") contains certain restrictive covenants that restrict AccessIT DC and its subsidiaries from making certain capital expenditures, incurring other indebtedness, engaging in a new line of business, selling certain assets, acquiring, consolidating with, or merging with or into other companies and entering into transactions with affiliates and is non-recourse to the Company and our subsidiaries. In August 2007, the Company entered into a securities purchase agreement (the "Purchase Agreement") pursuant to which the Company issued 10% Senior Notes (the "2007 Senior Notes") in the aggregate
principal amount of $55.0 million (the "August 2007 Private Placement"). The 2007 Senior Notes restrict the Company and its subsidiaries (other than AccessIT DC and its subsidiaries) from incurring other indebtedness, creating or acquiring subsidiaries which do not guarantee such notes, making certain investments and modifying authorized capital.
We were incorporated on March 31, 2000. Our first data center, a part of our initial business, became operational in December 2000. Subsequent thereto, we added additional data centers and expanded into the following new business areas which are currently our primary focus: (a) providing satellite delivery services, through our wholly-owned subsidiary AccessIT Satellite; (b) operating a movie theatre, through our wholly-owned subsidiary ADM Cinema; (c) placing digital cinema projection systems into movie theatres and collecting virtual print fees in connection with such placements, through our indirect wholly-owned subsidiary AccessIT DC; (d) providing pre-show on-screen advertising and entertainment, through our wholly-owned subsidiary USM and (e) operating an alternate content distribution company, through our wholly-owned subsidiary, CEG. Although we have retained certain senior management of the acquired businesses and have hired other experienced personnel, 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. We also cannot assure you that we will be able to successfully operate these businesses. Our efforts to expand into these five business areas may prove costly and time-consuming and have become our primary business focus.
increased operating and capital costs;
an inability to effect a viable growth strategy;
service interruptions for our customers; and
an inability to attract and retain customers.
limited operating experience;
net losses;
lack of sufficient customers or loss of significant customers;
insufficient revenues and cash flow to be self-sustaining;
necessary capital expenditures;
an unproven business model;
a changing business focus; and
difficulties in managing potentially rapid growth.
Even though we are among the first to integrate software and systems for the delivery of digital content to movie theatres and other venues, there can be no assurance that certain major movie studios or providers of alternative digital content that currently rely on traditional distribution networks to provide physical delivery of digital files will quickly adopt a different method, particularly electronic delivery, of distributing digital content to movie theatres or other venues or that those major movie studios or content providers that currently utilize electronic delivery to distribute digital content will continue to do so. If the development of digital presentations and changes in the way digital files are delivered does not continue to occur, the demand for
DMS' delivery systems and software will not grow and if new technology is developed which is adopted by major movie studios or providers of alternative digital content, there may be reduced demand for DMS' delivery systems and software.
We cannot assure you that there will be a continued demand for the digital cinema software and delivery services provided by DMS. DMS' profitability depends largely upon the general expansion of digital presentations at theatres, which may not occur for several years. Although AccessIT DC has entered into digital cinema deployment agreements with seven motion picture studios, there can be no assurance that these and other major movie studios which are currently 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 theatres or that they will release all, some or any of their motion pictures via digital cinema. If the development of digital presentations and changes in the way digital files are delivered does not continue to occur, there may be reduced demand or market for DMS' software and systems.
Our plan to acquire additional businesses involves risks, including our inability to successfully complete an acquisition, our assumption of liabilities, dilution of your investment and significant costs.
Our previous acquisitions involve risks, including our inability to integrate successfully the new businesses and our assumption of certain liabilities.
We have made several 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. In July 2006, we acquired all of the capital stock of USM and in January 2007, the Company, through its wholly-owned subsidiary, CEG, purchased substantially all of the assets of BP/KTF, LLC. We cannot assure you that we will be able to effectively market the services provided by USM and CEG. 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 satisfy adequately 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.
We may not be successful in managing our rapid growth. Since November 2003, we have acquired several businesses including most recently the acquisitions of USM and CEG. These subsidiaries operate in business areas different from our IDC operations business. The number of our employees has grown from 11 in March 2003 to just under 250 in March 2009. Past growth has placed, and future growth will continue to place, significant challenges on 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 staffs 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.
licensable software products;
rights to certain domain names;
registered service marks on certain names and phrases;
various unregistered trademarks and service marks;
know-how;
rights to certain logos; and
a pending patent application with respect to certain of our software.
We now have, and will continue to have, significant debt obligations. We have notes payable to third parties with principal amounts aggregating $251.2 million as of March 31, 2009. We also have capital lease obligations covering facilities and computer network equipment with principal amounts of $6.0 million as of March 31, 2009.
In August 2007, we issued the 2007 Senior Notes in the aggregate principal amount of $55.0 million. Additionally, AccessIT DC, our indirect wholly-owned subsidiary, has entered into the GE Credit Facility, which permits permited us to borrow up to $217.0 million of which $201.3 million has been drawn down as of March 31, 2009 and AccessIT DC has repaid principal of $15.4 million as of March 31, 2009. As of March 31, 2009, the balance of the GE Credit Facility was $185.8 million and is included in the notes payable to third parties mentioned above. The obligations and restrictions under the GE Credit Facility, the 2007 Senior Notes and our other debt obligations could have important consequences for us, including:
make certain capital expenditures;
incur other indebtedness;
engage in a new line of business;
sell certain assets;
acquire, consolidate with, or merge with or into other companies; and
enter into transactions with affiliates.
create or acquire subsidiaries which do not guarantee the notes;
pay dividends; and
modify authorized capital.
Based on our current level of operations, we believe our cash flow from operations, subsequent borrowings and amended GE Credit Facility terms will be adequate to meet our future liquidity needs through at least March 31, 2010. 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:
reducing capital expenditures;
reducing research and development efforts;
selling assets;
restructuring or refinancing our remaining indebtedness; and
seeking additional funding.
We have incurred losses since our inception in March 2000 and have financed our operations principally through equity investments and borrowings. As of March 31, 2009, we had positive working capital, defined as current assets less current liabilities, of $3.4 million and cash and cash equivalents of $26.3 million; we had an accumulated deficit of $138.1 million and, from inception through such date, and we had provided $0.2 million in cash for operating activities. However, our net losses are likely to continue for the foreseeable future.
Our net losses and cash outflows may increase as and to the extent that we increase the size of our business operations, increase the purchases of Systems for AccessIT DC's Phase I Deployment or Phase 2 DC's Phase II Deployment, 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.
As of March 31, 2009, our directors, executive officers and principal stockholders, those known by the Company to beneficially own more than 5% of the outstanding shares of the Company's Common Stock, beneficially own, directly or indirectly, in the aggregate, approximately 40.2% of our outstanding common stock. In particular, A. Dale Mayo, our President and Chief Executive Officer, beneficially holds all 733,811 shares of Class B common stock, and 280,388 shares of Class A common stock which collectively represent approximately 5.0% of our outstanding common stock, and includes 59,761 restricted shares of Class A common stock, 87,500 shares of Class A common stock held by Mr. Mayo's spouse, of which Mr. Mayo disclaims beneficial ownership, and 12,000 shares of Class A common stock held for the account of Mr. Mayo's grandchildren, the custodian of which accounts is Mr. Mayo's spouse, of which Mr. Mayo also disclaims beneficial ownership. 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. Due to the supervoting Class B common stock, Mr. Mayo has approximately 21.8% of our 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. Also, certain corporate actions directed by our officers may not necessarily inure to the proportional benefit of other stockholders of our company.
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 theatre industry are integral to our business, particularly in the business areas of AccessIT SW, DMS and AccessIT DC. Although we have obtained two $5.0 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 $5.0 million, and while we are the beneficiary of each policy, under one of the policies the proceeds are to be used to repurchase, after reimbursement of all premiums paid by us, 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 certain officers of our subsidiaries. In addition, our future success will depend upon our ability to hire, train, integrate and retain qualified new employees.
Our IDCs 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. Although we are still the lessee of the IDCs, substantially all of the revenues and expenses are being realized by FiberMedia, unrelated third parties, and not the Company.
In connection with the disposition of our Data Center Services, we entered into a MCA with FiberMedia, unrelated third parties, to operate our IDCs. FiberMedia operates a network of geographically distributed IDCs. We have assigned our IDC customer contracts to FiberMedia, and going forward, FiberMedia will be responsible for all customer service issues, including the maintenance of the IDCs, sales, installation of customer equipment, cross connects, electrical and other customer needs. Among such items are certain operating leases which expire from June 2009 through January 2016. As of March 31, 2009, obligations under these operating leases totaled $6.2 million. We will attempt to obtain landlord consents to assign each facility lease to FiberMedia. Until such landlord consents are obtained, we will remain as the lessee and pursuant to the MCA, FiberMedia will reimburse our costs under the facility leases, including rent, at an escalating percentage, starting at 50% in May 2007 and increasing to 100% in May 2008 and thereafter through the remaining term of each IDC lease. 100% of all other operating costs for each IDC, are payable by FiberMedia through the term of each IDC lease. We cannot assure you that the existing landlords would consent to the assignment of these leases to a buyer of our data centers. As a result, we may have continuing obligations under these leases, which could have a material adverse effect on our business, financial position and results of operations.
The stock markets have experienced extreme price and volume fluctuations that have affected the market prices of equity securities of many companies that may be unrelated or disproportionate to the operating results of such companies. These broad market movements may adversely affect the market price of the Company's Common Stock. The Company's Common Stock is presently listed on NASDAQ. Although we are not currently in jeopardy of delisting, we cannot assure you that NASDAQ will continue its suspension of the continued listing requirement relating to minimum bid prices of securities currently scheduled to expire on July 20, 2009. If NASDAQ discontinues such suspension and our Common Stock continues to trade at current prices, we cannot assure you that we will meet the criteria for continued listing and our Common Stock could become delisted. Any such delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the loss of confidence in our financial stability by suppliers, customers and employees. If the Company's Common Stock is delisted from the NASDAQ, we may face a lengthy process to re-list the Company's Common Stock, if we are able to re-list the Company's Common Stock at all, and the liquidity that NASDAQ provides will no longer be available to investors.
While we believe we currently have effective internal control over financial reporting, we are required to assess our internal control over financial reporting on an annual basis and any future adverse results from such assessment could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 and the accompanying rules and regulations promulgated by the SEC to implement it required us to include in our Form 10-K annual reports by our management and independent auditors regarding the effectiveness of our internal control over financial reporting. The reports included, among other things, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year. These assessments did not result in the disclosure of any material weaknesses in our internal control over financial reporting identified by management. During this process, if our management identified one or more material weaknesses in our internal control over financial reporting that cannot
be remediated in a timely manner, we would not be unable to assert such internal control as effective. While we currently believe our internal control over financial reporting is effective, the effectiveness of our internal controls in future periods is subject to the risk that our controls may become inadequate because of changes in conditions, and, as a result, the degree of compliance of our internal control over financial reporting with the applicable policies or procedures may deteriorate. If, in the future, we are unable to conclude that our internal control over financial reporting is effective (or if our independent auditors disagree with our conclusion), we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.
New technologies may make our Digital Cinema Assets less desirable to motion picture studios or exhibitors of digital content and result in decreasing revenues.
The demand for our Systems and other assets in connection with our digital cinema business (collectively, our "Digital Cinema Assets") may be affected by future advances in technology and changes in customer demands. We cannot assure you that there will be continued demand for our Digital Cinema Assets. Our profitability depends largely upon the continued use of digital presentations at theatres. Although we have entered into long term agreements with major motion picture studios and independent studios (the "Studio Agreements"), there can be no assurance that these studios will continue to distribute digital content to movie theatres. If the development of digital presentations and changes in the way digital files are delivered does not continue or technology is used that is not compatible with our Systems, there may be no viable market for our Systems. Any reduction in the use of our Systems resulting from the development and deployment of new technology may negatively impact our revenues and the value of our Systems.
We have concentration in our business with respect to our major motion picture studio customers, and the loss of one or more of our largest studio customers could have a material adverse effect on us.
Our Studio Agreements account for a significant portion of our revenues. Together these studios generated 90%, 82%, 51%, 74%, 79% and 56% of AccessIT DC's, Phase 2 DC's, AccessIT SW's, AccessDM's, the Media Service segment's, and consolidated revenues, respectively, for the fiscal year ended March 31, 2009.
The Studio Agreements are critical to our business. If some of the Studio Agreements were terminated prior to the end of their terms or found to be unenforceable, or if our Systems are not upgraded or enhanced as necessary, or if we had a material failure of our Systems, it may have a material adverse effect on our revenue, profitability, financial condition and cash flows. The Studio Agreements also generally provide that the VPF rates and other material terms of the agreements may not be more favorable to one studio as compared to the others.
Termination of the MLAs could damage our revenue and profitability.
The master license agreements with each of our licensed exhibitors (the "MLAs") are critical to our business. The MLAs each have a term which expires in 2020 and provide the exhibitor with an option to purchase our Systems or to renew for successive one year periods up to ten years thereafter. The MLAs also require our suppliers to upgrade our Systems when technology necessary for compliance with DCI Specification becomes commercially available and we may determine to enhance the Systems which may require additional capital expenditures. If any one of the MLAs were terminated prior to the end of its term, not renewed at its expiration or found to be unenforceable, or if our Systems are not upgraded or enhanced as necessary, it would have a material adverse effect on our revenue, profitability, financial condition and cash flows.
We have concentration in our business with respect to our major licensed exhibitors, and the loss of one or more of our largest exhibitors could have a material adverse effect on us.
Over 60% of our Systems are in theatres owned or operated by one large exhibitor. The loss of this exhibitor or another of our major licensed exhibitors could have a negative impact on the aggregate receipt of VPF revenues as a result of the loss of any associated MLAs. Although we do not receive revenues from licensed exhibitors and we have attempted to limit our licenses to only those theatres which we believe are successful, each MLA with our licensed exhibitors is important, depending on the number of screens, to our business since our VPF revenues are generated based on screen turnover at theatres. If the MLA with a significant exhibitor was terminated prior to the end of its term, it would have a material adverse effect on our revenue, profitability, financial condition and cash flows. There can be no guarantee that the MLAs with our licensed exhibitors will not be terminated prior to the end of its term.
We depend on a limited number of suppliers for our Systems, and any delay in supply could affect our ability to grow.
We currently purchase Systems from a limited number of suppliers, and we were dependent on one supplier for our Systems in our Phase One Deployment. The inability to obtain certain components on a timely basis would limit our ability to complete installation of such Systems in a timely manner and would affect the amount of future revenues.
An increase in the use of alternative film distribution channels and other competing forms of entertainment could drive down movie theatre attendance, which, if causing significant theatre closures or a substantial decline in motion picture production, may lead to reductions in our revenues.
Various exhibitor chains which are the Company's distributors face competition for patrons from a number of alternative motion picture distribution channels, such as DVD, network and syndicated television, video on-demand, pay-per-view television and downloading utilizing the internet. These exhibitor chains also compete with other forms of entertainment competing for patrons' leisure time and disposable income such as concerts, amusement parks and sporting events. An increase in popularity of these alternative film distribution channels and competing forms of entertainment could drive down movie theatre attendance and potentially cause certain of our exhibitors to close their theatres for extended periods of time. Significant theatre closures could in turn have a negative impact on the aggregate receipt of our VPF revenues, which in turn may have a material adverse effect on our business and ability to service our debt.
An increase in the use of alternative film distribution channels could also cause the overall production of motion pictures to decline, which, if substantial, could have an adverse effect on the businesses of the major studios with which we have Studio Agreements. A decline in the businesses of the major studios could in turn force the termination of certain Studio Agreements prior to the end of their terms. The Studio Agreements with each of the major studios are critical to our business, and their early termination may have a material adverse effect on our revenue, profitability, financial condition and cash flows.
Our revenues and earnings are subject to market downturns.
Our revenues and earnings may fluctuate significantly in the future. General economic or other conditions could cause a downturn in the market for our Systems or technology. The recent financial disruption affecting the banking system and financial markets and the concern as to whether investment banks and other financial institutions will continue operations in the foreseeable future have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets and extreme volatility in fixed income, credit and equity markets. The credit crisis may result in our inability to refinance our outstanding debt obligations or to finance our Phase II Deployment. The recent credit crisis may also result in the inability of our studios, exhibitors or other customers to obtain credit to finance operations; a slowdown in global economies which could result in lower consumer demand for films; counterparty failures negatively impacting our Interest Rate Swap; or increased impairments of our assets. The current volatility in the financial markets and overall economic uncertainty increase the risk of substantial quarterly and annual fluctuations in our earnings. Any of these factors could have a material adverse affect on our business, results of operations and could result in significant additional dilution to shareholders.
Economic conditions could materially adversely affect the Company.
The Company's operations and performance could be influenced by worldwide economic conditions. Uncertainty about current global economic conditions poses a risk as consumers and businesses may postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for the Company's products and services. Other factors that could influence demand include continuing increases in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect on demand for the Company's products and services and on the Company's financial condition and operating results. Uncertainty about current global economic conditions could also continue to increase the volatility of the Company's stock price.
The continued threat of terrorism and ongoing military and other actions may result in decreases in our net income, revenue and assets under management and may adversely affect our business.
The continued threat of terrorism, both within the United States of America and abroad, and the ongoing military and other actions and heightened security measures in response to these types of threats, may cause significant volatility and declines in the capital markets in the United States of America, Europe and elsewhere, loss of life, property damage, additional disruptions to commerce and reduced economic activity. An actual terrorist attack could cause losses from a decrease in our business.
The war on terrorism, the threat of additional terrorist attacks, the political and the economic uncertainties that may result and other unforeseen events may impose additional risks upon and adversely affect the cinema industry and our business. We cannot offer assurances that the threats of future terrorist-like events in the United States of America and abroad or military actions by the United States of America will not have a material adverse effect on our business, financial condition or results of operations.
Changes to existing accounting pronouncements or taxation rules or practices may affect how we conduct our business and affect our reported results of operations.
New accounting pronouncements or tax rules and varying interpretations of accounting pronouncements or taxation practice have occurred and may occur in the future. A change in accounting pronouncements or interpretations or taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. Changes to existing rules and pronouncements, future changes, if any, or the questioning of current practices or interpretations may adversely affect our reported financial results or the way we conduct our business.
Our segments operated from the following leased properties at March 31, 2009.
Administrative and Sales staff offices
Access Digital Server Assets (14)
Operations of Managed Services are based in the IDCs now operated by FiberMedia. Effective July 1, 2008, a portion of the operations of Managed Services operate at the new location in New York indicated above.
Lease has options to renew for two additional ten-year terms and contains a provision for the payment of additional rent if box office revenues exceed certain levels. To date, no additional rent has been paid.
There is no lease renewal provision.
In addition to this office, employees of CEG currently share office space with BP/KTF, LLC in Woodland Hills, California, which charges CEG for a pro-rated share of office space used. This office is currently being sub-leased to an unrelated third party through the remaining period of this lease.
Lease was renewed in February 2009 with a commencement date in June 2009. Lease has an option to renew for one additional five-year term with nine months prior written notice at the then prevailing market rental rate.
USM's previous administrative office lease expired during the fiscal year ended March 31, 2009. As a result, USM combined their administrative and sales staff offices. Lease has an option to renew for up to an additional five years with 90 days prior written notice at the then prevailing market rental rate.
Since May 1, 2007, the IDC facility has been operated by FiberMedia pursuant to a master collocation agreement. The Company and FiberMedia are attempting to have the IDC facility leases assigned to FiberMedia by the landlords, and FiberMedia is attempting to extend the term of the lease for the Jersey City IDC Facility.
Operations of the Access Digital Server Assets are based in the IDC located in the Brooklyn Borough of New York City, now operated by FiberMedia.
Our subsidiary, ADM Cinema, was named as a defendant in an action filed on May 19, 2008 in the Supreme Court of the State of New York, County of Kings by Pavilion on the Park, LLC ("Landlord"). Landlord is the owner of the premises located at 188 Prospect Park West, Brooklyn, New York, known as the Pavilion Theatre. Pursuant to the relevant lease, ADM Cinema leases the Pavilion Theatre from Landlord and operates it as a movie theatre.
In the complaint, Landlord alleges that ADM Cinema violated its obligations under Article 12 of the lease in that ADM Cinema failed to comply with an Order of the Fire Department of the City of New York issued on September 24, 2007 calling for the installation of a sprinkler system in the Pavilion Theatre and that such violation constitutes an event of default under the lease. Landlord seeks to terminate the lease and evict ADM Cinema from the premises and to recover its attorneys' fees and damages for ADM Cinema's alleged "holding over" by remaining on the premises. We have reached agreement in principle with Landlord to settle this matter, but in the event that no settlement is reached, we believe that we have meritorious defenses against these claims and we intend to defend our position vigorously. However, if we do not prevail, any significant loss resulting in eviction may have a material effect on our business, results of operations and cash flows.
Our Class A Common Stock trades publicly on the Nasdaq Global Market ("NASDAQ"), under the trading symbol "CIDM". The following table shows the high and low sales prices per share of our Class A Common Stock as reported by NASDAQ for the periods indicated:
The last reported closing price per share of our Class A Common Stock as reported by NASDAQ on March 31, 2009 was $0.62 per share. As of March 31, 2009, there were approximately 107 holders of record of our Class A Common Stock, not including beneficial owners of our Class A Common Stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.
There is no public trading market for our Class B common stock ("Class B Common Stock"). Each outstanding share of Class B Common Stock may be converted into one share of Class A Common Stock at any time, and from time to time, at the option of the holder and the holder of Class B Common Stock is entitled to ten (10) votes for each share of Class B Common Stock held. As of March 31, 2009, there was one holder of our Class B Common Stock.
We have never paid any cash dividends on our Class A Common Stock or Class B Common Stock (together, the "Common 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 (the "Board"). At the present time, the Company and its subsidiaries, other than AccessIT DC and its subsidiaries, are prohibited from paying dividends under the terms of the 2007 Senior Notes. The holders of our Series A 10% Non-Voting Cumulative Preferred Stock are entitled to receive dividends, however, such dividends will accrue and will not be paid until the Company is permitted under the terms of the 2007 Senior Notes to make such payments.
In January 2009, we issued 129,871 shares of Class A Common Stock as a placement agent fee related to the issuance of preferred stock. There was no underwriter associated with this privately negotiated transaction. These shares were issued in reliance upon applicable exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended.
In connection with the acquisition of CEG in January 2007, CEG entered into a services agreement with SD Entertainment, Inc. ("SDE") to provide certain services, such as the provision of shared office space and certain shared administrative personnel. In January 2009, we issued 22,010 shares of unregistered Class A Common Stock to SDE as partial payment for such services and resources. There was no underwriter associated with this privately negotiated transaction. These shares were issued in reliance upon applicable exemptions from registration under Section 4(2) of the Securities Act.
There were no purchases of shares of our Class A Common Stock made by us or on our behalf during the three months ended March 31, 2009. Although we are currently precluded from purchasing shares of our Class A Common Stock under the terms of the 2007 Senior Notes (see Note 5), we do not anticipate purchasing any shares of our Class A Common Stock in the foreseeable future.
The following tables set forth our historical selected financial and operating data for the periods indicated. The selected financial and operating data should be read together with the other information contained in this document, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," in Item 7 and the audited historical financial statements and the notes thereto included elsewhere in this document. The historical results here are not necessarily indicative of future results.
$ 10,651 $ 16,795 $ 47,110 $ 80,984 $ 83,014
5,811 11,550 22,214 26,569 25,671
4,840 5,245 24,896 54,415 57,343
640 186 848 1,396 587
4 - 2,920 453 945
- - 2,561 - -
- - - 1,588 -
- - - - 6,525
(5,700 ) (9,129 ) (17,800 ) (5,929 ) (4,937 )
5 316 1,425 1,406 372
Interest expense – cash portion
(605 ) (2,237 ) (7,273 ) (22,284 ) (22,775 )
Interest expense – non-cash
(832 ) (1,407 ) (1,903 ) (7,043 ) (4,745 )
- (6,269 ) - - -
- - - (1,122 ) -
33 1,603 (448 ) (715 ) (754 )
Change in fair value of interest rate swap
- - - - (4,529 )
$ (7,099 ) $ (17,123 ) $ (25,999 ) $ (35,687 ) $ (37,368 )
Preferred stock dividends
- - - - (50 )
Net loss attributable to common shareholders
$ (0.73 ) $ (1.22 ) $ (1.10 ) $ (1.40 ) $ (1.36 )
Shares used in computing basic and diluted net loss per
$ 4,779 $ 36,641 $ 29,376 $ 29,655 $ 26,329
$ 1,733 $ 48,851 $ 13,130 $ 14,038 $ 3,419
$ 36,172 $ 122,342 $ 301,727 $ 373,676 $ 322,397
$ 12,682 $ 1,948 $ 164,196 $ 250,689 $ 225,957
Total stockholders' equity $ 10,651 $ 97,774 $ 90,805 $ 68,007 $ 38,787
Other Financial Data (At Period End):
Net cash (used in) provided by operating activities
$ (3,258 ) $ (5,488 ) $ (19,190 ) $ (443 ) $ 33,818
$ (5,925 ) $ (50,872 ) $ (135,277 ) $ (96,855 ) $ (23,735 )
Net cash provided by (used in) financing activities
$ 11,632 $ 88,222 $ 147,202 $ 97,577 $ (13,409 )
The following discussion and analysis should be read in conjunction with our historical consolidated financial statements and the related notes included elsewhere in this document.
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. Forward-looking statements represent, as of the date of this report, our judgment relating to, among other things, future results of operations, growth plans, sales, capital requirements and general industry and business conditions applicable to us. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond the Company's control that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.
Cinedigm Digital Cinema Corp. was incorporated in Delaware on March 31, 2000 and began doing business as Cinedigm Digital Cinema Corp. on November 25, 2008 ("Cinedigm", and collectively with its subsidiaries, the "Company"). The Company provides technology solutions, software services, electronic delivery and content distribution services to owners and distributors of digital content to movie theatres and other venues. The Company has three segments, media services ("Media Services"), media content and entertainment ("Content & Entertainment") and other ("Other"). The Company's Media Services segment provides technology solutions, software services and electronic delivery services to the motion picture and television industries, primarily to facilitate the conversion from analog (film) to digital cinema and has positioned the Company at what it believes to be the forefront of an industry relating to the delivery and management of digital cinema and other content to theatres and other remote venues worldwide. The Company's Content & Entertainment segment provides motion picture exhibition to the general public and cinema advertising and content distribution services to theatrical exhibitors. The Company's Other segment provides hosting services and network access for other web hosting services ("Access Digital Server Assets"). Overall, the Company's goal is to aid in the transformation of movie theatres to entertainment centers by providing a platform of hardware, software and content choices. Additional information related to the Company's reporting segments can be found in Note 9 to the Company's Consolidated Financial Statements.
The following organizational chart provides a graphic representation of our business and our three reporting segments:
We have incurred net losses of $26.0 million, $35.7 million and $37.4 million in the fiscal years ended March 31, 2007, 2008 and 2009, respectively, and until recently, have used cash in operating activities, and we have an accumulated deficit of $38.8 million as of March 31, 2009. We also have significant contractual obligations related to our debt for the next fiscal year 2010 and beyond. We expect to continue generating net losses for the foreseeable future. Certain of our costs could be reduced if our working capital requirements increased. Based on our cash position at March 31, 2009, and expected cash flows from operations, we believe that we have the ability to meet our obligations through March 31, 2010. We are seeking to raise additional capital to refinance certain outstanding debt, to meet equipment requirements related to Phase 2 DC's Phase II Deployment and for working capital as necessary. Although we recently entered into certain agreements related to the Phase II Deployment, there is no assurance that financing for the Phase II Deployment 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. The accompanying consolidated financial statements do not reflect any adjustments which may result from our inability to continue as a going concern.
Useful lives are determined based on an estimate of either physical or economic obsolescence, or both. During the last three fiscal years the Company has not made any revisions to estimated useful lives, nor recorded any impairment charges on its fixed assets.
We account for these software development costs under SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed" ("SFAS No. 86"). SFAS No. 86 states that software development costs that are incurred subsequent to establishing technological feasibility are capitalized until the product is available for general release. Amounts capitalized as software development costs are amortized using the greater of revenues during the period compared to the total estimated revenues to be earned or on a straight-line basis over estimated lives ranging from three to five years. We review 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 charge was recorded for the fiscal years ended March 31, 2007, 2008 and 2009, respectively. Amortization of capitalized software development costs, included in direct operating costs, for the fiscal years ended March 31, 2007, 2008 and 2009 amounted to $0.8 million, $0.6 million and $0.7 million, respectively. Revenues relating to customized software development contracts are recognized on a percentage-of-completion method of accounting using the cost to date to the total estimated cost approach. For the fiscal years ended March 31, 2007, 2008 and 2009, unbilled receivables under such customized software development contracts aggregated $1.4 million, $1.2 million and $0.1 million, respectively. During the fiscal year ended March 31, 2009, the Company reached an agreement with a customer regarding a customized product contract whereby the Company will cease development efforts on the customized product and the customer will complete the development of the product going forward at their sole expense and deliver the completed product back to the Company. The Company will continue to own the product at all times and retains the rights to market the finished product to others. The customer agreed, and has made, certain payments to the Company as settlement of all billed and unbilled amounts.
The carrying value of goodwill and other intangible assets with indefinite lives are reviewed for possible impairment in accordance with SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 addresses the recognition and measurement of goodwill and other intangible assets subsequent to their acquisition. The Company tests its goodwill for impairment annually and in interim periods if certain events occur indicating that the carrying value of goodwill may be impaired. The Company reviews possible impairment of finite lived intangible assets in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The Company records goodwill and intangible assets resulting from past business combinations.
The Company's process of evaluating goodwill for impairment involves the determination of fair value of its four goodwill reporting units: AccessIT SW, The Pavilion Theatre, USM and CEG. Identification of reporting units is based on the criteria contained in SFAS No. 142. The Company normally conducts its annual goodwill impairment analysis during the fourth quarter of each fiscal year, measured as of March 31, unless triggering events occur which require goodwill to be tested as of an interim date. As discussed further below, the Company concluded that one or more triggering events had occurred during the three months ended December 31, 2008 and recorded an impairment charge of $6.5 million. The Company updated the impairment tests as of March 31, 2009 and concluded there was no additional impairment charge.
Inherent in the fair value determination for each reporting unit are certain judgments and estimates relating to future cash flows, including management's interpretation of current economic indicators and market conditions, and assumptions about the Company's strategic plans with regard to its operations. To the extent additional information arises, market conditions change or the Company's strategies change, it is possible that the conclusion regarding whether the Company's remaining goodwill is impaired could change and result in future goodwill impairment charges that will have a material effect on the Company's consolidated financial position or results of operations.
The discounted cash flow methodology establishes fair value by estimating the present value of the projected future cash flows to be generated from the reporting unit. The discount rate applied to the projected future cash flows to arrive at the present value is intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. The discounted cash flow methodology uses our projections of financial performance for a five-year period. The most significant assumptions used in the discounted cash flow methodology are the discount rate, the terminal value and expected future revenues and gross margins, which vary among reporting units. The discount rates utilized as of the December 31, 2008 testing date range from 16.0% - 27.5% based on the estimated market participant weighted average cost of capital ("WACC") for each unit. The market participant based WACC for each unit gives consideration to factors including, but not limited to, capital structure, historic and projected financial performance, and size.
The market multiple methodology establishes fair value by comparing the reporting unit to other companies that are similar, from an operational or industry standpoint and considers the risk characteristics in order to determine the risk profile relative to the comparable companies as a group. The most significant assumptions are the market multiplies and the control premium. The Company has elected not to apply a control premium to the fair value conclusions for the purposes of impairment testing.
The Company then assigns a weighting to the discounted cash flows and market multiple methodologies to derive the fair value of the reporting unit. The income approach is weighted 60% to 70% and the market approach is weighted 40% to 30% to derive the fair value of the reporting unit. The weightings are evaluated each time a goodwill impairment assessment is performed and give consideration to the relative reliability of each approach at that time.
Based on the results of our impairment evaluation, the Company recorded an impairment charge of $6.5 million in the quarter ended December 31, 2008 related to our content and entertainment reporting segment.
The changes in the carrying amount of goodwill are as follows ($ in thousands):
Balance at March 31, 2008
Goodwill impairment – USM
Goodwill impairment – The Pavilion Theatre
Goodwill impairment – CEG
The impairment charges were recorded following a period of decline in the Company's market capitalization and overall negative economic conditions during the fiscal year ended March 31, 2009. Declines were noted in the market valuations of designated peer group companies of each of the above reporting units and were a significant factor in the resulting impairment charges. The impairment charge recorded to the USM reporting unit was further impacted by a recent downturn in in-theatre advertising sales due to deterioration in overall economic conditions and a resulting reduction in the forecasted discounted cash flows. The impairment charge recorded for the Pavilion Theatre reporting unit was impacted by revised revenue estimates to better align its forecasted operations due to current recessionary trends and its current business model within the Company. Also, CEG's near term forecasts were revised to reflect what is anticipated to be a competitive landscape for the provision of alternative content, however offset by expected rapid digital screen count growth and alternative content availability. The impairment tests did not reveal any impairment noted in the remaining goodwill reporting units, primarily Software, due to historical and expected sales of software products to the theatrical market, primarily to support the digital cinema rollout.
Media Services revenues are generated as follows:
Virtual print fees ("VPFs") and alternative content fees ("ACFs").
Staff Accounting Bulletin ("SAB") No. 104 "Revenue Recognition in Financial Statements" ("SAB No. 104").
Software multi-element licensing arrangements, software maintenance contracts, and professional consulting services, which includes systems implementation, training, and other professional services, delivery revenues via satellite and hard drive, data encryption and preparation fee revenues, satellite network monitoring and maintenance fees.
Statement of Position ("SOP") 97-2, "Software Revenue Recognition"
Custom software development services.
SOP 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" ("SOP 81-1")
Customer licenses and application service provider ("ASP Service") agreements.
VPFs are earned pursuant to contracts with movie studios and distributors, whereby amounts are payable to AccessIT DC and to Phase 2 DC according to a fixed fee schedule, when movies distributed by the studio are displayed on screens utilizing the Company's Systems installed in movie theatres. One VPF is payable for every movie title displayed per System. The amount of VPF revenue is therefore dependent on the number of movie titles released and displayed on the Systems in any given accounting period. VPF revenue is recognized in the period in which the movie first opens for general audience viewing in that digitally-equipped movie theatre, as AccessIT DC's and Phase 2 DC's performance obligations have been substantially met at that time.
ACFs are earned pursuant to contracts with movie exhibitors, whereby amounts are payable to AccessIT DC and Phase 2 DC, generally as a percentage of the applicable box office revenue derived from the exhibitor's showing of content other than feature films, such as concerts and sporting events (typically referred to as "alternative content"). ACF revenue is recognized in the period in which the alternative content opens for audience viewing.
For software multi-element licensing arrangements that do not require significant production, modification or customization of the licensed software, revenue is recognized for the various elements as follows: revenue for the licensed software element is recognized upon delivery and acceptance of the licensed software product, as that represents the culmination of the earnings process and the Company has no further obligations to the customer, relative to the software license. Revenue earned from consulting services is recognized upon the performance and completion of these services. Revenue earned from annual software maintenance is recognized ratably over the maintenance term (typically one year).
Revenues relating to customized software development contracts are recognized on a percentage-of-completion method of accounting in accordance with SOP 81-1.
Revenue is deferred in cases where: (1) a portion or the entire contract amount cannot be recognized as revenue, due to non-delivery or pre-acceptance of licensed software or custom programming, (2) uncompleted implementation of ASP Service arrangements, or (3) unexpired pro-rata periods of maintenance, minimum ASP Service fees or website subscription fees. As license fees, maintenance fees, minimum ASP Service fees and website subscription fees are often paid in advance, a portion of this revenue is deferred until the contract ends. Such amounts are classified as deferred revenue and are recognized as earned revenue in accordance with the Company's revenue recognition policies described above.
Managed Services' revenues, which consist of monthly recurring billings pursuant to network monitoring and maintenance contracts, are recognized as revenues in the month earned, and other non-recurring billings are recognized on a time and materials basis as revenues in the period in which the services were provided.
Content & Entertainment revenues are generated as follows:
Movie theatre admission and concession revenues.
SOP 00-2, "Accounting by Producers or Distributors of Films" ("SOP 00-2")
Cinema advertising barter revenues.
The Emerging Issues Task Force ("EITF") 99-17, "Accounting for Advertising Barter Transactions" ("EITF 99-17")
Movie theatre admission and concession revenues are generated at the Company's nine-screen digital movie theatre, the Pavilion Theatre. Movie theatre admission revenues are recognized on the date of sale, as the related movie is viewed on that date and the Company's performance obligation is met at that time. Concession revenues consist of food and beverage sales and are also recognized on the date of purchase.
USM has contracts with exhibitors to display pre-show advertisements on their screens, in exchange for certain fees paid to the exhibitors. USM then contracts with businesses of various types to place their advertisements in select theatre locations, designs the advertisement, and places it on-screen for specific periods of time, generally ranging from three to twelve months. Cinema advertising service revenue, and the associated direct selling, production and support cost, is recognized on a straight-line basis over the period the related in-theatre advertising is displayed, pursuant to the specific terms of each advertising contract. USM has the right to receive or bill the entire amount of the advertising contract upon execution, and therefore such amount is recorded as a receivable at the time of execution, and all related advertising revenue and all direct costs actually incurred are deferred until such time as the a in-theatre advertising is displayed.
The right to sell and display such advertising, or other in-theatre programs, products and services, is based upon advertising contracts with exhibitors which stipulate payment terms to such exhibitors for this right. Payment terms generally consist of either fixed annual payments or annual minimum guarantee payments, plus a revenue share of the excess of a percentage of advertising revenue over the minimum guarantee, if any. The Company recognizes the cost of fixed and minimum guarantee payments on a straight-line basis over each advertising contract year, and the revenue share cost, if any, in accordance with the terms of the advertising contract.
Distribution fee revenue is recognized for the theatrical distribution of third party feature films and alternative content at the time of exhibition based on CEG's participation in box office receipts. CEG has the right to receive or bill a portion of the theatrical distribution fee in advance of the exhibition date, and therefore such amount is recorded as a receivable at the time of execution, and all related distribution revenue is deferred until the third party feature films' or alternative content's theatrical release date.
Barter advertising revenue is recognized for the fair value of the advertising time surrendered in exchange for alternative content. The Company includes the value of such exchanges in both Content & Entertainment's net revenues and direct operating expenses. There may be a timing difference between the screening of alternative content and the screening of the underlying advertising used to acquire the content. In accordance with EITF 99-17, the acquisition cost is being recorded and recognized as a direct operating expense by CEG when the alternative content is screened, and the underlying advertising is being deferred and recognized as revenue ratably over the period such advertising is screened by USM. For the fiscal years ended March 31, 2007, 2008 and 2009, the Company has recorded $0, $0 and $1.6 million, respectively, in net revenues and direct operating expenses with no impact on net loss.
Other revenues, attributable to the Access Digital Server Assets, were generated as follows:
Hosting and network access fees.
Since May 1, 2007, the Company's internet data centers ("IDCs") have been operated by FiberMedia AIT, LLC and Telesource Group, Inc. (together, "FiberMedia"), unrelated third parties, pursuant to a master collocation agreement. Although the Company is still the lessee of the IDCs, substantially all of the revenues and expenses were being realized by FiberMedia and not the Company and since May 1, 2008, 100% of the revenues and expenses are being realized by FiberMedia.
($ in thousands)
$ 53,917 $ 59,049 10 %
25,767 22,720 (12 )%
1,300 1,245 (4 )%
$ 80,984 $ 83,014 3 %
Revenues were $81.0 million and $83.0 million for the fiscal years ended March 31, 2008 and 2009, respectively, an increase of $2.0 million or 3%. In the Media Service segment, the increase in revenues was primarily due to a 14% increase in VPF revenues, attributable to the increased number of Systems installed in movie theatres, following the completion of our Phase I Deployment with 3,724 screens. We experienced a 24% increase in revenues from delivery of movies to digitally equipped theatres, due to the increase in the number of such theatres over the last year, as well as increases in satellite revenues and ACF revenues. We also experienced an overall 46% decline in software revenues, mainly due to a 93% decline of one-time license fees from our TCC software realized during the Phase I Deployment. We expect these software license fees to resume as Systems are deployed in our Phase II Deployment, and a possible international deployment of Systems. In the Content & Entertainment segment, revenues decreased 12% due to a 24% decline in in-theatre advertising revenues, attributable to the elimination of various under-performing customer contracts and also because of economic conditions in fiscal year 2009 which negatively impacted the advertising industry, offset by non-cash barter revenues of $1.6 million, which represents the fair value of advertising provided to alternative content providers of CEG, and a 5% increase in distribution revenues by CEG of alternative content and content sponsorship revenues, relating to digitally-equipped locations. The primary driver of the increased revenues is the number of programs CEG is distributing, together with the nationwide (and anticipated worldwide) conversion of theatres to digital capabilities, a trend the Company expects to continue. In addition to the distribution of independent motion pictures, the Company also expects that with its implementation of the CineLiveSM product into movie theatres, CEG's revenues will increase from the distribution of live 2D and 3D content such as concerts and sporting events. We expect consolidated revenues to generally remain near current levels until there is an increase in the number of Systems deployed from our Phase II Deployment, which will drive VPFs and other revenue sources including content delivery and distribution of alternative content generated from digitally equipped movie theatres. We are dependant on the availability of suitable financing for any large scale Phase II Deployment. To date such sources of financing are still being pursued.
Direct Operating Expenses
Direct operating costs:
$ 8,938 $ 8,466 (5 )%
16,749 16,310 (3 )%
882 895 1 %
$ 26,569 $ 25,671 (3 )%
Total direct operating costs were $26.6 million and $25.7 million for the fiscal years ended March 31, 2008 and 2009, respectively, a decrease of $0.9 million or 3%. The decrease in the Media Services segment and the Content & Entertainment segment was primarily related to reduced staffing levels and the Content & Entertainment segment also decreased due to reduced minimum guaranteed obligations under theatre advertising agreements with exhibitors for displaying cinema advertising offset by non-cash content acquisition expenses of $1.6 million for CEG related to the fair value of advertising provided by USM. Other than these non-cash content acquisition expenses, we expect direct operating expenses to decrease or remain consistent as compared to prior periods.
$ 6,137 $ 4,153 (32 )%
9,377 6,679 (29 )%
$ 23,170 $ 18,070 (22 )%
Total selling, general and administrative expenses were $23.2 million and $18.1 million for the fiscal years ended March 31, 2008 and 2009, respectively, a decrease of $5.1 million or 22%. The decrease was primarily related to reduced staffing levels in both the Media Services segment and the Content & Entertainment segment, as well as reduced professional fees within Corporate. Following the completion of our Phase I Deployment, overall headcount reductions have now stabilized. As of March 31, 2008 and 2009, we had 295 and 242 employees, respectively, of which 45 and 42, respectively, were part-time employees and 74 and 43, respectively, were sales personnel. Due to reduced headcount levels primarily from the consolidation of sales territories in USM, resulting in a reduced sales and administrative work force within the Content & Entertainment segment, we expect selling, general and administrative expenses to stabilize as compared to prior periods. We expect the Media Services' selling, general and administrative expenses to remain consistent as compared to prior periods until a Phase II Deployment begins, when we would expect a slight increase.
During the fiscal year ended March 31, 2008, we recorded an expense for the impairment of intangible asset of $1.6 million. In connection with the CEG Acquisition, approximately $2.1 million of the purchase price was allocated to a certain customer contract. During the fiscal year ended March 31, 2008, the customer decided not to continue its contract with CEG. As a result, the unamortized balance of $1.6 million was charged to expense and recorded as an impairment of intangible asset in the consolidated financial statements.
During the fiscal year ended March 31, 2009, the Company concluded that the fair value of its reporting units within the Content & Entertainment segment, was below the carrying amount and recorded an impairment charge of $6.5 million. This resulted from the continued decline in our market capitalization, the extremely depressed economic conditions generally, the re-evaluation of our forecasts and other assumptions, and the diminished market values of our identified peer companies.
Depreciation and Amortization Expense on Property and Equipment
Depreciation expense:
422 238 (44 )%
69 64 (7 )%
Total depreciation and amortization expense was $29.3 million and $32.5 million for the fiscal years ended March 31, 2008 and 2009, respectively, an increase of $3.2 million or 11%. The increase was primarily attributable to the increased amount of assets supporting AccessIT DC's Phase I Deployment. Depreciation expense for the fiscal year ended March 31, 2009 included depreciation and amortization expense on all 3,724 Systems while the number of Systems during the fiscal period ended March 31, 2008 increased from 2,275 to 3,724.
Interest income decreased $1.0 million or 74%. The decrease was attributable to lower cash balances compared to the prior year, and lower bank interest rates on deposited funds. We anticipate that interest income will continue to be moderately reduced in future periods.
— — — %
9,325 9,652 4 %
Total interest expense was $29.3 million and $27.5 million for the fiscal years ended March 31, 2008 and 2009, respectively, a decrease of $1.8 million or 6%. Total interest expense included $22.3 million and $22.8 million of interest paid and accrued along with non-cash interest expense of $7.0 million and $4.7 million for the fiscal years ended March 31, 2008 and 2009, respectively. The decrease in interest paid and accrued within the Media Services segment relates to the reduced interest rate on the GE Credit Facility in part due to the Interest Rate Swap (see change in fair value of interest rate swap discussed below), along with less interest related to the reduced outstanding principal balance of the GE Credit Facility offset by increased interest for the $9.6 million of vendor financing. The decrease in interest expense within the Content & Entertainment segment related to reduced interest due to the repayment of an USM term note with a portion of the proceeds from the 2007 Senior Notes in August 2007. The increase in interest expense within Corporate relates to the interest on the 2007 Senior Notes offset by the elimination of interest expense on the $22.0 million of One Year Senior Notes, which were also repaid with the proceeds from the $55.0 million of 2007 Senior Notes in August 2007.
Non-cash interest expense was from $7.0 million and $4.7 million for the fiscal years ended March 31, 2008 and 2009, respectively. The decrease was due to the payment of interest on the $55.0 million of 2007 Senior Notes in cash instead of by issuing shares of Class A Common Stock, along with reduced non-cash interest for the value of the shares issued as payment of interest on the $22.0 million of One Year Senior Notes, which were repaid with the proceeds from the $55.0 million of 2007 Senior Notes in August 2007. Non-cash interest could increase or continue to decrease depending on management's future decisions to pay interest payments on the 2007 Senior Notes in cash or shares of Class A Common Stock.
As a result of the completion of our Phase I Deployment and the continued payments of principal related to the GE Credit Facility, and subject to any Phase II Deployment related borrowings, we expect our interest expense to stabilize.
During the fiscal year ended March 31, 2008, the Corporate segment recorded debt refinancing expense of $1.1 million, of which $0.4 million related to the unamortized debt issuance costs of the One Year Senior Notes and $0.7 million for shares of Class A Common Stock issued to certain holders of the One Year Senior Notes.
The change in fair value of the interest rate swap was $4.5 million in the Media Services segment for the fiscal year ended March 31, 2009 due to the recent decline in Libor rates and the projected outlook for Libor rates remaining below the Company's 2.8% fixed Libor rate under the interest rate swap agreement.
In December 2007, the Financial Accounting Standards Board ("FASB") released SFAS No. 141(R), "Business Combinations (revised 2007)" ("SFAS 141(R)"), which changes many well-established business combination accounting practices and significantly affects how acquisition transactions are reflected in the financial statements. Additionally, SFAS 141(R) will affect how companies negotiate and structure transactions, model financial projections of acquisitions and communicate to stakeholders.
SFAS 141(R) must be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period effective for the Company beginning April 1, 2009. SFAS 141(R) will have an impact on the Company's consolidated financial statements related to any future acquisitions.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51" ("SFAS 160"). SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for the Company beginning April 1, 2009. The Company does not believe that SFAS 160 will have a material impact on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 requires enhanced disclosures about an entity's derivative and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS 161 is effective for the Company beginning April 1, 2009. SFAS 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company does not believe that SFAS 161 will have a material impact on its consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP FAS 142-3"). FSP FAS 142-3 applies to all recognized intangible assets and its guidance is restricted to estimating the useful life of recognized intangible assets. FSP FAS 142-3 is effective for the first fiscal period beginning after December 15, 2008 and must be applied prospectively to intangible assets acquired after the effective date. The Company will be required to adopt FSP FAS 142-3 to intangible assets acquired beginning April 1, 2009.
In May 2009, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles," ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS 162 is effective 60 days following the SEC's approval of Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." The Company does not believe that SFAS 162 will have a material impact on its consolidated financial statements.
In June 2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an Instrument (or an Embedded Feature) is indexed to an Entity's Own Stock" ("EITF 07-5"). The provisions of EITF 07-5 are to be applied to an entity's existing arrangements to reevaluate, in part, whether financial instruments or embedded features within those arrangements are exempt from accounting under SFAS 133. EITF 07-5 clarifies how to determine whether certain instruments or features are indexed to an entity's own stock under EITF Issue No. 01-6, "The Meaning of 'Indexed to a Company's Own Stock'" ("EITF 01-6") and thereby possibly exempt from accounting under FAS 133. The consensus reached in EITF 07-5 supersedes those reached in EITF 01-6. The Company will apply the provisions to its new arrangements as they arise. The application of EITF 07-5 is effective for the Company beginning April 1, 2009. We are currently evaluating the impact of adoption and application of EITF 07-5.
In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1 ("the FSP"). This FSP amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim financial statements as well as in annual financial statements. Prior to this FSP, fair values for these assets and liabilities were only disclosed annually. This FSP applies to all financial instruments within the scope of SFAS 107 and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. This FSP shall be effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, and FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. We will adopt the FSP as of June 30, 2009 and are currently evaluating the disclosure requirements of this new FSP.
In June 2008, the FASB issued Staff Position EITF 03-06-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities ("FSP EITF 03-06-1"). This Staff Position provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method in SFAS No. 128, Earnings per Share. FSP EITF 03-06-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those years
and requires all prior-period earnings per share data to be adjusted retrospectively. FSP EITF 03-06-1 is effective for the Company beginning April 1, 2009. The adoption of FSP EITF 03-06-1 is not expected to have a material impact on the Company's financial statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. We will adopt SFAS 165 in the first quarter of fiscal 2010 and do not expect a material impact on our consolidated financial statements upon adoption.
Our business is primarily driven by the emerging digital cinema marketplace and the primary revenue driver will be the increasing number of digitally equipped screens. There are approximately 38,000 domestic (United States and Canada) movie theatre screens and approximately 107,000 screens worldwide. Approximately 5,200 of the domestic screens are equipped with digital cinema technology, and 3,778 of those screens contain our Systems and software. We anticipate the vast majority of the industry's screens to be converted to digital in the next 5-7 years, and we have announced plans to convert up to an additional 10,000 domestic screens to digital in our Phase II Deployment over the next three years, of which 54 Systems have been installed as of March 31, 2009. For those screens that are deployed by us, the primary revenue source will be VPFs, with the number of digital movies shown per screen, per year will be the key factor for earnings and measuring the VPFs, since the studios pay such fees on a per movie, per screen basis. For all new digital screens, whether or not deployed by us, the opportunity for other forms of revenue also increases. We may generate additional software license fee revenues (mainly from the TCC software which is used by exhibitors to aid in the operation of their systems), ACFs (such as concerts and sporting events) and fees from the delivery of content via satellite or hard drive. In all cases, the number of digitally-equipped screens in the marketplace is the primary determinant of our potential revenue streams, although the emerging presence of competitors for software and content distribution and delivery may limit this opportunity.
In August 2006, AccessIT DC entered into a credit agreement (the "Credit Agreement") with GECC, as administrative agent and collateral agent for the lenders party thereto, and one or more lenders party thereto. As of March 31, 2009, the outstanding principal balance of the GE Credit Facility was $185.8 million at a weighted average interest rate of 7.1%. Further borrowings are not permitted under the GE Credit Facility. The Credit Agreement contains certain restrictive covenants that restrict AccessIT DC and its subsidiaries from making certain capital expenditures, incurring other indebtedness, engaging in a new line of business, selling certain assets, acquiring, consolidating with, or merging with or into other companies and entering into transactions with affiliates. The GE Credit Facility is not guaranteed by the Company or its other subsidiaries, other than AccessIT DC.
In August 2007, AccessIT DC received $9.6 million of vendor financing (the "Vendor Note") for equipment used in AccessIT DC's Phase I Deployment. The Vendor Note bears interest at 11% and may be prepaid without penalty. Interest is due semi-annually commencing February 2008 and is paid by Cinedigm. The balance of the Vendor Note, together with all unpaid interest is due on the maturity date of August 1, 2016. The Vendor Note is not guaranteed by the Company or its other subsidiaries, other than AccessIT DC. As of March 31, 2009, the outstanding principal balance of the Vendor Note was $9.6 million.
In August 2007, we entered into a securities purchase agreement (the "Purchase Agreement") with the purchasers party thereto (the "Purchasers") pursuant to which we issued 10% Senior Notes (the "2007 Senior Notes") in the aggregate principal amount of $55.0 million (the "August 2007 Private Placement") and received net proceeds of approximately $53.0 million. The term of the 2007 Senior Notes is three years which may be extended for one 6 month period at our discretion if certain conditions are met. Interest on the 2007 Senior Notes will be paid on a quarterly basis in cash or, at our option and subject to certain conditions, in shares of its Class A Common Stock ("Interest Shares"). In addition, each quarter, we will issue shares of Class A Common Stock to the Purchasers as payment of additional interest owed under the 2007 Senior Notes based on a formula ("Additional Interest"). We may prepay the 2007 Senior Notes in whole or in part following the first anniversary of issuance of the 2007 Senior Notes, subject to a penalty of 2% of the principal if the 2007 Senior Notes are prepaid prior to the two year anniversary of the issuance and a penalty of 1% of the principal if the 2007 Senior Notes are prepaid thereafter, and subject to paying the number of shares as Additional Interest that would be due through the end of the term of the 2007 Senior Notes. The Purchase Agreement also requires the 2007 Senior Notes to be guaranteed by each of our existing and, subject to certain exceptions, future subsidiaries (the
"Guarantors"), other than AccessIT DC and its respective subsidiaries. Accordingly, each of the Guarantors entered into a subsidiary guaranty (the "Subsidiary Guaranty") with the Purchasers pursuant to which it guaranteed our obligations under the 2007 Senior Notes. We also entered into a Registration Rights Agreement with the Purchasers pursuant to which we agreed to register the resale of any shares of its Class A Common Stock issued pursuant to the 2007 Senior Notes at any time and from time to time. As of March 31, 2009, all shares issued to the holders of the 2007 Senior Notes were registered for resale. Under the 2007 Senior Notes we agreed (i) to limit our total indebtedness to an aggregate of $315.0 million unless certain conditions were met, which conditions have been met allowing us to incur indebtedness in excess of $315.0 million in the aggregate, (ii) not to pay dividends on any capital stock, and (iii) not to, and not to cause our subsidiaries (except for AccessIT DC and its subsidiaries) to, incur indebtedness, with certain exceptions, including an exception for $10.0 million; provided that no more than $5.0 million of such indebtedness is incurred by AccessDM or AccessIT Satellite or any of their respective subsidiaries except as incurred by AccessDM pursuant to a guaranty entered into in accordance with the GE Credit Facility. Additionally, under the 2007 Senior Notes, AccessIT DC and its subsidiaries may incur additional indebtedness in connection with the deployment of Systems beyond our initial rollout of up to 4,000 Systems, if certain conditions are met. As of March 31, 2009, the outstanding principal balance of the 2007 Senior Notes was $55.0 million.
In May 2009, AccessIT DC entered into the fourth amendment (the "GE Fourth Amendment") with respect to the GE Credit Facility (see Note 5) to (1) increase the interest rate from 4.5% to 6% above the Eurodollar Base Rate; (2) set the Eurodollar Base Rate floor at 2.5%; (3) reduce the required amount to be reserved for the payment of interest from nine months of forward cash interest to a fixed $6.9 million, and permitted a one-time payment of $2.6 million to be made from AccessIT DC to its parent Company, AccessDM; (4) increase the quarterly maximum consolidated leverage ratio covenants that AccessIT DC is required to meet on a trailing 12 months basis; (5) increase the maximum consolidated senior leverage ratio covenants that AccessIT DC is required to meet on a trailing 12 months basis; (6) reduce the quarterly minimum consolidated fixed charge coverage ratio covenants that AccessIT DC is required to meet on a trailing 12 months basis and (7) add a covenant requiring AccessIT DC to maintain a minimum unrestricted cash balance of $2.0 million at all times. All of the changes contained in the GE Fourth Amendment are effective as of May 4, 2009 except for the covenant changes in (4), (5) and (6) above, which were effective as of March 31, 2009. In connection with the GE Fourth Amendment, AccessIT DC paid fees to GE and the other lenders totaling $1.0 million. At March 31, 2009 the Company was in compliance with all covenants contained in the GE Credit Facility, as amended and noted above.
As of March 31, 2009, we had cash and cash equivalents of $26.3 million and our working capital was $3.4 million.
Operating activities used net cash of $19.2 million and $0.4 million for the fiscal years ended March 31, 2007 and 2008, respectively, and provided net cash of $33.8 million for the fiscal year ended March 31, 2009. The decrease in cash used by operating activities, from the fiscal year ended March 31, 2007 to the fiscal year ended March 31, 2008, was primarily due to a reduction in cash used for accounts payable and accrued expenses, offset by an increase in accounts receivable and unbilled revenues and additionally offset by adjustments not requiring cash, specifically depreciation and amortization and non-cash interest expense. The increase in cash provided by operating activities, from the fiscal year ended March 31, 2008 to the fiscal year ended March 31, 2009, was primarily due to an increase of non-cash items, specifically the impairment of intangible assets, change in the fair value of our interest rate swap and depreciation and amortization along with improved collections of outstanding accounts receivable, reduced payments for accounts payable and accrued expenses and a reduction of unbilled revenues offset by a slight increase in net loss and increased prepaid expenses We expect operating activities to continue providing cash to operations as the balance of accounts receivable is reduced by collections. However, if and when a Phase II Deployment is accelerated, we would expect an increase in accounts receivable.
Investing activities used net cash of $135.3 million, $96.9 million and $23.7 million for the fiscal years ended March 31, 2007, 2008 and 2009, respectively. The decrease in cash used by investing activities, from the fiscal year ended March 31, 2007 to the fiscal year ended March 31, 2008, was due to reduced payments for purchases of and deposits paid for property and equipment, as our Phase I Deployment was completed during the quarter ended December 2007, offset by reduced maturities of available-for-sale securities. The decrease was due to reduced payments for purchases of and deposits paid for property and equipment, as our Phase I Deployment was completed during the quarter ended December 2007. The decrease in cash used by investing activities, from the fiscal year ended March 31, 2008 to the fiscal year ended March 31, 2009, was due to reduced payments for purchases of and deposits paid for property and equipment, as our Phase I Deployment was completed during the quarter ended December 2007. If and when a Phase II Deployment begins, we would expect an increase in capital expenditures resulting in an increase in cash used by investing activities.
Financing activities provided net cash of $147.2 million and $97.6 million for the fiscal years ended March 31, 2007 and 2008, respectively, and used net cash of $13.4 million for the fiscal year ended March 31, 2009. The decrease in cash provided by financing activities, from the fiscal year ended March 31, 2007 to the fiscal year ended March 31, 2008, was mainly due to reduced borrowings under the GE Credit Facility, offset by increased proceeds from the 2007 Senior Notes and other notes payable. The decrease from cash provided by financing activities to cash used by financing activities, from the fiscal year ended
March 31, 2008 to the fiscal year ended March 31, 2009, was mainly due to principal repayments on various notes payable, mainly $15.4 million on the GE Credit Facility, offset by $4.0 million of proceeds received from preferred stock investors. Financing activities are expected to continue using net cash for principal repayments on the GE Credit Facility, which began in August 2008. Although we have engaged a third-party investment banking firm to assist us in seeking to refinance the GE Credit Facility and to finance the Phase II Deployment, the terms of any such refinancing or financing have not yet been determined. If and when a Phase II Deployment begins, we expect an increase in cash provided by financing activities for borrowings under a financing that we intend to enter into in connection with the Phase II Deployment. Our Phase II Deployment would allow for the purchase of up to 10,000 Systems, which together with installation and related costs, could aggregate approximately $700 million. The cost of such equipment is expected to be funded with a combination of long term debt and payments from exhibitors and other third parties. The Company is currently pursuing various financing options with private parties in connection with the Phase II Deployment. If the Company is not successful in securing funding for its Phase II Deployment from lenders, exhibitors and/or hardware vendors, such deployment would have to be delayed, which would significantly reduce revenue growth.
We have contractual obligations that include long-term debt consisting of notes payable, a revolving credit facility, non-cancelable long-term capital lease obligations for the Pavilion Theatre and computer equipment for USM and Managed Services, non-cancelable operating leases consisting of real estate leases and minimum guaranteed obligations under theatre advertising agreements between USM and exhibitors for displaying cinema advertising.
The following table summarizes our significant contractual obligations as of March 31, 2009:
Contractual Obligations ($ in thousands)
$ 81,345 $ 7,635 $ 59,529 $ 2,117 $ 12,064
Credit facilities (2)
226,590 37,608 77,989 110,993 —
Capital lease obligations
15,495 1,217 2,393 2,284 9,601
Total debt-related obligations, including interest
$ 323,430 $ 46,460 $ 139,911 $ 115,394 $ 21,665
$ 8,999 $ 2,745 $ 3,116 $ 1,857 $ 1,281
USM theatre agreements (4)
Total obligations to be included in operating expenses
$ 29,453 $ 6,816 $ 8,283 $ 6,175 $ 8,179
Purchase obligations (5)
7,360 7,360 — — —
Includes interest on the 2007 Senior Notes to be paid on a quarterly basis that may be paid, at the Company's option and subject to certain conditions, in shares of our Class A Common Stock. Subsequent to the quarter ended June 30, 2008, the Company elected to pay all such interest payments in cash. Interest expense on the 2007 Senior Notes for the fiscal years ended March 31, 2007, 2008 and 2009 amounted to $0, $3.6 million and $5.5 million, respectively. The outstanding principal amount of $55.0 million for the 2007 Senior Notes is due August 2010, but may be extended for one 6 month period at the discretion of the Company to February 2011, if certain conditions are met. Includes the amounts due under the Vendor Note, of which the outstanding principal amount of $9.6 million is not guaranteed by the Company or its other subsidiaries, other than AccessIT DC.
Represents the amount due under the GE Credit Facility including interest thereon which is not guaranteed by the Company or its other subsidiaries, other than AccessIT DC.
Includes operating lease agreements for the IDCs now operated and paid for by FiberMedia, consisting of unrelated third parties, which total aggregates to $6.2 million. The Company will attempt to obtain landlord consents to assign each facility lease to FiberMedia. Until such landlord consents are obtained, the Company will remain as the lessee.
Represents minimum guaranteed obligations under theatre advertising agreements with exhibitors for displaying cinema advertising.
Includes $7.0 million for Systems related to Phase 2 DC's Phase II Deployment, to be funded by Phase 2 DC's credit facility and payments from exhibitors.
We expect to continue to generate net losses for the foreseeable future primarily due to depreciation and amortization, interest on funds advanced under the GE Credit Facility, interest on the 2007 Senior Notes, software development, marketing and promotional activities and the development of relationships with other businesses. Certain of these costs, including costs of
software development and marketing and promotional activities, could be reduced if necessary. The restrictions imposed by the 2007 Senior Notes and the Credit Agreement may limit our ability to obtain financing, make it more difficult to satisfy our debt obligations or require us to dedicate a substantial portion of our cash flow to payments on our existing debt obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other corporate requirements. We are seeking to raise additional capital to refinance certain outstanding debt, and also for equipment requirements related to our Phase II Deployment or for working capital as necessary. Although we recently entered into certain agreements with studio and exhibitors related to the Phase II Deployment, there is no assurance that financing for the Phase II Deployment 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. The accompanying consolidated financial statements do not reflect any adjustments which may result from our inability to continue as a going concern.
In April 2009, funds in the amount of $3.7 million were drawn down on the Barco Related Facility (see Note 5) by our indirectly wholly-owned subsidiary, Phase 2 B/AIX, which requires interest-only payments at 7.3% per annum through December 31, 2009 and principal installments commencing in March 2010.
In May 2009, AccessIT DC entered into the GE Fourth Amendment with respect to the GE Credit Facility (as discussed previously under "Liquidity and Capital Resources").
Consolidated Statements of Operations for the fiscal years ended March 31, 2008 and 2009
Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2008 and 2009
Consolidated Statements of Stockholders' Equity for the fiscal years ended March 31, 2008 and 2009
We have audited the accompanying consolidated balance sheets of Access Integrated Technologies, Inc. d/b/a Cinedigm Digital Cinema Corp. (the "Company") as of March 31, 2008 and 2009, and the related consolidated statements of operations, cash flows and stockholders' equity for the years 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 audits.
We conducted our audits 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting as of March 31, 2009. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2008 and 2009, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Fair value of interest rate swap
Preferred stock, 15,000,000 shares authorized; issued and outstanding:
Series A 10%-$0.001 par value per share; 20 shares authorized; 0 and 8 shares issued and outstanding, at
March 31, 2008 and March 31, 2009, respectively. Liquidation preference $4,050
Class A common stock, $0.001 par value per share; 40,000,000 and 65,000,000 shares
authorized at March 31, 2008 and March 31, 2009, respectively; 26,143,612 and 27,544,315 shares issued
and 26,092,172 and 27,492,875 shares outstanding at March 31, 2008 and March 31, 2009, respectively
authorized; 733,811 shares issued and outstanding, at March 31, 2008 and
March 31, 2009, respectively
For the fiscal years ended
— 6,525
Loss from operations before other expense
(5,929 ) (4,937 )
(29,327 ) (27,520 )
(1,122 ) —
(715 ) (754 )
— (4,529 )
$ (35,687 ) $ (37,368 )
— (50 )
Net loss per Class A and Class B common share:
$ (1.40 ) $ (1.36 )
Weighted average number of Class A and Class B common shares outstanding: