UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-KSB

(Mark One)

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: March 31, 2007

 

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: 000-51910

___________________________________

Access Integrated Technologies, Inc.

(Name of Small Business Issuer in its Charter)

___________________________________

 

 

55 Madison Avenue, Suite 300, Morristown, New Jersey 07960

(Address of principal executive offices)

 

(973) 290-0080

(Issuer’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

CLASS A COMMON STOCK, PAR VALUE $0.001 PER SHARE

 

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes x No o

 

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.     o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

Issuer’s revenues for the fiscal year ended March 31, 2007 were $47,109,615.

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the issuer based on a price of $7.60 per share, the closing price of such common equity on the Nasdaq Global Market, as of June 22, 2007, was approximately $156,466,018. For purposes of the foregoing calculation, all directors, officers and shareholders who beneficially own 10% of the shares of such common equity have been deemed to be affiliates, but the Company disclaims that any of such persons are affiliates.

 

As of June 22, 2007, 24,009,073 shares of Class A Common Stock, $0.001 par value, and 763,811 shares of Class B Common Stock, $0.001 par value, were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Items 9, 10, 11, 12 and 14 of Form 10-KSB is incorporated by reference into Part III hereof from the registrant’s Proxy Statement for the 2007 Annual Meeting of Stockholders to be held on or about September 18, 2007.

 

 

---

 

ACCESS INTEGRATED TECHNOLOGIES, INC.

TABLE OF CONTENTS

 

 

 

 

---

 

FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future. Forward-looking statements are based on current expectations and are indicated by words or phrases such as “believe,” “expect,” “may,” “will,” “should,” “seek,” “plan,” “intend” or “anticipate” or the negative thereof or comparable terminology, or by discussion of strategy. Forward-looking statements represent as of the date of this report our judgment relating to, among other things, future results of operations, growth plans, sales, capital requirements and general industry and business conditions applicable to us. Such forward-looking statements are based largely on our current expectations and are inherently subject to risks and uncertainties. Our actual results could differ materially from those that are anticipated or projected as a result of certain risks and uncertainties, including, but not limited to, a number of factors, such as:

 

 

Except as otherwise required to be disclosed in periodic reports required to be filed by public companies with the SEC pursuant to the SEC’s rules, we have no duty to update these statements, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking information contained in this report will in fact transpire.

 

In this report, “AccessIT,” “we,” “us,” “our” and the “Company” refers to Access Integrated Technologies, Inc. and its subsidiaries unless the context otherwise requires.

 

1

 

---

 

PART I

 

ITEM 1. BUSINESS

 

OVERVIEW

 

AccessIT was incorporated in Delaware on March 31, 2000. We provide fully managed storage, electronic delivery and software services and technology solutions for owners and distributors of digital content to movie theaters and other venues. In the past, we have generated revenues from two primary businesses, media services (“Media Services”) and internet data center (“IDC” or “data center”) services (“Data Center Services”), a business we will no longer operate after May 1, 2007 (see Data Center Services discussion below). Our Media Services business provides software, services and technology solutions to the motion picture and television industries, primarily to facilitate the transition from analog (film) to digital cinema and has positioned us at, what we believe to be, the forefront of an emerging industry opportunity relating to the delivery and management of digital cinema and other content to entertainment and other remote venues worldwide. Our Media Services business is currently our primary strategic focus. Our Data Center Services were comprised of three leased IDCs that provided corporate customers with secure and fail-safe off-site locations to house their computer and telecommunications equipment, as well as related services such as equipment monitoring and back-up and protection of customers’ data. We have decided to realign our resources and to dispose of our Data Center Services other than the businesses operated by Core Technology Services, Inc. (“Managed Services”) and by AccessIT through its Access Digital Server Assets (as defined below). The disposition of our Data Center Services represents a strategic realignment of our technical and financial resources, thus enabling us to focus on what we believe are more profitable business opportunities for the Company.

 

Digital Cinema Initiatives, LLC (“DCI”) was created in March 2002 as a joint venture of seven motion picture studios: Buena Vista Pictures Distribution (Disney), Twentieth Century Fox Film Corporation (Fox), Metro-Goldwyn-Mayer, Paramount Pictures, Sony Pictures Entertainment, Universal Studios, and Warner Bros. Studios. The primary purpose of DCI was to recommend uniform industry-wide specifications for digital cinema, in order to provide real benefits to theater audiences, theater owners, filmmakers and distributors. In June 2005, DCI announced recommendations regarding the final overall system requirements and specifications for digital cinema (the “DCI Recommendations”). The DCI Recommendations define technical specifications and requirements recommended for the mastering of, distribution of, and theatrical playback of digital cinema content. AccessIT’s processes and Systems (as defined below) operate in accordance with the DCI Recommendations.

 

In June 2005, in anticipation of the DCI Recommendations, we entered into a digital cinema framework agreement (the “Framework Agreement”) with Christie Digital Systems USA, Inc. (“Christie”) through our then-newly formed indirectly wholly-owned subsidiary, Christie/AIX, Inc. (“Christie/AIX”) to purchase Christie’s digital cinema projection systems (the “Systems”) at agreed-upon prices to be installed nationwide (our “Digital Cinema Roll-Out”).

 

Each System, purchased by Christie/AIX from Christie, consists of a Digital Light Processor (or DLP) Cinema™ 2K projector, capable of both 2-D and 3-D display, a digital cinema server, and such other components and software and any applicable upgrades along with a central library server, with our Theatre Command Center software installed, connecting all Systems within a theatre complex, together with a storage array, computer rack, uninterrupted power source, main switch and patch panel.

 

Distributors can send us digital cinema movie content or alternative digital content as a digital cinema distribution master (“DCDM”), which the distributors developed under the DCI Recommendations and are encrypted and transported to exhibitors.

 

We believe our Digital Cinema Roll-Out requires four key components:

 

Each of these four key components are provided within our Media Services.

 

2

 

---

 

MEDIA SERVICES

 

The Media Services reportable segment of our business consists of two primary activities: Digital Media Delivery and Entertainment Software. Digital Media Delivery is comprised of the operations of FiberSat Global Services, Inc. d/b/a AccessIT Satellite and Support Services, (“AccessIT Satellite”), Access Digital Media, Inc. (“AccessDM” and, together with AccessIT Satellite, “DMS”), ADM Cinema Corporation (“ADM Cinema”) d/b/a the Pavilion Theatre (the “Pavilion Theatre”), Christie/AIX, UniqueScreen Media, Inc. (“USM”) and Vistachiara Productions, Inc. d/b/a The Bigger Picture (“The Bigger Picture”). Entertainment Software is comprised of the operations of Hollywood Software, Inc. d/b/a AccessIT Software (“AccessIT SW”) and certain software of DMS.

 

Digital Media Delivery

 

 

In March 2004, AccessDM acquired certain digital cinema related assets of the Boeing Company (the “Boeing Digital Asset Acquisition”).

 

In November 2004, we acquired certain assets and liabilities of FiberSat Global Services, LLC (the “FiberSat Acquisition”).

 

In February 2005, through ADM Cinema, we acquired substantially all of the assets of the Pavilion Theatre located in the Park Slope section of Brooklyn, New York from Pritchard Square Cinema, LLC (the “Pavilion Theatre Acquisition”).

 

In June 2005, we formed Christie/AIX to purchase Systems for our Digital Cinema Roll-Out, under the Framework Agreement with Christie. In September 2005, pursuant to a second amendment to the Framework Agreement, Christie and Christie/AIX agreed to extend the number of Systems which may be ordered to 4,000 Systems.

 

In July 2006, we purchased all of the outstanding capital stock of USM from USM’s stockholders.

 

In January 2007, through our wholly owned subsidiary, The Bigger Picture, we purchased substantially all of the assets of BP/KTF, LLC (the “Bigger Picture Acquisition”).

 

Products

 

Current proprietary software of DMS for digital media delivery consists of the following:

 

 

The Digital Express e-Courier ServicesSM software makes interaction between the content originator (such as the motion picture studio) and the exhibitor easier:

 

 

3

 

---

 

   

 

Current licensed software of Christie/AIX consists of the following:

 

 

In February 2006, Christie/AIX entered into an agreement with Philips Electronics Nederland B.V. (“Philips”) for a non-exclusive, worldwide right to use software license for Philips’ software Cinefence (the “Cinefence License”). The Cinefence License is for an initial period of twelve years and renews automatically each year unless terminated by either party upon written notice. Cinefence is a watermarking detector of audio and video watermarks in content distributed through digital cinema. Christie incorporates Cinefence into the Systems deployed with motion picture exhibitors participating in Christie/AIX’s Digital Cinema Roll-Out.

 

Market Opportunity

 

According to the Motion Picture Association, on average, there were approximately 530 new movie releases for each of the past two years. The average major movie is released to approximately 4,000 screens in the United States and 8,000 screens worldwide. According to the National Association of Theatre Owners, there are approximately 107,000 screens worldwide that play major movie releases, with approximately 38,000 screens located in the United States.

 

We believe that:

 

 

To date, in connection with our Digital Cinema Roll-Out, we have entered into digital cinema deployment agreements with seven motion picture studios and a digital cinema agreement with one alternative content provider for the distribution of digital movie releases and alternative content to motion picture exhibitors equipped with Systems, and providing for payment of VPFs and ACFs to Christie/AIX. As of March 31, 2007, we have entered into master license agreements with nine motion picture exhibitors for the placement of Systems in movie theatres covering a total of 3,168 screens (including screens at AccessIT’s Pavilion Theatre) and we have installed 2,275 Systems. We expect to complete 4,000 System installations by October 31, 2007.

 

4

 

---

 

Intellectual Property

 

AccessDM has received United States service mark registrations for the following: AccessDM® and The Courier For The Digital Era®. AccessIT has received United States service mark registration for Access Digital Media® and AccessIT Satellite has received a United States service mark registration for Theater Command Center®.

 

AccessIT Satellite has applied for service mark registration for the name Theatre Command Center SM. As of March 31, 2007, AccessIT Satellite has not yet received United States service mark registration for this service mark.

 

Customers

 

Digital Media Delivery customers are mainly the motion picture studios and in-theatre advertising customers. For the fiscal year ended March 31, 2007, Christie/AIX’s and USM’s customers comprised 37.2% and 37.2% of the Digital Media Delivery revenues, respectively. Our advertising business consists mainly of local advertisers, with no one customer representing 10% of in-theatre advertising revenues. Five customers, Sony Pictures Releasing Corporation, Disney Worldwide Services, Paramount Pictures, 20^th Century Fox and Universal Pictures, each represented 10% or more of Christie/AIX revenues and together generated 73.7% and 27.4% of Christie/AIX and Digital Media Delivery revenues, respectively, and are also customers for Entertainment Software. We expect to continue to conduct business with these customers in fiscal year 2008.

 

Competition

 

Companies that have developed forms of digital content delivery to entertainment venues include:

 

 

These competitors have significantly greater financial, marketing and managerial resources than we do, have generated greater revenue and are better known than we are. However, we believe that DMS, through its technology and management experience, its development of software capable of delivering digital content electronically worldwide, its development of the Theatre Command Center software, and the complement of AccessIT SW’s software, differentiate us from our competitors by providing a competitive alternative to their forms of digital content delivery.

 

We expect to co-market Digital Media Delivery to the current and prospective customers of AccessIT SW, using marketing and sales efforts and resources of both companies, which would enable owners of digital content to securely deliver such digital content to their customers and, thereafter, to manage and track data regarding the presentation of the digital content, including different forms of audio and/or visual entertainment. As the digital content industry continues to develop, we may engage in other marketing methods, such as advertising and service bundling, and may hire additional sales personnel.

 

Seasonality

 

Digital Media Delivery revenues derived from our Pavilion Theatre and 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. The seasonality of motion picture exhibition, however, has become less pronounced as the motion picture studios are releasing movies somewhat more evenly throughout the year.

 

Government Regulation

 

The distribution of movies is in large part regulated by federal and state antitrust laws and has been the subject of numerous antitrust cases. Motion picture studios offer and license movies to motion picture exhibitors, on a movie-by-movie and theatre-by-

 

5

 

---

 

theatre basis. Consequently, motion picture exhibitors cannot assure themselves of a supply of movies by entering into long-term arrangements with motion picture studios, but must negotiate for licenses on a movie-by-movie basis. AccessIT Satellite maintains a Federal Communications Commission (“FCC”) broadcast license related to our satellite transmission of content and should we violate any FCC laws, we may be subject to fines and or forfeiture of our broadcast license.

 

Our Pavilion Theatre must comply with Title III of the Americans with Disabilities Act of 1990 (the “ADA”) to the extent that such property is “public accommodations” and/or “commercial facilities” as defined by the ADA. Compliance with the ADA requires that public accommodations “reasonably accommodate” individuals with disabilities and that new construction or alterations made to “commercial facilities” conform to accessibility guidelines unless “structurally impracticable” for new construction or technically infeasible for alterations. Non-compliance with the ADA could result in the imposition of injunctive relief, fines, award of damages to private litigants and additional capital expenditures to remedy such non-compliance. We believe that we are in substantial compliance with all current applicable regulations relating to accommodations for the disabled and we intend to comply with future regulations in that regard.

 

Digital Media Delivery is also subject to federal, state and local laws governing such matters as wages, working conditions, citizenship and health and sanitation requirements. We believe that we are in substantial compliance with all of such laws.

 

The nature of Digital Media Delivery does not subject us to environmental laws in any material manner.

 

Entertainment Software

 

 

In November 2003, we acquired all of the capital stock of AccessIT SW, a leading provider of proprietary transactional support software and consulting services for distributors and exhibitors of filmed entertainment in the United States and Canada (the “AccessIT SW Acquisition”).

 

In June 2006, the Company, through its indirectly wholly-owned subsidiary, PLX Acquisition Corp. (“PLX Acquisition”), purchased substantially all the assets of PLX Systems Inc. (“PLX”) and Right Track Solutions Incorporated (“Right Track”). PLX Acquisition provides technology, expertise and core competencies in intellectual property (“IP”) rights and royalty management, expanding the Company’s ability to bring alternative forms of content, such as non-traditional feature films. PLX’s and Right Track’s assets have been integrated into the operations of AccessIT SW.

 

Products

 

AccessIT SW provides proprietary software applications and services to support customers of varying sizes, through software licenses, its ASP Service which it hosts the application through Managed Services and client access via the Internet and provides outsourced film distribution services, called IndieDirect. Current proprietary software of AccessIT SW consists of the following:

 

 

6

 

---

 

 

 

Current proprietary software of DMS for exhibition management consists of the following:

 

 

Exhibition Management

 

We believe that our EMS™ system is one of the most powerful and comprehensive systems available to manage all key elements of motion picture exhibition. This fully supported solution can exchange information with every financial, ticketing, point-of-sale, distributor and data system to eliminate manual processes. Also, EMS™ is designed to create innovative revenue opportunities for motion picture exhibitors from the presentation of new and/or additional advertising and alternative entertainment in their movie theaters due to the expanding use of digital content delivery.

 

Our TCC system, provides in-theatre management for digitally–equipped movie theaters, enabling one to control all the screens in a movie theatre, manage content and version review, show building, program scheduling and encryption security key management from a central terminal, whether located in the projection booth, the theatre manager’s office or both.

 

Domestic Theatrical Distribution Management

 

AccessIT SW’s TDS product is currently licensed to several motion picture studios, including 20th Century Fox, Universal Studios, Lionsgate and the Weinstein Company. These studios comprised approximately 22.9%, 5.7%, 4.2% and 3.1%, respectively, of AccessIT SW’s revenues for the fiscal year ended March 31, 2007. Several distributors utilize AccessIT SW’s products through its ASP Service, including IDP, First Look, IFC Films, Magnolia Pictures, Freestyle Releasing, Maple Pictures, Director’s Limited and IFS. In addition, AccessIT SW licenses to customers other distribution-related software, including MPPS and MMS, which further automate and manage related aspects of movie distribution, including advertising, strategic theater selection and competitive release planning.

 

7

 

---

 

AccessIT SW also provides outsourced movie distribution services, specifically for independent film distributors and producers, through IndieDirect. The IndieDirect staff uses the TDS distribution software to provide back office movie booking, tracking, reporting, settlement, and receivables management services.

 

International Theatrical Distribution Management

 

In 2004, AccessIT SW began developing TDSG, an international version of our successful TDS application, to support worldwide movie distribution and has the capability to run either from a single central location or multiple locations. In December 2004, AccessIT SW signed an agreement to license TDSG to 20th Century Fox, who will implement the software in fourteen overseas territories, encompassing eighteen foreign offices. As with our North American TDS solution, the TDSG system seamlessly integrates with AccessIT’s digital content delivery, significantly enhancing our international market opportunities.

 

IP Rights and Royalty Management

 

AccessIT SW also provides software for the management of IP rights and royalties, called RTS, PAS and PTS, which were acquired in the acquisition of PLX.

 

Distributed Software

 

AccessIT SW also distributes Vista, a theatre ticketing solution, developed by Vista Entertainment Solutions Limited (“Vista Entertainment”) which is based in New Zealand. AccessIT SW is currently the only United States-based distributor of Vista to the United States theatre market. Under our distribution agreement with Vista Entertainment, AccessIT SW earns a percentage of license fees, maintenance fees and consulting fees generated from each Vista product we sell.

 

Research and Development

 

The Company’s research and development was $300 thousand and $330 thousand for the fiscal years ended March 31, 2006 and 2007, respectively, and was comprised mainly of personnel costs and third party contracted services attributable to research and development efforts at AccessIT SW related to the development of our digital software applications and various product enhancements to TDS and EMS™.

 

Market Opportunity

 

The customers for AccessIT SW’s existing software and consulting services consist principally of worldwide motion picture studios and North American motion picture exhibitor chains. Upon the completion of TDSG, our international version of TDS, we will have the ability to support worldwide movie distribution.

 

We believe that:

 

 

Intellectual Property

 

AccessIT SW currently has intellectual property consisting of:

 

 

8

 

---

 

 

Customers

 

Entertainment Software customers are principally worldwide motion picture studios. For the fiscal year ended March 31, 2007, three customers, Carmike Theatres, Twentieth Century Fox and Pacific Theatres, each represented 10% or more of Entertainment Software revenues and together generated 56.2% of Entertainment Software revenues. Twentieth Century Fox and Pacific Theatres together generated 42.0% of AccessIT SW’s revenues and Carmike Theatres generated 80.5% of DMS’ TCC revenues. Twentieth Century Fox is also a customer for Digital Media Delivery. We expect to continue to conduct business with both of these customers in fiscal year 2008.

 

Competition

 

Within the major motion picture studios and exhibition circuits, AccessIT SW’s principal competitors for its products are in-house development teams, which generally are assisted by outside contractors and other third-parties. Most motion picture studios that do not use the TDS software use their own in-house developed systems. Internationally, AccessIT SW is aware of one vendor based in the Netherlands providing similar software on a smaller scale. AccessIT SW’s movie exhibition product, EMS™, competes principally with customized solutions developed by the large exhibition circuits and at least one other competitor that has been targeting mid- to small-sized motion picture exhibitors. We believe that AccessIT SW, through its technology and management experience, may differentiate itself by providing a competitive alternative to their forms of digital content delivery and management business.

 

Government Regulation

 

Except for the requirement of compliance with United States export controls relating to the export of high technology products, we are not subject to government approval procedures or other regulations for the licensing of our Entertainment Software products.

 

Entertainment Softwareis also subject to federal, state and local laws governing such matters as wages, working conditions, citizenship and health and sanitation requirements. We believe that we are in substantial compliance with all of such laws.

 

The nature of Entertainment Software does not subject us to environmental laws in any material manner.

 

DATA CENTER SERVICES

 

In December 2006, we decided to realign our resources and dispose of our Data Center Services segment. The disposition of our Data Center Services represents a strategic realignment of our technical and financial resources, thus enabling us to focus on what we believe are more profitable business opportunities for the Company. In our consolidated financial statements for the quarter ended December 31, 2006, the operations of our Data Center Services were shown separately as discontinued operations based on our decision at that time to dispose of the entire segment. During the quarter ended March 31, 2007, we decided to retain our Managed Services business. In addition, during the quarter ended March 31, 2007, it was determined that the agreement being negotiated at such time with FiberMedia AIT, LLC and Telesource Group, Inc. (together, “FiberMedia”) prevented us from continuing to classify the IDCs as discontinued operations as we retained significant involvement in the operations of the IDCs, because we are still the lessee of the relevant facilities until landlord consents can be obtained to assign each facility lease to FiberMedia.

 

The Data Center Services segment of our business consisted of two primary activities: our IDCs or Data Centers and Managed Services.

 

 

9

 

---

 

 

 

In January 2004, we acquired Managed Services, a managed service provider of information technologies (the “Managed Services Acquisition”) which operates a 24x7 GNCC, capable of running the networks and systems of large corporate clients. The three largest customers of Managed Services accounted for approximately 60% of its revenues. The service capabilities of Managed Services have been integrated with our IDCs.

 

In January 2006, we purchased certain web hosting assets which have been integrated into the operations of Managed Services (the “Access Digital Server Assets”).

 

Data Centers

 

As of March 31, 2007, we operated three IDCs, one in New Jersey and two in New York City. In addition, we maintain an IDC in Chatsworth, California that is dedicated to AccessIT’s delivery of movies and other digital content to motion picture exhibitors worldwide.

 

Effective May 1, 2007, we entered into a master collocation agreement (“MCA”) with FiberMedia to operate the three IDCs. FiberMedia operates a network of geographically distributed IDCs. We have assigned our IDC customer contracts to FiberMedia, and going forward, FiberMedia will be responsible for all customer service issues, including the maintenance of the IDCs, sales, installation of customer equipment, cross connects, electrical and other customer needs. We will attempt to obtain landlord consents to assign each facility lease to FiberMedia. Until such landlord consents are obtained, we will remain as the lessee and pursuant to the MCA, FiberMedia will reimburse our costs under the facility leases, including rent, at an escalating percentage, starting at 50% in May 2007 and increasing to 100% in May 2008 and thereafter through the remaining term of each IDC lease. 100% of all other operating costs for each IDC, are payable by FiberMedia through the term of each IDC lease.

 

Managed Services

 

We have developed two distinct Managed Services offerings, Network and Systems Management and Managed Storage Services.

 

Network and Systems Management

 

We offer our customers the economies of scale of the GNCC with an advanced engineering staff. Our network and systems management services include:

 

 

Managed Storage Services

 

Our managed storage services, known as AccessStorage-on-Demand, include:

 

 

10

 

---

 

All managed storage services are available separately or may be bundled together with other services. Monthly pricing is based on the type of storage (tape or disk), the capacity used and the level of accessibility required.

 

Market Opportunity

 

We believe that:

 

 

Intellectual Property

 

AccessIT has received United States service mark registration for the following service marks: Access Integrated Technologies®, AccessSecure®; AccessSafe®; AccessBackup®; AccessBusiness Continuance®; AccessVault®; AccessContent®; AccessColocenter®; AccessDataVault®; AccessColo®; and AccessStore®. 

 

Customers

 

Our Managed Services customers mainly include major and mid-level networks and ISPs, various users of network services, traditional voice and data transmission providers, long distance carriers and commercial businesses and the motion picture studio customers of our Media Services. For the fiscal year ended March 31, 2007, three customers, the Weinstein Company, Rothschild, Inc. and Kelley, Drye & Warren LLP (“KDW”), each represented 10% or more of Managed Service revenues and together generated 60% of our Managed Service revenues. Other than KDW, who is also outside legal counsel for the Company, we do not have any other relationships with these customers. We expect to continue to conduct business with both of these customers in fiscal 2008.

 

Competition

 

Many data center operators offer managed services to clients who co-locate servers in the operator owned data center. Our focus is on delivery of managed services inside the IDCs, now operated by FiberMedia, as a lead product for primary data center services and to also offer those services to clients who have servers outside the IDCs allowing us to offer remote server and network monitoring, server and network management and disaster recovery services.

 

Our competitors have greater financial, technical, marketing and managerial resources than we do. These competitors also generate greater revenue and are better known than we are. However, we believe that, by offering the IDCs now operated by FiberMedia along with related data center services, may differentiate us from our competition by providing a competitive bundled solution.

 

Government Regulation

 

Our Managed Services business is also subject to federal, state and local laws governing such matters as wages, working conditions, citizenship and health and sanitation requirements. We believe that we are in substantial compliance with all of such laws.

 

The nature of our Managed Services business does not subject us to environmental laws in any material manner.

 

EMPLOYEES  

 

As of March 31, 2007, we had 348 employees, of which 52, working primarily at the Pavilion Theatre, are part-time and 296 are full-time. Of our full-time employees, 120 are in sales and marketing, 97 are in operations, 14 are in research and development, 21 are in technical services, and 44 are in finance and administration. The Pavilion Theatre has a collective bargaining agreement with one union which covers three union projectionists, one of whom is a full-time employee.

 

11

 

---

 

ITEM 2. PROPERTY

 

Our businesses operated from the following leased properties at March 31, 2007.

 

Media Services

 

 

 

Data Center Services

 

 

 

Corporate

 

 

 

12

 

---

 

 

We believe that we have sufficient space to conduct our business for the foreseeable future. All of our leased properties are, in the opinion of our management, in satisfactory condition and adequately covered by insurance.

 

We do not own any real estate or invest in real estate or related investments.

 

ITEM 3. LEGAL PROCEEDINGS

 

None.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

 

None.

 

13

 

---

 

PART II

 

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

 

CLASS A COMMON STOCK

 

Until the close of business on April 17, 2006, our Class A common stock (“Class A Common Stock”) traded publicly on the American Stock Exchange (“AMEX”) under the trading symbol “AIX”. Effective April 18, 2006, the Company’s Class A Common Stock began trading publicly on the Nasdaq National Market, now known as the Nasdaq Global Market (“NASDAQ”), under the trading symbol “AIXD”. The following table shows the high and low sales prices per share of our Class A Common Stock as reported by the AMEX and NASDAQ for the periods indicated:

 

 

The last reported closing price per share of our Class A Common Stock as reported by NASDAQ on June 22, 2007 was $7.60 per share. As of June 22, 2007, there were approximately 110 holders of record of our Class A Common Stock.

 

CLASS B COMMON STOCK

 

There is no public trading market for our Class B common stock (“Class B Common Stock”). Each outstanding share of Class B Common Stock may be converted into one share of Class A Common Stock at any time, and from time to time, at the option of the holder. As of June 22, 2007, there was one holder of our Class B Common Stock.

 

DIVIDEND POLICY

 

We have never paid any cash dividends on our Class A Common Stock or Class B Common Stock (together the “Common Stock”) and do not anticipate paying any on our Common Stock in the foreseeable future. Any future payment of dividends on our Common Stock will be in the sole discretion of our board of directors (the “Board”).

 

SALES OF UNREGISTERED SECURITIES

 

On February 7, 2007, in connection with the Managed Services Acquisition in January 2004, the Company issued 3,394 shares of unregistered Class A Common Stock as additional purchase price based on the subsequent performance of the business acquired.

 

On March 31, 2007, pursuant to the Senior Notes (see Note 7), the Company issued 81,768 shares of Class A Common Stock as Additional Interest in payment of the quarterly interest on the Senior Notes, due March 31, 2007. The Company elected to pay the quarterly interest due March 31, 2007 in 78,720 shares of its Class A Common Stock. The Company filed a registration statement on Form S-3 on April 27, 2007, which was declared effective by the SEC on May 18, 2007 to register the resale of such shares.

 

On March 31, 2007, the Company agreed to issue 30,000 shares of unregistered Class A Common Stock to one of the holders of the HS Notes (see Note 7) for their agreement to reduce their note and forego $150 of principal payments at the end of their note term.

 

PURCHASE OF EQUITY SECURITIES

 

There were no purchases of shares of our Class A Common Stock made by us or on our behalf during the three months ended March 31, 2007. We do not anticipate purchasing any shares of our Class A Common Stock in the foreseeable future.

 

14

 

---

 

ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

AccessIT was incorporated in Delaware on March 31, 2000. We provide fully managed storage, electronic delivery and software services and technology solutions for owners and distributors of digital content to movie theaters and other venues. We have generated revenues from two primary businesses, media services (“Media Services”) and internet data center (“IDC” or “data center”) services (“Data Center Services”) a business we will no longer operate after May 1, 2007. Our Media Services business provides software, services and technology solutions to the motion picture and television industries, primarily to facilitate the transition from analog (film) to digital cinema and has positioned us at what we believe to be the forefront of an emerging industry opportunity relating to the delivery and management of digital cinema and other content to entertainment and other remote venues worldwide. Our Media Services business is currently our primary strategic focus. Our Data Center Services were comprised of three leased IDCs that provided corporate customers with secure and fail-safe off-site locations to house their computer and telecommunications equipment, as well as related services such as equipment monitoring and back-up and protection of customers’ data. We have decided to realign our resources and to dispose of our Data Center Services other than the businesses operated by Managed Services and by AccessIT through its Access Digital Server Assets. The disposition of our Data Center Services represents a strategic realignment of our technical and financial resources, thus enabling us to focus on what we believe are more profitable business opportunities for the Company.

 

As of March 31, 2007, we had two reportable segments: Media Services, which represents the operations of AccessIT SW, DMS, the Pavilion Theatre, Christie/AIX, USM and The Bigger Picture and Data Center Services, which consists of the operations of our three IDCs and the operations of Managed Services. Revenues for our reportable segments were ($ in thousands):

 

 

In November 2005, we received notification from KMC that they would not renew the contracts for six out of seven IDC sites which were licensed by KMC, which contracts expired on December 31, 2005. In addition, certain other data center customer contracts expired over the next several months. Through December 31, 2005, the average monthly revenue from KMC for the expired contracts was approximately $144 thousand. Additionally, we had two other large data center customer contracts expired prior to July 1, 2006, which provided approximately $105 thousand of total monthly revenue. These contracts were not renewed, however, new contracts for IDC and Managed Services business partially offset these non-renewed contracts.

 

In connection with the expiration of the six KMC contracts, we exited the six leased IDC’s in which KMC was the sole or primary IDC customer. These six leases expired between December 31, 2005 and April 30, 2006 and were intended to terminate in conjunction with the associated KMC contract. We did not incur any significant costs in connection with the exit from the six IDC’s.

 

Effective May 1, 2007, we entered into a master collocation agreement (“MCA”) with FiberMedia AIT, LLC and Telesource Group, Inc. (together, “FiberMedia”) to operate our three remaining IDCs. FiberMedia operates a network of geographically distributed IDCs. We have assigned our IDC customer contracts to FiberMedia, and going forward, FiberMedia will be responsible for all customer service issues, including the maintenance of the IDCs, sales, installation of customer equipment, cross connects, electrical and other customer needs. We will attempt to obtain landlord consents to assign each facility lease to FiberMedia. Until such landlord consents are obtained, we will remain as the lessee and pursuant to the MCA, FiberMedia will reimburse our costs under the facility leases, including rent, at an escalating percentage, starting at 50% in May 2007 and increasing to 100% in May 2008 and thereafter through the remaining term of each IDC lease. 100% of all other operating costs are payable by FiberMedia through the term of each IDC lease. All future costs not fully reimbursed by FiberMedia have been included in the loss on disposition of assets for the fiscal year ended March 31, 2007.

 

We have incurred net losses of $17.1 million and $26.0 million in the fiscal years ended March 31, 2006 and 2007, respectively, and we have an accumulated deficit of $65.0 million as of March 31, 2007. We anticipate that, with our recent acquisitions and the operations of Christie/AIX and DMS, our results of operations will improve. As we grow, we expect our operating costs and general and administrative expenses will also increase for the foreseeable future, but as a much lower percentage of revenue. In

 

15

 

---

 

order to achieve and sustain profitable operations, we will need to generate more revenues than we have in prior years and we may need to obtain additional financing.

 

Results of Operations for the Fiscal Years Ended March 31, 2006 and 2007

 

The following table sets forth, for the period indicated, the comparative changes to amounts included in our consolidated statements of operations.

 

 

 

Revenues

 

Revenues were $16.8 million and $47.1 million for the fiscal years ended March 31, 2006 and 2007, respectively, an increase of $30.3 million or 181%. The increase was driven largely by the USM Acquisition (see Note 4), VPF revenues, license fees earned for our TCC software and the Bigger Picture Acquisition offset by reduced revenues from our IDCs. We expect Christie/AIX’s VPF revenues, and DMS digital distribution related revenues to significantly increase as an increasing number of Systems are placed into service by Christie/AIX in support of its Digital Cinema Roll-Out. We also expect USM cinema on-screen advertising revenues and alternative content distribution related revenues of The Bigger Picture to increase significantly as both will have operations for a full year.

 

Direct Operating Costs

 

Total direct operating costs were $11.5 million and $22.2 million for the fiscal years ended March 31, 2006 and 2007, respectively, an increase of $10.7 million or 93%. The increase was attributable to the USM Acquisition (see Note 4), payroll and other operating costs. We expect an increase in direct operating costs, primarily in payroll and other costs related to the impact of the operations of USM and The Bigger Picture for a full year, offset by reduced direct operating costs from our IDCs as those costs will be reimbursed by FiberMedia.

 

16

 

---

 

Selling, General and Administrative Expenses

 

Total selling, general and administrative expenses were $8.9 million and $18.6 million for the fiscal years ended March 31, 2006 and 2007, respectively, an increase of $9.7 million or 109%. The increase was primarily due to the USM Acquisition (see Note 4) and increased company-wide staffing costs. We expect an increase in selling, general and administrative expenses mainly in payroll and other expenses related to the impact of the operations of USM and The Bigger Picture for a full year. As of March 31, 2006 and 2007 we had 140 and 348 employees, respectively, of which 54 and 52, respectively, were part-time employees and 0 and 115, respectively, were salespersons. We anticipate an increase in employees going forward as we expect to hire as employees some of the subcontracted technical staff we used during the fiscal year ended March 31, 2007.

 

Non-cash Stock-based Compensation Expense

 

Total non-cash stock-based compensation expense was $0 and $2.9 million for the fiscal years ended March 31, 2006 and 2007, respectively. We anticipate that we will experience a decrease in our total non-cash stock-based compensation expense as $2.8 million for the fiscal year ended March 31, 2007 related to the Company’s adoption of SFAS 123(R) (see Note 2).

 

Loss on Disposition of Assets

 

For the fiscal year ended March 31, 2007, we recognized a loss of $2.6 million on the disposition of assets related to our IDCs. Included in this loss was the write-off of all the IDC net assets as of March 31, 2007 and the estimated fiscal 2008 IDC net loss for those expenses not fully reimbursable by FiberMedia (see Note 14).

 

Depreciation Expense on Property and Equipment

 

Total depreciation expense was $3.7 million and $14.7 million for the fiscal years ended March 31, 2006 and 2007, respectively, an increase of $11.0 million or 298%. The increase was primarily attributable to the depreciation for the assets to support Christie/AIX’s Digital Cinema Roll-Out. We anticipate that we will experience an increase in our total depreciation expense consistent with the depreciation of an increasing number of Systems purchased by Christie/AIX in support of its Digital Cinema Roll-Out.

 

Amortization Expense of Intangible Assets

 

Total amortization expense was $1.3 million and $2.8 million for the fiscal years ended March 31, 2006 and 2007, respectively, an increase of $1.5 million or 112%. The increase was primarily attributable to the amortization of intangible assets due to the USM Acquisition and the Bigger Picture Acquisition (see Note 4). We anticipate that we will experience a slight increase in our total amortization expense as the intangible assets associated with both the USM Acquisition and the Bigger Picture Acquisition are expensed for a full fiscal year.

 

Interest Income

 

Total interest income was $0.3 million and $1.4 million for the fiscal years ended March 31, 2006 and 2007, respectively, an increase of $1.1 million or 351%. The increase was directly attributable to the amount of cash, cash equivalents and investments on hand during the fiscal year ended March 31, 2007 compared to the fiscal year ended March 31, 2006, resulting from the funds received from the March 2006 Offering, the March 2006 Second Offering, the October 2006 Private Placement and borrowings from the GE Credit Facility (see Note 7)(each as defined below). We anticipate that we will experience a decrease in our interest income as the above mentioned funds are used for operations and for additional Systems purchased by Christie/AIX in support of its Digital Cinema Roll-Out.

 

Interest expense

 

Total interest expense was $2.2 million and $7.3 million for the fiscal years ended March 31, 2006 and 2007, respectively, an increase of $5.1 million or 225%. The increase was primarily due to the interest expense, unused credit facility fees and the amortization of debt issuance costs incurred on the GE Credit Facility (see Note 7) and interest associated with USM’s Excel Credit Facility and Excel Term Note (as defined in Note 7) offset by the reduced interest expense associated with the $7.6 million of 7% Convertible Debentures and $1.7 million of 6% convertible notes issued in February 2005 (the “6% Convertible Notes”) converted to equity. Additionally, the fiscal year ended March 31, 2006 included $730 thousand of debt issuance costs which was charged to interest expense in connection with the conversion of all of our Convertible Debentures and 6% Convertible Notes. We anticipate that we will experience an increase in our total interest expense consistent with the increase in our obligations under the GE Credit Facility in support of Christie/AIX’s Digital Cinema Roll-Out. We anticipate that we will experience an

 

17

 

---

 

increase in our interest expense consistent with the borrowings from the GE Credit Facility (see Note 7) by Christie/AIX in support of its Digital Cinema Roll-Out.

 

Non-cash interest expense

 

Total non-cash interest expense was $1.4 million and $1.9 million for the fiscal years ended March 31, 2006 and 2007, respectively, an increase of $0.5 million or 35%. The increase was primarily due to the value of the shares issued as payment of interest on the $22.0 million of Senior Notes (see Note 7) during the fiscal year ended March 31, 2007 versus non-cash interest expense for the fiscal year ended March 31, 2006 resulting from the accretion of the value of warrants to purchase shares of our Class A Common Stock attached to the $7.6 million Convertible Debentures (which bore interest at 7% per year), the 5-Year Notes and $1.0 million that was expensed for the remaining accretion of the notes in connection with the conversion of the $7.6 million of the Convertible Debentures. We do not anticipate any significant increase in our non-cash interest expense.

 

Debt conversion expense

 

Total debt conversion expense was $6.3 million and $0 for the fiscal years ended March 31, 2006 and 2007, respectively. The prior year included the value of the New Shares (as defined in Note 7) and New Warrants (as defined in Note 7) issued as a result of the conversion of the $7.6 million Convertible Debentures in August 2005.

 

Other Income (Expense), Net

 

Total other income, net was $1.6 million for the fiscal year ended March 31, 2006 compared to other expense, net of $0.5 million for the fiscal year ended March 31, 2007, an increase in expense of $2.1 million or 128%. The increase in expense was directly attributable to other income resulting from the change in value of the July 2005 Private Placement Warrants (as defined in Note 8) and the New Warrants in the fiscal year ended March 31, 2006, while there was no such other income in the fiscal year ended March 31, 2007.

 

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.

 

In December 2005, the Company filed a shelf registration statement on Form S-3 with the SEC (the “Shelf”), which was declared effective on January 13, 2006. The Shelf provided that the Company may offer and sell in one or more offerings up to $75.0 million of any combination of the following securities: Class A Common Stock, preferred stock in one or more series and warrants to purchase common stock or preferred stock. The proceeds from sales of securities under this shelf registration were used for the purchase, installation and maintenance of Systems by Christie/AIX in connection with Christie/AIX’s Digital Cinema Roll-Out, and for general working capital.

 

In August 2006, Christie/AIX, an indirect wholly-owned subsidiary of the Company, entered into a definitive credit agreement (the “Credit Agreement”) with General Electric Capital Corporation, as administrative agent and collateral agent for the lenders party thereto, and one or more lenders party thereto. Pursuant to the Credit Agreement, at any time prior to August 1, 2008, Christie/AIX may draw up to $217.0 million in the form of a senior secured multi draw term loan (the “GE Credit Facility”), in one or more borrowings. Proceeds from the Credit Facility will be 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 digital cinema systems in connection with Christie/AIX’s Digital Cinema Roll-Out and to pay transaction fees and expenses related to the Credit Facility, and for certain other specified purposes. The remaining cost of the Systems would be funded from other sources of capital including contributed equity. As of March 31, 2007, the Company had borrowed $134.6 million under the GE Credit Facility at a weighted average interest rate of 9.87%. The Credit Agreement contains certain restrictive covenants that restrict Christie/AIX 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.

 

In October 2006, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with the purchasers party thereto (the “Purchasers”) pursuant to which the Company issued 8.5% Senior Notes (the “Senior Notes”) in the aggregate principal amount of $22 million (the “October 2006 Private Placement”). The net proceeds of approximately $21.0 million from the October 2006 Private Placement will be used for the expansion of the Company’s digital cinema rollout plans to markets outside of the United States, and any one or more of the following: (i) the payment of certain existing outstanding indebtedness

 

18

 

---

 

of the Company due within twelve months of the issuance of the Senior Notes, (ii) working capital and (iii) other general corporate purposes, including acquisitions. The Purchase Agreement also requires the Senior Notes to be guaranteed by each of the Company’s existing and, subject to certain exceptions, future subsidiaries (the “Guarantors”), other than Christie/AIX and USM and their respective subsidiaries. Accordingly, each of the Guarantors, other than Christie/AIX and USM and their respective subsidiaries entered into a subsidiary guaranty (the “Subsidiary Guaranty”) with the Purchasers pursuant to which it guaranteed the obligations of the Company under the Senior Notes. The Senior Notes contain certain restrictive covenants that restrict the Company and the Subsidiary Guarantors from incurring other indebtedness, creating or acquiring subsidiaries which do not guarantee the Senior Notes, making certain investments and modifying authorized capital.

 

In January 2006, in connection with the Shelf, the Company entered into: (1) a placement agency agreement to issue and sell up to 1,145,000 registered shares of Class A Common Stock at a price to the public of $10.70 per share to certain institutional and other accredited investors, and (2) a purchase agreement with an underwriter for 355,000 registered shares of Class A Common Stock at a price to the public of $10.70 per share (together the “January 2006 Offering”) for gross aggregate proceeds of $16.1 million. The offering and sale of the 1,500,000 shares was completed on January 25, 2006. The Company used the net proceeds for the purchase, installation and maintenance of Systems by Christie/AIX in connection with Christie/AIX’s Digital Cinema Roll-Out and for general corporate purposes. The securities were offered by the Company pursuant to the Shelf.

 

In March 2006, in connection with the Shelf, the Company entered into a purchase agreement with two underwriters for 5,126,086 registered shares of Class A Common Stock at a price to the public of $10.00 per share (the “March 2006 Offering”) for gross proceeds of $51.3 million, which was completed on March 17, 2006. The Company granted the underwriters a 30-day option to purchase up to an additional 768,913 shares of Class A Common Stock at a price to the public of $10.00 per share (the “March 2006 Second Offering”) to cover over-allotments, which was exercised by the underwriters on March 21, 2006 for gross proceeds of $7.7 million and was completed on March 24, 2006. The Company used the estimated net proceeds from the March 2006 Offering and the March 2006 Second Offering of approximately $54.6 million, for the purchase, installation and maintenance of Systems by Christie/AIX in connection with Christie/AIX’s Digital Cinema Roll-Out and for general corporate purposes. The securities were offered by the Company pursuant to the Shelf.

 

As a result of the January 2006 Offering, the March 2006 Offering and the March 2006 Second Offering, substantially all of the Shelf amount of $75.0 million has been utilized. The de minimus remainder was deregistered.

 

As of March 31, 2007, Christie/AIX has paid $164.9 million for Systems ordered in connection with Christie/AIX’s Digital Cinema Roll-Out.

 

As of March 31, 2007, we had cash and cash equivalents of $29.4 million and our working capital was $11.8 million.

 

Operating activities used net cash of $5.5 million and $19.2 million for the fiscal years ended March 31, 2006 and 2007, respectively. The increase in cash used by operating activities was primarily due to an increase of accounts receivable related to the USM Acquisition and the reduction of accounts payable and accrued expenses and an increased net loss offset by adjustments not requiring cash, specifically depreciation and amortization, non-cash stock-based compensation, loss on disposition of assets and non-cash interest expense.

 

Investing activities used net cash of $50.9 million and $135.3 million for the fiscal years ended March 31, 2006 and 2007, respectively. The increase was due to the purchase of and deposits paid for additional digital cinema projection systems and other assets, primarily in connection with Christie/AIX’s Digital Cinema Roll-Out along with the purchase of PLX and USM (see Note 4) offset by the maturities and sales of available-for-sale investment securities. We anticipate that we will experience an increase in our capital expenditures consistent with the anticipated growth in our operations, infrastructure and personnel mainly in the support of Christie/AIX’s Digital Cinema Roll-Out.

 

Financing activities provided net cash of $88.2 million and $147.2 million for the fiscal years ended March 31, 2006 and 2007, respectively. The increase was primarily due to the net proceeds from the GE Credit Facility (see Note 7) and the October 2006 Private Placement (see Note 7) offset slightly by the repayments of notes payable, credit facilities and debt issuance costs.

 

19

 

---

 

We have acquired property and equipment under a non-cancelable long-term capital lease obligation that expires July 2022. As of March 31, 2007, we had an outstanding capital lease obligation of $6.0 million. Our capital lease obligation is at the following location and in the following principal amount ($ in thousands):

 

 

As of March 31, 2007, minimum future capital lease payments (including interest) totaled $17.5 million, are due as follows ($ in thousands):

 

 

As of March 31, 2007, obligations under non-cancelable operating leases totaled $14.0 million, including the amounts for the IDCs currently being operated by FiberMedia (see Note 14), are due as follows ($ in thousands):

 

 

As of March 31, 2007, obligations under theatre agreements with exhibitors for displaying cinema advertising totaled $13.5 million, are due as follows ($ in thousands):

 

 

As of March 31, 2007, all of our purchase obligations for Systems ordered in connection with Christie/AIX’s Digital Cinema Roll-Out have been included in our consolidated financial statements.

 

20

 

---

 

Management expects that we will continue to generate losses for the foreseeable future due to depreciation and amortization, interest on funds advanced under the GE Credit Facility (see Note 7), interest on the Senior Notes, software development, marketing and promotional activities and the development of relationships with other businesses. Certain of these costs, including costs of software development and marketing and promotional activities, could be reduced if working capital decreased. The restrictions imposed by the Senior Notes and the Credit Agreement may limit the ability of the Company to obtain financing, make it more difficult to satisfy the Company’s debt obligations or require the Company to dedicate a substantial portion of the Company’s cash flow to payments on our existing debt obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other corporate requirements. We may attempt to raise additional capital from various sources for working capital as necessary, but there is no assurance that such financing will be completed as contemplated or under terms acceptable to us, or our existing shareholders. Failure to generate additional revenues, raise additional capital, meet our financial covenants or other obligations under our Credit Agreement or manage discretionary spending could have a material adverse effect on our ability to continue as a going concern and to achieve our intended business objectives.

 

Our management believes that the net proceeds generated by our recent financing transactions, combined with our cash on hand, cash receipts from existing operations and funds available under the GE Credit Facility (see Note 7), will be sufficient to permit us meet our obligations through March 31, 2008.

 

Seasonality

 

Media Services revenues derived from our Pavilion Theatre and 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.

 

Subsequent Events

 

In April 2007, in connection with the USM Acquisition (see Note 4) and the achievement of certain digital cinema deployment milestones, the Company issued 67,906 shares of the Company’s Class A Common Stock, with a value of $512, to the USM Stockholders as additional purchase price.

 

Effective May 1, 2007, we entered into the MCA with FiberMedia to operate our three remaining IDCs. FiberMedia operates a network of geographically distributed IDCs. We have assigned our IDC customer contracts to FiberMedia, and going forward, FiberMedia will be responsible for all customer service issues, including the maintenance of the IDCs, sales, installation of customer equipment, cross connects, electrical and other customer needs. We will attempt to obtain landlord consents to assign each facility lease to FiberMedia. Until such landlord consents are obtained, we will remain as the lessee and pursuant to the MCA, FiberMedia will reimburse our costs under the facility leases, including rent, at an escalating percentage, starting at 50% in May 2007 and increasing to 100% in May 2008 and thereafter through the remaining term of each IDC lease. 100% of all other operating costs for each IDC are payable by FiberMedia through the term of each IDC lease. All future costs not fully reimbursed by FiberMedia have been included in the loss on disposition of assets.

 

In May 2007, the Company ordered additional Systems from Christie for an estimated aggregate total purchase price of approximately $16,500, and in connection with this order, Christie provided $5,000 of vendor financing (the “Christie Note”). The Christie Note may be prepaid and matures in July 2008.

 

Subsequent to March 31, 2007, under the Plan (see Note 8), the Company granted 8,500 stock options to employees and 50,000 stock options to five non-employee members of our Board, all at an exercise price range from $6.01 to $7.60 per share.

 

Off-balance sheet arrangements

 

We are not a party to any off-balance sheet arrangements.

 

21

 

---

 

ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS

 

ACCESS INTEGRATED TECHNOLOGIES, INC.

INDEX TO FINANCIAL STATEMENTS

 

 

 

 

22

 

---

 

[EISNER LETTERHEAD]

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders

Access Integrated Technologies, Inc.

 

We have audited the accompanying consolidated balance sheets of Access Integrated Technologies, Inc. and subsidiaries (the "Company") as of March 31, 2006 and 2007 and the related consolidated statements of operations, cash flows and stockholders' equity for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements enumerated above present fairly, in all material respects, the consolidated financial position of Access Integrated Technologies, Inc. and subsidiaries as of March 31, 2006 and 2007, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 2 to the consolidated financial statements, the Company has restated its previously issued consolidated financial statements to reduce the deferred tax valuation allowance and goodwill in connection with prior year business combinations. Also as discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment.”

 

 

/s/ Eisner LLP

Florham Park, New Jersey

June 28, 2007

 

F-1

 

---

 

ACCESS INTEGRATED TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share data)

 

 

See accompanying notes to Consolidated Financial Statements

 

F-2

 

---

 

ACCESS INTEGRATED TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for share and per share data)

 

 

See accompanying notes to Consolidated Financial Statements

 

F-3

 

---

 

ACCESS INTEGRATED TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

See accompanying notes to Consolidated Financial Statements

 

F-4

 

---

 

ACCESS INTEGRATED TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

 

 

See accompanying notes to Consolidated Financial Statements

 

F-5

 

---

 

ACCESS INTEGRATED TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)