CINEVERSE CORP.
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
(Mark
One)
x
QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended: December 31, 2009
o
TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
For the
transition period from --- to ---
Commission
File Number: 001-31810
______________________________________
Cinedigm
Digital Cinema Corp.
(Exact
Name of Registrant as Specified in its Charter)
______________________________________
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Delaware
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22-3720962
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(State
or Other Jurisdiction of Incorporation
or
Organization)
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(I.R.S.
Employer Identification No.)
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55
Madison Avenue, Suite 300, Morristown New Jersey 07960
(Address
of Principal Executive Offices, Zip Code)
(973-290-0080)
(Registrant’s
Telephone Number, Including Area Code)
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Indicate
by check mark whether the registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
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Yes
x
No
o
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Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and
post such files).
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Yes
o
No
o
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Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large
accelerated filer
o
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Accelerated
filer
o
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Non-accelerated
filer
o
(Do not check if a
smaller reporting company)
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Smaller reporting company
x
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
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Yes
o
No
x
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As
of February 5, 2010, 28,032,875 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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CINEDIGM
DIGITAL CINEMA CORP.
CONTENTS
TO FORM 10-Q
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PART
I --
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FINANCIAL
INFORMATION
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Page
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Item
1.
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Financial
Statements (Unaudited)
|
|
|
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Condensed
Consolidated Balance Sheets at March 31, 2009 and December 31, 2009
(Unaudited)
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1
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|
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Unaudited
Condensed Consolidated Statements of Operations for the Three and Nine
Months ended December 31, 2008 and 2009
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3
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Unaudited
Condensed Consolidated Statements of Cash Flows for the Nine Months ended
December 31, 2008 and 2009
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4
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Notes
to Unaudited Condensed Consolidated Financial Statements
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5
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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30
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Item
4T.
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Controls
and Procedures
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43
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PART
II --
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OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
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44
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Item
1A.
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Risk
Factors
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44
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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45
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Item
3.
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Defaults
Upon Senior Securities
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46
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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46
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Item
5.
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Other
Information
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46
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Item
6.
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Exhibits
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46
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Signatures
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47
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Exhibit
Index
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48
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CINEDIGM
DIGITAL CINEMA CORP.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except for share data)
|
March
31,
2009
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December
31,
2009
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|||||||
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ASSETS
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(Unaudited)
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|||||||
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Current
assets
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||||||||
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Cash
and cash equivalents
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$ | 26,329 | $ | 12,118 | ||||
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Restricted
available-for-sale investments
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— | 5,764 | ||||||
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Accounts
receivable, net
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13,884 | 13,073 | ||||||
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Deferred
costs, current portion
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3,936 | 3,013 | ||||||
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Unbilled
revenue, current portion
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3,082 | 5,061 | ||||||
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Prepaid
and other current assets
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1,798 | 1,856 | ||||||
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Note
receivable, current portion
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616 | 165 | ||||||
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Total
current assets
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49,645 | 41,050 | ||||||
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Restricted
available-for-sale investments
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— | 3,492 | ||||||
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Restricted
cash
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255 | 7,164 | ||||||
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Security
deposits
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424 | 427 | ||||||
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Property
and equipment, net
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243,124 | 228,037 | ||||||
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Intangible
assets, net
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10,707 | 8,452 | ||||||
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Capitalized
software costs, net
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3,653 | 3,803 | ||||||
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Goodwill
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8,024 | 8,024 | ||||||
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Deferred
costs, net of current portion
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3,967 | 7,295 | ||||||
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Unbilled
revenue, net of current portion
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1,253 | 966 | ||||||
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Note
receivable, net of current portion
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959 | 843 | ||||||
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Accounts
receivable, net of current portion
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386 | 386 | ||||||
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Total
assets
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$ | 322,397 | $ | 309,939 | ||||
See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements
1
CINEDIGM
DIGITAL CINEMA CORP.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except for share data)
(continued)
|
March
31,
2009
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December
31,
2009
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|||||||
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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(Unaudited)
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|||||||
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Current
liabilities
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||||||||
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Accounts
payable and accrued expenses
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$ | 14,954 | $ | 7,333 | ||||
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Current
portion of notes payable, non-recourse
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24,824 | 25,791 | ||||||
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Current
portion of notes payable
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424 | 181 | ||||||
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Current
portion of capital leases
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175 | 499 | ||||||
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Current
portion of deferred revenue
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5,535 | 4,916 | ||||||
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Current
portion of customer security deposits
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314 | 104 | ||||||
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Total
current liabilities
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46,226 | 38,824 | ||||||
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Notes
payable, non-recourse, net of current portion
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170,624 | 153,637 | ||||||
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Notes
payable, net of current portion
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55,333 | 67,633 | ||||||
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Capital
leases, net of current portion
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5,832 | 5,721 | ||||||
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Warrant
liability
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— | 13,695 | ||||||
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Interest
rate swap
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4,529 | 2,453 | ||||||
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Deferred
revenue, net of current portion
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1,057 | 1,976 | ||||||
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Customer
security deposits, net of current portion
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9 | 9 | ||||||
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Total
liabilities
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283,610 | 283,948 | ||||||
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Commitments
and contingencies (see Note 7)
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||||||||
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Stockholders’
Equity
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||||||||
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Preferred
stock, 15,000,000 shares authorized;
Series
A 10% - $0.001 par value per share; 20 shares authorized; 8 shares issued
and outstanding at March 31, 2009 and December 31, 2009, respectively.
Liquidation preference $4,050
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3,476 | 3,556 | ||||||
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Class
A common stock, $0.001 par value per share; 65,000,000 and 75,000,000
shares authorized at March 31, 2009 and December 31, 2009, respectively;
27,544,315 and 28,084,315 shares issued and 27,492,875 and 28,032,875
shares outstanding at March 31, 2009 and December 31, 2009,
respectively
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27 | 28 | ||||||
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Class
B common stock, $0.001 par value per share; 15,000,000 shares authorized;
733,811 shares issued and outstanding, at March 31, 2009 and December 31,
2009, respectively
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1 | 1 | ||||||
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Additional
paid-in capital
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173,565 | 175,596 | ||||||
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Treasury
stock, at cost; 51,440 Class A shares
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(172 | ) | (172 | ) | ||||
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Accumulated
deficit
|
(138,110 | ) | (152,958 | ) | ||||
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Accumulated
other comprehensive loss
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— | (60 | ) | |||||
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Total
stockholders’ equity
|
38,787 | 25,991 | ||||||
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Total
liabilities and stockholders’ equity
|
$ | 322,397 | $ | 309,939 | ||||
See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements
2
CINEDIGM
DIGITAL CINEMA CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except for share and per share data)
(Unaudited)
|
For
the Three
Months
Ended
December
31,
|
For
the Nine
Months
Ended
December
31,
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|||||||||||||||
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2008
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2009
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2008
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2009
|
|||||||||||||
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Revenues
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$
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22,710
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$
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21,769
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$
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65,129
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$
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60,316
|
||||||||
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Costs
and Expenses:
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||||||||||||||||
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Direct
operating (exclusive of depreciation and amortization shown
below)
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7,068
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6,585
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19,597
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18,113
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||||||||||||
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Selling,
general and administrative
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4,691
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4,158
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13,711
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12,100
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||||||||||||
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Provision
for doubtful accounts
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98
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144
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271
|
408
|
||||||||||||
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Research
and development
|
107
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47
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207
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151
|
||||||||||||
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Stock-based
compensation
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295
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346
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653
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1,112
|
||||||||||||
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Impairment
of goodwill
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6,525
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—
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6,525
|
—
|
||||||||||||
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Depreciation
and amortization of property and equipment
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8,126
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8,286
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24,394
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24,762
|
||||||||||||
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Amortization
of intangible assets
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821
|
740
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2,669
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2,255
|
||||||||||||
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Total
operating expenses
|
27,731
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20,306
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68,027
|
58,901
|
||||||||||||
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Income
(loss) from operations
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(5,021
|
)
|
1,463
|
(2,898
|
)
|
1,415
|
||||||||||
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Interest
income
|
88
|
101
|
311
|
236
|
||||||||||||
|
Interest
expense
|
(6,935
|
)
|
(9,261
|
)
|
(21,101
|
)
|
(25,602
|
)
|
||||||||
|
Extinguishment
of debt
|
—
|
—
|
—
|
10,744
|
||||||||||||
|
Other
expense, net
|
(162
|
)
|
(153
|
)
|
(488
|
)
|
(454
|
)
|
||||||||
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Change
in fair value of interest rate swap
|
(5,411
|
)
|
853
|
(3,846
|
)
|
2,076
|
||||||||||
|
Change
in fair value of warrant liability
|
—
|
613
|
—
|
(2,963
|
)
|
|||||||||||
|
Net
loss
|
$
|
(17,441
|
)
|
$
|
(6,384
|
)
|
$
|
(28,022
|
)
|
$
|
(14,548
|
)
|
||||
|
Preferred
stock dividends
|
—
|
(100
|
)
|
—
|
(300
|
)
|
||||||||||
|
Net
loss attributable to common stockholders
|
$
|
(17,441
|
)
|
$
|
(6,484
|
)
|
$
|
(28,022
|
)
|
$
|
(14,848
|
)
|
||||
|
Net
loss per Class A and Class B common share - basic and
diluted
|
$
|
(0.63
|
)
|
$
|
(0.23
|
)
|
$
|
(1.03
|
)
|
$
|
(0.52
|
)
|
||||
|
Weighted
average number of Class A and Class B common shares
outstanding:
|
||||||||||||||||
|
Basic
and diluted
|
27,566,462
|
28,766,686
|
27,324,324
|
28,572,727
|
||||||||||||
See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements
3
CINEDIGM
DIGITAL CINEMA CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands) (Unaudited)
|
For
the Nine Months Ended December 31,
|
|||||||
|
2008
|
2009
|
||||||
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Cash
flows from operating activities
|
|||||||
|
Net
loss
|
$
|
(28,022
|
)
|
$
|
(14,548
|
)
|
|
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|||||||
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Loss
on disposal of assets
|
164
|
7
|
|||||
|
Loss
on impairment of goodwill
|
6,525
|
—
|
|||||
|
Depreciation
and amortization of property and equipment and amortization of intangible
assets
|
27,063
|
27,017
|
|||||
|
Amortization
of capitalized software costs
|
601
|
486
|
|||||
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Amortization
of debt issuance costs included in interest expense
|
1,134
|
1,499
|
|||||
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Provision
for doubtful accounts
|
271
|
408
|
|||||
|
Stock-based
compensation
|
653
|
1,112
|
|||||
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Non-cash
interest expense
|
3,937
|
2,398
|
|||||
|
Change
in fair value of interest rate swap
|
3,846
|
(2,076
|
)
|
||||
|
Change
in fair value of warrant liability
|
—
|
2,963
|
|||||
|
Realized
loss on available-for-sale investments
|
—
|
7
|
|||||
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Interest
expense added to note payable
|
—
|
2,333
|
|||||
|
Gain
on extinguishment of debt
|
—
|
(10,744
|
)
|
||||
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Accretion
of note payable discount included in interest expense
|
—
|
837
|
|||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
receivable
|
4,823
|
403
|
|||||
|
Unbilled
revenue
|
1,262
|
(1,692
|
)
|
||||
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Prepaids
and other current assets
|
(670
|
)
|
(78
|
)
|
|||
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Other
assets
|
(434
|
)
|
582
|
||||
|
Accounts
payable and accrued expenses
|
472
|
(4,493
|
)
|
||||
|
Deferred
revenue
|
(23
|
)
|
265
|
||||
|
Other
liabilities
|
13
|
(210
|
)
|
||||
|
Net
cash provided by operating activities
|
21,615
|
6,476
|
|||||
|
Cash
flows from investing activities
|
|||||||
|
Purchases
of property and equipment
|
(18,115
|
)
|
(13,045
|
)
|
|||
|
Purchase
of intangible assets
|
(550
|
)
|
—
|
||||
|
Additions
to capitalized software costs
|
(825
|
)
|
(637
|
)
|
|||
|
Sales/maturities
of available-for-sale investments
|
—
|
1,997
|
|||||
|
Purchase
of available-for-sale investments
|
—
|
(11,265
|
)
|
||||
|
Restricted
cash
|
—
|
(6,909
|
)
|
||||
|
Net
cash used in investing activities
|
(19,490
|
)
|
(29,859
|
)
|
|||
|
Cash
flows from financing activities
|
|||||||
|
Proceeds
from notes payable
|
—
|
76,513
|
|||||
|
Repayment
of notes payable
|
(1,434
|
)
|
(42,862
|
)
|
|||
|
Repayment
of credit facilities
|
(9,676
|
)
|
(26,434
|
)
|
|||
|
Proceeds
from credit facilities
|
569
|
8,884
|
|||||
|
Payments
of debt issuance costs
|
(518
|
)
|
(6,209
|
)
|
|||
|
Principal
payments on capital leases
|
(83
|
)
|
(689
|
)
|
|||
|
Proceeds
for subscription of preferred stock
|
2,000
|
—
|
|||||
|
Costs
associated with issuance of preferred stock
|
(73
|
)
|
(8
|
)
|
|||
|
Costs
associated with issuance of Class A common stock
|
—
|
(23
|
)
|
||||
|
Net
cash (used in) provided by financing activities
|
(9,215
|
)
|
9,172
|
||||
|
Net
decrease in cash and cash equivalents
|
(7,090
|
)
|
(14,211
|
)
|
|||
|
Cash
and cash equivalents at beginning of period
|
29,655
|
26,329
|
|||||
|
Cash
and cash equivalents at end of period
|
$
|
22,565
|
$
|
12,118
|
|||
See
accompanying notes to Unaudited Condensed Consolidated Financial
Statements
4
CINEDIGM
DIGITAL CINEMA CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
($ in
thousands, except for per share data)
(Unaudited)
|
1.
|
NATURE
OF OPERATIONS
|
Cinedigm
Digital Cinema Corp. was incorporated in Delaware on March 31, 2000 (“Cinedigm”,
and collectively with its subsidiaries, the “Company”). On September
30, 2009, the Company’s stockholders approved a change in the Company’s name
from Access Integrated Technologies, Inc. to Cinedigm Digital Cinema Corp., and
such change was effected October 5, 2009. The Company provides
technology solutions, financial services and advice, software services,
electronic delivery and content distribution services to owners and distributors
of digital content to movie theatres and other venues.
Beginning
September 1, 2009, the Company made changes to its organizational structure
which impacted its reportable segments, but did not impact its consolidated
financial position, results of operations or cash flows. The Company realigned
its focus to five primary businesses as follows: the first digital cinema
deployment (“Phase I Deployment”), the second digital cinema deployment (“Phase
II Deployment”), services (“Services”), media content and entertainment
(“Content & Entertainment”) and other (“Other”). The Company’s
Phase I Deployment and Phase II Deployment segments are the non-recourse,
financing vehicles and administrators for the Company’s digital cinema equipment
(the “Systems”) installed in movie theatres nationwide. The Company’s
Services segment provides services and support to the Phase I Deployment and
Phase II Deployment segments as well as to other third party
customers. Included in these services are asset management services
for a specified fee via service agreements with Phase I Deployment and Phase II
Deployment; software license, maintenance and consulting services; and
electronic content delivery services via satellite and hard drive to the motion
picture industry. These services primarily facilitate the conversion
from analog (film) to digital cinema and have positioned the Company at what it
believes to be the forefront of a rapidly developing 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 alternative and
theatrical content owners and to theatrical exhibitors and in-theatre
advertising. The Company’s Other segment provides motion picture
exhibition to the general public, information technology consulting and managed
network monitoring services and 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 10.
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
BASIS
OF PRESENTATION, USE OF ESTIMATES AND CONSOLIDATION
The
Company has incurred net losses historically and has an accumulated deficit of
$152,958 as of December 31, 2009. The Company also has significant contractual
obligations related to its recourse and non-recourse debt for the remaining part
of fiscal year 2010 and beyond. Management expects that the Company will
continue to generate net losses for the foreseeable future. Based on
the Company’s cash position at December 31, 2009, and expected cash flows from
operations, management believes that the Company has the ability to meet its
obligations through December 31, 2010. In August 2009, the Company entered into
a private placement of a senior secured recourse note and extinguished its
existing senior notes, which provided net proceeds after repayment of existing
debt, funding of an interest reserve and transactions fees and expenses of
approximately $11,300 of working capital funding. The Company has
signed commitment letters for additional non-recourse debt capital, primarily to
meet equipment requirements related to the Company’s Phase II Deployment, there
is no assurance that financing for the Phase II Deployment will be completed as
contemplated or under terms acceptable to the Company or its existing
stockholders. Failure to generate additional revenues, raise additional capital
or manage discretionary spending could have a material adverse effect on the
Company’s ability to continue as a going concern. The accompanying unaudited
condensed consolidated financial statements do not reflect any adjustments which
may result from the Company’s inability to continue as a going
concern.
The
condensed consolidated balance sheet as of March 31, 2009, which has been
derived from audited financial statements, and the condensed consolidated
financial statements were prepared following the interim reporting requirements
of the Securities and Exchange Commission (“SEC”). They do not
include all disclosures normally
5
made in
financial statements contained in the Form 10-K. In management’s opinion, all
adjustments necessary for a fair presentation of financial position, the results
of operations and cash flows in accordance with accounting principles generally
accepted in the United States (GAAP) for the periods presented have been made.
The results of operations for the respective interim periods are not necessarily
indicative of the results to be expected for the full year. The accompanying
condensed consolidated financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the fiscal year ended March 31, 2009 filed with the SEC
on June 15, 2009 (the “Form 10-K”).
The
Company’s condensed consolidated financial statements include the accounts of
Cinedigm, Access Digital Media, Inc. (“AccessDM”), Hollywood Software, Inc.
d/b/a AccessIT Software (“Software”), Core Technology Services, Inc. (“Managed
Services”), FiberSat Global Services, Inc. d/b/a AccessIT Satellite and Support
Services (“Satellite”), ADM Cinema Corporation (“ADM Cinema”) d/b/a the Pavilion
Theatre (the “Pavilion Theatre”), Christie/AIX, Inc. d/b/a AccessIT Digital
Cinema (“Phase 1 DC”), PLX Acquisition Corp., UniqueScreen Media, Inc.
(“USM”), Vistachiara Productions, Inc. f/k/a The Bigger Picture,
currently d/b/a Cinedigm Content and Entertainment Group (“CEG”),
Access Digital Cinema Phase 2 Corp. (“Phase 2 DC”) and Access Digital Cinema
Phase 2 B/AIX Corp. (“Phase 2 B/AIX”). AccessDM and Satellite are together
referred to as the Digital Media Services Division (“DMS”). All intercompany
transactions and balances have been eliminated.
The
preparation of the consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the condensed consolidated financial statements and accompanying
notes. On an on-going basis, the Company evaluates its estimates, including
those related to the carrying values of its long-lived assets, intangible assets
and goodwill, the valuation of deferred tax assets, the valuation of assets
acquired and liabilities assumed in purchase business combinations, stock-based
compensation expense, revenue recognition and capitalization of software
development costs. The Company bases its estimates on historical experience and
on other assumptions that the Company believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Because of the uncertainty inherent in such estimates, actual
results could differ materially from these estimates under different assumptions
or conditions.
The March
31, 2009 consolidated balance sheets were reclassified to break out the recourse
and non-recourse notes payable to conform to the current period
presentation.
REVENUE
RECOGNITION
Phase
I Deployment and Phase II Deployment
Virtual
print fees (“VPFs”) are earned pursuant to contracts with movie studios and
distributors, whereby amounts are payable to Phase 1 DC and to Phase 2 DC, when
movies distributed by the studio are displayed on screens utilizing the
Company’s digital cinema equipment (the “Systems”) installed in movie
theatres. VPFs are earned and payable to Phase 1 DC based on a
defined fee schedule with a reduced VPF rate year over year until the sixth year
(calendar 2011) at which point the VPF rate remains unchanged through the tenth
year. 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 Phase 1 DC’s and
Phase 2 DC’s performance obligations have been substantially met at that
time.
Phase 2
DC’s agreements with distributors require the payment of VPFs, according to a
defined fee schedule, for ten years from the date each system is installed;
however, Phase 2 DC may no longer collect VPFs once “cost recoupment,” as
defined in the agreements, is achieved. Cost recoupment will occur once
the cumulative VPFs 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, and including the
Company’s service fees, 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 eighth contract year, a one-time “cost
recoupment bonus” is payable by the studios to the Company. 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.
6
Alternative
content fees (“ACFs”) are earned pursuant to contracts with movie exhibitors,
whereby amounts are payable to Phase 1 DC and to 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.
Services
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).
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
application service provider arrangements (“ASP Service”), 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.
Revenues
from the delivery of data via satellite and hard drive are recognized upon
delivery, as DMS’ performance obligations have been substantially met at that
time.
Content
& Entertainment
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 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 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.
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. 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 three months ended December 31, 2008 and
2009, the Company recorded net revenues and direct operating expenses related to
barter advertising of $1,152 and $583, respectively, and $1,152 and $1,124, for
the nine months ended December 31, 2008 and 2009, respectively.
CEG has
contracts for the theatrical distribution of third party feature films and
alternative content. CEG’s distribution fee revenue is recognized at
the time a feature film and alternative content is viewed, 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
7
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.
Other
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 sale.
Managed
Services’ revenues, which consist of monthly recurring billings pursuant to
network monitoring and maintenance contracts, are recognized as revenues in the
period the services are provided, and other non-recurring billings are
recognized on a time and materials basis as revenues in the period in which the
services were provided.
Other
revenues, attributable to the Access Digital Server Assets, which consist of
monthly recurring billings for hosting and network access fees, are recognized
as revenues in the period the services are provided.
Since May
1, 2007, the Company’s three 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 June 2009, one of the IDC leases expired,
leaving two IDC leases with the Company as lessee.
RESTRICTED
AVAILABLE-FOR-SALE INVESTMENTS
In
connection with the $75,000 Senior Secured Note issued in August 2009 (see Note
5), the Company was required to segregate $11,265 of the proceeds into
marketable securities which will be used to pay interest over the next two
years. The Company classifies the marketable securities as
available-for-sale investments and accordingly, these investments are recorded
at fair value. The maturity dates of these investments coincide with
the quarterly interest payment dates through September 2011. The
changes in the value of these investments are recorded in other comprehensive
loss in the condensed consolidated financial statements. Realized
gains and losses are recorded in earnings when securities mature or are
redeemed. During the three and nine months ended December 31, 2009,
there were realized losses of $5 and $7, respectively.
The
Company held no available-for-sale securities at March 31,
2009. During the three and nine months ended December 31, 2009, the
Company has made scheduled quarterly interest payments of $1,327 and $2,041,
respectively. Investment securities of $5,764 with a maturity of
twelve months or less are classified as short-term and investment securities of
$3,492 with a maturity greater than twelve months are classified as
long-term. The carrying value and fair value of investment securities
available-for-sale at December 31, 2009 were as follows:
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair
Value
|
|||||||||||||
|
U.S.
Treasury securities
|
$ | 3,655 | $ | 1 | $ | (31 | ) | $ | 3,625 | |||||||
|
Obligations
of U.S. government agencies and FDIC guaranteed bank debt
|
4,651 | — | (28 | ) | 4,623 | |||||||||||
|
Corporate
debt securities
|
505 | — | — | 505 | ||||||||||||
|
Other
interest bearing securities
|
505 | — | (2 | ) | 503 | |||||||||||
| $ | 9,316 | $ | 1 | $ | (61 | ) | $ | 9,256 | ||||||||
8
DEFERRED
COSTS
Deferred
costs primarily consist of the unamortized debt issuance costs related to the
credit facility with General Electric Capital Corporation (“GECC”), the $55,000
of 10% Senior Notes issued in August 2007 up to August 2009 (see Note 5) and the
$75,000 Senior Secured Note issued in August 2009 (see Note 5), which are
amortized on a straight-line basis over the term of the respective debt (see
Note 5 for extinguishment of debt). The straight-line basis is not
materially different from the effective interest method. As of
December 31, 2009 and included in deferred costs are advertising production,
post production and technical support costs related to developing and displaying
advertising in the amount of $768, which are capitalized and amortized on a
straight-line basis over the same period as the related cinema advertising
revenues of $4,517 are recognized.
DIRECT
OPERATING COSTS
Direct
operating costs consist of facility operating costs such as rent, utilities,
real estate taxes, repairs and maintenance, insurance and other related
expenses, direct personnel costs, film rent expense, amortization of capitalized
software development costs, exhibitors payments for displaying cinema
advertising and other deferred expenses, such as advertising production, post
production and technical support related to developing and displaying
advertising.
STOCK-BASED
COMPENSATION
For the
three months ended December 31, 2008 and 2009, the Company recorded stock-based
compensation expense of $295 and $346, respectively, and $653 and $1,112 for the
nine months ended December 31, 2008 and 2009, respectively. The
Company estimates that the stock-based compensation expense related to current
outstanding stock options, using a Black-Scholes option valuation model, and
current outstanding restricted stock awards will be approximately $1,485 in
fiscal 2010.
The
weighted-average grant-date fair value of options granted during the three
months ended December 31, 2008 and 2009 was $0.55 and $0.80, respectively, and
$0.58 and $0.71, for the nine months ended December 31, 2008 and 2009,
respectively. There were no stock options exercised during the three and nine
months ended December 31, 2008 and 2009.
The
Company estimated the fair value of stock options at the date of each grant
using a Black-Scholes option valuation model with the following
assumptions:
|
For
the Three Months Ended December 31,
|
For
the Nine Months Ended December 31,
|
|||||||||||||||
|
2008
|
2009
|
2008
|
2009
|
|||||||||||||
|
Range
of risk-free interest rates
|
2.5-5.2 | % | 2.4 | % | 2.5-5.2 | % | 2.4-2.7 | % | ||||||||
|
Dividend
yield
|
— | — | — | — | ||||||||||||
|
Expected
life (years)
|
5 | 5 | 5 | 5 | ||||||||||||
|
Range
of expected volatilities
|
52.5-58.7 | % | 77.6 | % | 52.5-58.7 | % | 77.4-77.6 | % | ||||||||
The
risk-free interest rate used in the Black-Scholes option valuation model for
options granted under the Company’s stock option plan awards is the historical
yield on U.S. Treasury securities with equivalent remaining lives. The Company
does not currently anticipate paying any cash dividends on common stock in the
foreseeable future. Consequently, an expected dividend yield of zero is used in
the Black-Scholes option valuation model. The Company estimates the
expected life of options granted under the Company’s stock option plans using
both exercise behavior and post-vesting termination behavior, as well as
consideration of outstanding options. The Company estimates expected
volatility for options granted under the Company’s stock option plans based on a
measure of historical volatility in the trading market for the Company’s common
stock.
CAPITALIZED
SOFTWARE COSTS
Internal
Use Software
The
Company accounts for internal use software development costs based on three
distinct stages to the software development process for internal use
software. The first stage, the preliminary project stage, includes
the conceptual
9
formulation,
design and testing of alternatives. The second stage, or the program
instruction phase, includes the development of the detailed functional
specifications, coding and testing. The final stage, the
implementation stage, includes the activities associated with placing a software
project into service. All activities included within the preliminary
project stage are considered research and development and expensed as
incurred. During the program instruction phase, all costs incurred
until the software is substantially complete and ready for use, including all
necessary testing, are capitalized, Capitalized costs are amortized on a
straight-line basis over estimated lives ranging from three to five years,
beginning when the software is ready for its intended use.
Software
to be Sold, Licensed or Otherwise Marketed
Software
development costs that are incurred subsequent to establishing technological
feasibility are capitalized until the product is available for general release.
Amounts capitalized as software development costs are amortized 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. The Company reviews capitalized software costs for impairment on
a periodic basis with other long-lived assets. Amortization of
capitalized software development costs, included in direct operating costs, for
the three months ended December 31, 2008 and 2009 amounted to $214 and $163,
respectively and $601 and $486 for the nine months ended December 31, 2008 and
2009, respectively. At December 31, 2009, there were no unbilled
receivables under such customized software development contracts included in
unbilled revenue in the condensed consolidated balance sheets.
GOODWILL
AND INTANGIBLE ASSETS
Goodwill
is the excess of the purchase price paid over the fair value of the net assets
of the acquired business. The Company assesses its goodwill for impairment at
least annually, and in interim periods if certain triggering events occur
indicating that the carrying value of goodwill may be impaired. The Company also
reviews possible impairment of finite lived intangible assets
annually. The Company recorded an impairment charge of $6,525 in the
quarter ended December 31, 2008 related to the Company’s Content and
Entertainment segment and the Pavilion Theatre, in the Other segment, based on
the results of an impairment evaluation since the Company had concluded that one
or more triggering events had occurred during the three months ended December
31, 2008.
As of
December 31, 2009, the Company’s finite-lived intangible assets consisted of
customer relationships and agreements, theatre relationships, covenants not to
compete, trade names and trademarks and Federal Communications Commission
licenses (for satellite transmission services), which are estimated to have
useful lives ranging from two to ten years. No intangible assets were
acquired during the three and nine months ended December 31,
2009. During the nine months ended December 31, 2009, no impairment
charge was recorded.
|
Balance
at March 31, 2008
|
$ | 14,549 | ||
|
Goodwill impairment – USM
|
(4,401 | ) | ||
|
Goodwill impairment – The Pavilion Theatre
|
(1,960 | ) | ||
|
Goodwill impairment – CEG
|
(164 | ) | ||
|
Balance
at December 31, 2009
|
$ | 8,024 |
PROPERTY
AND EQUIPMENT
Property
and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation expense is recorded using the straight-line method
over the estimated useful lives of the respective assets. Leasehold improvements
are being amortized over the shorter of the lease term or the estimated useful
life of the improvement. Maintenance and repair costs are charged to expense as
incurred. Major renewals, improvements and additions are
capitalized. Upon the sale or other disposition of any property and
equipment, the cost and related accumulated depreciation and amortization are
removed from the accounts and the gain or loss is included in the condensed
consolidated statement of operations.
IMPAIRMENT
OF LONG
-
LIVED
ASSETS
The
Company reviews the recoverability of its long-lived assets when events or
conditions exist that indicate a possible impairment exists. The assessment for
recoverability is based primarily on the Company’s ability to recover the
carrying value of its long-lived assets from expected future undiscounted net
cash flows. If the total of expected future undiscounted net cash flows is less
than the total carrying value of the assets the asset is deemed not to be
10
recoverable
and possibly impaired. The Company then estimates the fair value of
the asset to determine whether an impairment loss should be
recognized. An impairment loss will be recognized if for the
difference between the fair value (computed based upon) and the carrying value
of the asset exceeds its fair value. Fair value is estimated by
computing the expected future discounted cash flows. During the nine
months ended December 31, 2008 and 2009, no impairment charge for long-lived
assets was recorded.
NET
LOSS PER COMMON SHARE
Basic and
diluted net loss per common share has been calculated as follows:
|
Basic
and diluted net loss per common share =
|
Net
loss – preferred dividends
|
|
Weighted
average number of Common Stock
outstanding
during the period
|
Shares
issued and any shares that are reacquired during the period are weighted for the
portion of the period that they are outstanding.
The
Company incurred net losses for each of the three and nine months ended December
31, 2008 and 2009 and, therefore, the impact of dilutive potential common shares
from outstanding stock options, warrants, restricted stock, and restricted stock
units, totaling 4,335,382 shares and 24,407,770 shares as of December 31, 2008
and 2009, respectively, were excluded from the computation as it would be
anti-dilutive.
ACCOUNTING
FOR DERIVATIVE ACTIVITIES
In April
2008, the Company executed an interest rate swap agreement (the “Interest Rate
Swap”) (see Note 5) to limit the Company’s exposure to changes in interest
rates. Changes in fair value of derivative financial instruments are
either recognized in other comprehensive income (a component of stockholders'
equity) or in the condensed consolidated statement of operations depending on
whether the derivative is being used to hedge changes in cash flows or fair
value. The Company has determined that this is not a hedging
transaction and changes in the value of its Interest Rate Swap were recorded in
the condensed consolidated statements of operations (see Note 5).
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The fair
value measurement disclosures are grouped into three levels based on valuation
factors:
|
·
|
Level
1 – quoted prices in active markets for identical
investments
|
|
·
|
Level
2 – other significant observable inputs (including quoted prices for
similar investments, market corroborated inputs,
etc.)
|
|
·
|
Level
3 – significant unobservable inputs (including the Company’s own
assumptions in determining the fair value of
investments)
|
Assets
and liabilities measured at fair value on a recurring basis use the market
approach, where prices and other relevant information are generated by market
transactions involving identical or comparable assets or
liabilities.
The
following table summarizes the levels of fair value measurements of the
Company’s financial assets:
|
Financial
Assets at Fair Value
as
of December 31, 2009
|
||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
||||||||||
|
Cash
and cash equivalents
|
$ | 12,118 | $ | — | $ | — | ||||||
|
Investment
securities, available-for-sale
|
$ | 97 | $ | 9,159 | $ | — | ||||||
|
Restricted
cash
|
$ | 7,164 | $ | — | $ | — | ||||||
|
Interest
rate swap
|
$ | — | $ | (2,453 | ) | $ | — | |||||
11
|
3.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
Effective
July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting
Standards Codification (“ASC”) became the single official source of
authoritative, nongovernmental generally accepted accounting principles (“GAAP”)
in the United States. The historical GAAP hierarchy was eliminated
and the ASC became the only level of authoritative GAAP, other than guidance
issued by the SEC. Our accounting policies were not affected by the
conversion to ASC. However, references to specific accounting
standards in the footnotes to our condensed consolidated financial statements
have been changed to refer to the appropriate section of ASC.
In
October 2009, the FASB issued Accounting Standards Update (“ASU”)
No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements (a consensus of the FASB Emerging Issues Task Force)” (“ASU
2009-13”), which amends ASC 605-25, “Revenue Recognition: Multiple-Element
Arrangements.” ASU 2009-13 addresses how to determine whether an arrangement
involving multiple deliverables contains more than one unit of accounting and
how to allocate consideration to each unit of accounting in the arrangement. ASU
2009-13 replaces all references to fair value as the measurement criteria with
the term selling price and establishes a hierarchy for determining the selling
price of a deliverable. ASU 2009-13 also eliminates the use of the residual
value method for determining the allocation of arrangement consideration.
Additionally, ASU 2009-13 requires expanded disclosures. ASU 2009-13 will become
effective for the Company for revenue arrangements entered into or materially
modified on or after April 1, 2011. Earlier application is permitted with
required transition disclosures based on the period of adoption. The Company
does not believe that ASU 2009-13 will have a material impact on the Company’s
consolidated financial statements.
In
October 2009, the FASB issued ASU No. 2009-14, “Software (Topic 985):
Certain Revenue Arrangements That Include Software Elements (a consensus of the
FASB Emerging Issues Task Force)” (“ASU 2009-14”). ASU 2009-14 amends
ASC 985-605, “Software: Revenue Recognition,” such that tangible products,
containing both software and non-software components that function together to
deliver the tangible product’s essential functionality, are no longer within the
scope of ASC 985-605. It also amends the determination of how arrangement
consideration should be allocated to deliverables in a multiple-deliverable
revenue arrangement. ASU 2009-14 will become effective for the Company for
revenue arrangements entered into or materially modified on or after
April 1, 2011. Earlier application is permitted with required transition
disclosures based on the period of adoption. The Company does not believe that
ASU 2009-14 will have a material impact on the Company’s consolidated financial
statements.
In June
2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”
(“SFAS 167”) (which will be codified in ASC 810-10). Revisions to ASC 810-10
improves financial reporting by enterprises involved with variable interest
entities and to address (1) the effects on certain provisions of FASB
Interpretation No. 46 (revised December 2003), “Consolidation of Variable
Interest Entities”, as a result of the elimination of the qualifying
special-purpose entity concept in SFAS 166 and (2) constituent concerns about
the application of certain key provisions of Interpretation 46(R), including
those in which the accounting and disclosures under the Interpretation do not
always provide timely and useful information about an enterprise’s involvement
in a variable interest entity. Revisions to ASC 810-10 is effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. The Company
is currently
evaluating
the impact of adoption and application of revisions to ASC
810-10 will have on the Company’s consolidated financial
statements.
In
January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about
Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 requires some new
disclosures and clarifies some existing disclosure requirements about fair value
measurements codified within ASC 820, “Fair Value Measurements and Disclosures.”
ASU 2010-06 is effective for interim and annual reporting periods beginning
after December 15, 2009. Early application of the provisions of this update
is permitted. The Company is currently evaluating the impact the adoption of ASU
2010-06 will have on the Company’s consolidated financial statements
disclosures.
|
4.
|
NOTES
RECEIVABLE
|
Notes
receivable consisted of the following:
12
|
As
of March 31, 2009
|
As
of December 31, 2009
|
|||||||||||||||
|
Note
Receivable (as defined below)
|
Current
Portion
|
Long
Term Portion
|
Current
Portion
|
Long
Term Portion
|
||||||||||||
|
Exhibitor
Note
|
$ | 54 | $ | 37 | $ | 51 | $ | — | ||||||||
|
Exhibitor
Install Notes
|
118 | 908 | 90 | 840 | ||||||||||||
|
FiberMedia
Note
|
431 | — | — | — | ||||||||||||
|
Other
|
13 | 14 | 24 | 3 | ||||||||||||
| $ | 616 | $ | 959 | $ | 165 | $ | 843 | |||||||||
In March
2006, in connection with Phase 1 DC’s deployment, the Company issued to a
certain motion picture exhibitor a 7.5% note receivable for $231 (the “Exhibitor
Note”), in return for the Company’s payment for certain financed digital
projectors. The Exhibitor Note requires monthly principal and
interest payments through September 2010. As of December 31, 2009,
the outstanding balance of the Exhibitor Note was $51.
In
connection with Phase 1 DC’s deployment, the Company agreed to provide financing
to certain motion picture exhibitors upon the billing to the motion picture
exhibitors by Christie Digital Systems USA, Inc. (“Christie”) for the
installation costs associated with the placement of Systems in movie
theatres. In April 2006, certain motion picture exhibitors agreed to
issue to the Company two 8% notes receivable for an aggregate of $1,287 (the
“Exhibitor Install Notes”). Under the Exhibitor Install Notes, the motion
picture exhibitors are required to make monthly interest only payments through
October 2007 and quarterly principal and interest payments thereafter through
August 2009 and August 2017, respectively. As of December 31, 2009,
the aggregate outstanding balance of the Exhibitor Install Notes was
$930.
In
November 2008, FiberMedia issued to the Company a 10% note receivable for $631
(the “FiberMedia Note”) related to certain expenses FiberMedia is required to
repay to the Company under a master collocation agreement of the IDCs.
FiberMedia was required to make monthly principal and interest payments
beginning in January 2009 through July 2009. As of December 31, 2009,
the FiberMedia Note was repaid in full.
The
Company has not experienced a default by any party to any of their obligations
in connection with any of the above notes.
|
5.
|
NOTES
PAYABLE
|
Notes
payable consisted of the following:
|
As
of March 31, 2009
|
As
of December 31, 2009
|
|||||||||||||||
|
Note
Payable (as defined below)
|
Current
Portion
|
Long
Term Portion
|
Current
Portion
|
Long
Term Portion
|
||||||||||||
|
First
USM Note
|
$ | 221 | $ | — | $ | — | $ | — | ||||||||
|
SilverScreen
Note
|
20 | — | — | — | ||||||||||||
|
2007
Senior Notes
|
— | 55,000 | — | — | ||||||||||||
|
NEC
Facility
|
168 | 333 | 181 | 195 | ||||||||||||
|
2009
Note, net of debt discount
|
— | — | — | 67,438 | ||||||||||||
|
Other
|
15 | — | — | — | ||||||||||||
|
Total
recourse notes payable
|
$ | 424 | $ | 55,333 | $ | 181 | $ | 67,633 | ||||||||
|
Vendor
Note
|
$ | — | $ | 9,600 | $ | — | $ | 9,600 | ||||||||
|
GE
Credit Facility
|
24,824 | 161,024 | 24,444 | 135,094 | ||||||||||||
|
KBC
Related Facility
|
— | — | 1,269 | 7,616 | ||||||||||||
|
P2
Vendor Note
|
— | — | 49 | 741 | ||||||||||||
|
P2
Exhibitor Notes
|
— | — | 29 | 586 | ||||||||||||
|
Total
non-recourse notes payable
|
$ | 24,824 | $ | 170,624 | $ | 25,791 | $ | 153,637 | ||||||||
|
Total
notes payable
|
$ | 25,248 | $ | 225,957 | $ | 25,972 | $ | 221,270 | ||||||||
Non-recourse
debt is generally defined as debt whereby the lenders’ sole recourse with
respect to defaults by the Company is limited to the value of the asset
collateralized by the debt. The Vendor Note and the GE Credit
Facility are not guaranteed by the Company or its other subsidiaries, other than
Phase 1 DC. The KBC Related Facility, the
13
P2 Vendor
Note and the P2 Exhibitor Notes are not guaranteed by the Company or its other
subsidiaries, other than Phase 2 DC.
As part
of the consideration for the purchase price of USM in 2006, the
Company issued an 8% note payable in the principal amount of $1,204 (the “USM
Note”) The First USM Note was payable in twelve equal quarterly installments
commencing on October 1, 2006 until July 1, 2009. During the nine months ended
December 31, 2008 and 2009, the Company repaid principal of $414 and $221,
respectively, on the First USM Note. As of December 31, 2009, the
First USM Note was repaid in full.
Prior to
the Company’s acquisition of USM, USM had purchased substantially all the assets
of SilverScreen Advertising Incorporated (“SilverScreen”) and issued a 3-year,
4% note payable in the principal amount of $333 (the “SilverScreen Note”) as
part of the purchase price for SilverScreen. The SilverScreen Note was payable
in equal monthly installments until May 2009. During the nine months
ended December 31, 2008 and 2009, the Company repaid principal of $86 and $20,
respectively, on the SilverScreen Note. As of December 31, 2009, the
SilverScreen Note was repaid in full.
In August
2007, the Company entered into a securities purchase agreement (the “Purchase
Agreement”) with the purchasers party thereto (the “Purchasers”) pursuant to
which the Company issued 10% Senior Notes (the “2007 Senior Notes”) in the
aggregate principal amount of $55,000 (the “August 2007 Private Placement”). The
term of the 2007 Senior Notes was three years which may be extended for one 6
month period at the discretion of the Company if certain conditions were
met. Interest on the 2007 Senior Notes was payable on a quarterly
basis in cash or, at the Company’s option and subject to certain conditions, in
shares of its Class A Common Stock (“Interest Shares”). In addition, each
quarter, the Company issued 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”). The Company 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 Company
and its subsidiaries, other than Phase 1 DC and its subsidiaries, were
prohibited from paying dividends under the terms of the 2007 Senior
Notes. Interest expense on the 2007 Senior Notes for the three months
ended December 31, 2008 and 2009 amounted to $1,375 and $0, respectively and
$4,092 and $1,996 for the nine months ended December 31, 2008 and 2009,
respectively. In August 2009, in connection with the consummation of
the 2009 Private Placement (as defined below), the Company consummated purchase
agreements (the “Note Purchase Agreements”) with the holders of all of its
outstanding 2007 Senior Notes pursuant to which the Company purchased all of the
2007 Senior Notes, in satisfaction of the principal and any accrued and unpaid
interest thereon, for an aggregate purchase price of $42,500 in
cash. The source of such aggregate cash payment was the proceeds of
the 2009 Private Placement discussed below. Upon such purchase, the
2007 Senior Notes were canceled and the remaining principal of $12,500 along
with unamortized debt issuance costs of $(2,377) and accrued interest of $621
resulted in a $10,744 gain on extinguishment of debt included in the condensed
consolidated statements of operations.
In August
2009, the Company entered into a securities purchase agreement (the “Purchase
Agreement”) with an affiliate of Sageview Capital LP (the “Purchaser”) pursuant
to which the Company agreed to issue a Senior Secured Note (the “2009 Note”) in
the aggregate principal amount of $75,000 and warrants (the “Sageview Warrants”)
to purchase 16,000,000 shares of its Class A Common Stock (the “2009 Private
Placement”). The remaining proceeds of the 2009 Private Placement
after the repayment of existing indebtedness of the Company and one of its
subsidiaries, the funding of a cash reserve to pay the cash interest amount
required under the 2009 Note for the first two years, the payment of fees and
expenses incurred in connection with the 2009 Private Placement and related
transactions, and other general corporate purposes was approximately
$11,300. The 2009 Note has a term of five years, which may be
extended for up to one 12 month period at the discretion of the Company if
certain conditions are satisfied. Subject to certain adjustments set
forth in the 2009 Note, interest on the 2009 Note is 8% per annum to be accrued
as an increase in the aggregate principal amount of the 2009 Note (“PIK
Interest”) and 7% per annum paid in cash. The Company may prepay the
2009 Note (i) during the initial 18 months of their term, in an amount up to 20%
of the original principal amount of the 2009 Note plus accrued and unpaid
interest without penalty and (ii) following the second anniversary of issuance
of the 2009 Note, subject to a prepayment penalty equal to 7.5% of the principal
amount prepaid if the 2009 Note is prepaid prior to the three-year anniversary
of its issuance, a prepayment penalty of 3.75% of the principal amount prepaid
if the 2009 Note is prepaid after such third anniversary but prior to the fourth
anniversary of its issuance and without penalty if the 2009 Note is prepaid
thereafter, plus cash in an amount equal to the accrued and unpaid interest
amount with respect to the principal
14
amount
through and including the prepayment date. The Company is obligated
to offer to redeem all or a portion of the 2009 Note upon the occurrence of
certain triggering events described in the 2009 Note. Subject to
limited exceptions, the Purchaser may not assign the 2009 Note until the
earliest of (a) August 11, 2011, (b) the consummation of a change in control as
defined in the 2009 Note or (c) an event of default as defined under the 2009
Note. The Purchase Agreement also requires the 2009 Note to be
guaranteed by each of the Company’s existing and future subsidiaries, other than
AccessDM, Phase 1 DC and its subsidiaries and Phase 2 DC and its subsidiaries
and subsidiaries formed after August 11, 2009 which are primarily engaged in the
financing or deployment of digital cinema equipment (the "Guarantors"), and that
the Company and each Guarantor pledge substantially all of their assets to
secure payment on the 2009 Note, except that AccessDM and Phase 1 DC are not
required to become Guarantors until such time as certain indebtedness is
repaid. Accordingly, the Company and each of the Guarantors entered
into a guarantee and collateral agreement (the “Guarantee and Collateral
Agreement”) pursuant to which each Guarantor guaranteed the obligations of the
Company under the 2009 Note and the Company and each Guarantor pledged
substantially all of their assets to secure such obligations.
The Company agreed to
register the resale of the shares of Class A Common Stock underlying the
Sageview Warrants (the “Registration Rights Agreement”). The Purchase
Agreement, Note Purchase Agreement, 2009 Note, Warrants, Registration Rights
Agreement and Guarantee and Collateral Agreement contain representations,
warranties, covenants and events of default as are customary for transactions of
this type and nature.
The 2009
Note is shown net of the discount associated with the issuance of the Sageview
Warrants (see Note 6) and the PIK Interest. As of December 31, 2009,
the net balance of the 2009 Note was as follows:
|
As
of March 31, 2009
|
As
of December 31, 2009
|
|||||||
|
2009
Note, at issuance
|
$ | — | $ | 75,000 | ||||
|
Discount
on 2009 Note
|
— | (9,895 | ) | |||||
|
PIK
Interest
|
— | 2,333 | ||||||
|
2009
Note, net
|
$ | — | $ | 67,438 | ||||
|
Less
current portion
|
— | — | ||||||
|
Total
long term portion
|
$ | — | $ | 67,438 | ||||
In August
2007, Phase 1 DC obtained $9,600 of vendor financing (the “Vendor Note”) for
equipment used in Phase 1 DC’s deployment. The Vendor Note bears interest at 11%
and may be prepaid without penalty. Interest is due semi-annually
commencing February 2008. The balance of the Vendor Note, together
with all unpaid interest is due on the maturity date of August 1,
2016. As of December 31, 2009, the outstanding balance of the Vendor
Note was $9,600.
In
September 2009, Phase 2 DC obtained $898 of vendor financing (the “P2 Vendor
Note”) for equipment used in Company’s Phase II Deployment. The P2 Vendor Note
bears interest at 7% and requires quarterly interest-only payments through
January 2010. Quarterly installments commencing in April 2010 are to
be repaid with 92.5% of the VPFs and ACFs received on this equipment with the
payments being applied to accrued and unpaid interest first and any remaining
amounts be applied to the principal. The balance of the P2 Vendor Note,
together with all accrued and unpaid interest is due on the maturity date of
December 31, 2018. The P2 Vendor Note may be prepaid at any time
without penalty and is not guaranteed by the Company or its other subsidiaries,
other than Phase 2 DC. During the three and nine months ended
December 31, 2009, the Phase 2 DC repaid principal of $108 on the P2 Vendor
Note. As of December 31, 2009, the outstanding balance of the Vendor
Note was $790.
During
the three months ended September 30, 2009, Phase 2 DC obtained $615 of financing
from certain exhibitors (the “P2 Exhibitor Notes”) for equipment used in the
Company’s Phase II Deployment. The P2 Exhibitor Notes bear interest
at 7% and may be prepaid without penalty. The P2 Exhibitor Notes requires
quarterly interest-only payments through June 2010. Principal is to be repaid in
thirty-two equal quarterly installments commencing in September 2010. The P2
Exhibitor Notes may be prepaid at any time without penalty and are not
guaranteed by the Company or its other subsidiaries, other than Phase 2
DC. As of December 31, 2009, the outstanding balance of the P2
Exhibitor Notes was $615.
CREDIT
FACILITIES
In August
2006, Phase 1 DC entered into an agreement with GECC pursuant to which GECC and
certain other lenders agreed to provide to Phase 1 DC a $217,000 Senior Secured
Multi Draw Term Loan (the “GE Credit
15
Facility”).
Proceeds from the GE Credit Facility were used for the purchase and installation
of up to 70% of the aggregate purchase price, including all costs, fees or other
expenses associated with the purchase acquisition, receipt, delivery,
construction and installation of Systems in connection with Phase 1 DC’s
deployment and to pay transaction fees and expenses related to the GE Credit
Facility, and for certain other specified purposes. The remaining cost of the
Systems was funded from other sources of capital including contributed equity.
Each of the borrowings by Phase 1 DC bears interest, at the option of Phase 1 DC
and subject to certain conditions, based on the bank prime loan rate in the
United States or the Eurodollar rate, plus a margin ranging from 2.75% to 4.50%,
depending on, among other things, the type of rate chosen, the amount of equity
contributed into Phase 1 DC and the total debt of Phase 1 DC. Under the GE
Credit Facility, Phase 1 DC paid interest only through July 31, 2008. Beginning
August 31, 2008, in addition to the interest payments, Phase 1 DC must repay
approximately 71.5% of the principal amount of the borrowings over a five-year
period with a balloon payment for the balance of the principal amount, together
with all unpaid interest on such borrowings and any fees incurred by Phase 1 DC
pursuant to the GE Credit Facility on the maturity date of August 1, 2013. In
addition, Phase 1 DC may prepay borrowings under the GE Credit Facility in whole
or in part, after July 31, 2007 and before August 1, 2010, subject to paying
certain prepayment penalties ranging from 3% to 1%, depending on when the
prepayment is made. The GE Credit Facility is required to be guaranteed by each
of Phase 1 DC’s existing and future direct and indirect domestic subsidiaries
(the “Guarantors”) and secured by a first priority perfected security interest
on all of the collective assets of Phase 1 DC and the Guarantors, including real
estate owned or leased, and all capital stock or other equity interests in Phase
1 DC and its subsidiaries, subject to specified exceptions. The GE Credit
Facility is not guaranteed by the Company or its other subsidiaries, other than
Phase 1 DC. During the nine months ended December 31, 2008 and 2009, the Company
repaid principal of $9,644 and $26,310, respectively, on the GE Credit
Facility. The 2009 payments include a prepayment of $5,000 in
accordance with the GE Fifth Amendment described below, and a additional
voluntary prepayments of $3,616 during the nine months ended December 31,
2009. As of December 31, 2009, the outstanding principal balance of
the GE Credit Facility was $159,538 at a weighted average interest rate of
10.7%.
In May
2009, Phase 1 DC entered into the fourth amendment (the “GE Fourth Amendment”)
with respect to the GE Credit Facility 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 9 months of forward cash interest to a fixed $6,900 (which is
included in restricted cash in the accompanying consolidated financial
statements), and permitted a one-time payment of $2,600 to be made from Phase 1
DC to its parent Company, AccessDM; (4) increase the quarterly maximum
consolidated leverage ratio covenants that Phase 1 DC is required to meet on a
trailing 12 months basis; (5) increase the maximum consolidated senior leverage
ratio covenants that Phase 1 DC is required to meet on a trailing 12 months
basis; (6) reduce the quarterly minimum consolidated fixed charge coverage ratio
covenants that Phase 1 DC is required to meet on a trailing 12 months basis and
(7) add a covenant requiring Phase 1 DC to maintain a minimum unrestricted cash
balance of $2,000 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, Phase 1 DC paid an
amendment fee to GE and the other lenders of approximately
$1,000. The amendment fee was recorded as debt issuance costs and is
being amortized over the remaining term of the GE Credit Facility. At
December 31, 2009, the Company was in compliance with all covenants contained in
the GE Credit Facility, as amended.
In August
2009, in connection with the 2009 Private Placement (see Note 5), Phase 1 DC
entered into a fifth amendment (the “GE Fifth Amendment”) with respect to
the GE Credit Facility, whereby $5,000 of the proceeds of the 2009 Private
Placement were used by the Company to purchase capital stock of AccessDM, which
in turn used such amount to purchase capital stock of Phase 1 DC. Phase 1 DC
then funded the prepayment with respect to the GE Credit Facility. The
prepayment is being applied ratably to
each of the next 24 successive regularly
scheduled monthly amortization payments due under the GE Credit Facility
beginning in August 2009.
In
October 2009, in connection with the Company’s Phase II Deployment, Phase 2 DC
has received commitment letters from GECC’s Media, Communications &
Entertainment business (“GE Capital”) and Société Générale Corporate &
Investment Banking (“Soc Gen”) for senior credit facilities totaling up to $100
million. GE Capital’s commitment covers the financing of up to about
1,600 Systems and Soc Gen’s commitment covers the financing of up to an
additional 533 Systems.
In April
2008, Phase 1 DC executed the Interest Rate Swap with a counterparty for a
notional amount of approximately 90% of the amounts outstanding under the GE
Credit Facility or an initial amount of $180,000. Under the Interest Rate Swap,
Phase 1 DC will effectively pay a fixed rate of 7.3%, to guard against Phase 1
DC’s
16
exposure
to increases in the variable interest rate under the GE Credit Facility to
remain in effect until August 2010. As principal repayments of the GE
Credit Facility occur, the notional amount will decrease by a pro rata amount,
such that approximately 90% of the remaining principal amount will be covered by
the Interest Rate Swap at any time.
Upon any
refinance of the GE Credit Facility or other early termination or at the
maturity date of the Interest Rate Swap, the fair value of the Interest Rate
Swap, whether favorable to the Company or not, would be settled in cash with the
counterparty. As of December 31, 2009, the fair value of the Interest
Rate Swap liability was $2,453. The change in fair value of the
interest rate swap for the three months ended December 31, 2008 and 2009
amounted to a loss of $5,411 and a gain of $853, respectively and loss of $3,846
and a gain of $2,076 for the nine months ended December 31, 2008 and 2009,
respectively.
In May
2008, AccessDM entered into a credit facility with NEC Financial Services, LLC
(the “NEC Facility”) to fund the purchase and installation of equipment to
enable the exhibition of 3-D live events in movie theatres as part of the
Company’s CineLive
SM
product
offering. The NEC Facility provides for maximum borrowings of up to
approximately $2,000, repayments over a 47 month period, and interest at annual
rates ranging from 8.25-8.44%. As of December 31, 2009, AccessDM has
borrowed $569 and the equipment purchased therewith is included in property and
equipment. During the nine months ended December 31, 2008 and 2009,
the Company repaid principal of $0 and $125, respectively, on the NEC Credit
Facility. As of December 31, 2009, the outstanding principal balance
of the NEC Credit Facility was $376.
In
December 2008, Phase 2 B/AIX, a direct wholly-owned subsidiary of Phase 2 DC and
an indirect wholly-owned subsidiary of the Company, entered into a credit
facility with KBC Bank NV (the “KBC Related Facility”) to fund the purchase of
Systems from Barco, Inc. (“Barco”), to be installed in movie theatres as part of
the Company’s Phase II Deployment. The KBC Related Facility provides
for borrowings of up to a maximum of $8,900 through December 31, 2009 (the “Draw
Down Period”) and requires interest-only payments at 7.3% per annum during the
Draw Down Period. For any funds drawn, the principal is to be repaid
in twenty-eight equal quarterly installments commencing in March 2010 (the
“Repayment Period”) at an interest rate of 8.5% per annum during the Repayment
Period. The KBC Related Facility may be prepaid at any time
without penalty and is not guaranteed by the Company or its other subsidiaries,
other than Phase 2 DC. As of December 31, 2009, $8,885 has been drawn
down on the KBC Related Facility. Interest expense on the KBC Related
Facility for the three months ended December 31, 2008 and 2009 amounted to $0
and $166, respectively and $0 and $384 for the nine months ended December 31,
2008 and 2009, respectively. As of December 31, 2009, the outstanding
principal balance of the KBC Related Facility was $8,885.
At
December 31, 2009, the Company was in compliance with all of its debt
covenants.
|
6.
|
STOCKHOLDERS’
EQUITY
|
STOCKHOLDERS’
RIGHTS
On August
10, 2009, the Company entered into a tax benefit preservation plan (the "Tax
Preservation Plan"), dated August 10, 2009, between the Company and American
Stock Transfer & Trust Company, LLC, as rights agent. The
Company’s board of directors (the "Board") adopted the Tax Preservation Plan in
an effort to protect stockholder value by attempting to protect against a
possible limitation on its ability to use net operating loss carryforwards (the
"NOLs") to reduce potential future federal income tax
obligations.
On August
10, 2009, the Board declared a dividend of one preferred share purchase right
(the "Rights") for each outstanding share of the Company’s Class A Common Stock
and each outstanding share of the Company’s Class B Common Stock, (the
"Class B Common Stock," and together with the Class A Common Stock, the
"Common Stock") under the terms of the Tax Preservation Plan. The
dividend is payable to the stockholders of record as of the close of business on
August 10, 2009. Each Right entitles the registered holder to
purchase from the Company one one-thousandth of a share of the Company’s Series
B Junior Participating Preferred Stock, par value $0.001 per share, (the
"Preferred B Stock") at a price of $6.00, subject to adjustment. The
Rights are not exercisable, and would only become exercisable when any person or
group has acquired, subject to certain conditions, beneficial ownership of 4.99%
or more of the Company’s outstanding shares of Class A Common
Stock. As of December 31, 2009, the Company did not record the
dividends as a 4.99% or more change in the beneficial ownership of the Company’s
outstanding shares of Class A Common Stock had not occurred.
17
CAPITAL
STOCK
In August
2004, the Board authorized the repurchase of up to 100,000 shares of Class A
Common Stock, which may be purchased at prevailing prices from time-to-time in
the open market depending on market conditions and other
factors. Under the terms of the 2007 Senior Notes (see Note 5), the
Company was previously precluded from purchasing shares of its Class A Common
Stock. In a prior year, the Company repurchased 51,440 shares of
Class A Common Stock for an aggregate purchase price of $172, including fees,
which have been recorded as treasury stock.
Pursuant
to the 2007 Senior Notes, in August 2007 the Company issued 715,000 shares of
Class A Common Stock (the “Advance Additional Interest Shares”) covering the
first 12 months of Additional Interest (see Note 5). The Company
registered the resale of these shares of Class A Common Stock and also
registered an additional 1,249,875 shares of Class A Common Stock for future
Interest Shares and Additional Interest. The Company filed a
registration statement on Form S-3 on September 26, 2007, which was declared
effective by the SEC on November 2, 2007. The Company is recording
the value of the Advance Additional Interest Shares of $4,676 to interest
expense over the 36 month term of the 2007 Senior Notes. For the
three months ended December 31, 2008 and 2009, the Company recorded $401 and
$134, respectively, and $802 and $534 for the nine months ended December 31,
2008 and 2009, respectively, to interest expense in connection with the Advance
Additional Interest Shares. See Note 5 on extinguishment of debt.
Commencing
with the quarter ended December 31, 2008 and through the maturity of the
previous 2007 Senior Notes in the quarter ended September 30, 2010, the Company
was obligated to issue a minimum of 132,000 shares or a maximum of 220,000
shares of Class A Common Stock per quarter as Additional Interest (the
“Additional Interest Shares”). The Company estimated the initial
value of the Additional Interest Shares to be $5,244 and is amortizing that
amount over the 36 month term of the 2007 Senior Notes. For the three
months ended December 31, 2008 and 2009, the Company recorded $437 and $0,
respectively, and $874 and $0 for the nine months ended December 31, 2008 and
2009, respectively, to interest expense in connection with the Additional
Interest Shares. In March 2009 and June 2009, the Company issued
220,000 shares of Class A Common Stock, each period, as Additional Interest
Shares with a value of $136 and $220, respectively. No Additional
Interest Shares were issued in September 2009, as the 2007 Senior Notes were
cancelled in August 2009.
In March
2008 and June 2008, the Company issued 548,572 and 635,847 shares of Class A
Common Stock, respectively, as Interest Shares pursuant to the 2007 Senior Notes
(see Note 5), which were part of the 1,249,875 shares previously registered on
the registration statement on Form S-3 filed on September 26, 2007, which was
declared effective by the SEC on November 2, 2007 and the additional 500,000
shares registered on the registration statement on Form S-3 filed on May 6,
2008, which was declared effective by the SEC on June 30, 2008. For
the three months ended December 31, 2008 and 2009, the Company did not record
any non-cash interest expense in connection with the Interest
Shares. For the nine months ended December 31, 2008 and 2009, the
Company recorded $1,342 and $186 as non-cash interest expense in connection with
the Interest Shares. No Interest Shares were issued and no interest
was paid in cash in September 2009, as the 2007 Senior Notes were cancelled in
August 2009.
In
connection with the acquisition of CEG in January 2007, CEG entered into a
services agreement (the “SD Services Agreement”) with SD Entertainment, Inc.
(“SDE”) to provide certain services, such as the provision of shared office
space and certain shared administrative personnel. The SD Services
Agreement is on a month-to-month term and requires the Company to pay
approximately $18 per month, of which 70% may be paid periodically in the form
of Cinedigm Class A Common Stock, at the Company’s option. In
September 2008 and January 2009, the Company issued 22,010 and 70,432 shares of
unregistered Class A Common Stock, respectively, with a value of $33 and $49,
respectively, to SDE as partial payment for such services and
resources.
In August
2009, in connection with the 2009 Private Placement (see Note 5), the Purchaser
agreed with the Company that, subject to limited exceptions, the Purchaser and
its affiliates would not, without the Company’s consent, acquire, offer to
acquire or join or participate in any group, as defined in Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, that would result in Purchaser and
its affiliates beneficially owning more than 42.5% of the Class A Common Stock
and the Company’s Class B Common Stock outstanding. This agreement
will terminate upon the earliest of August 11, 2011, a change of control, an
event of default (each as defined in the 2009 Note) and the date when the
Purchaser and its affiliates own less than 10% of the outstanding Class A Common
Stock and the Company’s Class B Common Stock.
18
In August
2009, in connection with the 2009 Private Placement (see Note 5), the Company
entered into an agreement (the “Aquifer Agreement”) with Aquifer Capital Group,
LLC (“Aquifer Capital”) pursuant to which Aquifer Capital provided financial
advisory services to the Company in connection with the purchase of the 2007
Senior Notes in exchange for the issuance of 200,000 shares of unregistered
Class A Common Stock to designees of Aquifer Capital. In August 2009,
200,000 shares were issued to designees of Aquifer Capital, with a value of $198
as payment for such services and were recorded as a debt issuance cost
associated with the 2009 Note.
In
September 2009, the Company issued 12,815 shares of Class A Common Stock for
restricted stock awards that vested.
In
October 2009, the Company increased the number of shares Class A Common Stock
authorized for issuance from 65,000,000 to 75,000,000 shares.
PREFERRED
STOCK
In
February 2009, the Company issued eight shares of Series A 10% Non-Voting
Cumulative Preferred Stock (“Preferred Stock”) to two
investors. There is no public trading market for the Preferred Stock.
The Preferred Stock has the designations, preferences and rights set forth in
the certificate of designations filed with the Secretary of State for the State
of Delaware on February 3, 2009 (the “Certificate of Designations”). Pursuant to
the Certificate of Designations, holders of Preferred Stock shall have the
following rights among others: (1) the holders are entitled to receive dividends
at the rate of 10% of the Preferred Stock original issue price per annum on each
outstanding share of Preferred Stock (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such
shares). Such dividends shall begin to accrue commencing upon the first date
such share is issued and becomes outstanding and shall be payable in cash or, at
the Company’s option, by converting the cash amount of such dividends into Class
A Common Stock, and will not be paid until September 30, 2010, as the Company
was not permitted to do so under the terms of the 2007 Senior Notes and is not
so permitted under the 2009 Note, (2) the holders will not have the right to
vote on matters brought before the stockholders of the Corporation, (3) upon any
liquidation, dissolution, or winding up of the Corporation, whether voluntary or
involuntary, before any distribution or payment shall be made to the holders of
any Junior Stock (as defined in the Certificate of Designations), subject to the
rights of any series of preferred stock that may from time-to-time come into
existence and which is expressly senior to the rights of the Preferred Stock,
the holders of Preferred Stock shall be entitled to be paid in cash out of the
assets of the Company an amount per share of Preferred Stock equal to 100% of
the Preferred Stock original issue price (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such
shares), plus accrued but unpaid dividends (the “Liquidation Preference”), for
each share of Preferred Stock held by each such holder, (4) the holders will
have no rights with respect to the conversion of the Preferred Stock into shares
of Class A Common Stock or any other security of the Company and (5) the
Preferred Stock may be redeemed by the Company at any time after the second
anniversary of the original issue date upon 30 days advance written notice to
the holder for a price equal to 110% of the Liquidation Preference, payable in
cash or, at the Company’s option, so long as the closing price of the Class A
Common Stock is $2.18 or higher (as shall be adjusted for stock splits) for at
least 90 consecutive trading days ending on the trading day into Class
A Common Stock at the market price, as measured on the original issue date for
the initial issuance of shares of Series A Preferred Stock.
In
connection with the issuance of Preferred Stock, the Company issued warrants to
purchase 700,000 shares of Class A Common Stock, to each holder of Preferred
Stock, at an exercise price of $0.63 per share (the “Preferred Warrants”). The
Preferred Warrants are exercisable beginning on March 12, 2009 for a period of
five years thereafter. The Preferred Warrants are callable by the Company after
February 2010, provided that the closing price of the Company’s Class A Common
Stock is $1.26 per share, 200% of the applicable exercise price, for twenty
consecutive trading days and a minimum average daily trading volume of 50,000
shares. The Company allocated $537 of the proceeds from the Preferred
Stock issuance to the estimated fair value of the Preferred
Warrants.
STOCK
OPTION PLAN
The
Company’s equity incentive plan (“the Plan”) provides for the issuance of up to
5,000,000 shares of Class A Common Stock to employees, outside directors and
consultants. The Company obtained stockholder approval to expand the size of the
Plan to 5,000,000, from the previously authorized 3,700,000, shares of Class A
Common Stock, at the Company’s 2009 Annual Meeting of Stockholders held on
September 30, 2009.
19
Stock
Options
During
the nine months ended December 31, 2009, under the Plan, the Company granted
stock options to purchase 1,652,500 shares of its Class A Common Stock to its
employees at an exercise price of $1.37 per share, of which 171,000 were issued
in exchange for the termination of the AccessDM options. As of
December 31, 2009, the weighted average exercise price for outstanding stock
options is $4.12 and the weighted average remaining contractual life is 6.0
years.
The
following table summarizes the activity of the Plan related to stock option
awards:
|
Shares
Under Option
|
Weighted
Average Exercise Price Per Share
|
|||||||
|
Balance
at March 31, 2009
|
2,313,622 | $ | 6.11 | |||||
|
Granted
|
1,652,500 | 1.37 | ||||||
|
Exercised
|
— | — | ||||||
|
Cancelled/Forfeited
|
(27,250 | ) | 5.51 | |||||
|
Balance
at December 31, 2009
|
3,938,872 | $ | 4.12 | |||||
Restricted
Stock Awards
The Plan
also provides for the issuance of restricted stock and restricted stock unit
awards. During the nine months ended December 31, 2009, the Company
granted 504,090 restricted stock units, of which 274,750 will vest equally over
a three year period and 229,340 will vest at the end of the third year or sooner
depending on the Company’s stock price.
The
following table summarizes the activity of the Plan related to restricted stock
and restricted stock unit awards:
|
Restricted
Stock Awards
|
Weighted
Average Market Price Per Share
|
|||||||
|
Balance
at March 31, 2009
|
773,168 | $ | 1.83 | |||||
|
Granted
|
504,090 | 1.06 | ||||||
|
Vested
|
(120,000 | ) | 2.06 | |||||
|
Cancelled/Forfeited
|
(65,831 | ) | 1.67 | |||||
|
Balance
at December 31, 2009
|
1,091,427 | $ | 1.46 | |||||
There
were 1,040,440 restricted stock units granted which have not vested as of
December 31, 2009. The Company may pay such restricted stock units
upon vesting in cash or shares of Class A Common Stock or a combination thereof
at the Company’s discretion.
ACCESSDM
STOCK OPTION PLAN
In August
2009, in connection with the 2009 Private Placement (see Note 5), AccessDM
terminated its stock option plan and all stock options outstanding
thereunder. In exchange for the termination of the AccessDM stock
options, the Company issued 171,000 stock options to the holders of AccessDM
stock options, pursuant to the Plan.
WARRANTS
Warrants
outstanding consist of the following:
20
|
Outstanding
Warrant (as defined below)
|
March
31,
2009
|
December
31,
2009
|
|
July
2005 Private Placement Warrants
|
467,275
|
467,275
|
|
August
2005 Warrants
|
760,196
|
760,196
|
|
Preferred
Warrants
|
1,400,000
|
1,400,000
|
|
Sageview
Warrants
|
—
|
16,000,000
|
|
Imperial
Warrants
|
—
|
750,000
|
|
2,627,471
|
19,377,471
|
In July
2005, in connection with the July 2005 Private Placement, the Company issued
warrants to purchase 477,275 shares of Class A Common Stock at an exercise price
of $11.00 per share (the “July 2005 Private Placement Warrants”). The July 2005
Private Placement Warrants were exercisable beginning on February 18, 2006 for a
period of five years thereafter. The July 2005 Private Placement Warrants are
conditionally callable by the Company. The underlying shares of these warrants
are registered for resale. As of December 31, 2009, 467,275 July 2005
Private Placements Warrants remained outstanding.
In August
2005, certain then outstanding warrants were exercised for $2,487 and the
Company issued to the investors 560,196 shares of Class A Common Stock and
warrants to purchase 760,196 shares of Class A Common Stock at an exercise price
of $11.39 per share (the “August 2005 Warrants”). The underlying shares of these
warrants are registered for resale. As of December 31, 2009, all
760,196 of the August 2005 Warrants remained outstanding.
In
February 2009, in connection with the issuance of Preferred Stock, the Company
issued warrants to purchase 700,000 shares of Class A Common Stock, to each
holder of Preferred Stock, at an exercise price of $0.63 per share (the
“Preferred Warrants”). The Preferred Warrants are exercisable beginning on March
12, 2009 for a period of five years thereafter. The Preferred Warrants are
conditionally callable by the Company after February 2010, provided that the
closing price of the Company’s Class A Common Stock is $1.26 per share, 200% of
the applicable exercise price, for twenty consecutive trading days and a minimum
average daily trading volume of 50,000 shares. The Company agreed to
register the resale of the shares of Class A Common Stock underlying the
Preferred Warrants from time to time. The Company allocated $537 of
the proceeds from the Preferred Stock issuance to the estimated fair value of
the Preferred Warrants. As of December 31, 2009, all 1,400,000 of the
Preferred Warrants remained outstanding and the underlying shares have not yet
been registered.
In August
2009, in connection with the 2009 Private Placement (see Note 5), the Company
issued warrants to purchase 16,000,000 shares of Class A Common Stock at an
exercise price of $1.37 per share (the “Sageview Warrants”). The
Sageview Warrants are exercisable beginning on September 30, 2009 and contain
customary cashless exercise provision and anti-dilution adjustments, and expire
on August 11, 2016 (subject to extension in limited circumstances). The
Company also entered into a Registration Rights Agreement with the Purchaser
pursuant to which the Company agreed to register the resale of the underlying
shares of the Sageview Warrants from time to time in accordance with the terms
of the Registration Rights Agreement. The fair value of the Sageview
Warrants at the date of issuance was $10,732, using a Black-Scholes option
valuation model and was recorded as a liability in the condensed consolidated
financial statements. For the three and nine months ended December
31, 2009, the Company recorded a gain of $613 and a loss of $3,576,
respectively, for the change in fair value of warrants in the condensed
consolidated statement of operations and resulted in a warrant liability fair
value of $13,695 at December 31, 2009. As of December 31, 2009, all
16,000,000 of the Sageview Warrants remained outstanding and the underlying
shares have not yet been registered.
In
connection with the 2009 Private Placement (see Note 5), the Company engaged
Imperial Capital, LLC (“Imperial”) to provide financial advisory
services. As partial consideration for such services, the Company
issued warrants to Imperial to purchase 750,000 shares of Class A Common Stock
(the “Imperial Warrants”). The Imperial Warrants have a customary
cashless exercise feature and a strike price of $1.37 per share, become
exercisable on February 11, 2010 and expire on August 11, 2014. In
connection with the issuance of the Imperial Warrants, the Company and Imperial
entered into a registration rights agreement (the “Imperial Registration Rights
Agreement”) pursuant to which the Company agreed to register the shares of Class
A Common Stock underlying the Imperial Warrants from time to time if other
registrations are filed, in accordance with the terms of the Imperial
Registration Rights Agreement. The fair value of the Imperial
Warrants at the date of issuance was $427, using a Black-Scholes option
valuation model and was recorded in debt issuance costs and stockholders’ equity
in the condensed
21
consolidated
financial statements at December 31, 2009. As of December 31, 2009,
all 750,000 of the Imperial Warrants remained outstanding and the underlying
shares have not yet been registered.
|
7.
|
COMMITMENTS
AND CONTINGENCIES
|
As of
December 31, 2009, in connection with the Phase II Deployment, Phase 2 DC has
entered into digital cinema deployment agreements with eight motion picture
studios for the distribution of digital movie releases to motion picture
exhibitors equipped with Systems, and providing for payment of VPFs to Phase 2
DC. As of December 31, 2009, Phase 2 DC also entered into master
license agreements with six exhibitors covering a total of 911 screens, whereby
the exhibitors agreed to the placement of Systems as part of the Phase II
Deployment. Included in the 911 contracted screens are contracts
covering 536 screens with three exhibitors who will purchase and own Systems
using their own financing, and will pay an upfront activation fee of $2,000 per
screen to the Company (the “Exhibitor-Buyer Structure”). The Company will manage
the billing and collection of VPFs and will remit all VPFs collected to the
exhibitors, less an administrative fee that will approximate 10% of the VPFs
collected. For Systems covered under the Exhibitor-Buyer Structure,
the Company will have no debt, property and equipment, financing costs or
depreciation recorded to its financial statements. As of December 31,
2009 the Company has 227 Phase 2 Systems installed, including 67 screens under
the Exhibitor-Buyer Structure. For Phase 2 Systems that the Company will
own and finance, installation of additional Systems in the Phase II Deployment
is contingent upon the completion of appropriate vendor supply agreements and
financing for the purchase of Systems.
In
November 2008, in connection with the Phase II Deployment, Phase 2 DC entered
into a supply agreement with Christie, for the purchase of up to 10,000 Systems
at agreed upon pricing, as part of the Phase II Deployment. As of
December 31, 2009, the Company has purchased 12 Systems under this agreement for
$898.
In
November 2008, in connection with the Phase II Deployment, Phase 2 DC entered
into a supply agreement with Barco, for the purchase of up to 5,000 Systems at
agreed upon pricing, as part of the Phase II Deployment. As of
December 31, 2009, the Company has purchased 138 Systems under this agreement
for $10,096.
In March
2009, in connection with the Phase II Deployment, Phase 2 DC entered into a
supply agreement with NEC Corporation of America (“NEC”), for the purchase of up
to 5,000 Systems at agreed upon pricing, as part of the Phase II
Deployment. As of December 31, 2009, the Company has not purchased
any Systems under this agreement.
LITIGATION
The
Company’s 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 alleged 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 constituted an event of default under the lease. Landlord
sought 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. In July 2009, the Company entered into an
agreement with Landlord to settle this matter whereby the Company would be
responsible for 25% of the cost and expenses related to the installation of a
sprinkler system. The Company’s share of the cost to install a sprinkler system
is estimated to be $100. As an additional condition of this
agreement, any option to renew or extend this lease has been
eliminated. This lease ends on July 31, 2022.
|
8.
|
COMPREHENSIVE
LOSS
|
The
components of comprehensive loss for the three and nine months ended December
31, 2009 is as follows:
22
|
Three
Months Ended December 31, 2009
|
Nine
Months Ended December 31, 2009
|
|||||||
|
Net
loss
|
$ | (6,384 | ) | $ | (14,548 | ) | ||
|
Other
comprehensive loss:
Unrealized
loss on available-for-sale investments
|
(43 | ) | (60 | ) | ||||
|
Comprehensive
net loss
|
$ | (6,427 | ) | $ | (14,608 | ) | ||
There was
no comprehensive income (loss) for the three and nine months ended December 31,
2008.
|
9.
|
SUPPLEMENTAL
CASH FLOW DISCLOSURE
|
|
For
the Nine Months Ended December 31,
|
||||||||
|
2008
|
2009
|
|||||||
|
Interest
paid
|
$ | 15,758 | $ | 24,448 | ||||
|
Equipment
purchased from Christie included in accounts payable and accrued expenses
at end of period
|
$ | 231 | $ | — | ||||
|
Issuance
of Class A Common Stock as additional purchase price for Access Digital
Server Assets
|
$ | 129 | $ | — | ||||
|
Issuance
of Class A Common Stock as additional purchase price for Managed
Services
|
$ | 82 | $ | — | ||||
|
Issuance
of Class A Common Stock to SDE as payment for services
and resources
|
$ | 93 | $ | — | ||||
|
Assets
acquired under capital leases
|
$ | 92 | $ | 901 | ||||
|
Accretion
of preferred stock discount
|
$ | — | $ | 72 | ||||
|
Accrued
dividends on preferred stock
|
$ | — | $ | 300 | ||||
|
Issuance
of Class A Common Stock to Aquifer Capital for financial advisory services
in connection with the purchase of the 2007 Senior Notes
|
$ | — | $ | 198 | ||||
|
Issuance
of Class A Common Stock to Imperial to provide financial advisory
services
|
$ | — | $ | 437 | ||||
|
10.
|
SEGMENT
INFORMATION
|
Beginning
September 1, 2009, the Company modified how its decision makers review and
allocate resources to operating segments, which resulted in revised reportable
segments. The Company is comprised of five reportable segments: Phase
I Deployment, Phase II Deployment, Services, Content & Entertainment and
Other. The segments were determined based on the products and services provided
by each segment and how management reviews and makes decisions regarding segment
operations. Performance of the segments is evaluated on income (loss) from
operations before interest, taxes, depreciation and amortization. As
a result of the change in the Company’s reportable segments, the Company has
restated the segment information for the prior periods. Future
changes to this organization structure may result in changes to the reportable
segments disclosed.
The Phase
I Deployment and Phase II Deployment segments consist of the
following:
23
|
Operations
of:
|
Products
and services provided:
|
|
|
Phase
1 DC
|
Financing
vehicles and administrators for the Company’s 3,724 Systems installed
nationwide in Phase 1 DC’s deployment to theatrical
exhibitors. The Company retains ownership of the residual cash
flows and the Systems after the repayment of all non-recourse debt and at
the expiration of exhibitor master license agreements.
|
|
|
Phase
2 DC
|
Financing
vehicles and administrators for the Company’s second digital cinema
deployment, through Phase 2 DC (the “Phase II Deployment”). The
Company retains no ownership of the residual cash flows and digital cinema
equipment after the completion of cost recoupment and at the expiration of
the exhibitor master license
agreements.
|
The
Services segment consists of the following:
|
Operations
of:
|
Products
and services provided:
|
|
|
Digital
Cinema Services
|
Provides
monitoring, billing, collection, verification and other management
services to the Company’s Phase I Deployment, Phase II Deployment as well
as to exhibitors who purchase their own equipment. Collects and disburses
VPFs from motion picture studios and distributors and ACFs from
alternative content providers, movie exhibitors and theatrical
exhibitors.
|
|
|
Software
|
Develops
and licenses software to the theatrical distribution and exhibition
industries, provides ASP Service, and provides software enhancements and
consulting services.
|
|
|
DMS
|
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, video network
origination and management services and a virtual booking center to
outsource the booking and scheduling of satellite and fiber networks and
provides forensic watermark detection services for motion picture studios
and forensic recovery services for content
owners.
|
The
Content & Entertainment segment consists of the following:
|
Operations
of:
|
Products
and services provided:
|
|
|
USM
|
Provides
cinema advertising services and entertainment.
|
|
|
CEG
|
Acquires,
distributes and provides the marketing for programs of alternative content
and feature films to movie
exhibitors.
|
The Other
segment consists of the following:
|
Operations
of:
|
Products
and services provided:
|
|||
|
Pavilion
Theatre
|
A
nine-screen digital movie theatre and showcase to demonstrate the
Company’s integrated digital cinema solutions.
|
|||
|
Managed
Services
|
Provides
information technology consulting services and managed network monitoring
services through its global network command center.
|
|||
|
Access
Digital Server Assets
|
Provides
hosting services and provides network access for other web hosting
services.
|
|||
Since May
1, 2007, the Company’s IDCs have been operated by FiberMedia, consisting of
unrelated third parties,
24
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 June 2009,
one of the IDC leases expired, leaving two IDC leases with the Company as
lessee. One of the remaining IDC leases expires in July 2010, which
the Company does not intend to renew.
Information
related to the segments of the Company and its subsidiaries is detailed
below:
|
As
of March 31, 2009
|
||||||||||||||||||||||||||||
|
Phase
I
|
Phase
II
|
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
||||||||||||||||||||||
|
Total
intangible assets, net
|
$ | 527 | $ | — | $ | 156 | $ | 10,010 | $ | 14 | $ | — | $ | 10,707 | ||||||||||||||
|
Total
goodwill
|
$ | — | $ | — | $ | 4,306 | $ | 1,568 | $ | 2,150 | $ | — | $ | 8,024 | ||||||||||||||
|
Total
assets
|
$ | 250,030 | $ | 5,330 | $ | 19,911 | $ | 21,391 | $ | 9,476 | $ | 16,259 | $ | 322,397 | ||||||||||||||
|
Notes
payable, non-recourse
|
$ | 195,448 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 195,448 | ||||||||||||||
|
Notes
payable
|
— | — | 501 | 35 | — | 55,221 | 55,757 | |||||||||||||||||||||
|
Capital
leases
|
— | — | — | 68 | 5,939 | — | 6,007 | |||||||||||||||||||||
|
Total
debt
|
$ | 195,448 | $ | — | $ | 501 | $ | 103 | $ | 5,939 | $ | 55,221 | $ | 257,212 | ||||||||||||||
|
As
of December 31, 2009
|
||||||||||||||||||||||||||||
|
Phase
I
|
Phase
II
|
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
||||||||||||||||||||||
|
Total
intangible assets, net
|
$ | 493 | $ | — | $ | 54 | $ | 7,893 | $ | 12 | $ | — | $ | 8,452 | ||||||||||||||
|
Total
goodwill
|
$ | — | $ | — | $ | 4,306 | $ | 1,568 | $ | 2,150 | $ | — | $ | 8,024 | ||||||||||||||
|
Total
assets
|
$ | 226,698 | $ | 12,364 | $ | 19,958 | $ | 19,546 | $ | 8,521 | $ | 22,852 | $ | 309,939 | ||||||||||||||
|
Notes
payable, non-recourse
|
$ | 169,138 | $ | 10,290 | $ | — | $ | — | $ | — | $ | — | $ | 179,428 | ||||||||||||||
|
Notes
payable
|
— | — | 376 | — | — | 67,438 | 67,814 | |||||||||||||||||||||
|
Capital
leases
|
— | 28 | 314 | 47 | 5,831 | — | 6,220 | |||||||||||||||||||||
|
Total
debt
|
$ | 169,138 | $ | 10,318 | $ | 690 | $ | 47 | $ | 5,831 | $ | 67,438 | $ | 253,462 | ||||||||||||||
|
Capital
Expenditures
|
Phase
I
|
Phase
II
|
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
|||||||||||||||||||||
|
For
the nine months ended December 31, 2008
|
$ | 15,782 | $ | — | $ | 1,923 | $ | 241 | $ | 148 | $ | 21 | $ | 18,115 | ||||||||||||||
|
For
the nine months ended December 31, 2009
|
$ | 66 | $ | 11,768 | $ | 1,075 | $ | 30 | $ | 100 | $ | 6 | $ | 13,045 | ||||||||||||||
25
|
For
the Three Months Ended December 31, 2008
|
||||||||||||||||||||||||||||
|
Phase
I
|
Phase
II
|
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
||||||||||||||||||||||
|
Revenues
from external customers
|
$ | 13,956 | $ | 29 | $ | 1,679 | $ | 4,862 | $ | 2,184 | $ | — | $ | 22,710 | ||||||||||||||
|
Intersegment
revenues
|
1 | — | 81 | 12 | 125 | — | 219 | |||||||||||||||||||||
|
Total
segment revenues
|
13,957 | 29 | 1,760 | 4,874 | 2,309 | — | 22,929 | |||||||||||||||||||||
|
Less
:Intersegment revenues
|
(1 | ) | — | (81 | ) | (12 | ) | (125 | ) | — | (219 | ) | ||||||||||||||||
|
Total
consolidated revenues
|
$ | 13,956 | $ | 29 | $ | 1,679 | $ | 4,862 | $ | 2,184 | $ | — | $ | 22,710 | ||||||||||||||
|
Direct
operating (exclusive of depreciation and amortization shown
below)
|
283 | 18 | 1,243 | 3,726 | 1,798 | — | 7,068 | |||||||||||||||||||||
|
Selling,
general and administrative
|
165 | 323 | 539 | 1,541 | 233 | 1,890 | 4,691 | |||||||||||||||||||||
|
Plus:
Allocation of Corporate overhead
|
— | — | 1,215 | 337 | 161 | (1,713 | ) | — | ||||||||||||||||||||
|
Provision
for doubtful accounts
|
— | — | — | 88 | 10 | — | 98 | |||||||||||||||||||||
|
Research
and development
|
— | — | 107 | — | — | — | 107 | |||||||||||||||||||||
|
Stock-based
compensation
|
32 | — | 38 | 27 | 3 | 195 | 295 | |||||||||||||||||||||
|
Impairment
of goodwill
|
— | — | — | 4,565 | 1,960 | — | 6,525 | |||||||||||||||||||||
|
Depreciation
and amortization of property and equipment
|
7,142 | — | 473 | 238 | 256 | 17 | 8,126 | |||||||||||||||||||||
|
Amortization
of intangible assets
|
11 | — | 82 | 706 | 22 | — | 821 | |||||||||||||||||||||
|
Total
operating expenses
|
7,633 | 341 | 3,697 | 11,228 | 4,443 | 389 | 27,731 | |||||||||||||||||||||
|
Income
(loss) from operations
|
$ | 6,323 | $ | (312 | ) | $ | (2,018 | ) | $ | (6,366 | ) | $ | (2,259 | ) | $ | (389 | ) | $ | (5,021 | ) | ||||||||
26
|
For
the Three Months Ended December 31, 2009
|
||||||||||||||||||||||||||||
|
Phase
I
|
Phase
II
|
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
||||||||||||||||||||||
|
Revenues
from external customers
|
$ | 12,053 | $ | 480 | $ | 1,694 | $ | 5,452 | $ | 2,090 | $ | — | $ | 21,769 | ||||||||||||||
|
Intersegment
revenues
|
3 | — | 543 | 11 | 117 | — | 674 | |||||||||||||||||||||
|
Total
segment revenues
|
12,056 | 480 | 2,237 | 5,463 | 2,207 | — | 22,443 | |||||||||||||||||||||
|
Less
:Intersegment revenues
|
(3 | ) | — | (543 | ) | (11 | ) | (117 | ) | — | (674 | ) | ||||||||||||||||
|
Total
consolidated revenues
|
$ | 12,053 | $ | 480 | $ | 1,694 | $ | 5,452 | $ | 2,090 | $ | — | $ | 21,769 | ||||||||||||||
|
Direct
operating (exclusive of depreciation and amortization shown
below)
|
(102 | ) | 15 | 1,528 | 3,439 | 1,705 | — | 6,585 | ||||||||||||||||||||
|
Selling,
general and administrative
|
38 | 46 | 785 | 1,361 | 193 | 1,735 | 4,158 | |||||||||||||||||||||
|
Plus:
Allocation of Corporate overhead
|
— | — | 1,143 | 101 | 48 | (1,292 | ) | — | ||||||||||||||||||||
|
Provision
for doubtful accounts
|
— | — | — | 144 | — | — | 144 | |||||||||||||||||||||
|
Research
and development
|
— | — | 47 | — | — | — | 47 | |||||||||||||||||||||
|
Stock-based
compensation
|
— | — | 89 | 32 | 3 | 222 | 346 | |||||||||||||||||||||
|
Depreciation
and amortization of property and equipment
|
7,139 | 297 | 451 | 212 | 182 | 5 | 8,286 | |||||||||||||||||||||
|
Amortization
of intangible assets
|
11 | — | 23 | 705 | 1 | — | 740 | |||||||||||||||||||||
|
Total
operating expenses
|
7,086 | 358 | 4,066 | 5,994 | 2,132 | 670 | 20,306 | |||||||||||||||||||||
|
Income
(loss) from operations
|
$ | 4,967 | $ | 122 | $ | (2,372 | ) | $ | (542 | ) | $ | (42 | ) | $ | (670 | ) | $ | 1,463 | ||||||||||
27
|
For
the Nine Months Ended December 31, 2008
|
||||||||||||||||||||||||||||
|
Phase
I
|
Phase
II
|
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
||||||||||||||||||||||
|
Revenues
from external customers
|
$ | 38,570 | $ | 29 | $ | 5,894 | $ | 13,325 | $ | 7,311 | $ | — | $ | 65,129 | ||||||||||||||
|
Intersegment
revenues
|
1 | — | 370 | 34 | 297 | — | 702 | |||||||||||||||||||||
|
Total
segment revenues
|
38,571 | 29 | 6,264 | 13,359 | 7,608 | — | 65,831 | |||||||||||||||||||||
|
Less
:Intersegment revenues
|
(1 | ) | — | (370 | ) | (34 | ) | (297 | ) | — | (702 | ) | ||||||||||||||||
|
Total
consolidated revenues
|
$ | 38,570 | $ | 29 | $ | 5,894 | $ | 13,325 | $ | 7,311 | $ | — | $ | 65,129 | ||||||||||||||
|
Direct
operating (exclusive of depreciation and amortization shown
below)
|
705 | 18 | 3,806 | 9,126 | 5,942 | — | 19,597 | |||||||||||||||||||||
|
Selling,
general and administrative
|
875 | 323 | 1,559 | 5,077 | 658 | 5,219 | 13,711 | |||||||||||||||||||||
|
Plus:
Allocation of Corporate overhead
|
— | — | 2,713 | 753 | 361 | (3,827 | ) | — | ||||||||||||||||||||
|
Provision
for doubtful accounts
|
(150 | ) | — | 40 | 311 | 70 | — | 271 | ||||||||||||||||||||
|
Research
and development
|
— | — | 207 | — | — | — | 207 | |||||||||||||||||||||
|
Stock-based
compensation
|
53 | — | 116 | 70 | (27 | ) | 441 | 653 | ||||||||||||||||||||
|
Impairment
of goodwill
|
— | — | — | 4,565 | 1,960 | — | 6,525 | |||||||||||||||||||||
|
Depreciation
and amortization of property and equipment
|
21,398 | — | 1,362 | 796 | 788 | 50 | 24,394 | |||||||||||||||||||||
|
Amortization
of intangible assets
|
11 | — | 383 | 2,209 | 65 | 1 | 2,669 | |||||||||||||||||||||
|
Total
operating expenses
|
22,892 | 341 | 10,186 | 22,907 | 9,817 | 1,884 | 68,027 | |||||||||||||||||||||
|
Income
(loss) from operations
|
$ | 15,678 | $ | (312 | ) | $ | (4,292 | ) | $ | (9,582 | ) | $ | (2,506 | ) | $ | (1,884 | ) | $ | (2,898 | ) | ||||||||
28
|
For
the Nine Months Ended December 31, 2009
|
||||||||||||||||||||||||||||
|
Phase
I
|
Phase
II
|
Services
|
Content
& Entertainment
|
Other
|
Corporate
|
Consolidated
|
||||||||||||||||||||||
|
Revenues
from external customers
|
$ | 34,081 | $ | 1,174 | $ | 5,509 | $ | 12,662 | $ | 6,890 | $ | — | $ | 60,316 | ||||||||||||||
|
Intersegment
revenues
|
3 | — | 676 | 18 | 344 | — | 1,041 | |||||||||||||||||||||
|
Total
segment revenues
|
34,084 | 1,174 | 6,185 | 12,680 | 7,234 | — | 61,357 | |||||||||||||||||||||
|
Less
:Intersegment revenues
|
(3 | ) | — | (676 | ) | (18 | ) | (344 | ) | — | (1,041 | ) | ||||||||||||||||
|
Total
consolidated revenues
|
$ | 34,081 | $ | 1,174 | $ | 5,509 | $ | 12,662 | $ | 6,890 | $ | — | $ | 60,316 | ||||||||||||||
|
Direct
operating (exclusive of depreciation and amortization shown
below)
|
340 | 100 | 4,051 | 8,148 | 5,474 | — | 18,113 | |||||||||||||||||||||
|
Selling,
general and administrative
|
276 | 540 | 1,699 | 4,108 | 623 | 4,854 | 12,100 | |||||||||||||||||||||
|
Plus:
Allocation of Corporate overhead
|
— | — | 3,342 | 313 | 149 | (3,804 | ) | — | ||||||||||||||||||||
|
Provision
for doubtful accounts
|
— | — | 39 | 369 | — | — | 408 | |||||||||||||||||||||
|
Research
and development
|
— | — | 151 | — | — | — | 151 | |||||||||||||||||||||
|
Stock-based
compensation
|
74 | — | 175 | 87 | 9 | 767 | 1,112 | |||||||||||||||||||||
|
Depreciation
and amortization of property and equipment
|
21,418 | 741 | 1,338 | 647 | 594 | 24 | 24,762 | |||||||||||||||||||||
|
Amortization
of intangible assets
|
34 | — | 102 | 2,117 | 2 | — | 2,255 | |||||||||||||||||||||
|
Total
operating expenses
|
22,142 | 1,381 | 10,897 | 15,789 | 6,851 | 1,841 | 58,901 | |||||||||||||||||||||
|
Income
(loss) from operations
|
$ | 11,939 | $ | (207 | ) | $ | (5,388 | ) | $ | (3,127 | ) | $ | 39 | $ | (1,841 | ) | $ | 1,415 | ||||||||||
11.
RELATED PARTY TRANSACTIONS
In August
2009, the Company hired Adam M. Mizel to be its Chief Financial Officer and
Chief Strategy Officer. Mr. Mizel has been a member of the Company’s Board
of Directors since March 2009 and is currently the Managing Principal of Aquifer
Capital Group, LLC and the General Partner of the Aquifer Opportunity Fund,
L.P., currently the Company’s largest shareholder.
29
12.
SUBSEQUENT EVENTS
The Company
has evaluated events and transactions that occurred between December 31, 2009
and February 12, 2010, which is the date the financial statements were issued,
for possible disclosure or recognition in the financial
statements. The Company has determined that there were no such
events or transactions that warrant disclosure or recognition in the financial
statements except as noted below.
In
February 2010, the KBC Related Facility was increased by $2,890 to fund the
purchase of additional Systems from Barco.
In
February 2010, in connection with the Company’s Phase II Deployment, Phase 2 DC
entered into a master license agreement with an exhibitor covering 205 screens
under the Exhibitor-Buyer Structure, whereby the exhibitor agreed to the
placement of Systems as part of the Phase II Deployment.
The
following is a discussion of the historical results of operations and financial
condition of Cinedigm Digital Cinema Corp. (the “Company”) and factors affecting
the Company’s financial resources. This discussion should be read in conjunction
with the condensed consolidated financial statements, including the notes
thereto, set forth herein under Item 1 “Financial Statements” and the
Form 10-K for the year ended March 31, 2009.
This
report contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties,
many of which are beyond our control. Our actual results could differ
materially and adversely from those anticipated in such forward-looking
statements as a result of certain factors, including those set forth in our
Annual Report on Form 10-K for the year ended March 31, 2009. 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. Additional information regarding risks to
the Company can be found below (see Part II Item 1A under Risk
Factors).
In this
report, “Cinedigm,” “we,” “us,” “our” refers to Cinedigm Digital Cinema Corp.
f/k/a Access Integrated Technologies, Inc. and the “Company” refers to Cinedigm
and its subsidiaries unless the context otherwise requires.
OVERVIEW
Cinedigm
Digital Cinema Corp. was incorporated in Delaware on March 31, 2000 (“Cinedigm”,
and collectively with its subsidiaries, the “Company”). On September
30, 2009 the Company’s stockholders approved a change in the Company’s name from
Access Integrated Technologies, Inc. to Cinedigm Digital Cinema Corp., and such
change was effected October 5, 2009. The Company provides technology
solutions, financial services and advice, software services, electronic delivery
and content distribution services to owners and distributors of digital content
to movie theatres and other venues. Beginning September 1, 2009, the
Company modified how its decision makers review and allocate resources to
operating segments, which resulted in revised reportable segments, but did not
impact our consolidated financial position, results of operations or cash
flows. We realigned our focus to five primary businesses: first
digital cinema deployment (“Phase I Deployment”), second digital cinema
deployment (“Phase II Deployment”), services (“Services”), media content and
entertainment (“Content & Entertainment”) and other
(“Other”). The Company’s Phase I Deployment and Phase II Deployment
segments are the financing vehicles and administrators for the Company’s digital
cinema equipment (the “Systems”) installed in movie theatres
nationwide. The Company’s Services segment provides technology
solutions, software services, electronic content delivery services via satellite
and hard drive to the motion picture industry, 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 rapidly developing 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 and in-theatre advertising. The Company’s Other segment
provides motion picture exhibition to the general public, information technology
consulting and managed network monitoring services and hosting services and
network access for other web hosting services (“Access Digital Server
Assets”).
30
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.
The Phase
I Deployment segment of our business is comprised of Christie/AIX, Inc. (“Phase
1 DC”). The Phase II Deployment segment is comprised of Access
Digital Cinema Phase 2 Corp. (“Phase 2 DC”). The Services segment of our
business is comprised of FiberSat Global Services, Inc. d/b/a AccessIT Satellite
and Support Services, (“Satellite”), Access Digital Media, Inc. (“AccessDM” and,
together with Satellite, “DMS”), Hollywood Software, Inc. d/b/a AccessIT
Software (“Software”), and PLX Acquisition Corp. The Content &
Entertainment segment of our business is comprised of UniqueScreen Media, Inc.
(“USM”) and Vistachiara Productions, Inc. f/k/a The Bigger Picture, currently
d/b/a Cinedigm Content and Entertainment Group (“CEG”). Our Other segment
consists of the operations of Core Technology Services, Inc. (“Managed
Services”), ADM Cinema Corporation (“ADM Cinema”) d/b/a the Pavilion Theatre
(the “Pavilion Theatre”) and our Access Digital Server Assets. In the
past our Other segment included the operations of our internet data centers
(“IDCs”). However, since May 2007, our three IDCs have been operated
by FiberMedia, consisting of unrelated third parties, and 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 June 2009, one of the IDC leases expired, leaving two
IDC leases with the Company as lessee. One of the remaining IDC
leases expires in July 2010, which the Company does not intend to
renew.
The
following organizational chart provides a graphic representation of our business
and our five reporting segments:
We have
incurred net losses of $17.4 million and $6.4 million in the three months ended
December 31, 2008 and 2009, respectively, and $28.0 million and $14.5 million in
the nine months ended December 31, 2008 and 2009, respectively, and we have an
accumulated deficit of $153.0 million as of December 31, 2009. We also have
significant contractual obligations related to our recourse and non-recourse
debt for the remainder of fiscal year 2010 and beyond. We expect to continue
generating net losses for the foreseeable future. Based on our cash
position at December 31, 2009, and expected cash flows from operations,
management believes that we have the ability to meet its obligations through
December 31, 2010. In August 2009, we entered into a private placement of a
senior secured recourse note and extinguished its existing senior notes, which
provided net proceeds after repayment of existing debt, funding of an interest
reserve and transactions fees and expenses of approximately $11.3 million of
working capital funding. We have signed commitment letters for
additional non-recourse debt capital, primarily to meet equipment requirements
related to our Phase II Deployment, however there is no assurance that financing
for the Phase II Deployment will be completed as contemplated or under terms
acceptable to us or our existing stockholders. Failure to generate
additional revenues, raise additional capital or manage discretionary spending
could have a material adverse effect on our ability to continue as a going
concern. The accompanying unaudited
31
condensed
consolidated financial statements do not reflect any adjustments which may
result from our inability to continue as a going concern.
Results
of Operations for the Three Months Ended December 31, 2008 and 2009
Revenues
|
For
the Three Months Ended
December
31,
|
||||||||||||
|
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
|
Phase
I Deployment
|
$ | 13,956 | $ | 12,053 | (14 | )% | ||||||
|
Phase
II Deployment
|
29 | 480 | 1,555 | % | ||||||||
|
Services
|
1,679 | 1,694 | 1 | % | ||||||||
|
Content
& Entertainment
|
4,862 | 5,452 | 12 | % | ||||||||
|
Other
|
2,184 | 2,090 | (4 | )% | ||||||||
| $ | 22,710 | $ | 21,769 | (4 | )% | |||||||
Revenues
decreased $0.9 million or 4%. The 14% decrease in revenues in the
Phase I Deployment segment was attributable to a contractual 16%
reduction in VPF rates starting in November 2008, offset by an increase in
quarterly screen turnover. The increase in revenues in the Phase II
Deployment segment was due to Phase 2 DC VPF revenues which commenced during the
three months ended December 31, 2008 and increased as total Phase 2 DC Systems
deployed expanded from 54 Systems at December 31, 2008 compared to 227 Phase 2
DC Systems installed at December 31, 2009. Revenues in the Services
segment were flat, consisting of decreased revenues in the DMS unit from (i)
fewer digital feature and trailer deliveries as DMS maintained its movie studio
customers but experienced limited growth in the number of digital delivery sites
and an 18% decrease in non-theatrical satellite services revenues due to general
economic factors offset by (ii) a 44% increase in Software revenues due to
increased license and maintenance fees from Phase 2 deployments as well as new
Theatrical Distribution Software customers; and (iii) increased service fees
generated by the 227 Phase 2 DC Systems installed as well as initial service
fees generated by additional Phase 2 DC Systems deployed through the structure
where exhibitors purchase and own Systems using their own financing (the
“Exhibitor-Buyer Structure”). We expect Phase 2 DC service fees, DMS revenues
and software license fees to increase as additional Systems are deployed under
both the recent $100 million non-recourse credit facility commitment letters
from GECC’s Media, Communications & Entertainment business (“GE Capital”)
and Société Générale Corporate & Investment Banking (“Soc Gen”) as well as
through the Exhibitor-Buyer Structure launched in September 2009, initially with
two exhibitors.
In the
Content & Entertainment segment, revenues increased 12% due to $1.8 million
of content distribution-related revenues earned by CEG from events such as
Opa!
, an independent film
distributed by CEG to 240 theaters, and
Dave Matthews Band in 3-D,
a
recorded 3-D concert film distributed by CEG to 520 theaters. These
gains were
offset
by a 14% decline in in-theatre advertising revenues at USM. This
decline was attributable to (i) the elimination of various under-performing
customer contracts, (ii) the current weak economic environment for local
advertising, and (iii) a decrease in non-cash barter revenues of $0.6 million,
which represents the fair value of advertising provided to alternative content
providers of CEG, offset by a 22% increase in national advertising revenues
generated by the contract with Screenvision. The primary driver of CEG 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
CineLive
SM
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 remain consistent during the remainder of our
fiscal year relative to the previous fiscal year, with lower Phase 1 screen
turnover, and resulting VPF revenue, offset by increased revenues from our
growing Phase 2 screen base and our services businesses. The primary cause of
the VPF decline is
Avatar
which opened on
December 18, 2009 on approximately 650 screens in our Phase I and II
Deployments and remains booked on almost all of those screens
.
This anomaly is
expected to reduce our fiscal Q4 revenues by $1.0-$1.2
million. Currently scheduled advanced movie studio release schedules
reflect a return to normal release schedules and our expected revenue patterns
in our fiscal 2011 first quarter. Longer term we expect revenues to
increase, primarily due to continued Phase 2 Systems deployed from both
Cinedigm-financed screens and screens deployed under the Exhibitor-Buyer
Structure. These deployments will drive increased levels of VPF
revenues, digital cinema services fees, software license and maintenance fees,
digital delivery fees and content distribution fees. As of December
31, 2009, in connection with the Phase II Deployment, Phase 2 DC has entered
into digital
32
cinema
deployment agreements with eight motion picture studios for the distribution of
digital movie releases to motion picture exhibitors equipped with Systems, and
providing for payment of VPFs to Phase 2 DC. As of December 31, 2009,
Phase 2 DC also entered into master license agreements with six exhibitors
covering a total of 911 screens, whereby the exhibitors agreed to the placement
of Systems as part of the Phase II Deployment. Included in the 911
contracted screens are contracts covering 536 screens with three exhibitors who
will purchase and own Systems using their own financing, and will pay an upfront
activation fee of $2,000 per screen to the Company (the “Exhibitor-Buyer
Structure”). The Company will manage the billing an collection of VPFs and will
remit all VPFs collected to the exhibitors, less an administrative fee that will
approximate 10% of the VPFs collected. For Systems covered under the
Exhibitor-Buyer Structure, the Company will have no debt, property and
equipment, financing costs or depreciation recorded to its financial
statements. As of December 31, 2009 the Company has 227 Phase 2
Systems installed, including 67 screens under the Exhibitor-Buyer
Structure. For Phase 2 Systems that the Company will own and finance,
installation of additional Systems in the Phase II Deployment is still upon the
completion of appropriate vendor supply agreements and financing for the
purchase of Systems.
Direct Operating
Expenses
|
For
the Three Months Ended
December
31,
|
||||||||||||
|
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
|
Phase
I Deployment
|
$ | 283 | $ | (102 | ) | (136 | )% | |||||
|
Phase
II Deployment
|
18 | 15 | (17 | )% | ||||||||
|
Services
|
1,243 | 1,528 | 23 | % | ||||||||
|
Content
& Entertainment
|
3,726 | 3,439 | (8 | )% | ||||||||
|
Other
|
1,798 | 1,705 | (5 | )% | ||||||||
| $ | 7,068 | $ | 6,585 | (7 | )% | |||||||
Direct
operating expenses decreased $0.5 million or 7%. The decrease in
direct operating costs in the Phase I Deployment segment was primarily due to
the reduction of an accrual for certain operating expenses, reduced property
taxes incurred on deployed Systems and prior year costs now being allocated to
our Servicer Co.. The increase in the Services segment was primarily
related to the expense within DMS associated with the start-up and shift to
a new trailer delivery program, additional costs incurred in support of the
Phase II Deployment and the allocation of additional costs to our Servicer Co.
which were shown within the Phase I Deployment segment in the prior
year. The decrease in the Content & Entertainment segment was
primarily related to a 20% decrease in minimum guaranteed obligations under
theatre advertising agreements with exhibitors for displaying cinema
advertising, reduced operational staffing levels at USM and reduced non-cash
content acquisition expenses of $0.6 million for CEG related to the fair value
of barter advertising provided by USM offset by increased advertising and
marketing costs in CEG related to the release of Opa! and the release of Dave
Matthews Band in 3-D. We expect direct operating expenses to decrease as
compared to prior periods and remain constant at the current level.
Selling, General and
Administrative Expenses
|
For
the Three Months Ended
December
31,
|
||||||||||||
|
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
|
Phase
I Deployment
|
$ | 165 | $ | 38 | (77 | )% | ||||||
|
Phase
II Deployment
|
323 | 46 | (86 | )% | ||||||||
|
Services
|
539 | 785 | 46 | % | ||||||||
|
Content
& Entertainment
|
1,541 | 1,361 | (12 | )% | ||||||||
|
Other
|
233 | 193 | (17 | )% | ||||||||
|
Corporate
|
1,890 | 1,735 | (8 | )% | ||||||||
| $ | 4,691 | $ | 4,158 | (11 | )% | |||||||
Selling,
general and administrative expenses decreased approximately $0.5 million or
11%. The decrease was primarily caused by reduced payroll related
expenses in the Phase I Deployment and Phase II Deployment segments as those
costs are now being allocated to our Servicer Co. within the Services
segment. The decrease was also related to reduced staffing levels in
the Content & Entertainment segment and decreased professional fees and
investor relations expenses within Corporate. Following the completion of our
Phase I Deployment, overall
33
headcount
reductions have now stabilized. As of December 31, 2008 and 2009, we
had 251 and 235 employees, of which 43 and 42 were part-time employees and 41
and 38 were salespersons, respectively. We expect selling, general
and administrative expenses to decrease as compared to prior periods and remain
relatively constant at the current level.
Impairment of
goodwill
Based on
the Company’s testing at December 31, 2008, the Company concluded that the fair
value of its reporting units within the Content & Entertainment segment and
the Pavilion Theatre, in the Other segment, were below the carrying amounts and
recorded an aggregate impairment charge of $6.5 million. This
resulted from the continued decline in our market capitalization, the extremely
depressed economic conditions generally, the re-evaluation of our forecasts and
other assumptions, and the diminished market values of our identified peer
companies.
Depreciation and
Amortization Expense on Property and Equipment
|
For
the Three Months Ended
December
31,
|
||||||||||||
|
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
|
Phase
I Deployment
|
$ | 7,142 | $ | 7,139 | — | |||||||
|
Phase
II Deployment
|
— | 297 | — | |||||||||
|
Services
|
473 | 451 | (5 | )% | ||||||||
|
Content
& Entertainment
|
238 | 212 | (11 | )% | ||||||||
|
Other
|
256 | 182 | (29 | )% | ||||||||
|
Corporate
|
17 | 5 | (71 | )% | ||||||||
| $ | 8,126 | $ | 8,286 | 2 | % | |||||||
Depreciation
and amortization expense increased $0.2 million or 2%. Other than the
Phase II Deployment segment, the decreases reflect reduced expense on assets
which are fully depreciated or amortized at December 31, 2009. The
increase in the Phase II Deployment segment represents depreciation on the Phase
2 DC Systems which were not in service during the three months ended December
31, 2008. We expect the depreciation and amortization expense in the
Phase II Deployment segment to increase as new Phase 2 DC Systems are
installed.
Interest
expense
|
For
the Three Months Ended
December
31,
|
||||||||||||
|
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
|
Phase
I Deployment, non-recourse
|
$ | 4,140 | $ | 5,107 | 23 | % | ||||||
|
Phase
II Deployment, non-recourse
|
— | 210 | — | |||||||||
|
Services
|
9 | 17 | 89 | % | ||||||||
|
Content
& Entertainment
|
35 | 3 | (91 | )% | ||||||||
|
Other
|
259 | 258 | — | |||||||||
|
Corporate
|
2,492 | 3,666 | 47 | % | ||||||||
| $ | 6,935 | $ | 9,261 | 34 | % | |||||||
Interest
expense increased $2.3 million or 34%. Total interest expense included $6.0
million and $8.7 million of interest paid and accrued for the three months ended
December 31, 2008 and 2009, respectively. The increase in interest
paid and accrued within the Phase I Deployment segment relates to the increased
interest rate on the GE Credit Facility related to the fourth amendment and in
part to the Interest Rate Swap (see change in fair value of interest rate swap
discussed below) and increased interest within the Phase II Deployment segment
related to the credit facility with KBC Bank NV (“KBC”) to fund the purchase of
Systems (the “KBC Related Facility”) from Barco, Inc.
(“Barco”). Interest paid and accrued within Corporate increased $1.5
million due to the note issued in August 2009 (the “2009
Note”). Interest on the 2009 Note is 8% per annum to be accrued as an
increase in the aggregate principal amount of the 2009 Note (“PIK Interest”) and
7% per annum paid in cash. This increase is offset by the elimination
of interest payments on the 2007 Senior Notes which ceased as the 2007 Senior
Notes were cancelled in August 2009.
34
Non-cash
interest expense was $0.9 million and $0.6 million for the three months ended
December 31, 2008 and 2009, respectively. The decrease in the
non-cash interest related to the cessation of interest payments on the 2007
Senior Notes upon their cancellation in August 2009. During the three
months ended December 31, 2009 accretion of $0.5 million was recorded on the
note payable discount associated with the 2009 Note and will continue over the
term of the 2009 Note.
As a
result of the completion of our Phase I Deployment and the continued payments of
principal related to the GE Credit Facility, partially offset by limited
borrowings related to the Phase II Deployment, we expect our interest expense to
stabilize and remain relatively constant at the current level, as reduced
interest from the 2007 Senior Notes has been replaced by increased interest on
the 2009 Note.
Change in fair value of
interest rate swap
The
change in fair value of the interest rate swap was a loss of $5.4 million and a
gain of $0.9 million for the three months ended December 31, 2008 and 2009,
respectively. The loss which resulted during the three months ended
December 31, 2008 resulted from the decline in Libor rates and the then
projected outlook for the Libor rates remaining below the Company’s 2.8% fixed
Libor rate under the interest rate swap agreement.
Change in fair value of
warrants
The
change in fair value of warrants issued to Sageview Capital LP (“Sageview”),
related to the 2009 Note, was a gain of $0.6 million for the three months ended
December 31, 2009. The change in fair value will change based on the
volatility and closing stock price of the Company’s Class A Common
Stock. Until the shares underlying these warrants are registered with
the SEC, the Company will continue to adjust the warrant liability each quarter
to the then fair value.
Results
of Operations for the Nine Months Ended December 31, 2008 and 2009
Revenues
|
For
the Nine Months Ended
December
31,
|
||||||||||||
|
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
|
Phase
I Deployment
|
$ | 38,570 | $ | 34,081 | (12 | )% | ||||||
|
Phase
II Deployment
|
29 | 1,174 | 3,948 | % | ||||||||
|
Services
|
5,894 | 5,509 | (7 | )% | ||||||||
|
Content
& Entertainment
|
13,325 | 12,662 | (5 | )% | ||||||||
|
Other
|
7,311 | 6,890 | (6 | )% | ||||||||
| $ | 65,129 | $ | 60,316 | (7 | )% | |||||||
Revenues
decreased $4.8 million or 7%. The decrease in revenues in the Phase I
Deployment segment was primarily due to an 11% decrease in Phase 1 DC’s VPF
revenues, attributable to a contractual 16% reduction in VPF rates starting in
November 2008, offset by an increase in quarterly screen
turnover. The increase in revenues in the Phase II Deployment segment
was due to Phase 2 DC VPF revenues which were not generated during the entire
nine months ended December 31, 2008, as no Phase 2 DC’s Systems were installed
and ready for content until December 2008. The decrease in revenues in the
Services segment was primarily due to (i) a 13% decrease in DMS revenues,
attributable to flat revenues from digital feature and trailer deliveries as DMS
maintained its movie studio customers but experienced limited growth in the
number of digital delivery sites and a 26% decrease in non-theatrical satellite
services revenues due to general economic factors; (ii) a 2% increase in
Software revenues related to increased Phase 2 deployment license and
maintenance fees; offset by (iii) the beginning of Phase 2 DC service fees for
additional Phase 2 DC Systems deployed through the Exhibitor-Buyer
Structure. We expect Phase 2 DC service fees, DMS revenues and
software license fees to increase as additional Systems are deployed under both
the recent $100 million non-recourse credit facility commitment letters from GE
Capital and Soc Gen as well as through the Exhibitor-Buyer Structure launched in
September 2009 initially with two exhibitors.
In the
Content & Entertainment segment, revenues decreased 5% due to a 22% decline
in in-theatre advertising revenues, attributable to the elimination of various
under-performing customer contracts, as well as the current weak economic
environment, offset by 21% increase in national advertising revenues generated
by the partnership with
35
Screenvision. CEG’s
distribution revenues relating to digitally-equipped locations increased 216% or
$1.5 million for content distribution-related revenues by CEG with the release
of Opa! and the release of Dave Matthews Band in 3-D. The primary
driver of CEG revenues is the number of programs CEG is distributing, together
with the nationwide (and anticipated worldwide) conversion of theatres to
digital capabilities, a trend the Company expects to continue. In addition to
the distribution of independent motion pictures, the Company also expects that
with its implementation of the CineLive
SM
product into movie theatres, CEG’s revenues will increase from the distribution
of live 2D and 3D content such as concerts and sporting events.
Direct Operating
Expenses
|
For
the Nine Months Ended December 31,
|
||||||||||||
|
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
|
Phase
I Deployment
|
$ | 705 | $ | 340 | (52 | )% | ||||||
|
Phase
II Deployment
|
18 | 100 | 456 | % | ||||||||
|
Services
|
3,806 | 4,051 | 6 | % | ||||||||
|
Content
& Entertainment
|
9,126 | 8,148 | (11 | )% | ||||||||
|
Other
|
5,942 | 5,474 | (8 | )% | ||||||||
| $ | 19,597 | $ | 18,113 | (8 | )% | |||||||
Direct
operating expenses decreased $1.5 million or 8%. The decrease in
direct operating costs in the Phase I Deployment segment was primarily due to
the reduction of an accrual for certain operating expenses and prior year costs
now being allocated to our Servicer Co. and a decrease in property taxes
incurred on deployed Systems. The increase in direct operating costs
in the Phase II Deployment segment was due to Phase 2 DC costs which were not
generated during the entire nine months ended December 31, 2008. The
increase in the Services segment was primarily related to start-up trailer
delivery expense within DMS not incurred in the prior year, additional costs
incurred in support of the Phase II Deployment and the allocation of costs to
our Servicer Co. which were shown within the Phase I Deployment segment in the
prior year, offset by reduced operational staffing levels in
Software. The decrease in the Content & Entertainment segment was
primarily related to a 16% decrease in minimum guaranteed obligations under
theatre advertising agreements with exhibitors for displaying cinema
advertising, reduced operational staffing levels at USM offset by increased
advertising and marketing costs in CEG related to the release of Opa! and the
release of Dave Matthews Band in 3-D. We expect direct operating expenses to
decrease as compared to prior periods and remain constant at the current
level.
Selling, General and
Administrative Expenses
|
For
the Nine Months Ended December 31,
|
||||||||||||
|
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
|
Phase
I Deployment
|
$ | 875 | $ | 276 | (68 | )% | ||||||
|
Phase
II Deployment
|
323 | 540 | 67 | % | ||||||||
|
Services
|
1,559 | 1,699 | (9 | )% | ||||||||
|
Content
& Entertainment
|
5,077 | 4,108 | (19 | )% | ||||||||
|
Other
|
658 | 623 | (5 | )% | ||||||||
|
Corporate
|
5,219 | 4,854 | (7 | )% | ||||||||
| $ | 13,711 | $ | 12,100 | (12 | )% | |||||||
Selling,
general and administrative expenses decreased approximately $1.6 million or
12%. The decrease was related to reduced staffing levels in both the
Services segment and the Content & Entertainment segment, and decreased
professional fees and travel expenses within Corporate. Following the completion
of our Phase I Deployment, overall headcount reductions have now
stabilized. As of December 31, 2008 and 2009, we had 251 and 235
employees, of which 43 and 42 were part-time employees and 41 and 38 were
salespersons, respectively. We expect selling, general and
administrative expenses to decrease as compared to prior periods and remain
relatively constant at the current level.
36
Stock-based
compensation
Stock-based
compensation expense increased approximately $0.5 million or 70%. The
increase was primarily related to the expenses associated with the stock option
awards granted during the three months ended September 30, 2009 which were
issued in exchange for the termination of the AccessDM options. Such
grants vested upon issuance and resulted in an additional $0.3 million of
expense during the nine months ended December 31, 2009.
Impairment of
goodwill
Based on
the Company’s testing at December 31, 2008, the Company concluded that the fair
value of its reporting units within the Content & Entertainment segment and
the Pavilion Theatre, in the Other segment, were below the carrying amounts and
recorded an aggregate impairment charge of $6.5 million. This
resulted from the continued decline in our market capitalization, the extremely
depressed economic conditions generally, the re-evaluation of our forecasts and
other assumptions, and the diminished market values of our identified peer
companies.
Depreciation and
Amortization Expense on Property and Equipment
|
For
the Nine Months Ended December 31,
|
||||||||||||
|
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
|
Phase
I Deployment
|
$ | 21,398 | $ | 21,418 | — | |||||||
|
Phase
II Deployment
|
— | 741 | — | |||||||||
|
Services
|
1,362 | 1,338 | (2 | )% | ||||||||
|
Content
& Entertainment
|
796 | 647 | (19 | )% | ||||||||
|
Other
|
788 | 594 | (25 | )% | ||||||||
|
Corporate
|
50 | 24 | (52 | )% | ||||||||
| $ | 24,394 | $ | 24,762 | 2 | % | |||||||
Depreciation
and amortization expense increased $0.4 million or 2%. Other than the
Phase II Deployment segment, the decreases reflect reduced expense on assets
which are fully depreciated or amortized at December 31, 2009. The
increase in the Phase II Deployment segment represents depreciation on the Phase
2 DC Systems which were not in service during the nine months ended December 31,
2008. We expect the depreciation and amortization expense in the
Phase II Deployment segment to generally increase as new Phase 2 DC Systems are
installed.
Interest
expense
|
For
the Nine Months Ended December 31,
|
||||||||||||
|
($
in thousands)
|
2008
|
2009
|
Change
|
|||||||||
|
Phase
I Deployment, non-recourse
|
$ | 12,990 | $ | 15,390 | 18 | % | ||||||
|
Phase
II Deployment, non-recourse
|
— | 504 | — | |||||||||
|
Services
|
15 | 57 | 280 | % | ||||||||
|
Content
& Entertainment
|
42 | 9 | (79 | )% | ||||||||
|
Other
|
780 | 778 | — | |||||||||
|
Corporate
|
7,274 | 8,864 | 22 | % | ||||||||
| $ | 21,101 | $ | 25,602 | 21 | % | |||||||
Interest
expense increased $4.5 million or 21%. Total interest expense included $17.2
million and $23.2 million of interest paid and accrued for the nine months ended
December 31, 2008 and 2009, respectively. The increase in interest
paid and accrued within the Phase I Deployment segment relates to the increased
interest rate on the GE Credit Facility related to the fourth amendment and in
part to the Interest Rate Swap (see change in fair value of interest rate swap
discussed below) and increased interest within the Phase II Deployment segment
related to the KBC Related Facility to fund the purchase of Systems from
Barco. Interest paid and accrued within Corporate increased $1.5
million due to the 2009 Note. Interest on the 2009 Note is 8% PIK
Interest and 7% per annum paid
37
in
cash. This increase is offset by the elimination of interest payments
on the 2007 Senior Notes which ceased as the 2007 Senior Notes were cancelled in
August 2009.
Non-cash
interest expense was $3.9 million and $2.4 million for the nine months ended
December 31, 2008 and 2009, respectively. The decrease in the
non-cash interest related to the cessation of interest payments on the 2007
Senior Notes upon their cancellation in August 2009. Accretion of
$0.8 million since August 2009 on the note payable discount associated with the
2009 Note will continue over the term of the 2009 Note.
As a
result of the completion of our Phase I Deployment and the continued payments of
principal related to the GE Credit Facility, partially offset by limited
borrowings related to the Phase II Deployment, we expect our interest expense to
stabilize, as reduced interest from the 2007 Senior Notes has been replaced by
increased interest on the 2009 Note.
Extinguishment of
debt
The gain
on the extinguishment of debt was $10.7 million for the nine months ended
December 31, 2009, which resulted from the satisfaction of the principal and any
accrued and unpaid interest on the 2007 Senior Notes for an aggregate purchase
price of $42.5 million which resulted in a gain of $12.5 million of remaining
principal along with $0.6 million in unpaid accrued interest offset by
unamortized debt issuance costs of $2.4 million.
Change in fair value of
interest rate swap
The
change in fair value of the interest rate swap was $2.1 million for the nine
months ended December 31, 2009. This represents Phase 1 DC’s
unrealized gain from the change in the fair value of the Interest Rate Swap
executed in April 2008 related to the GE Credit Facility.
Change in fair value of
warrants
The
change in fair value of warrants issued to Sageview, related to the 2009 Note,
was a loss of $3.0 million for the nine months ended December 1,
2009. At December 31, 2009, the fair value of the warrant liability
was $13.7 million.
The
change in fair value will change based on the volatility and closing stock price
of the Company’s Class A Common Stock.
Until the shares underlying
these warrants are registered with the SEC, the Company will continue to adjust
the warrant liability each quarter to the then fair value.
Recent
Accounting Pronouncements
Effective
July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting
Standards Codification (“ASC”) became the single official source of
authoritative, nongovernmental generally accepted accounting principles (“GAAP”)
in the United States. The historical GAAP hierarchy was eliminated
and the ASC became the only level of authoritative GAAP, other than guidance
issued by the SEC. Our accounting policies were not affected by the
conversion to ASC. However, references to specific accounting
standards in the footnotes to our condensed consolidated financial statements
have been changed to refer to the appropriate section of ASC.
In
October 2009, the FASB issued Accounting Standards Update (“ASU”)
No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements (a consensus of the FASB Emerging Issues Task Force)” (“ASU
2009-13”), which amends ASC 605-25, “Revenue Recognition: Multiple-Element
Arrangements.” ASU 2009-13 addresses how to determine whether an arrangement
involving multiple deliverables contains more than one unit of accounting and
how to allocate consideration to each unit of accounting in the arrangement. ASU
2009-13 replaces all references to fair value as the measurement criteria with
the term selling price and establishes a hierarchy for determining the selling
price of a deliverable. ASU 2009-13 also eliminates the use of the residual
value method for determining the allocation of arrangement consideration.
Additionally, ASU 2009-13 requires expanded disclosures. ASU 2009-13 will become
effective for the Company for revenue arrangements entered into or materially
modified on or after April 1, 2011. Earlier application is permitted with
required transition disclosures based on the period of adoption. The Company
does not believe that ASU 2009-13 will have a material impact on the Company’s
consolidated financial statements.
In
October 2009, the FASB issued ASU No. 2009-14, “Software (Topic 985):
Certain Revenue Arrangements That Include Software Elements (a consensus of the
FASB Emerging Issues Task Force)” (“ASU 2009-14”). ASU 2009-14 amends
ASC 985-605, “Software: Revenue Recognition,” such that tangible products,
containing both software and non-software components that function together to
deliver the tangible product’s essential functionality, are no
38
longer
within the scope of ASC 985-605. It also amends the determination of how
arrangement consideration should be allocated to deliverables in a
multiple-deliverable revenue arrangement. ASU 2009-14 will become effective for
the Company for revenue arrangements entered into or materially modified on or
after April 1, 2011. Earlier application is permitted with required
transition disclosures based on the period of adoption. The Company does not
believe that ASU 2009-14 will have a material impact on the Company’s
consolidated financial statements.
In June
2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”
(“SFAS 167”) (which will be codified in ASC 810-10). Revisions to ASC 810-10
improves financial reporting by enterprises involved with variable interest
entities and to address (1) the effects on certain provisions of FASB
Interpretation No. 46 (revised December 2003), “Consolidation of Variable
Interest Entities”, as a result of the elimination of the qualifying
special-purpose entity concept in SFAS 166 and (2) constituent concerns about
the application of certain key provisions of Interpretation 46(R), including
those in which the accounting and disclosures under the Interpretation do not
always provide timely and useful information about an enterprise’s involvement
in a variable interest entity. Revisions to ASC 810-10 is effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. The Company
is currently
evaluating
the impact of adoption and application of revisions to ASC
810-10 will have on the Company’s consolidated financial
statements.
In
January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about
Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 requires some new
disclosures and clarifies some existing disclosure requirements about fair value
measurements codified within ASC 820, “Fair Value Measurements and Disclosures.”
ASU 2010-06 is effective for interim and annual reporting periods beginning
after December 15, 2009. Early application of the provisions of this update
is permitted. The Company is currently evaluating the impact the adoption of ASU
2010-06 will have on the Company’s consolidated financial statements
disclosures.
Liquidity
and Capital Resources
We have
incurred operating losses in each year since we commenced our operations. Since
our inception, we have financed our operations substantially through the private
placement of shares of our common and preferred stock, the issuance of
promissory notes, our initial public offering and subsequent private and public
offerings, notes payable and common stock used to fund various
acquisitions.
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 7,500 of the domestic screens are equipped
with digital cinema technology, and 3,950 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 a three year period starting October 2008, of which 227 Systems
have been installed as of December 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 being 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, Phase 1 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. Further borrowings
are not permitted under the GE Credit Facility. The Credit Agreement
contains certain restrictive covenants that restrict Phase 1 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 Phase 1
DC. As of December 31, 2009, the outstanding principal balance of the
GE Credit Facility was $159.5 million at a weighted average interest rate of
10.7%.
39
In August
2007, Phase 1 DC received $9.6 million of vendor financing (the “Vendor Note”)
for equipment used in Phase 1 DC’s 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 Phase 1 DC. As of December 31,
2009, the outstanding principal balance of the Vendor Note was $9.6
million.
In April
2008, Phase 1 DC executed the Interest Rate Swap with a counterparty for a
notional amount of approximately 90% of the amounts outstanding under the GE
Credit Facility or an initial amount of $180.0 million. Under the Interest Rate
Swap, Phase 1 DC will effectively pay a fixed rate of 7.3%, to guard against
Phase 1 DC’s exposure to increases in the variable interest rate under the GE
Credit Facility. GE Corporate Financial Services arranged the transaction, which
took effect commencing August 1, 2008 as required by the GE Credit Facility and
will remain in effect until August 2010. As principal repayments of
the GE Credit Facility occur, the notional amount will decrease by a pro rata
amount, such that approximately 90% of the remaining principal amount will be
covered by the Interest Rate Swap at any time.
In May
2009, Phase 1 DC entered into the fourth amendment (the “GE Fourth Amendment”)
with respect to the GE Credit Facility 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 Phase 1 DC to its
parent Company, AccessDM; (4) increase the quarterly maximum consolidated
leverage ratio covenants that Phase 1 DC is required to meet on a trailing 12
months basis; (5) increase the maximum consolidated senior leverage ratio
covenants that Phase 1 DC is required to meet on a trailing 12 months basis; (6)
reduce the quarterly minimum consolidated fixed charge coverage ratio covenants
that Phase 1 DC is required to meet on a trailing 12 months basis and (7) add a
covenant requiring Phase 1 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, Phase 1 DC paid
fees to GE and the other lenders totaling $1.0 million. At December
31, 2009 the Company was in compliance with all covenants contained in the GE
Credit Facility, as amended and noted above.
In
December 2008, Phase 2 B/AIX, an indirect wholly-owned subsidiary of the
Company, entered into the KBC Related Facility to fund the purchase of Systems
from Barco, to be installed in movie theatres as part of the Company’s Phase II
Deployment. As of December 31, 2009, $8.9 million has been drawn down
on the KBC Related Facility and the outstanding principal balance of the KBC
Related Facility was $8.9 million.
In August
2009, the Company entered into a securities purchase agreement (the “Purchase
Agreement”) with an affiliate of Sageview Capital LP (the “Purchaser”) pursuant
to which the Company agreed to issue a Senior Secured Note (the “2009 Note”) in
the aggregate principal amount of $75.0 million and warrants (the “Sageview
Warrants”) to purchase 16,000,000 shares of its Class A Common Stock (the “2009
Private Placement”). The net proceeds of the 2009 Private Placement
of approximately $63.7 million will be used for the repayment of existing
indebtedness of the Company and one of its subsidiaries, the funding of a cash
reserve to pay the cash interest amount required under the 2009 Note for the
first two years, the payment of fees and expenses incurred in connection with
the Private Placement and related transactions, and other general corporate
purposes. The 2009 Note has a term of five years, which may be
extended for up to one 12 month period at the discretion of the Company if
certain conditions set forth in the 2009 Note are satisfied. Subject
to certain adjustments set forth in the 2009 Note, interest on the 2009 Note is
8% per annum to be accrued as an increase in the aggregate principal amount of
the 2009 Note (“PIK Interest”) and 7% per annum paid in cash. The
Company may prepay the 2009 Note (i) during the initial 18 months of their term,
in an amount up to 20% of the original principal amount of the 2009 Note plus
accrued and unpaid interest without penalty and (ii) following the second
anniversary of issuance of the 2009 Note, subject to a prepayment penalty equal
to 7.5% of the principal amount prepaid if the 2009 Note is prepaid prior to the
three-year anniversary of its issuance, a prepayment penalty of 3.75% of the
principal amount prepaid if the 2009 Note is prepaid after such third
anniversary but prior to the fourth anniversary of its issuance and without
penalty if the 2009 Note is prepaid thereafter, plus cash in an amount equal to
the accrued and unpaid interest amount with respect to the principal amount
through and including the prepayment date. The Company is obligated
to offer to redeem all or a portion of the 2009 Note upon the occurrence of
certain triggering events described in the 2009 Note. Subject to
limited exceptions, the Purchaser may not assign the 2009 Note until the
earliest of (a) August 11, 2011, (b) the consummation of a change in control as
defined in the 2009 Note or (c) an event of default as defined in the 2009
Note. The Purchase Agreement also requires the 2009 Note to be
guaranteed by each of the Company’s existing and
40
future
subsidiaries, other than AccessDM, Phase 1 DC and its subsidiaries and Phase 2
DC and its subsidiaries and subsidiaries formed after August 11, 2009 which are
primarily engaged in the financing or deployment of digital cinema equipment
(the "Guarantors"), and that the Company and each Guarantor pledge substantially
all of their assets to secure payment on the 2009 Note, except that AccessDM and
Phase 1 DC are not required to become Guarantors until such time as certain
indebtedness is paid off. Accordingly, the Company and each of the
Guarantors entered into a guarantee and collateral agreement (the “Guarantee and
Collateral Agreement”) pursuant to which each Guarantor guaranteed the
obligations of the Company under the 2009 Note and the Company and each
Guarantor pledged substantially all of their assets to secure such
obligations. The Company agreed to register the resale of the shares
of Class A Common Stock underlying the Sageview Warrants (the “Registration
Rights Agreement”). The Purchase Agreement, Note Purchase Agreement,
2009 Note, Warrants, Registration Rights Agreement and Guarantee and Collateral
Agreement contain representations, warranties, covenants and events of default
as are customary for transactions of this type and nature. As of
December 31, 2009, the net balance of the 2009 Note was $67.4
million.
In August
2009, in connection with the 2009 Private Placement, Phase 1 DC entered into a
fifth amendment (the “GE Fifth Amendment”) with respect to the GE
Credit Facility, whereby $5.0 million of the proceeds of the 2009 Private
Placement were used by the Company to purchase capital stock of AccessDM, which
in turn used such amount to purchase capital stock of Phase 1 DC, which in turn
used such amount to fund a prepayment with respect to the GE Credit Facility,
with such prepayment being applied ratably to each of the next 24 successive
regularly scheduled monthly amortization payments due under the GE Credit
Facility beginning in August 2009.
As of
December 31, 2009, we had cash and cash equivalents, investment securities and
restricted cash totaling $28.5 million and our working capital, defined as
current assets less current liabilities, was $2.2 million.
Operating
activities provided net cash of $21.6 million and $6.5 million for the nine
months ended December 31, 2008 and 2009, respectively. The decrease
in cash provided by operating activities was primarily due to increased payments
for accounts payable and accrued expenses and an increase in non-trade
receivables coupled with greater amounts of non-cash expenses, specifically the
gain from extinguishment of debt, offset by a decreased net loss. We
expect operating activities to continue to be a positive source of
cash.
Investing
activities used net cash of $19.5 million and $29.9 million for the nine months
ended December 31, 2008 and 2009, respectively. The increase was due to the
purchase of available-for-sale investments related to the funds received from
the 2009 Note offset by reduced payments on Systems purchased in addition to an
increase in restricted cash of $6.9 million related to the fourth amendment with
respect to the GE Credit Facility. We expect investing activities to use less
cash than prior periods moving forward at least until additional Systems for the
Phase II Deployment are purchased and installed.
Financing
activities used net cash of $9.2 million for the nine months ended December 31,
2008 and provided net cash of $9.2 million for the nine months ended December
31, 2009. The increase in cash provided was due to the proceeds from
the 2009 Note and the proceeds from credit facilities for Systems for our Phase
II Deployment offset by the repayment of the 2007 Senior Notes, increased
principal repayments on the GE Credit Facility and debt issuance costs paid
resulting from the GE Fourth Amendment and the 2009 Note. Financing
activities are expected to continue using net cash, primarily for principal
repayments on the GE Credit Facility and other existing debt
facilities. Although we continue to seek new sources of financing and
to refinance existing obligations, the terms of any such financing have not yet
been determined.
The
Company expects to deploy Phase II Systems using a combination of
Cinedigm-financed screens and the Exhibitor-Buyer Structure. The
method used to deploy systems will vary depending on the exhibitors’ preference
and both the exhibitors’ and Cinedigm’s ability to finance Phase 2
Systems. The number of Systems ultimately deployed by each method
cannot be predicted at this time.
We have
contractual obligations that include long-term debt consisting of notes payable,
credit facilities, non-cancelable long-term capital lease obligations for the
Pavilion Theatre and other various computer related equipment, non-cancelable
operating leases consisting of real estate leases and minimum guaranteed
obligations under theatre advertising agreements with exhibitors for displaying
cinema advertising.
41
The
following table summarizes our significant contractual obligations as of
December 31, 2009 ($ in thousands):
|
Payments
Due by Period
|
||||||||||||||||||||
|
Contractual
Obligations
|
Total
|
2010
|
2011
&
2012
|
2013
&
2014
|
Thereafter
|
|||||||||||||||
|
Long-term
recourse debt (1)
|
$ | 111,994 | $ | 181 | $ | 190 | $ | 111,623 | $ | — | ||||||||||
|
Long-term
non-recourse debt (2)
|
179,428 | 25,791 | 64,170 | 76,583 | 12,884 | |||||||||||||||
|
Capital
lease obligations
|
6,220 | 499 | 425 | 506 | 4,790 | |||||||||||||||
|
Debt-related
obligations, principal
|
297,642 | 26,471 | 64,785 | 188,712 | 17,674 | |||||||||||||||
|
Interest
on recourse debt (3)
|
30,038 | 5,603 | 12,641 | 11,794 | — | |||||||||||||||
|
Interest
on non-recourse debt
|
44,291 | 14,403 | 21,479 | 6,422 | 1,987 | |||||||||||||||
|
Interest
on capital leases
|
8,717 | 1,029 | 1,946 | 1,796 | 3,946 | |||||||||||||||
|
Total
interest
|
83,046 | 21,035 | 36,066 | 20,012 | 5,933 | |||||||||||||||
|
Total
debt-related obligations
|
$ | 380,688 | $ | 47,506 | $ | 100,851 | $ | 208,724 | $ | 23,607 | ||||||||||
|
Operating
lease obligations (4)
|
$ | 6,972 | $ | 2,157 | $ | 2,440 | $ | 2,341 | $ | 34 | ||||||||||
|
Theatre
agreements (5)
|
17,807 | 3,488 | 4,710 | 4,309 | 5,300 | |||||||||||||||
|
Obligations
to be included in operating expenses
|
24,779 | 5,645 | 7,150 | 6,650 | 5,334 | |||||||||||||||
|
Purchase
obligations (6)
|
1,981 | 1,981 | — | — | — | |||||||||||||||
|
Total
|
$ | 407,448 | $ | 55,132 | $ | 108,001 | $ | 215,374 | $ | 28,941 | ||||||||||
|
Total
non-recourse debt including interest
|
$ | 223,719 | $ | 40,194 | $ | 85,649 | $ | 83,005 | $ | 14,871 | ||||||||||
|
|
(1)
|
The
2009 Note is due August 2014, but may be extended for one 12 month period
at the discretion of the Company to August 2015, if certain conditions set
forth in the 2009 Note are satisfied. Includes the interest on
the 2009 Note to be accrued as an increase in the aggregate principal
amount of the 2009 Note (“PIK
Interest”).
|
|
|
(2)
|
Non-recourse
debt is generally defined as debt whereby the lenders’ sole recourse with
respect to defaults by the Company is limited to the value of
the asset collateralized by the debt. The Vendor Note and
the GE Credit Facility are not guaranteed by the Company or its other
subsidiaries, other than Phase 1 DC and the KBC Related Facility is not
guaranteed by the Company or its other subsidiaries, other than Phase 2
DC.
|
|
|
(3)
|
Includes
the remaining interest of approximately $9.2 million on the 2009 Note to
be paid with the funding of a cash reserve established with proceeds from
the 2009 Private Placement and excludes the PIK Interest on the 2009
Note.
|
|
|
(4)
|
Includes
the remaining operating lease agreements for the two IDCs now operated and
paid for by FiberMedia, consisting of unrelated third parties, which total
aggregates to $4.9 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. In June 2009, one of the IDC
leases expired, leaving two IDC leases with the Company as
lessee. One of the remaining IDC leases expires in July 2010,
which the Company does not intend to
renew.
|
|
|
(5)
|
Represents
minimum guaranteed obligations under theatre advertising agreements with
exhibitors for displaying cinema
advertising.
|
|
|
(6)
|
Includes
$1.7 million for additional Phase II Systems to be purchased from Barco
with funds from the increase in the KBC Related
Facility.
|
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 2009 Note, 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 2009 Note 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
42
fund
working capital, capital expenditures and other corporate
requirements. We are seeking to raise additional capital 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 of additional Systems for the Phase II Deployment will be completed as
contemplated or under terms acceptable to us or our existing stockholders.
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 condensed consolidated financial statements do not reflect any
adjustments which may result from our inability to continue as a going
concern.
Seasonality
Revenues
derived from our Pavilion Theatre in our Other segment and our Phase I
Deployment and Phase II Deployment segment revenues derived from the collection
of VPFs from motion picture studios are seasonal, coinciding with the timing of
releases of movies by the motion picture studios. Generally, motion picture
studios release the most marketable movies during the summer and the holiday
season. The unexpected emergence of a hit movie during other periods can alter
the traditional trend. The timing of movie releases can have a significant
effect on our results of operations, and the results of one quarter are not
necessarily indicative of results for the next quarter or any other quarter. We
believe the seasonality of motion picture exhibition, however, is becoming less
pronounced as the motion picture studios are releasing movies somewhat more
evenly throughout the year.
Related
Party Transactions
In August
2009, the Company hired Adam M. Mizel to be its Chief Financial Officer and
Chief Strategy Officer. Mr. Mizel has been a member of the Company’s Board
of Directors since March 2009 and is currently the Managing Principal of Aquifer
Capital Group, LLC and the General Partner of the Aquifer Opportunity Fund,
L.P., currently the Company’s largest shareholder.
Subsequent
Events
We have
evaluated events and transactions that occurred between December 31, 2009 and
February 12, 2010, which is the date the financial statements were issued, for
possible disclosure or recognition in the financial statements. We have
determined that there were no such events or transactions that warrant
disclosure or recognition in the financial statements except as noted
below.
In
February 2010, the KBC Related Facility was increased by $2,890 to fund the
purchase of additional Systems from Barco.
In
February 2010, in connection with the Company’s Phase II Deployment, Phase 2 DC
entered into a master license agreement with an exhibitor covering 205 screens
under the Exhibitor-Buyer Structure, whereby the exhibitor agreed to the
placement of Systems as part of the Phase II Deployment.
Off-balance
sheet arrangements
We are
not a party to any off-balance sheet arrangements, other than operating leases
in the ordinary course of business, which is disclosed above in the table of our
significant contractual obligations.
Impact
of Inflation
The
impact of inflation on our operations has not been significant to
date. However, there can be no assurance that a high rate of
inflation in the future would not have an adverse impact on our operating
results.
Our
management, with the participation of our principal executive officer and
principal financial officer, has evaluated the effectiveness of the Company’s
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)) as of the end of the period covered by this report. Based on
such evaluation, our principal executive officer and principal financial officer
have concluded that, as of the end of such period, the Company’s disclosure
controls and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information
43
required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act and are effective in ensuring that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the Company’s management,
including the Company’s principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.
There have been no
changes in the Company’s internal control over financial reporting during the
last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
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. In July 2009, we entered into an agreement with
Landlord to settle this matter where we would be responsible for 25% of the cost
and expenses related to the installation of a sprinkler system. As an
additional condition of this agreement, any option to renew or extend this lease
has been eliminated. This lease ends on July 31, 2022.
The
information regarding certain factors which could materially affect our
business, financial condition or future results set forth under Item 1A.
“Risk Factors” in the Form 10-K, should be carefully reviewed and considered.
There have been no material changes from the factors disclosed in the Form 10-K
for the fiscal year ended March 31, 2009, except as set forth below, although we
may disclose changes to such factors or disclose additional factors from time to
time in our future filings with the SEC.
The acquisition restrictions
contained in our certificate of incorporation and our Tax Benefit Preservation
Plan, which are intended to help preserve our net operating losses, may not be
effective or may have unintended negative effects.
We have
experienced, and may continue to experience, substantial operating losses, and
under Section 382 of the Internal Revenue Code of 1986, as amended ("Section
382"), and rules promulgated by the Internal Revenue Service, we may "carry
forward" these net operating losses (“NOLs”) in certain circumstances to offset
any current and future earnings and thus reduce our federal income tax
liability, subject to certain requirements and restrictions. To the
extent that the NOLs do not otherwise become limited, we believe that we will be
able to carry forward a significant amount of the NOLs, and therefore these NOLs
could be a substantial asset to us. If, however, we experience a
Section 382 ownership change, our ability to use the NOLs will be substantially
limited, and the timing of the usage of the NOLs could be substantially delayed,
which could therefore significantly impair the value of that
asset.
To reduce
the likelihood of an ownership change, we have established acquisition
restrictions in our certificate of incorporation and our board of directors (the
"Board") adopted a tax benefit preservation plan (the "Tax Benefit Preservation
Plan"). The Tax Benefit Preservation Plan is designed to protect shareholder
value by attempting to protect against a limitation on our ability to use our
existing NOLs. The acquisition restrictions in our certificate of incorporation
are also intended to restrict certain acquisitions of our common stock to help
preserve our ability to utilize our NOLs by avoiding the limitations imposed by
Section 382 and the related Treasury regulations. The
44
acquisition
restrictions and the Tax Benefit Preservation Plan are generally designed to
restrict or deter direct and indirect acquisitions of our common stock if such
acquisition would result in a shareholder becoming a “5-percent shareholder” (as
defined by Section 382 and the related Treasury regulations) or increase
the percentage ownership of Cinedigm stock that is treated as owned by an
existing 5-percent shareholder.
Although
the acquisition restrictions and the Tax Benefit Preservation Plan are intended
to reduce the likelihood of an ownership change that could adversely affect us,
we can give no assurance that such restrictions would prevent all transfers that
could result in such an ownership change. In particular, we have been advised by
our counsel that, absent a court determination, there can be no assurance that
the acquisition restrictions will be enforceable against all of our
shareholders, and that they may be subject to challenge on equitable grounds. In
particular, it is possible that the acquisition restrictions may not be
enforceable against the shareholders who voted against or abstained from voting
on the restrictions at our 2009 annual meeting of stockholders.
Under
certain circumstances, our Board may determine it is in the best interest of the
Company to exempt certain 5-percent shareholders from the operation of the
acquisition restrictions or the Tax Benefit Preservation Plan, if a proposed
transaction is determined not to be detrimental to the Company’s utilization of
its NOLs.
The
acquisition restrictions and Tax Benefit Preservation Plan also require any
person attempting to become a holder of 5% or more of our common stock, as
determined under Section 382, to seek the approval of our Board. This may have
an unintended “anti-takeover” effect because our Board may be able to prevent
any future takeover. Similarly, any limits on the amount of stock that a
stockholder may own could have the effect of making it more difficult for
stockholders to replace current management. Additionally, because the
acquisition restrictions and the Tax Benefit Preservation Plan have the effect
of restricting a stockholder’s ability to dispose of or acquire our common
stock, the liquidity and market value of our Class A Common Stock might suffer.
The Tax Benefit Preservation Plan will remain in effect until the earlier of (a)
August 10, 2012, or (b) such other date as our Board in good faith
determines it is no longer in the best interests of Cinedigm and its
stockholders. The acquisition restrictions may be waived by our Board.
Stockholders are advised to monitor carefully their ownership of our common
stock and consult their own legal advisors and/or Cinedigm to determine whether
their ownership of our common stock approaches the proscribed
level.
The occurrence of various events may
adversely affect the ability of the Company to fully utilize
NOLs.
The
Company has a substantial amount of NOLs for U.S. federal income tax
purposes that are available both currently and in the future to offset taxable
income and gains. Events outside of our control may cause us to experience a
Section 382 ownership change, and limit our ability to fully utilize such
NOLs.
In
general, an ownership change occurs when, as of any testing date, the percentage
of stock of a corporation owned by one or more “5-percent shareholders,” as
defined in the Section 382 and the related Treasury regulations, has increased
by more than 50 percentage points over the lowest percentage of stock of
the corporation owned by such shareholders at any time during the three-year
period preceding such date. In general, persons who own 5% or more of a
corporation’s stock are 5-percent shareholders, and all other persons who own
less than 5% of a corporation’s stock are treated, together, as a single, public
group 5-percent shareholder, regardless of whether they own an aggregate of 5%
or more of a corporation’s stock. If a corporation experiences an ownership
change, it is generally subject to an annual limitation, which limits its
ability to use its NOLs to an amount equal to the equity value of the
corporation multiplied by the federal long-term tax-exempt rate.
If we
were to experience an ownership change, we could potentially have, in the
future, higher U.S. federal income tax liabilities than we would otherwise
have had and it may also result in certain other adverse consequences to us.
Therefore, we have adopted the Tax Benefit Preservation Plan and the acquisition
restrictions set forth in Article Fourth of our certificate of
incorporation in order to reduce the likelihood that we will experience an
ownership change under Section 382. There can be no assurance, however,
that these efforts will deter or prevent the occurrence of an ownership change
and the adverse consequences that may arise therefrom, as described above under
“The acquisition restrictions contained in our certificate of incorporation and
our Tax Benefit Preservation Plan, which are intended to help preserve our net
operating losses, may not be effective or may have unintended negative
effects.”
45
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
None.
None.
The
exhibits are listed in the Exhibit Index on page 48 herein.
46
SIGNATURES
In
accordance with the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CINEDIGM
DIGITAL CINEMA CORP.
(Registrant)
|
Date:
|
February 11, 2010 |
By:
|
/s/ A. Dale Mayo | |
|
A.
Dale Mayo
President
and Chief Executive Officer and Director
(Principal
Executive Officer)
|
||||
|
Date:
|
February 11, 2010 |
By:
|
/s/ Adam M. Mizel | |
|
Adam
M. Mizel
Chief
Financial Officer and Chief Strategy Officer and Director
(Principal
Financial Officer)
|
||||
|
Date:
|
February 11, 2010 |
By:
|
/s/ Brian D. Pflug | |
|
Brian
D. Pflug
Senior
Vice President – Accounting & Finance
(Principal
Accounting Officer)
|
47
EXHIBIT
INDEX
|
Exhibit
Number
|
Description of Document
|
|
|
31.1
|
Officer’s
Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Officer’s
Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
31.3
|
Officer’s
Certificate Pursuant to 15 U.S.C. 7241, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.3
|
Certification
of Chief Accounting Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
48
TABLE OF CONTENTS
Part I - Financial InformationItem 1. Financial Statements (unaudited)Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 4T. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of Proceeds None. Item 3. Defaults Upon Senior SecuritiesItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission Of Matters To A Vote Of Security HoldersItem 5. Other InformationItem 6. Exhibits