As filed with the Securities and Exchange Commission on September 22, 2003.
Registration No. 333-107711
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------
Amendment No.1
to
FORM SB-2
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
---------------------
ACCESS INTEGRATED TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
Delaware 7379 22-3720962
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
55 Madison Avenue, Suite 300
Morristown, NJ 07960
(973) 290-0080
(Address and telephone number of principal executive
offices and principal place of business)
---------------------
A. DALE MAYO
Chief Executive Officer and President
Access Integrated Technologies, Inc.
55 Madison Avenue, Suite 300
Morristown, NJ 07960
(973) 290-0080
(Name, address and telephone number of agent for service)
---------------------
Copies of all communications to be sent to:
STEPHEN R. CONNONI, ESQ. RICHARD F. HOROWITZ, ESQ.
Kirkpatrick & Lockhart LLP Heller, Horowitz & Feit, P.C.
599 Lexington Avenue 292 Madison Avenue
New York, NY 10022-6030 New York, NY 10017
(212) 536-4040 (212) 685-7600
Approximate date of proposed sale to the public:
As soon as practicable after this registration
statement becomes effective.
If this Form is filed to register securities for an offering to be made on
a continuous or delayed basis, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
---------------------
================================================================================
--------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
------------------------- ---------------------- ------------------- --------------------- ----------------------
PROPOSED PROPOSED
TITLE OF CLASS OF MAXIMUM MAXIMUM AGGREGATE
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING PRICE (2) AMOUNT ($) OF
REGISTERED REGISTERED PER SHARE REGISTRATION FEE (3)
------------------------- ---------------------- ------------------- --------------------- ----------------------
Class A Common Stock, 1,150,000 shares (1) $5.00 $5,750,000 $465.18
par value $0.001
------------------------- ---------------------- ------------------- --------------------- ----------------------
Class A Common Stock, 100,000 shares $6.00 $600,000 $ 48.54
par value $0.001,
issuable upon exercise
of the underwriter's
warrants (4)
------------------------- ---------------------- ------------------- --------------------- ----------------------
(1) Includes shares that the underwriter has the option to purchase solely
in order to cover any overallotments.
(2) Bona fide estimates for computation of the registration fee pursuant
to Rule 457(a) under the Securities Act of 1933, as amended.
(3) A registration fee of $650.00 was paid, via wire transfer, on July 31,
2003, of which $513.72 was due.
(4) Pursuant to Rule 416 under the Securities Act of 1933, as amended, the
Registrant is also registering such additional indeterminate number of
shares of Class A Common Stock as may become issuable by virtue of
anti-dilution provisions contained in the warrants.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
-------------------------------------------------------------------------------
PROSPECTUS
SUBJECT TO COMPLETION. DATED SEPTEMBER ___, 2003
1,000,000 Shares
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Class A Common Stock
------------------
This is an initial public offering of 1,000,000 shares of Class A
Common Stock of Access Integrated Technologies, Inc.
No public market currently exists for our shares. We are seeking to
list our shares of Class A Common Stock for trading on the American Stock
Exchange. We have filed an application to be listed on the American Stock
Exchange under the symbol "AIX".
It is expected that the initial public offering price will be between
$4.00 and $6.00 per share.
See "Risk factors" beginning on page 8 for a discussion of factors that
you should consider before buying shares of our Class A Common Stock.
Completion of this offering is subject to our acquisition of the
capital stock of Hollywood Software, Inc., which is scheduled to close on the
completion of this offering. See "Risk factors" relating to our acquisition of
Hollywood Software, Inc. on pages 9 and 10.
------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
------------------
Per Share Total
--------------- ------------
Public offering price..................................................... $ $
Underwriting discounts and commissions.................................... $ $
Proceeds, before expenses, to
Access Integrated Technologies, Inc................................... $ $
The underwriter may, for 30 days after the date of this prospectus,
purchase up to an additional 150,000 shares of Class A Common Stock from us at
the initial public offering price, less underwriting discounts, to cover
overallotments, if any.
------------------
The underwriting agreement provides that the shares of Class A Common
Stock are being offered on a firm-commitment basis, such that the underwriter
will purchase all 1,000,000 offered shares if any of such shares are purchased.
The underwriter expects to deliver the shares against payment therefor in New
York, New York on October __, 2003.
----------------------------
JOSEPH GUNNAR & CO., LLC
_______, 2003.
--------------------------------------------------------------------------------
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
--------------------------------------------------------------------------------
[Inside Front Cover]
[Textual summary providing flow chart data related to our colocation
facilities, managed services . . .]
[Graphic depiction of data center infrastructure components, including
generators, uninterrupted power source, EMC2 Symmetrix Disk Storage]
Prospectus summary
You should read the following summary together with the more detailed
information regarding our company and the Class A Common Stock being offered and
the financial statements and notes to those statements appearing elsewhere in
this prospectus, including the "Risk factors" beginning on page 8. Unless
otherwise specifically indicated, the information contained in this prospectus
gives effect to a one-for-five reverse split of all outstanding shares of our
common stock, effective as of September 18, 2003, and assumes that the
underwriter's overallotment option is not exercised.
We were organized in March 2000 and have been in the business of
operating Internet data centers, or IDCs. IDCs are facilities that, for monthly
and variable fees, provide our customers with: a secure location for their
computer and telecommunications equipment; access to voice and data transmission
services from a choice of network providers; services to monitor their computer
and telecommunications equipment; and services to store, back-up and protect
their programs and data. Our IDCs provide fail-safe environments for our
customers' equipment by using back-up generators as well as back-up battery
power and specialized air conditioning systems. Our customers include major and
mid-level network and Internet service providers, such as KMC Telecom, AT&T,
OnFiber Communications, NorVergence and Zone Telecom, as well as various users
of network services. The network and Internet service providers named above,
collectively, comprised approximately 69% and 76% of our revenues for the fiscal
year ended March 31, 2003 and the three months ended June 30, 2003,
respectively.
We currently operate nine IDCs in eight states. After developing our
first two data centers, which are located in Jersey City, New Jersey and
Brooklyn, New York, we acquired an additional IDC, located in Manhattan, New
York, in December 2001 and six more in November 2002.
We are actively seeking to expand into two additional and interrelated
business areas and we expect these new businesses, enhanced by our IDC business
activities, to become our primary focus. In February 2003, we organized Access
Digital Media, Inc., or AccessDM. AccessDM is our 80%-owned subsidiary that has
completed its development and final testing of proprietary software designed to
enable worldwide delivery of digital data - including movies, advertisements and
alternative content such as concerts, seminars and sporting events - to movie
theaters and other venues having digital projection equipment. On July 17, 2003,
we signed an agreement to acquire the capital stock of Hollywood Software, Inc.,
or Hollywood SW, the leading developer of proprietary transactional support
software for movie distributors in the U.S., to complement AccessDM's digital
content delivery software.
Following our acquisition of Hollywood SW, we expect to be able to
offer interrelated services that use aspects of each of our businesses and that
have been specifically tailored for the delivery and management of digital
content to entertainment venue operators. We believe that our ability to offer a
wide range of services will differentiate us from other service providers,
including digital media distributors.
The following outlines some recent events involving our company
referred to throughout this prospectus:
o We have agreed to acquire Hollywood SW for a purchase price,
payable upon and subject to the completion of this offering,
of 400,000 shares of Class A Common Stock, $3 million of 8%
promissory notes and $2.5 million of cash (of which $50,000
has been paid);
o We issued, in June and July 2003, five-year promissory notes
(which bear interest at 8% per year) in the aggregate
principal amount of $1.23 million, of which approximately
$437,000 is being used to pay outstanding capital lease
obligations;
2
o We have agreed to issue, upon and subject to the completion of
this offering, 8,700 shares of Class A Common Stock to the
vendor that assisted us in developing AccessDM's digital
content delivery software. See "Business - Access Digital
Media, Inc. - Formation/background"; and
o We have agreed to issue, upon and subject to the completion of
this offering, 2,202,848 shares of Class A Common Stock
to a principal stockholder of ours in exchange for all
of its outstanding shares of Series A and Series B Preferred
Stock, including accrued dividends thereon, and through the
exercise and exchange of certain warrants held by it. See
"Related party transactions."
Our principal executive offices are at 55 Madison Avenue, Suite 300,
Morristown, NJ 07960, and our telephone and telecopier numbers at such offices
are (973) 290-0080 and (973) 290-0081, respectively. Our e-mail address is
investor@accessitx.com and our web site address is www.accessitx.com.
Information accessed on or through our web site does not constitute a part of
this prospectus. The terms we, us, the company, our company and AccessIT used in
this prospectus refer to Access Integrated Technologies, Inc. and, unless
otherwise indicated, its 80%-owned subsidiary, Access Digital Media, Inc.
3
The offering
Class A Common Stock offered
by us.......................................................... 1,000,000 shares
Common stock equivalents presently
outstanding.................................................... 4,857,885 shares (1)
Common stock equivalents to be
outstanding immediately after this
offering....................................................... 7,093,936 shares (1)(2)
Overallotment option.............................................. 150,000 shares
Use of proceeds................................................... We anticipate using the net proceeds
of this offering for:
o Payment of the remaining cash
portion of the purchase price for
Hollywood SW and related
transaction expenses;
o Repayment of $1 million of secured
indebtedness incurred in
connection with a previous
acquisition;
o Working capital for general
business purposes; and
o Marketing costs for AccessDM.
Proposed American Stock Exchange symbol........................... "AIX"
(1) Reflects 2,211,489 outstanding shares of our Class A Common Stock,
1,005,811 outstanding shares of our Class B Common Stock, which are
convertible into 1,005,811 shares of Class A Common Stock, and 3,226,538
outstanding shares of our Series A Preferred Stock and 4,976,391
outstanding shares of our Series B Preferred Stock, which, prior to the
completion of this offering, are convertible into 645,307 shares of Class C
Common Stock (excluding accrued dividends on such preferred stock) and
995,278 shares of Class D Common Stock (excluding accrued dividends on such
preferred stock), respectively; excludes up to 1,681,782 shares of Class A
Common Stock issuable upon exercise of outstanding warrants and options.
See "Related party transactions" and "Description of securities."
(2) Includes (i) 400,000 shares of Class A Common Stock issuable, upon and
subject to the completion of this offering, in connection with our purchase
of Hollywood SW (see "Business - Hollywood Software"), (ii) notwithstanding
footnote (1) above, 265,088 shares of Class A Common Stock issuable upon
the expected exercise, at $0.05 per share, of certain of our warrants,
whose exercise period expires on the completion of this offering (see
"Description of securities - warrants in connection with promissory
notes"), (iii) 8,700 shares of Class A Common Stock issuable, upon and
subject to the completion of this offering, in connection with the
development of software for our subsidiary, AccessDM (see "Business -
Access Digital Media, Inc.") and (iv) 2,202,848 additional shares of Class
A Common Stock issuable, upon and subject to the completion of this
offering, to a principal stockholder of ours in exchange for all of its
outstanding shares of Series A and Series B Preferred Stock (presently
convertible into 1,640,585 shares of Class A Common Stock included in note
1 above), including accrued dividends thereon, and through the exercise and
exchange of certain warrants held by it (see "Related party transactions").
Access Integrated TechnologiesSM, AccessColoSM, AccessColocenterSM,
AccessStorageSM, AccessStorage on DemandSM, AccessStoreSM, AccessSecureSM,
AccessSafeSM, AccessPortalSM, AccessManaged StorageSM, AccessDataSM,
AccessContentSM, AccessBusiness ContinuanceSM, AccessBackupSM, Access Digital
MediaIM, AccessVaultSM and AccessData VaultSM are our service marks. We have
filed applications to register all such service marks. This prospectus refers to
the tradenames, service marks and trademarks of other companies. These
references are made with due recognition of the rights of these companies and
without any intent to misappropriate these names or marks.
4
Summary financial information
The following tables summarize operating data of our company and
should be read in conjunction with the "Management's discussion and analysis of
financial condition and results of operations" section and our consolidated
financial statements and the notes to those statements appearing elsewhere in
this prospectus. In the first table, the data in the first three columns have
been derived from our audited financial statements. The fourth column sets forth
pro forma condensed combined financial data for the fiscal year ended March 31,
2003, after giving effect to the transactions discussed in the overview of the
pro forma data beginning on page P-1 of this prospectus. In the second table,
the data in the first two columns have been derived from our unaudited financial
statements for the three months ended June 30, 2002 and 2003, respectively. The
third column sets forth pro forma condensed combined financial data for the
three months ended June 30, 2003, after giving effect to the transactions
discussed in the overview of the pro forma data beginning on page P-1 of this
prospectus. For a discussion of the adjustments made in presenting such pro
forma financial data, see the "Selected historical and pro forma financial data"
section and the pro forma condensed combined financial data appearing elsewhere
in this prospectus.
Fiscal Year
Ended March 31,
-----------------------------------------
(in thousands, except share and per
share data)
2001 2002 2003 2003
---------- ---------- ------------ ------------
Consolidated statements of operations data (1): (pro forma,
as adjusted)(2)
Revenues.......................................... $ 71 $ 1,911 $ 4,228 $ 7,108
Gross profit (loss)............................... (439) 78 1,127 3,392
Loss from operations.............................. (3,204) (3,417) (2,964) (3,944)
Net loss.......................................... (2,880) (3,610) (3,404) (4,791)
Net loss available to
common stockholders........................... $ (2,880) $ (3,933) $ (4,261) $ (5,843)
Net loss available to common
stockholders per common share -
basic and diluted.............................. $ (0.94) $ (1.21) $ (1.41) $ (0.89)
======== ========= ========= ==========
Weighted average number of common shares
outstanding - basic and diluted................ 3,072,300 3,238,084 3,027,865 6,587,313
Three Months Ended
June 30,
--------------------------------------------------------------
(in thousands, except share and per share data)
2002 2003 2003
--------------- --------------- ---------------
Consolidated statements of operations data (1): (pro forma,
as adjusted)(2)
Revenues.......................................... $ 888 $ 1,421 $ 1,715
Gross profit (loss)............................... 183 552 802
Loss from operations.............................. (692) (631) (994)
Net loss.......................................... (803) (832) (1,243)
Net loss available to
common stockholders........................... $ (998) $ (1,148) $ (1,665)
Net loss available to common
stockholders per common share -
basic and diluted.............................. $ (0.33) $ (0.38) $ (0.25)
========== ========== ==========
Weighted average number of common shares
outstanding - basic and diluted................ 3,042,841 3,021,577 6,581,025
5
(1) The company acquired one IDC from, and assumed certain liabilities of,
BridgePoint International (USA) Inc., or BridgePoint, on December 21, 2001.
The company acquired six IDCs from, and assumed certain liabilities of,
R.E. Stafford, Inc. d/b/a/ ColoSolutions, or ColoSolutions, on November 27,
2002. See "Business - IDCs." The above historical financial data are
derived from our audited and unaudited financial statements and reflect the
results of operations of the acquired IDCs of BridgePoint and ColoSolutions
from the respective dates of such acquisitions. The information regarding
net loss available to common stockholders per common share and weighted
average number of common shares outstanding for the fiscal years ended
March 31, 2001, 2002 and 2003, and for the three months ended June 30, 2002
and 2003, gives effect to the one-for-five reverse stock split of our
common stock, effective as of September 18, 2003.
(2) See notes to our unaudited pro forma condensed combined financial data
beginning on page P-6 of this prospectus.
6
The following table summarizes our balance sheet data at June 30,
2003. The "pro forma" column gives effect to our issuance in July 2003 of
promissory notes in the aggregate principal amount of $175,000, with attached
warrants with an estimated value of $87,500, and our assumed payment of
approximately $437,000 in capital lease obligations from the proceeds of the
June and July 2003 issuances of such notes in the total principal amount of
$1.23 million. In addition to the foregoing, the "pro forma, as adjusted" column
assumes (i) the sale of 1,000,000 shares of our Class A Common Stock in this
offering at an assumed initial public offering price of $5.00 per share, after
deducting underwriting discounts and commissions and estimated offering expenses
payable by us, (ii) our repayment of $1 million in previously incurred secured
indebtedness from the net proceeds of this offering, (iii) our acquisition of
the capital stock of Hollywood SW and (iv) the issuance of 2,202,848 additional
shares of Class A Common Stock, upon and subject to the completion of this
offering, to a principal stockholder of ours in exchange for all of its
outstanding shares of Series A and Series B Preferred Stock, including accrued
dividends thereon, and through the exercise and exchange of certain warrants
held by it (see "Related party transactions"). See "Use of proceeds."
At June 30, 2003
-------------------------------------------------
(in thousands)
Pro forma,
Actual Pro forma as adjusted
------------- -------------- --------------
Consolidated balance sheet data:
Cash and cash equivalents........................... $ 1,407 $ 1,145 $ 1,021
Working capital (deficit)........................... (406) (405) (351)
Total assets........................................ 10,124 9,862 17,808
Current portion of notes payable.................... 1,325 1,325 839
Capital lease obligations........................... 437 - -
Long-term debt, net of current
portion........................................... 2,165 2,253 4,744
Total liabilities................................... 5,884 5,535 8,136
Mandatorily redeemable, convertible
preferred stock................................. 3,137 3,137 -
Total stockholders' equity.......................... $ 1,103 $ 1,190 $ 9,672
7
Risk factors
An investment in our Class A Common Stock involves a high degree of
risk and uncertainty. You should carefully consider the risks described below
and the information contained elsewhere in this prospectus before deciding to
invest. The risks described below are not the only ones facing our company.
Additional risks not presently known to us or that we presently consider
immaterial may also adversely affect our company. If any of the following risks
occur, our business, financial condition, results of operation and prospects
could be materially adversely affected.
Risks relating to our existing and new businesses
We have incurred losses since our inception and our financial condition has
limited our development and resulted in a going concern qualification from our
auditors.
We have generated limited revenues to date, have incurred losses and
generated negative cash flows since our inception and have financed our
operations principally through borrowings and equity investments. We incurred
net losses of $2.9 million, $3.6 million and $3.4 million in the fiscal years
ended March 31, 2001, 2002 and 2003, respectively. We incurred a net loss of
$832,000 for the three months ended June 30, 2003. To date, we have incurred
uninterrupted quarterly losses from operations. As of June 30, 2003, we had a
working capital deficit of $406,000 and cash and cash equivalents of $1.4
million, we had an accumulated deficit of $10.7 million and, from inception
through such date, we had used $6 million in cash for operating activities. Our
net losses and negative cash flows are likely to continue for the foreseeable
future. Our financial condition has limited somewhat the development of our
business, required an increase in our debt and resulted in a going concern
explanatory paragraph in the report on our consolidated financial statements for
the fiscal years ended March 31, 2002 and 2003 from our independent auditors.
A high percentage of the costs of our data centers (all of which we
lease) are fixed and our profitability, accordingly, is dependent upon us
achieving a sufficient volume of business from our customers to help offset
those costs. If we cannot achieve a high enough volume, we likely will incur
additional net and operating losses. We may be unable to continue our business
as presently conducted unless we obtain funds from additional financings.
Moreover, if we cannot complete this offering, we will not be able to close our
acquisition of Hollywood SW. See "Risk factors" relating to our acquisition of
Hollywood SW beginning on page 9.
Our net losses and negative cash flows may increase as and to the
extent that we increase the number and, possibly, the size of our data centers,
increase our sales and marketing activities, enlarge our customer support and
professional services and acquire additional businesses. These efforts may prove
to be more expensive than we currently anticipate, which could further increase
our losses. We must significantly increase our revenues in order to become
profitable. We cannot predict when, or if, we will become profitable. Even if we
achieve profitability, we may not be able to sustain it. If we cannot generate
operating income or positive cash flows in the future, we will be unable to meet
our working capital requirements, subject to any ability to obtain debt or
equity financings.
Our experience in operating data centers is limited, which may affect our
ability to generate sufficient revenues to achieve profitability.
We were incorporated on March 31, 2000; our first Internet data center,
or IDC, became operational in December 2000. Our operating history through June
30, 2003 consisted of less than three years of IDC operations. We have a limited
history upon which an evaluation of our business and prospects can be based. In
addition, the overall business of operating IDCs is relatively new, having
developed, to our knowledge, as recently as only 1995. Our lack of operating
experience could result in:
8
increased operating and capital costs; an inability to effect a viable growth
strategy; service interruptions for our customers; and an inability to attract
and retain customers. In addition, our long-term business strategy calls for us
over time to offer higher margin, value-added services to our customers. We do
not have meaningful experience in developing, implementing or marketing these
services. Accordingly, our IDCs may not generate sufficient revenues for us to
achieve profitability. We cannot assure you that we will be successful in
providing additional services or, even if we do provide them, that they will not
result in additional losses.
We will have two subsidiaries conducting business in areas in which we have
little experience and in which we may not be successful because those areas may
not complement our data center operations.
In addition to our data center operations, we have determined to expand
into two new business areas: (a) providing back office transactional software
for distributors and exhibitors of filmed and digital entertainment through our
acquisition of Hollywood SW; and (b) providing software and systems for the
delivery of digital entertainment, such as movies, to movie theaters and other
venues through our 80%-owned subsidiary, Access Digital Media, Inc. See
"Business - Hollywood Software" and " - Access Digital Media, Inc." We have
little experience in these new areas of business. Neither of these new
businesses is directly related to our data center operations and we cannot
assure you that either will complement our data center operations, or vice
versa. We also cannot assure you that we will be able successfully to operate
these businesses, particularly in the case of Hollywood SW. Our efforts to
expand into these two new business areas may prove costly and time-consuming and
may divert a considerable amount of resources from our data center operations.
Our acquisition of Hollywood SW is conditioned on our receipt of at least $3
million in net proceeds from this offering and the satisfaction of other
conditions, which, if they are not satisfied, would prevent this offering from
being consummated.
The closing of our acquisition of Hollywood SW is subject to several
conditions, the principal one of which is our receipt of at least $3 million in
net proceeds from this offering. Assuming an initial public offering price of
$5.00 per share, we estimate the net proceeds of this offering will be $3.32
million. See "Use of proceeds." The remaining cash portion of the purchase price
for Hollywood SW is $2.45 million. In addition, we estimate that the expenses
related to this transaction will be $155,000. We cannot assure you that we will
receive net proceeds of at least $3 million or be able to satisfy the other
conditions to closing of the acquisition or that the sellers will sell their
capital stock. Because this offering is conditioned upon our acquisition of
Hollywood SW, it will not be consummated if either we or the sellers of
Hollywood SW do not, for any reason, close on the sale of Hollywood SW.
You will incur ownership dilution as a result of our proposed acquisition of
Hollywood SW.
The purchase price for Hollywood SW consists of cash, 8% promissory
notes and shares of our Class A Common Stock. The sellers of Hollywood SW's
common stock will be issued restricted shares of our Class A Common Stock that
may not be sold or otherwise disposed of during a lock-up period of up to 18
months from the date of this prospectus. We have agreed to ensure that such
shares have a prescribed value by, if necessary, issuing to them additional
shares of Class A Common Stock if the value of our Class A Common Stock declines
below certain levels. We have agreed also to pay the sellers an additional
purchase price for each of the three years after the closing of the Hollywood SW
acquisition if certain annual earnings targets for Hollywood SW's business are
achieved, consisting of additional cash, notes payable and shares of Class A
Common Stock. See "Business - Hollywood Software." As a result of the shares of
our Class A Common Stock that we will, and may additionally issue, you will
experience ownership dilution.
9
Our acquisition of Hollywood SW involves other risks, including our inability to
integrate successfully its business and our assumption of liabilities.
We may not be able to integrate successfully the acquired business into
our existing business. We cannot assure you that we will be able to market the
services provided by Hollywood SW with the other services we provide to
customers of our data centers. Further, integrating Hollywood SW's business may
involve significant diversion of our management time and resources and be
costly. Our acquisition of Hollywood SW also involves the risks that the assets
acquired may prove to be less valuable than we expected and/or that we may
assume unknown or unexpected liabilities, costs and problems. In addition, three
customers accounted for approximately 52% and 60% of its revenues for the fiscal
year ended March 31, 2003 and the three months ended June 30, 2003,
respectively. In entering into the Hollywood SW stock purchase agreement, we
relied on limited representations and warranties of the sellers of Hollywood
SW's capital stock. Although we have contractual and other legal remedies for
losses that we may incur as a result of breaches of their agreements,
representations and warranties, we cannot assure you that our remedies will
adequately cover any losses that we incur.
If we default on the payment of the notes, we may lose ownership of Hollywood
SW.
The notes that we will issue as part of the purchase price of Hollywood
SW, as well as our obligation to pay the sellers of Hollywood SW any additional
purchase price, will be secured by the purchased shares of Hollywood SW's
capital stock. If we were to default on those notes, at any time during their
five-year term, the sellers could seek to recover the portion of the amount owed
to them by taking a variety of remedial measures, including a sale of shares of
the capital stock of Hollywood SW securing the notes, to recover such amounts.
In that event, we would not own all, and may not own even most, of the shares of
Hollywood SW. In addition, as a result of the security interest that we have
granted and other related terms of our acquisition, we will not be able to sell
the capital stock or any of the assets of Hollywood SW without obtaining the
prior consent of the sellers.
Hollywood SW has no patents with respect to its software products and must
compete against other businesses.
Hollywood SW depends for its success on the proprietary nature of its
back office transactional software for distributors in the U.S. Hollywood SW,
however, has no patents with respect to its software. See "Business - Hollywood
Software." We cannot assure you that Hollywood SW can compete effectively or not
suffer from pricing pressure with respect to its existing and developing
products that could adversely affect its ability to generate revenues. If and to
the extent that Hollywood SW cannot compete effectively or it suffers from
pricing pressure, these problems will become our problems as the new owners of
Hollywood SW.
Access Digital Media, Inc. is an early-stage company that may not be able to
successfully market its digital content delivery services.
Access Digital Media, Inc., or AccessDM, our 80%-owned subsidiary, is
an early-stage company. It is expected to provide software and systems for the
delivery of digital content to movie theaters and other venues. We recently
completed development of a working version of this software, with final testing
completed in September 2003. We did not, however, have the personnel to develop
this type of software and we hired outside consultants to assist us. In
addition, we may never be successful in developing software that is commercially
saleable or that our customers will buy. Moreover, other companies that are
attempting to develop similar software may be able to market and sell their
versions before or more cost-effectively than we can.
10
The ability to market AccessDM's services is largely dependent on a concurrent
expansion of digital presentations requiring electronic delivery of digital
content.
Even if we were among the first to develop software and systems for the
delivery of digital content to movie theaters and other venues, the demand for
them will largely depend on a concurrent expansion of the digital presentation
at theaters, which may not occur for several years. See "Business - Access
Digital Media, Inc." There can be no assurance, however, that major movie
studios that currently rely on traditional distribution networks to provide
physical delivery of digital files will adopt a different method, particularly
electronic delivery, of distributing digital content to movie theaters. If the
development of digital presentations and changes in the way digital files are
delivered does not occur, there may be no viable market for AccessDM's software
and systems.
We may continue to have customer concentration in our data center operations and
the loss of one or more of our largest customers could have a material adverse
effect on us.
We expect that we will rely, at least in the near future, upon a
limited number of data center customers for a substantial percentage of our
revenues on a per facility basis and may continue to have customer concentration
company-wide. In fiscal year 2003, our four largest IDC customers accounted for
approximately 60% of our revenues (our largest customer, KMC Telecom, accounted
for approximately 17% of our revenues for such year). For the three-month period
ended June 30, 2003, our four largest IDC customers accounted for approximately
69% of our revenues (our largest customer, KMC Telecom, accounted for
approximately 34% of our revenues for such period). A loss of or decrease in
business from one or more of our largest customers for any reason could have a
material adverse effect on our business, financial condition and results of
operations. In addition, because customers entering into contracts covering
multiple facilities may have a significant impact on our revenues, they may
obtain pricing concessions from us that reduce our gross profit margins.
An inability to obtain necessary financing would have a material adverse effect
on our financial condition, operations and prospects.
The extent of our capital requirements is uncertain. Our capital
requirements may vary significantly from what we currently project and be
affected by unforeseen delays and expenses. The problems, delays, expenses and
difficulties frequently encountered by similarly-situated companies, as well as
changes in economic, regulatory or competitive conditions, may lead to cost
increases that make the net proceeds of this offering (plus any operating cash
and cash on hand) insufficient to fund our operations for the next 12 months and
beyond. If we encounter any of these problems or difficulties or have
underestimated our operating losses or capital requirements, we may require
significantly more financing than we currently anticipate. We cannot assure you
that we will be able to obtain any required additional financing on terms
acceptable to us, if at all. We will be restricted on the type and amount of
additional indebtedness that we may incur as a result of our acquisition of
Hollywood SW; as part of the purchase price for that acquisition, we will issue
promissory notes to the sellers that will be secured and senior to all
indebtedness during the term of those notes with certain exceptions. See
"Business - Hollywood Software." An inability to obtain necessary financing
would have a material adverse effect on our financial condition, operations and
prospects.
Our plan to acquire additional businesses involves risks, including our
inability successfully to complete an acquisition, our assumption of
liabilities, dilution of your investment and significant costs.
We intend to make further acquisitions of similar or complementary
businesses or assets, including additional IDCs, although there are no
acquisitions identified by us as probable at this time. Even if we identify
appropriate acquisition candidates, we may be unable to negotiate successfully
the terms of the acquisitions, finance them, integrate the acquired business
into our existing businesses and/or
11
attract and retain customers. Completing an acquisition and integrating an
acquired business, including our recently acquired businesses, may require a
significant diversion of management time and resources and involves assuming new
liabilities. Any acquisition also involves the risks that the assets acquired
may prove less valuable than expected and/or that we may assume unknown or
unexpected liabilities, costs and problems. These risks exist in connection with
our proposed acquisition of Hollywood SW. See "Risk factors" relating to our
acquisition of Hollywood SW on pages 9 and 10. Any acquisition of additional
IDCs could require us to retrofit facilities to meet our standards and may pose
difficulties in assimilating customers, technology and personnel from acquired
businesses. We may also experience unforeseen delays and expenses in adding
IDCs. If we make one or more significant acquisitions in which the consideration
consists of our capital stock, your equity interest in our company could be
diluted, perhaps significantly. If we were to proceed with one or more
significant acquisitions in which the consideration included cash, we could be
required to use a substantial portion of our available cash, including any
remaining net proceeds of this offering, or obtain additional financing to
consummate them.
We expect competition to be intense and if we are unable to compete
successfully, our business and results of operations will be seriously harmed.
The market for colocation facilities and managed services, although
relatively new, is competitive, evolving and subject to rapid technological and
other changes. We expect the intensity of competition to increase in the future.
There are no significant barriers to entry into the market for outsourced data
center facilities and companies willing to expend the necessary capital to
create facilities similar to ours can compete in our market. Increased
competition may result in reduced revenues and/or margins and loss of market
share, any of which could seriously harm our business. Historically, many
companies that had substantially greater resources than us did not succeed in
the data center and managed services business. In order to compete effectively,
we must differentiate ourselves from existing providers of space for
communications equipment and web-hosting companies.
Many of our current and potential competitors have longer operating
histories and greater financial, technical, marketing and other resources than
us, which may permit them to adopt aggressive pricing policies. As a result, we
may suffer from pricing pressures that could adversely affect our ability to
generate revenues and our results of operations. Many of our competitors also
have significantly greater name and brand recognition and a larger customer base
than us. We may not be able to compete successfully with our competitors. If we
are unable to compete successfully, our business and results of operations will
be seriously harmed.
We face the risks of an early-stage company in a new and rapidly evolving
market.
We have encountered and will continue to encounter the challenges,
uncertainties and difficulties frequently experienced by early-stage companies
in new and rapidly evolving markets, including a lack of operating experience;
net losses; lack of sufficient customers; insufficient revenues and cash flow to
be self-sustaining; necessary capital expenditures; an unproven business model;
a changing business focus; and difficulties in managing rapid growth. This is
particularly the case as and to the extent that we change our business focus to
new areas. See "Business - business strategy." We cannot assure you that we will
ever be successful or profitable.
Many of our corporate actions may be controlled by our officers, directors and
principal stockholders; these actions may benefit these principal stockholders
more than our other stockholders.
Our directors, executive officers and principal stockholders will
beneficially own, in the aggregate, approximately 70% of our outstanding common
stock immediately after completion of this offering. In particular, A. Dale
Mayo, our President and Chief Executive Officer, holds 1,005,811 shares of Class
B Common Stock, which represent approximately 56% of our total voting stock (62%
12
immediately after completion of this offering). These stockholders, and Mr. Mayo
himself, will have significant influence over our business affairs, with the
ability to control matters requiring approval by our stockholders, including
elections of directors and approvals of mergers or other business combinations.
Our Class B Common Stock entitles the holder to ten votes per share. The shares
of Class A Common Stock have one vote per share. See "Description of securities
- common stock." Also, certain corporate actions directed by our officers may
not necessarily inure to the proportional benefit of other stockholders of our
company; under his employment agreement, for example, Mr. Mayo is entitled to
receive cash bonuses based on our revenues, regardless of our earnings, if any.
See "Management - employment agreements."
We have a new management team and our success will significantly depend on our
ability to attract and retain key personnel.
All of our senior management team joined us in 2000. Although our
management team has significant business experience, most of the members of the
team have worked together for only a limited period. Our ability effectively to
execute our business plan depends, in large part, on our management team's
ability to operate well together; otherwise, our business, results of operations
and prospects may be materially and adversely affected.
Our success will depend in significant part upon the continued services
of our key technical, sales and senior management personnel. If we lose one or
more of our key employees, we may not be able to find a suitable replacement(s)
and our business and results of operations could be adversely affected. In
particular, our performance depends significantly upon the continued service of
A. Dale Mayo, our President and Chief Executive Officer, whose experience and
relationships in the movie theater industry are integral to our business,
particularly in the business areas of Hollywood SW and AccessDM. Although we
have obtained a $5 million key-man life insurance policy in respect of Mr. Mayo,
the loss of his services would have a material and adverse effect on our
business, operations and prospects. We also will rely on the experience and
expertise of Russell J. Wintner, whom we expect to become AccessDM's President
and Chief Operation Officer, and the two co-founders of Hollywood SW, David
Gajda and Robert Jackovich, who will continue to manage Hollywood SW's
day-to-day operations. See "Management." In addition, our future success will
depend upon our ability to hire, train, integrate and retain qualified new
employees.
Service and other interruptions could lead to significant costs and disruptions
that could reduce our revenues and harm our reputation and financial results.
Our facilities and our customers' equipment are vulnerable to damage
from human error, physical or electronic security breaches, power loss, other
facility failures, fire, earthquake, water damage, sabotage, vandalism and
similar events. In addition, our customers would be adversely affected by the
failure of carriers to provide network access to our facilities as a result of
any of these events. Moreover, we use an internally-developed, standard facility
design and are installing substantially the same equipment at each of our
facilities; flaws in our design or equipment would affect most (or even all) of
our facilities. Any of these events or other unanticipated problems could
interrupt our customers' ability to provide services from our facilities. This
could damage our reputation, make it difficult to attract new and retain
customers and cause our customers to terminate their contracts with us and to
seek damages. Any of these events could have a material adverse effect on our
business, financial condition and prospects.
We depend on relationships with third parties, which, if not maintained, may
adversely affect our ability to provide services to our data centers.
We are not a communications carrier and, therefore, we rely
substantially on third parties to provide our customers with access to voice,
data and Internet networks. We must maintain relationships
13
with third-party network providers in order to offer our data center customers
access to a choice of networks. Many carriers have their own data center
facilities and may be reluctant to provide network services at our data centers.
As a result, some carriers may choose not to connect their services to our data
centers. We do not own any real property and depend on our ability to negotiate
favorable lease terms with the owners of our data center facilities. The use of
our IDCs is limited to the extent that we do not extend or renew our leases, in
which case we might not be able to accommodate our customers, particularly if we
were unable to relocate timely to a comparable facility.
The availability of an adequate supply of electrical power and the
infrastructure to deliver that power is critical to our ability to attract and
retain customers and achieve profitability. We rely on third parties to provide
electrical power to our data centers, and cannot be certain that these parties
will provide adequate electrical power or that we will have the necessary
infrastructure to deliver such power to our customers. If the electrical power
delivered to our facilities is inadequate to support our customers' requirements
or if delivery is not timely, our results of operations and financial condition
may be materially and adversely affected.
We depend on ManagedStorage International, Inc., or MS, to provide
managed storage services to our customers. We have entered into an agreement
with MS, under which we are permitted to market and resell MS's hardware and
software products under AccessStorage-on-DemandSM. The agreement expires on July
16, 2004 and may be automatically extended for additional one-year periods
unless we or MS provides written notice prior to the expiration of the term. We
cannot assure you that MS will not seek to terminate this agreement. See
"Business - IDCs."
We may have difficulty collecting payments from some of our customers and incur
costs as a result.
We anticipate that a number of our customers will be start-up
companies. In addition, many of our customers are telecommunications companies,
and many telecommunications companies have been experiencing significant
financial difficulties. There is a risk that these companies will experience
difficulty paying amounts owed to us, and we might not be able to collect on a
timely basis all monies owed to us by some of them. Although we intend to remove
customers that do not pay us in a timely manner, we may experience difficulties
and costs in collecting from or removing these customers.
If we do not respond to future advances in technology and changes in customer
demands, our financial condition, prospects and results of operations may be
adversely affected.
The demand for our data centers will be affected, in large part, by
future advances in technology and changes in customer demands. Our success will
also depend on our ability to address the increasingly sophisticated and varied
needs of our existing and prospective customers. Although we have wireless
communications capabilities at our facilities, further development of this
technology could lead to a reduced need for our other products and services. If
future advances in technology result in substantial changes in the standard size
specifications of our customers' equipment, and thereby result in the need for
different dimensions of cage or cabinet space, we may incur additional costs to
retrofit our facilities. As a result, our financial condition, prospects and
results of operations may be adversely affected.
If we fail to manage our growth and expansion effectively, our prospects,
business and results of operations could be seriously harmed.
We are experiencing, and expect to continue to experience, growth in
respect of our planned acquisitions of additional data centers, our customer
base and number of employees. This growth has placed, and we expect it to
continue to place, a significant strain on our financial, management,
operational and other systems and resources, and we cannot assure you that our
systems, resources and controls will be adequate to support further expansion of
our operations. Any failure to manage our growth effectively could seriously
harm our prospects, business and results of operations.
14
We may be subject to environmental risks relating to the on-site storage of
diesel fuel and batteries.
Our data centers contain tanks for the storage of diesel fuel for our
generators and significant quantities of lead acid batteries used to provide
back-up power generation for uninterrupted operation of our customers'
equipment. We cannot assure you that our systems will be free from leaks or that
use of our systems will not result in spills. Any leak or spill, depending on
such factors as the nature and quantity of the materials involved and the
environmental setting, could result in interruptions to our operations and the
incurrence of significant costs, particularly to the extent we incur liability
under applicable environmental laws. This could have a material adverse effect
on our business, financial condition and results of operations.
Risks relating to this offering
The liquidity of our Class A Common Stock is uncertain; the offering price has
been determined by negotiation and may not be indicative of prices that will
prevail in the trading market.
Prior to this offering, there has not been a public market for our
Class A Common Stock. We cannot predict the extent, if any, to which an active
trading market for our Class A Common Stock will develop or be sustained. The
public offering price for the shares has been determined by negotiation between
us and the underwriter, does not necessarily bear any relation to the company's
assets, book value, results of operations or financial condition, or to any
other recognized criterion of value and, therefore, may not be indicative of
prices that will prevail in the trading market. See "Determination of offering
price." You may be unable to resell your shares of Class A Common Stock at or
above their offering price.
Substantial resales of our Class A Common Stock could depress our stock price.
Upon completion of this offering, the 1,000,000 (1,150,000 if the
underwriter's overallotment option is exercised in full) shares of Class A
Common Stock being sold in this offering will be immediately eligible for resale
in the public market, unless purchased by any of our affiliates. Substantially
all of the capital stock (i.e., 93% on a fully-diluted basis) held by our
existing stockholders are subject to agreements with the underwriter restricting
their ability to transfer stock for periods ranging from 12 to 18 months from
the date of this prospectus. When these agreements expire, up to an additional
6,093,936 shares will be eligible for resale in the public market, including
4,725,961 held by our directors, executive officers and principal stockholders.
See "Shares eligible for future resale."
The market price for our Class A Common Stock could decline, perhaps
significantly, as a result of resales of a large number of shares of Class A
Common Stock in the public market after this offering or even the perception
that such resales could occur. In addition, we have a substantial number of
options and warrants outstanding that may be exercised in the future. The
holders of these warrants, as well as holders of our outstanding shares of Class
A Common Stock, have piggy-back registration rights and the holder of shares of
Class A Common Stock issuable in exchange for its shares of preferred stock and
certain warrants has demand and piggy-back registration rights. See "Related
party transactions" and "Description of securities - registration rights." These
factors could also make it more difficult for us to raise funds through future
offerings of our equity securities.
You will incur substantial dilution as a result of this offering and certain
future equity issuances.
The initial public offering price is significantly higher than the per
share as adjusted, pro forma net tangible book value of our common stock.
Investors purchasing Class A Common Stock in this offering will, on a pro forma,
as adjusted basis, incur immediate and substantial dilution of $5.06 per share.
See "Dilution." In addition, we have a substantial number of options and
warrants to acquire
15
shares of Class A Common Stock outstanding at exercise prices significantly
below the initial public offering price. To the extent that these options or
warrants are exercised, there will be further dilution to investors in this
offering.
Our management may fail to use the net proceeds from this offering effectively,
which could have a material adverse effect on our business, financial condition,
prospects and results of operations.
We will use a substantial portion of the net proceeds (i.e.,
approximately $2.6 million, or 78%) of this offering to acquire Hollywood SW.
Our management will have discretion, however, in applying the remainder of the
net proceeds. Allocation of the net proceeds is subject to future economic
conditions, our financial condition, changes in our business plan and our
responses to competitive pressures. See "Use of proceeds." Accordingly, our
management could apply the net proceeds in a manner that investors did not
expect. The failure of our management effectively to use these net proceeds
could have a material adverse effect on our business, financial condition,
prospects and results of operations.
Provisions of our certificate of incorporation and Delaware law could make it
more difficult for a third party to acquire us.
Provisions of our certificate of incorporation, as well as of Section
203 of the Delaware General Corporation Law, or the DGCL, could make it more
difficult for a third party to acquire us, even if doing so might be beneficial
to our stockholders.
Our certificate of incorporation authorizes the issuance of 15,000,000
shares of preferred stock. The terms of our preferred stock may be fixed by the
company's board of directors without further stockholder action. The terms of
any outstanding series or class of preferred stock may include priority claims
to assets and dividends and special voting rights, which could adversely affect
the rights of holders of our Class A Common Stock. The future issuance(s) of
preferred stock could make the takeover of the company more difficult,
discourage unsolicited bids for control of the company in which our stockholders
could receive premiums for their shares, dilute or subordinate the rights of
holders of Class A Common Stock and adversely affect the trading price of our
Class A Common Stock.
Under Section 203 of the DGCL, Delaware corporations whose securities
are listed on a national securities exchange, like the AMEX, may not engage in
business combinations such as mergers or acquisitions with any interested
stockholder, defined as an entity or person beneficially owning 15% or more of
our outstanding common stock without obtaining certain prior approvals. As a
result of the application of Section 203, potential acquirers of the company may
be discouraged from attempting to effect an acquisition transaction with the
company, thereby depriving holders of the company's securities of opportunities
to sell or otherwise dispose of the securities at prices above prevailing market
prices.
We may not be able to maintain listing on the AMEX, which may adversely affect
the ability of purchasers in this offering to resell their securities in the
secondary market.
Even if our Class A Common Stock qualifies for initial listing on the
AMEX, we cannot assure you that the company will meet the criteria for continued
listing on the AMEX. If the company were unable to meet the continued listing
criteria of the AMEX and became delisted, trading of the Class A Common Stock
could thereafter be conducted in the over-the-counter market in the so-called
"pink sheets" or, if available, the NASD's Electronic Bulletin Board. In such
case, an investor would likely find it more difficult to dispose of, or to
obtain accurate market quotations for, the company's securities.
The AMEX will ordinarily consider suspending dealings in, or delisting
securities from trading for, a company that has (i) sustained losses from
continuing operations and/or net losses in two of its three most recent fiscal
years and has less than $2 million in stockholders' equity, (ii) sustained
losses from continuing operations and/or net losses in three of its four most
recent fiscal years and has less than
16
$4 million in stockholders' equity, (iii) sustained losses from continuing
operations and/or net losses in its five most recent fiscal years and has less
than $6 million in stockholders' equity, (iv) a number of shares publicly held
(exclusive of holdings of officers, directors, controlling stockholders, or
other family or concentrated holdings) that is less than 200,000, (v) a total
number of public stockholders that is less than 300 or (vi) float that is less
than $1 million for more than 90 consecutive days. Under the AMEX rules, a
company's securities may be delisted for failing to meet other criteria as well.
If the shares of Class A Common Stock were delisted from the AMEX, they
may become subject to Rule 15g-9 under the Securities Exchange Act of 1934, as
amended, or the Exchange Act, which imposes sales practice requirements on
broker-dealers that sell such securities to persons other than established
customers and "accredited investors" (generally, persons with net worths in
excess of $1 million or annual incomes exceeding $200,000, or $300,000 together
with their spouses). For transactions covered by this Rule, a broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Application of
this Rule could adversely affect the ability and/or willingness of
broker-dealers to sell the company's securities and may adversely affect the
ability of purchasers in this offering to resell their securities in the
secondary market.
17
Forward-looking statements
This prospectus contains forward-looking statements. These
forward-looking statements include statements about our plans, objectives,
strategies, expectations and intentions and other statements that are not
historical facts. When we use the words "expects," "anticipates," "intends,"
"plans," "could," "might," "believes," "seeks," "estimates" and words of similar
import, we generally are identifying forward-looking statements. Because
forward-looking statements involve various risks and uncertainties, there are
many factors that could cause actual results to differ materially from those
expressed or implied by such statements, including the risk factors discussed
above.
18
Use of proceeds
The estimated net proceeds to us of this offering, assuming an initial
public offering price of $5.00 per share and after deducting underwriting
discounts and commissions and offering expenses payable by us, will be $3.82
million. We intend to use approximately $500,000 of the net proceeds from our
issuances in June and July 2003 of 8% promissory notes in the aggregate
principal amount of $1.23 million to pay a portion of our offering expenses.
Accordingly, such expenses have not been deducted in calculating the net
proceeds to us from this offering. The balance of our offering expenses will be
paid from the gross proceeds of this offering. We anticipate using the estimated
net proceeds as follows:
Use Dollar amount Percentage
--------------------------------------------------------------- -------------- -----------
Payment of the remaining cash portion of the purchase price
for Hollywood SW and related transaction expenses........... $ 2,605,000 68%
Repayment of secured indebtedness incurred in connection with
a previous acquisition...................................... 1,000,000 26%
Working capital for general business purposes.................. 117,000 3%
Marketing costs for AccessDM................................... 100,000 3%
------------- ----
Total...................................................... $ 3,822,000 100%
============= ====
We cannot assure you that the above amounts will be allocated
specifically as set forth above. Allocation of the net proceeds will be subject
to economic conditions, our financial condition, changes in our business plan
and strategy and our response to competitive pressures. Our management will have
discretion to apply net proceeds from this offering in a manner other than as
set forth above. However, completion of this offering is subject to our
acquisition of Hollywood SW, and 78% of the estimated net proceeds are to be
used for such purpose. The indebtedness to be repaid is due and payable on
November 27, 2003, bears interest at the rate of 9% per year and is secured by
all of the assets underlying the IDCs purchased by us from R.E. Stafford, Inc.
d/b/a ColoSolutions, or ColoSolutions. If the underwriter's overallotment option
is exercised, we anticipate using the additional net proceeds for general
business purposes. Pending their ultimate application, the net proceeds will be
invested in interest-bearing securities guaranteed by the U.S. government or its
agencies.
Determination of offering price
Prior to this offering, there has been no public market for the shares
of our Class A Common Stock. The public offering price for the shares of our
Class A Common Stock has been determined by negotiation between our company and
the underwriter. Among the factors considered in determining the public offering
price were our results of operations, our financial position and prospects, the
experience of our management, our revenues and other operating information and
the price-earnings ratios, price-sales ratios, market prices of securities, and
financial and operating information of companies engaged in businesses similar
to ours. The estimated initial public offering price range set forth on the
cover page of this preliminary prospectus is subject to change as a result of
market conditions and other factors.
19
Capitalization
The following table sets forth our capitalization as of June 30, 2003:
(i) on an actual basis;
(ii) on a "pro forma" basis to reflect our issuance in July 2003 of
promissory notes (which bear interest at 8% per year) in the
aggregate principal amount of $175,000, with attached warrants
with an estimated value of $87,500, as well as our assumed
payment of $437,000 in capital lease obligations from the
proceeds of the June and July 2003 issuances of such notes in
the total principal amount of $1.23 million; and
(iii) on an "as adjusted" basis to reflect (in addition to the
foregoing pro forma adjustments) (a) the receipt by us of the
estimated net proceeds of this offering (assuming an initial
public offering price of $5.00 per share), (b) the repayment of
$1 million in previously incurred secured indebtedness using a
portion of the net proceeds of this offering, (c) our issuance
of 400,000 shares of Class A Common Stock and $3 million of
promissory notes as part of the purchase price for Hollywood SW
(see "Business - Hollywood Software") and (d) our issuance of
2,202,848 additional shares of Class A Common Stock to a
principal stockholder of ours in exchange for all of its
outstanding shares of Series A and Series B Preferred Stock,
including accrued dividends thereon, and through the exercise
and exchange of certain warrants (see "Related party
transactions").
You should read this information together with the financial statements
and the notes to those statements appearing elsewhere in this prospectus.
20
As of June 30, 2003
-------------------------------------------------------
(dollar amounts in thousands)
Pro forma,
Actual Pro forma as adjusted
--------------- -------------- ------------------
Notes payable, net of current portion ................ $ 2,165 $ 2,253 $ 4,744
Capital lease obligations, including
current portion.................................. $437 -- --
Current portion of notes payable...................... $ 1,325 $ 1,325 $ 839
------- ------- -------
Redeemable, convertible preferred stock
(Series A and B), par value $.001; 8,500,000 shares
authorized; 8,202,929 shares issued and outstanding,
actual and pro forma; no shares issued, pro forma,
as adjusted........................................ $ 3,137 $ 3,137 $ --
Stockholders' equity:
Common stock (Classes A, B, C and D),
par value $.001; 80,000,000 shares
authorized; 3,021,577 shares (Class A and B)
issued and outstanding, actual
and pro forma; 6,581,025 shares issued and
outstanding, pro forma, as adjusted............. 3 3 7
------- -------- --------
Additional paid-in capital......................... 11,831 11,918 20,396
Deferred stock-based compensation.................. (5) (5) (5)
Accumulated deficit................................ (10,726) (10,726) (10,726)
------- -------- --------
Total stockholders' equity..................... 1,103 1,190 9,672
Total capitalization......................... $8,167 $7,905 $ 15,255
======= ======= ========
------------------------
The table above assumes that no stock options or warrants outstanding
as of June 30, 2003 or granted thereafter are exercised except, as reflected in
the pro forma, as adjusted column, for certain warrants to be exercised by a
principal stockholder of ours (see "Related party transactions"). In addition to
the shares of capital stock outstanding, we may issue shares of our common stock
under the following plans and arrangements:
o 306,397 shares of Class A Common Stock subject to stock
options granted under our 2000 Stock Option Plan and 293,603
shares available for future issuance under such Plan;
o 100,000 shares of Class A Common Stock reserved for issuance
upon exercise of the underwriter's warrants; and
o 460,805 shares of Class A Common Stock reserved for issuance
upon execution of warrants (whose exercise period expires on
completion of this offering), the proceeds of which are to be
used as working capital for general corporate purposes.
See "Description of securities" and "Underwriting."
21
Dilution
At June 30, 2003, the historical net tangible book value of our company
was $2.17 million, or approximately $0.72 per share, based on 3,021,577 shares
of our common stock then outstanding. Net tangible book value per share
represents the amount of our total tangible assets less our total liabilities,
divided by the number of shares of our common stock deemed outstanding. In
arriving at the historical net tangible book value, net intangible assets of
approximately $2,071,000 were deducted. At June 30, 2003, the pro forma net
tangible book value of our company was $2.26 million, or approximately $0.75 per
share. Pro forma net tangible book value per share has been calculated after
giving effect to our issuance in July 2003 of promissory notes (which bear
interest at 8% per year) in the aggregate principal amount of $175,000, with
attached warrants with an estimated value of $87,500, as well as our assumed
payment of $437,000 in capital lease obligations from the proceeds of the June
and July 2003 issuances of such notes in the total principal amount of $1.23
million. Our as adjusted pro forma net tangible book value at June 30, 2003
would have been $5.36 million, or approximately $0.87 per share, based on
6,181,025 shares of our common stock deemed outstanding before giving effect to
the Hollywood SW acquisition, an increase of $0.12 per share attributable to new
investors. The increase in pro forma net tangible book value attributable to new
investors has been calculated after giving effect to (i) the estimated net
proceeds from this offering of $3.32 million, (ii) the repayment of a 9%
promissory note of $1 million and (iii) the issuance of 2,202,848 additional
shares of Class A Common Stock, upon and subject to the completion of this
offering, to a principal stockholder of ours in exchange for all of its
outstanding shares of Series A and Series B Preferred Stock, including accrued
dividends thereon, and through the exercise and exchange of certain warrants
held by it (see "Related party transactions"). After giving effect to the
Hollywood SW acquisition, which includes the issuance of 400,000 shares of Class
A Common Stock and promissory notes in the aggregate principal amount of $3
million, as well as a cash payment (including transaction expenses) of $2.65
million, the adjusted pro forma net tangible book value as of June 30, 2003
would have been $(364,000), or approximately $(0.06) per share, based on
6,581,025 shares of our common stock deemed outstanding. This would represent
an immediate decrease in our pro forma net tangible book value of approximately
$0.81 per share to existing stockholders and an immediate dilution of
approximately $5.06 per share to new investors purchasing shares in this
offering. The following table illustrates the per share dilution:
Assumed initial public offering price
per share............................................. $ 5.00
Pro forma net tangible book value per share as of
June 30, 2003....................................... $ 0.75
Increase in pro forma net tangible book value per
share attributable to new investors................. $ 0.12
Decrease in pro forma net tangible book value
attributable to Hollywood SW acquisition............ $ (0.93)(1)
As adjusted pro forma net tangible book value per
share after this offering........................... $ (0.06)
Dilution per share to new investors....................... $ 5.06
=======
22
-------------------
(1) The decrease in pro forma net tangible book value per share
attributable to the Hollywood SW acquisition reflects the acquisition
of its intangible assets, which include goodwill, non-compete
agreements, customer relationships and capitalized software costs
totaling $7.75 million, and the payment of the purchase price
described above.
The table below sets forth, as of June 30, 2003, on an as adjusted
basis to give effect to the sale of the 1,000,000 shares of Class A Common Stock
offered by this prospectus at the assumed initial public offering price of $5.00
per share, the following information for both our existing stockholders and new
investors purchasing shares in this offering:
- the number of shares of capital stock purchased from us;
- the total consideration paid to us; and
- the average price paid per share.
Shares purchased Total consideration Average
------------------------- --------------------------- price per
Number Percent Amount($) Percent share
--------- ------- ------------ ------- -----------
Existing stockholders............. 4,662,166 82% $ 12,422,750 71% $ 2.66
New investors..................... 1,000,000 18% 5,000,000 29% $ 5.00
--------- -------------
Total.............. 5,662,166 100% $ 17,422,750 100%
========= === ============= ===
The calculations in the above table assume (i) no exercise of any
options or warrants and (ii) the conversion of all outstanding shares of our
Series A and Series B Preferred Stock into 1,640,585 shares of common stock. As
of June 30, 2003, there were outstanding options and warrants to purchase
1,859,999 shares of our Class A Common Stock, with a weighted average exercise
price of $1.18 per share (of which warrants covering 1,553,600 shares, 587,968
of which were then exercisable, had exercise prices of $0.05 per share). To the
extent that any shares of Class A Common Stock are issued pursuant to the
exercise of options or warrants, there may be further dilution to new investors.
Dividend policy
We have never paid any cash dividends on our common stock or preferred
stock and do not anticipate paying any on the common stock in the foreseeable
future. Any future payment of dividends on our common stock will, subject to the
immediately following sentence, be in the sole discretion of our board of
directors. We have agreed to issue, upon and subject to the completion of this
offering, approximately 99,000 shares of our Class A Common Stock as payment of
accrued dividends on the outstanding shares of our Series A and Series B
Preferred Stock held by the holder thereof. See "Related party transactions."
23
Selected historical and pro forma financial data
The summary below sets forth certain selected historical financial
data. The financial data below should be read in conjunction with the historical
financial statements and the notes thereto of our company and of Hollywood SW
appearing elsewhere in this prospectus.
The company. The following tables set forth selected historical
financial data of our company at and for each of the fiscal years ended March
31, 2001, 2002 and 2003, which have been derived from our audited consolidated
financial statements, and at and for the three-month period ended June 30, 2003
and for the three-month period ended June 30, 2002. The financial data for the
three months ended June 30, 2003 and 2002 have not been audited by independent
auditors. However, in the opinion of management, such financial data includes
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein. Interim results are not
necessarily indicative of results for the entire year. When you read the
selected financial data below, it is important that you also read the company's
audited and unaudited consolidated financial statements and the notes to those
statements appearing elsewhere in this prospectus, as well as the section of
this prospectus entitled "Management's discussion and analysis of financial
condition and results of operations."
Access Integrated Technologies, Inc.
(in thousands, except share and per share data)
Fiscal Year Ended
March 31,
---------------------------------------------------------------
2001 2002 2003
----------------- ----------------- -----------------
Consolidated statements of operations data (1):
Revenues.............................. $ 71 $ 1,911 $ 4,228
Costs of revenues..................... 510 1,833 3,101
---------- ----------- ----------
Gross profit (loss)................... (439) 78 1,127
Selling, general and administrative
expenses............................ 2,417 2,267 2,305
Non-cash stock-based compensation..... 294 235 99
Depreciation and amortization......... 54 993 1,687
Loss from operations.................. $ (3,204) $ (3,417) $ (2,964)
Interest income....................... 126 30 13
Interest expense...................... -- (83) (364)
Non-cash interest expense............. -- (140) (282)
Other income.......................... 198 -- 8
Net loss before income taxes.......... $ (2,880) $ (3,610) $(3,589)
Income tax benefit ................... -- -- 185
Net loss.............................. $ (2,880) $ (3,610) $ (3,404)
Preferred stock accretion(2).......... -- (323) (857)
Net loss available to common
stockholders........................ $ (2,880) $ (3,933) $ (4,261)
======== ======== ========
Net loss available to common
stockholders per common
share -basic and diluted............ $ (0.94) $ (1.21) $ (1.41)
========= ========= =========
Weighted average number of common
shares outstanding -
basic and diluted(3)................ 3,072,300 3,238,084 3,027,865
24
Three Months Ended June 30,
----------------------------------
2002 2003
----------------- ------------
Consolidated statements of operations data (1):
Revenues.............................. $ 888 $ 1,421
Costs of revenues..................... 705 869
----------- ----------
Gross profit.......................... 183 552
Selling, general and administrative
expenses............................ 553 558
Non-cash stock-based compensation..... 23 6
Depreciation and amortization......... 299 619
Loss from operations.................. $ (692) $ (631)
Interest income....................... 3 1
Interest expense...................... (66) (116)
Non-cash interest expense............. (48) (80)
Other income (expense)................ -- (6)
Net loss.............................. $ (803) $ (832)
Preferred stock accretion(2).......... (195) (316)
Net loss available to common
stockholders........................ $ (998) $ (1,148)
======== ==========
Net loss available to common
stockholders per common
share -basic and diluted............ $ (0.33) $ (0.38)
========= ==========
Weighted average number of common
shares outstanding -
basic and diluted(3)................ 3,042,841 3,021,577
----------------------
(1) The company acquired one IDC from, and assumed certain liabilities of,
BridgePoint International (USA) Inc., or BridgePoint, on December 21, 2001.
The company acquired six IDCs from, and assumed certain liabilities of,
R.E. Stafford, Inc. d/b/a/ ColoSolutions, or ColoSolutions, on November 27,
2002. See "Business - IDCs." The above financial data are derived from our
audited and unaudited financial statements and reflect the results of
operations of the acquired IDCs of BridgePoint and ColoSolutions from the
respective dates of such acquisitions.
(2) Reflects the accretion of our Series A and Series B Preferred Stock to its
estimated redemption value, as well as the accretion of the beneficial
conversion feature of our Series A Preferred Stock and the cumulative
dividends on the Series A and Series B Preferred Stock.
(3) The information regarding net loss per common share and weighted average
number of common shares outstanding for the fiscal years ended March 31,
2001, 2002 and 2003, and for the three months ended June 30, 2002 and 2003
gives effect to the one-for-five reverse stock split of our common stock,
effective as of September 18, 2003.
25
At March 31,
------------------------------------------
At June 30,
2001 2002 2003 2003
------------ ---------- ------------ --------------
Consolidated balance sheet data:
Cash and cash equivalents.............. $ 2,001 $1,001 $ 956 $ 1,407
Working capital (deficit).............. 845 378 (954) (406)
Total assets........................... 7,104 8,616 9,894 10,124
Current portion of notes payable............... -- 333 1,152 1,325
Capital lease obligations.............. -- 440 513 437
Long-term debt, net of current portion. -- 921 1,730 2,165
Total liabilities.............................. 1,596 3,652 5,355 5,884
Mandatorily redeemable, convertible
preferred stock.............................. -- 251 2,911 3,137
Total stockholders' equity .................... $ 5,508 $4,713 $ 1,628 $ 1,103
Hollywood Software. The following tables set forth selected historical
financial data of Hollywood SW at and for each of the two fiscal years ended
March 31, 2002 and 2003 and at and for the three-month period ended June 30,
2003 and for the three-month period ended June 30, 2002. The financial data for
the three months ended June 30, 2003 and 2002 have not been audited by
independent auditors. However, in the opinion of management, such financial data
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth therein. Interim results
are not necessarily indicative of results for the entire year. Such data have
been derived from, and should be read in conjunction with, the audited and
unaudited financial statements of Hollywood SW and the notes to those statements
appearing elsewhere in this prospectus.
Hollywood Software, Inc.
(in thousands, except share and per share data)
Fiscal Year Ended
March 31,
---------------------------------------------
2002 2003
------------------ -------------------
Statements of operations data:
Revenues.............................................. $ 1,891 $ 1,908
Cost of revenues...................................... 368 319
Gross profit.......................................... 1,523 1,589
Research and development 387 289
Selling, general and administrative expenses.......... 1,176 1,131
-------- -------
Income (loss) from operations......................... (40) 169
Other income (expense)................................ 3 (2)
Net income (loss)..................................... $ (38) $ 118
Net income (loss) per share - basic and diluted....... $ (.00) $ .01
======== =======
Weighted average number of common shares
outstanding - basic................................. 10,000,000 10,000,000
- diluted............................... 10,000,000 10,293,167
26
Hollywood Software, Inc.
(in thousands, except share and per share data)
Three Months Ended
June 30,
---------------------------------------------
2002 2003
------------------ -------------------
Statements of operations data:
Revenues.............................................. $ 582 $ 294
Cost of revenues...................................... 130 44
Gross profit.......................................... 452 250
Research and development 56 148
Selling, general and administrative expenses.......... 250 215
-------- -------
Income (loss) from operations......................... 146 (113)
Net income (loss)..................................... $ 103 $ (102)
Net income (loss) per share - basic and diluted....... $ .01 $ (.01)
======== ========
Weighted average number of common shares
outstanding - basic................................. 10,000,000 10,000,000
- diluted............................... 10,293,167 10,000,000
At March 31,
---------------------------------- At June 30,
2002 2003 2003
-------------- --------------- -----------------
Balance sheet data:
Cash and cash equivalents............... $ 235 $ 262 $ 186
Working capital (deficit)................ (90) (65) (127)
Total assets............................. 864 1,114 944
Long-term obligations.................... 8 -- --
Total liabilities........................ 537 669 601
Total stockholders' equity............... 327 445 343
27
Selected unaudited pro forma condensed combined financial data
The following tables set forth selected unaudited pro forma condensed
combined financial data of our company for the fiscal year ended March 31, 2003,
and at and for the three-month period ended June 30, 2003, after giving effect
to the transactions discussed in the overview of the pro forma data beginning on
page P-1 of this prospectus. The acquisition of Hollywood SW is expected to be
accounted for using the purchase method of accounting and, accordingly, the
assets, liabilities and results of operations of Hollywood SW will be included
in the company's consolidated financial statements subsequent to the acquisition
date.
The following selected unaudited financial data should be read in
conjunction with the audited and unaudited historical financial statements of
our company, Hollywood SW and ColoSolutions and the unaudited pro forma combined
consolidated financial information, including the notes thereto, appearing
elsewhere in this prospectus. The unaudited pro forma condensed combined
information is presented for illustrative purposes only and is not necessarily
indicative of the results of operations or financial position that would have
occurred if the transactions had been completed at the dates indicated, nor is
it necessarily indicative of future results of operations or financial position
of the combined companies.
Selected unaudited pro forma condensed combined financial data
(in thousands, except share and per share data)
Fiscal Year Ended Three Months Ended
March 31, 2003 June 30, 2003
-------------------------- ------------------------
Pro forma condensed combined statement of operations
data (1):
Revenues.......................................... $ 7,108 $ 1,715
Cost of revenues.................................. 3,716 913
----- -------
Gross profit...................................... 3,392 802
Research and development.......................... 289 148
Selling, general and administrative expenses...... 3,760 766
Depreciation and amortization..................... 3,188 876
Loss from operations ............................. (3,944) (994)
Interest expense.................................. (599) (145)
Net loss ......................................... (4,791) (1,243)
------- -------
Preferred stock accretion......................... (1,052) (422)
Net loss available to common stockholders......... (5,843) (1,665)
Net loss available to common stockholders per
common share - basic and diluted................ (0.89) (0.25)
Weighted average number of common
shares for net loss per share
computations - basic and diluted................ 6,857,313 6,581,025
28
At June 30,
2003
---------------
Pro forma condensed combined balance sheet data (1):
Cash and cash equivalents......................... $ 1,021
Working capital................................... (351)
Total assets...................................... 17,808
Current portion of notes payable ................. 839
Long-term debt, net of current portion............ 4,744
Total liabilities................................. 8,136
Mandatorily redeemable, convertible
preferred stock................................. --
Total stockholders' equity ....................... 9,672
--------------------
(1) See notes to our unaudited pro forma condensed combined financial data
beginning on page P-6 of this prospectus.
29
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and related notes appearing elsewhere in this prospectus.
This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in those forward-looking statements as a result of factors described within this
prospectus and other factors. We refer you to the section encaptioned
"forward-looking statements" on page 18 of this prospectus.
Overview
We were incorporated on March 31, 2000 as AccessColo, Inc. In 2001, we
changed our name to Access Integrated Technologies Inc, or AccessIT. We have
been in the business of operating Internet data centers, or IDCs. IDCs are
facilities that, for monthly and other fees, provide our customers with: a
secure environment for their computer and telecommunications equipment; access
to voice and data transmission services from a choice of network providers; and
managed services to monitor their computer and telecommunications equipment and
to store, back-up and protect their programs and data.
We currently operate nine IDCs, or AccessColocentersSM, located in
eight states: Arkansas, Kansas, Maine, New Hampshire, New Jersey, New York,
Texas and Virginia. We developed our first two data centers, located in Jersey
City, New Jersey and Brooklyn, New York in the second half of 2000. We
subsequently acquired seven additional IDCs: we acquired one IDC, located in
Manhattan, New York City, at a cost of $800,000 in December 2001; and we
acquired the other six in one transaction, at a cost of $3.5 million in November
2002. The seven IDCs that we acquired were accounted for as business
combinations under Statement of Financial Accounting Standards No. 141,
"Business Combinations." From our inception through June 30, 2003, all of our
revenues have been derived from monthly license fees and fees from other
ancillary services provided by us at these IDCs. We do not intend to build any
additional IDCs. Instead, we intend to continue expanding our IDC footprint by
acquiring additional, operational IDCs from third parties. We incurred net
losses of $2.9 million, $3.6 million and $3.4 million in the fiscal years ended
March 31, 2001, 2002 and 2003, respectively, and a net loss of $832,000 in the
three months ended June 30, 2003, which resulted in an accumulated deficit of
$10.7 million as of June 30, 2003. We anticipate that, with the acquisition of
Hollywood Software, Inc., or Hollywood SW, and the operation of Access Digital
Media, Inc., our company's results of operations will improve. As we grow,
however, our facility operating costs and general and administrative expenses
will also increase for the foreseeable future. To achieve and sustain profitable
operations, we will need to generate more revenues than we have in prior years.
Critical accounting policies and use of estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Our most significant
estimates relate to revenue recognition, depreciation of fixed assets and
amortization of intangible assets. Actual results could differ from these
estimates. On an on-going basis, we evaluate our estimates, including those
related to the carrying values of our fixed assets and intangible assets. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances made, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
could differ from these estimates under different assumptions or conditions.
30
We believe that the following critical accounting policies and
estimates affect our more significant estimates and judgments used in the
preparation of our consolidated financial statements.
Revenue recognition
Revenues consist of license fees for colocation space, riser access
charges, electric and cross-connect fees, and non-recurring equipment
installation fees. Revenues from colocation, riser access charges, electric and
cross-connect fees are billed monthly and, in accordance with Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," are recognized
ratably over the terms of the contracts, generally two to nine years. Certain
customer contracts contain periodic increases in the amount of license fees to
be paid, and those amounts are recognized as license fee revenues on a
straight-line basis over the term of the contracts. Installation fees are
recognized on a time and materials basis in the period in which the services
were provided and represent the culmination of the earnings process as no
significant obligations remain. Amounts such as prepaid license fees and other
amounts which are collected prior to satisfying the above revenue recognition
criteria are classified as deferred revenues. Amounts satisfying the above
revenue recognition criteria prior to billing are classified as unbilled
revenues.
Business combinations and intangible assets
We have adopted SFAS No. 141 and SFAS No. 142, "Goodwill and other
Intangible Assets." SFAS No. 141 requires all business combinations to be
accounted for using the purchase method of accounting and that certain
intangible assets acquired in a business combination must be recognized as
assets separate from goodwill. SFAS No. 142 addresses the recognition and
measurement of goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 also addresses the initial recognition and measurement
of intangible assets acquired outside of a business combination, whether
acquired individually or with a group of other assets. This statement provides
that intangible assets with indefinite lives and goodwill will not be amortized
but will be tested at least annually for impairment. If an impairment is
indicated, then the asset will be written down to its fair value, typically
based upon its future expected discounted cash flows. As of March 31, 2003 and
June 30, 2003, our intangible assets consisted of a customer agreement
determined to be a finite-lived intangible asset, which is estimated to have a
useful life of three years, consistent with the term of such agreement.
Property and equipment
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is recorded using the straight-line method over the
estimated useful lives of the respective assets. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life of the
improvement. Maintenance and repair costs are charged to expense as incurred.
Major renewals, improvements and additions are capitalized.
Impairment of long-lived assets
Our company reviews the recoverability of its long-lived assets on a
periodic basis in order to identify business conditions which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on our ability to recover the carrying value of our long-lived assets from
expected future undiscounted cash flows. If the total of expected future
undiscounted cash flows is less than the total carrying value of the assets, a
loss is recognized for the difference between the fair value (computed based
upon the expected future discounted cash flows) and the carrying value of the
assets.
31
Description of line items
The following is a description of certain line items from our
statements of operations:
o Our revenues include charges for monthly license fees for colocation
space, electric fees, riser access charges and installation fees.
o Our cost of revenues consists of facility operating costs such as
rent, utilities, real estate taxes, repairs and maintenance,
insurance and other related expenses.
o Selling, general and administrative expenses consist primarily of
salaries and related personnel costs, professional fees, advertising
and marketing costs, and our corporate headquarters facility costs.
o Non-cash, stock-based compensation represents the value of employee
and non-employee stock options and restricted stock grants,
amortized over the vesting periods (if any).
o Non-cash interest expense represents the accretion of the value of
warrants attached to our one- and five-year promissory notes.
o Income tax benefit represents the net proceeds from the sale of the
company's New Jersey net operating loss carryforwards, or NOLs.
New subsidiary
Access Digital Media, Inc., or AccessDM, a Delaware corporation, was
formed in February 2003 as a wholly owned subsidiary. AccessDM has completed
development of its proprietary software enabling the delivery of digital content
- such as movies, advertising, trailers and alternative content such as
concerts, seminars and sporting events - to movie theaters and other venues
equipped with digital projection equipment.
AccessDM has been, and will continue in the foreseeable future to be,
financed principally by AccessIT, which owned all of AccessDM's capital stock at
June 30, 2003. In March 2003, we engaged The Casey Group, Inc., a software
consulting company, to help develop software designed to enable the delivery of
digital content. As compensation for assisting us in the development of the
software, the cost of which The Casey Group determined to be $174,000 (subject
to a final valuation analysis), we have agreed to issue to The Casey Group 8,700
shares of our Class A Common Stock, subject to and upon completion of this
offering before December 31, 2003. If we do not complete this offering by
December 31, 2003, we may be required to pay, in lieu of issuing shares of our
Class A Common Stock, $43,500 to The Casey Group. Also, in September 2003, as a
result of the final testing of the software, we issued 750,000 shares of
AccessDM's common stock to The Casey Group, representing, after giving effect to
such issuance, 20% of AccessDM's outstanding capital stock. The operations of
AccessDM will be controlled by AccessIT, and certain members of the senior
management of AccessIT are also members of the senior management of AccessDM.
All intercompany transactions between AccessIT and AccessDM are intended to be
conducted as transactions on competitive terms, including the terms of any
future investments by AccessIT in AccessDM and the terms of any intercompany
sales. See "Business - Access Digital Media, Inc."
32
Pending acquisition
On July 17, 2003, we signed a stock purchase agreement with Hollywood
SW and its stockholders. Pursuant to this agreement, we will acquire all of
Hollywood SW's capital stock in exchange for an initial purchase price
consisting of $2.5 million in cash, $50,000 of which we paid in July 2003, $3
million in 8% promissory notes and 400,000 shares of our Class A Common Stock.
We may pay an additional purchase price in each of the three years following the
closing of the Hollywood SW acquisition if certain annual earnings targets are
achieved. We also have agreed to issue additional shares of our Class A Common
Stock if the value of our Class A Common Stock declines below a certain level.
See "Business - Hollywood Software." We have incurred approximately $155,000 in
transaction costs associated with this acquisition. For the years ended March
31, 2002 and 2003, Hollywood SW generated revenues of approximately $1.9 million
in each year and had net income (loss) of ($38,000) and $118,000, respectively.
For the three months ended June 30, 2003, Hollywood SW generated revenues of
$294,000 and had a net loss of $(102,000). We believe that completion of this
acquisition is probable.
Results of operations
Year ended March 31, 2002 compared to year ended March 31, 2003
Revenues. Our total revenues were $4.2 million for the fiscal year
ended March 31, 2003 compared to $1.9 million for the year ended March 31, 2002,
an increase of 121%. This increase was primarily attributable to the $1.5 in
incremental revenues derived from the six additional data centers that we
acquired in fiscal year 2003, as well as a full year of operations from an IDC
we acquired in fiscal year 2002. In December 2001, we acquired one data center
located in Manhattan, NY and, in November 2002, we acquired six data centers at
various locations in the United States. Our average revenue per square foot for
colocation space as of March 31, 2003 had increased by 10% from March 31, 2002,
primarily due to contracts that we acquired in November 2002 as part of our
acquisition of six data centers from ColoSolutions. The remainder of our
increase in revenues came from new customers at our first two data centers,
principally including AT&T, NorVergence and Con Edison Communications.
Cost of revenues. Our cost of revenues was $3.1 million for the year
ended March 31, 2003 compared to $1.8 million for the year ended March 31, 2002,
an increase of 69%. This increase was primarily attributable to $1 million of
additional rent, utilities, real estate taxes and other operating expenses of
the seven locations acquired by us in the last two fiscal years. The remaining
increase of $300,000 was due to increases in utilities, repairs and maintenance
and other expenses at our two initial AccessColocentersSM. Our IDC located in
Brooklyn, NY became operational during the year ended March 31, 2002 and we have
experienced higher operating costs as that location became increasingly
utilized, consistent with the increase in customer activity.
Selling, general and administrative expenses. Our selling, general and
administrative expenses were approximately $2.3 million for each of the years
ended March 31, 2002 and 2003. Advertising and marketing expenditures declined
by $200,000 in fiscal year 2003 due, in part, to the recognition in fiscal year
2002 of $143,000 of previously deferred sales commissions in respect of a former
customer. This decline was partially offset by smaller increases in personnel,
insurance and other costs, and also the establishment in our latest fiscal year
of a reserve for doubtful accounts of $12,000. As of each of March 31, 2002 and
2003, we had 11 employees, one of whom was part-time.
Non-cash, stock-based compensation. We recorded non-cash, stock-based
compensation of $235,000 and $99,000 for the years ended March 31, 2002 and
2003, respectively. These amounts primarily represent the fair value of stock
options granted to non-employees in exchange for goods and services, amortized
over the three-year vesting period of the options. The types of services
performed by non-employees in exchange for stock options included advisory
services on real estate matters, and advertising and marketing. The fair value
of these stock options was determined using the Black-Scholes option-pricing
model. Also included in such expense for the year ended March 31, 2003 is
$48,000 related to our grant of a total of 60,000 shares of our Class A Common
Stock to four of our employees.
33
Depreciation and amortization. Depreciation and amortization were
$993,000 and $1.7 million for the years ended March 31, 2002 and 2003,
respectively, an increase of 70% in 2003. The increase is primarily attributable
to the $900,000, or 14%, increase in property and equipment, and the addition of
$2.7 million of intangible assets due to our November 2002 acquisition of six
additional IDCs. Also contributing to this increase was our first full year of
ownership of the IDC that we acquired in December 2001.
Interest expense. Interest expense was $83,000 and $364,000 for the
years ended March 31, 2002 and 2003, respectively. The increase was due to the
$1.82 million of five-year promissory notes, that we issued in the second half
of fiscal 2002, and an additional $1.36 million of such notes that we issued in
fiscal 2003, bringing the aggregate principal of such notes to $3.175 million,
at March 31, 2003. The five-year promissory notes bear interest at 8% per year,
with interest payable quarterly. Additionally, we issued a secured $1 million
note payable in connection with our November 2002 acquisition of six IDCs. This
note payable has a one-year term and bears interest at an annual rate of 9%,
payable quarterly.
Non-cash interest expense. Non-cash interest expense was $140,000 and
$282,000 for the years ended March 31, 2002 and 2003, respectively. Non-cash
interest expense results from the accretion of the value of warrants attached to
our one- and five-year promissory notes (which bear interest at 8% per year).
The increase in non-cash interest expense is due to the initial issuance of such
notes in the second half of fiscal 2002, and the issuance of an additional $1.36
million of such notes with attached warrants in fiscal 2003.
Income tax benefit. During the year ended March 31, 2002, we
participated in the New Jersey Technology Tax Transfer program, through which
technology-oriented businesses may sell their New Jersey NOLs to other
companies. In December 2002, we received $185,000, net of fees and expenses,
from the sale of our New Jersey NOLs.
Gross Profit. Gross profit was $78,000 and $1.1 million for the years
ended March, 31, 2002 and 2003, respectively. The increase was attributable to a
$530,000 increase at our Jersey City, New Jersey IDC as a result of new customer
additions, and $500,000 was attributable to gross profit generated at the six
IDC locations we acquired in November 2002.
Net loss. As a result of the foregoing, the Company had net losses of
$3.6 million and $3.4 million for the fiscal years ended March 31, 2002 and
2003, respectively.
Three months ended June 30, 2002 compared to three months ended June 30, 2003
Revenues. Our revenues were $1.4 million for the three months ended
June 30, 2003 as compared to $888,000 for the corresponding period of 2002, an
increase of 60%. This increase was primarily attributable to the $463,000 in
incremental revenues derived from the six additional data centers that we
acquired in November 2002 from ColoSolutions. Our average revenue per square
foot for colocation space as of June 30, 2003 had increased by 7% from June 30,
2002, primarily due to the contracts we acquired in November 2002 as part of our
acquisition of the six data centers from ColoSolutions. The remainder of our
increase in revenues came primarily from additional datacenter space licensed by
NorVergence, an existing customer.
Cost of revenues. Our cost of revenues was $869,000 for the three
months ended June 30, 2003 compared to $705,000 for the corresponding period of
2002, an increase of 23%. The increase was primarily attributable to $114,000 of
additional rent, utilities, real estate taxes and other operating expenses from
the six data centers that we acquired in November 2002. The remaining increase
of $50,000 was primarily due to increased utilities and repairs and maintenance
at our Brooklyn, NY AccessColocenterSM, as that location became operational
during the fiscal year ended March 31, 2002 and is experiencing higher operating
costs as that location becomes increasingly utilized, consistent with the
increase in customer activity.
34
Selling, general and administrative expenses. Our selling, general and
administrative expenses were $553,000 and $558,000 for the three month periods
ended June 30, 2002 and 2003, respectively. Personnel costs increased by $18,000
due to higher revenue-based bonuses paid to our Chief Executive Officer, and we
increased our allowance for doubtful accounts by $5,000 in our current fiscal
year. Advertising and marketing expenses declined by $14,000 in the three-month
period ended June 30, 2003 from the corresponding period due to spending
reductions. As of each of June 30, 2002 and 2003, our company employed 11
employees, one of whom was part-time.
Non-cash, stock-based compensation. We recorded non-cash, stock-based
compensation of $23,000 and $6,000 for the three months ended June 30, 2002 and
2003, respectively. These amounts primarily represent the fair value of stock
options granted to non-employees in exchange for goods and services, amortized
over the three-year vesting period of the options. The decrease is due to the
completion of vesting of the majority of these stock options. The services
performed by non-employees in exchange for such stock options included advisory
services on real estate matters, and advertising and marketing. The fair value
of these stock options was determined using the Black-Scholes option-pricing
model.
Depreciation and amortization. Depreciation and amortization was
$299,000 and $619,000 for the three months ended June 30, 2002 and 2003,
respectively, an increase of 107%. The increase is primarily attributable to the
$836,000, or 12%, increase in property and equipment, and the addition of $2.7
million of intangible assets as a result of the November 2002 acquisition of six
IDCs.
Interest expense. Interest expense was $66,000 and $116,000 for the
three months ended June 30, 2002 and 2003, respectively. The increase was due to
an additional $2.155 million principal amount of five-year promissory notes
issued since July 2002, bringing the aggregate principal amount of such notes to
$4.230 million, at June 30, 2003. The five-year promissory notes bear interest
at an 8% annual rate, with interest payable quarterly.
Non-cash interest expense. Non-cash interest expense was $48,000 and
$80,000 for the three months ended June 30, 2002 and 2003, respectively.
Non-cash interest expense resulted from the accretion of the value of warrants
attached to our one- and five-year promissory notes (which bear interest at 8%
per year). The increase in non-cash interest expense is due to the issuance of
an additional $2.155 million in principal amount of such notes with attached
warrants since July 2002.
Gross Profit. Gross profit was $183,000 and $552,000 for the three
months ended June 30, 2002 and 2003, respectively, reflecting an increase of
202%. The increase was attributable primarily to $349,000 of gross profit earned
at the six IDC locations that we acquired in November 2002.
Net loss. As a result of the foregoing, the Company had net losses of
$803,000 and $832,000 for the three months ended June 30, 2002 and 2003,
respectively.
Liquidity and capital resources
We have incurred operating losses and negative cash flows 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 and the issuance of our one- and five-year promissory notes
(which bear interest at 8% per year). From inception through June 30, 2003, we
had raised approximately $8 million, $4.5 million and $4.2 million through sales
of our common stock, preferred stock and promissory notes, respectively.
Additionally, in November 2002, we issued a $1 million secured note (which bears
interest at 9% per year) to a seller in connection with the acquisition of six
IDCs from ColoSolutions. We have no borrowings or line of credit arrangements
with banks or other financial institutions.
35
On July 17, 2003, we signed an agreement to purchase all of the
outstanding capital stock of Hollywood Software, or Hollywood SW. As part of the
purchase price for the acquisition of Hollywood SW, we will issue, $3 million of
8% promissory notes to the sellers, which notes will be secured and senior, with
certain exceptions, to all indebtedness during the term of those notes. Our
obligations to repay our promissory notes and to pay any additional purchase
price will be secured by a pledge of all of Hollywood SW's capital stock. See
"Business - Hollywood Software."
As of June 30, 2003, we had cash and cash equivalents of $1.4 million.
Our working capital deficiency at June 30, 2003 was ($406,000). As of March 31,
2002 and 2003, we had cash and cash equivalents of $1 million and $956,000,
respectively; as of March 31, 2002, we also had restricted cash of $951,000 to
cover a mechanic's lien in connection with a litigation instituted against us,
which was subsequently released. Our working capital (deficiency) at March 31,
2002 and 2003 was $378,000 and ($954,000), respectively.
During the year ended March 31, 2003, we raised $125,000, $2.5 million
and $1.4 million through sales of our common stock, preferred stock and
promissory notes, respectively, and we repaid promissory notes in the principal
amount of $333,000. During the year ended March 31, 2002, we raised $2 million
and $3.1 million through the sales of our preferred stock and promissory notes,
respectively, and we repaid promissory notes in the principal amount of $1
million.
During the three months ended June 30, 2002, we raised $125,000 and
$260,000 through sales of common stock and promissory notes, respectively, and
we repaid promissory notes of $333,000 in principal. In June and July 2003, we
issued promissory notes (which bear interest at 8% per year) in the aggregate
principal amount of $1.23 million, $1.055 million of which was raised in June
2003 and $175,000 of which was raised in July 2003; approximately $437,000 of
the proceeds from the issuance of the promissory notes is being used to pay
capital lease obligations, $49,000 of which was paid in July 2003, $48,000 of
which was paid in August 2003 and $62,000 of which was paid in September 2003.
Our operating activities resulted in net cash outflows of $456,000 and
$470,000 for the three months ended June 30, 2002 and 2003, respectively. Our
operating activities resulted in net cash outflows of $2.62 million and $761,000
for the years ended March 31, 2002 and 2003, respectively. The $1.86 million
improvement in 2003 was primarily due to a decrease in loss from operations, a
$400,000 security deposit paid in the prior year and an improved accounts
receivable position.
Investing activities used net cash of $143,000 and $58,000 for the
three months ended June 30, 2002 and 2003, respectively, due to additions and
improvements to our IDCs. Investing activities used net cash of $2.2 million and
$2.6 million for the years ended March 31, 2002 and 2003, respectively. Net cash
used in investing activities for the year ended March 31, 2002 was primarily
attributable to the funding of a letter of credit (restricted cash) in the
amount of $951,000 to cover a mechanic's lien in connection with a litigation
instituted by one of the company's former contractors. In July 2002, the
litigation was settled for a cash payment of $750,000 and the restricted cash
was released back to the company. The other components of net cash used in
investing activities for the year ended March 31, 2002 were approximately
$813,000 in construction-related additions to the company's initial two IDCs and
the initial purchase price of $455,000 for our Manhattan, NY AccessColocenterSM.
Net cash used in investing activities for the year ended March 31, 2003 was
primarily in connection with the cash portion of the purchase price of six
additional IDCs acquired in November 2002 for $2.3 million. Additions and
improvements to existing data centers of $290,000 accounted for the remaining
cash used in investing activities for the year ended March 31, 2003. We
anticipate that we will experience an increase in our capital expenditures
consistent with the anticipated growth in operations, infrastructure and
personnel.
36
We have agreed, subject to the completion of this offering, to pay the
underwriter an advisory fee of $4,167 per month for the 12-month period
beginning upon the completion of this offering.
Financing activities contributed cash of $19,000 and $979,000 for the
three months ended June 30, 2002 and 2003, respectively. Most of the cash
contributed during the three months ended June 30, 2002 was used to repay our
remaining one-year promissory notes totaling $333,000 in principal. Cash
contributed during the three months ended June 30, 2003 will be used for
repayment of capital lease obligations, IPO related expenses, and for general
working capital purposes. Net cash provided by financing activities in each of
these periods was primarily from the sales of promissory notes. Financing
activities contributed cash of $3.8 million and $3.4 million for the years ended
March 31, 2002 and 2003, respectively. This contributed cash was used to finance
the IDC acquisitions we have effected, and for general working capital purposes.
Net cash provided by financing activities in each of these periods was primarily
from the sales of preferred stock and promissory notes.
We have acquired equipment under long-term capital lease obligations
that expire at various dates through December 2006. As of June 30, 2003, we had
an outstanding balance of $437,000 in capital lease obligations. These capital
lease obligations covered computer and power generating equipment at our data
centers and our corporate office. All our capital lease obligations were secured
by equipment at the following locations and in the following principal amounts:
certain storage equipment at our Jersey City, New Jersey AccessColocenterSM in
the remaining principal amount of $169,000; telephone equipment at our executive
offices in the remaining principal amount of $30,000: generators at our
Manhattan, New York AccessColocenterSM in the remaining principal amount of
$61,000; and Caterpillar generators at six of our IDCs in the remaining
principal amount of $177,000. As of June 30, 2003, minimum future capital lease
payments (including interest) for the years ended June 30, 2004, 2005, 2006 and
2007 were $128,000, $90,000, $9,000 and $5,000, respectively. In July 2003, we
repaid the capital lease covering generators at our Manhattan, New York
AccessColocenterSM for $49,000. In August 2003, we entered into an agreement to
pay a capital lease covering certain storage equipment at our Jersey City, New
Jersey AccessColocenterSM for payments totaling $228,000 including all principal
and interest currently due. Payments of $48,000 and $62,000 were made in August
2003 and September 2003, respectively, and a final payment of $118,000 is to be
made in October 2003.
In September 2003, in connection with our initial public offering and
in order to simplify our capital structure, we entered into an agreement, the
Exchange Agreement, under which the holder of our outstanding Series A and
Series B Preferred Stock has agreed to (1) convert all 8,202,929 shares of
Series A and Series B Preferred Stock held by it into 1,640,585 shares of Class
A Common Stock; (2) exchange warrants exercisable, subject to certain future
conditions, for up to 951,041 shares of Class A Common Stock, for 320,000 shares
of Class A Common Stock; (3) exercise warrants currently exercisable for up to
144,663 shares of our Class A Common Stock (143,216 shares on a
cashless-exercise basis); and (4) accept 99,047 shares of our Class A Common
Stock as payment of all accrued dividends on shares of Series A and Series B
Preferred Stock held by the holder. The number of shares of Class A Common Stock
to be issued as payment of accrued dividends has been calculated assuming that
the effective date of this offering will be October 15, 2003 and the offering
price will be $5.00 (rather than the contractual provision of converting accrued
dividends into shares of Class A Common Stock at the conversion price). Any
variation in the offering price will, therefore, affect the number of shares of
Class A Common Stock to be issued as payment of accrued dividends. The
transactions contemplated by the Exchange Agreement will be effectuated subject
to and upon completion of the offering. A valuation of the warrants being
exchanged and the corresponding shares issued for them will be performed to
determine if any dividend charge will be required to be recorded as a result of
this transaction. We have estimated that the fair value of the shares of Class A
Common Stock to be issued to the holder is less than or equal to the fair value
of the warrants to be exchanged and, therefore, we believe no related dividend
charge will result from this transaction.
37
Other significant commitments consist of obligations under
non-cancelable operating leases that totaled $19 million as of March 31, 2003
and June 30, 2003 and are payable in varying monthly installments through 2015.
As of June 30, 2003, minimum future operating lease payments for the years
ended June 30, 2004, 2005, 2006, 2007, 2008 and thereafter (in total) were
$2,196,000, $2,277,000, $2,190,000, $2,146,000, $2,174,000 and $7,615,000,
respectively.
Our consolidated financial statements appearing elsewhere in this
prospectus have been prepared assuming that we will continue as a going concern
and reflect an expectation of continuity of operations, realization of assets
and the satisfaction of liabilities and commitments in the normal course of
business. We had an accumulated deficit of approximately $10.7 million through
June 30, 2003. The cash required to fund our planned operations for the next 12
months exceeds the cash anticipated to be generated from our planned operations.
Our actual working capital requirements will depend on various factors,
including our ability to maintain our IDC customer base and attract new
customers, the progress of the development of AccessDM's business, the
completion of the acquisition of Hollywood SW, the level of resources we are
able to allocate to the development of greater marketing and sales capabilities
and the status of our competitors. We expect to incur costs and expenses in
excess of expected revenues and negative cash flows for the foreseeable future
as we continue to execute our business strategy of becoming a leading provider
of digital content to entertainment venue operators. We are seeking additional
financing through this offering. In the event our operations are not profitable,
we do not generate sufficient cash to fund our business, and/or if we fail to
consummate this offering or another financing, we will need to reduce our
corporate overhead expenses, including the potential reduction of some personnel
associated with the anticipated growth of the business.
The factors noted in the above paragraph raise substantial doubt
concerning our ability to continue as a going concern. Our consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should we be unable to continue
as a going concern. Our ability to continue as a going concern is dependent upon
the support of our stockholders, creditors and our ability to close debt or
equity transactions to raise cash, including this offering. Additional funding
may not be available when needed or on terms acceptable to us, which could have
a material adverse effect on our business, financial condition and results of
operations.
Our management believes that, if this offering is completed, the net
proceeds therefrom, combined with our cash on hand and cash receipts from
existing and acquired operations, will be sufficient to permit us to continue
our operations for at least 12 months from the date of this prospectus.
Related party transactions
In April 2000, A. Dale Mayo, a founder and our President and Chief
Executive Officer, and Brett E. Marks, a founder and an executive officer and
director of our company, invested $200,000 and $100,000, respectively, in
Fibertech & Wireless, Inc., a holding company formed on March 29, 2000 with no
material assets or business activity, and received 10,000,000 and 5,000,000
shares, respectively, of the common stock of Fibertech & Wireless, Inc. Upon the
merger of Fibertech & Wireless, Inc. into AccessColo, Inc. in September 2000,
each of such shares was exchanged for 0.6205 of a share of common stock of
AccessColo, Inc., and resulted in A. Dale Mayo owning 1,241,000 shares of our
Class A Common Stock and Brett E. Marks owning 620,500 shares of our Class A
Common Stock. We changed our name from AccessColo, Inc. to Access Integrated
Technologies, Inc. in November 2001.
38
Kevin Booth, a co-founder and director of our company (and a former
employee), and Kevin Farrell, a co-founder and our Senior Vice President - Data
Center Operations, each received 400,000 shares of our Class A Common Stock in
April 2000, upon formation of AccessColo, Inc. and in connection with their
employment and status as co-founders. At the time of their receipt of such
shares, our company was a subsidiary of Fibertech & Wireless, Inc. See
"Business."
In October 2001, A. Dale Mayo returned 153,333 shares of our Class B
Common Stock and Brett E. Marks, Kevin Booth and Kevin Farrell returned 76,667,
85,000 and 85,000 shares, respectively, of our Class A Common Stock and received
no consideration from us for such returned shares.
In December 2002, A. Dale Mayo returned 30,000 shares of our Class B
Common Stock and Brett E. Marks, Kevin Booth and Kevin Farrell returned 10,000,
10,000 and 10,000 shares, respectively, of our Class A Common Stock and received
no consideration from us for such returned shares.
In connection with the execution of one of our long-term real property
leases, A. Dale Mayo and Brett E. Marks posted a letter of credit in the
aggregate amount of $525,000 in June 2000. This letter of credit was reduced by
one-third in each of the three successive years and terminated in July 2003. We
reimbursed Messrs. Mayo and Marks for the issuance costs of the letter of
credit.
A. Dale Mayo and Brett E. Marks invested $250,000 and $125,000,
respectively, in our offering of one-year 8% promissory notes and received
warrants to purchase 4,601 and 2,301 shares, respectively, of our Class A Common
Stock at $0.05 per share. These notes were repaid prior to March 31, 2002.
Messrs. Mayo and Marks invested $250,000 and $125,000, respectively, in our
offering of five-year 8% promissory notes and received warrants to purchase
25,000 and 12,500 shares, respectively, of Class A Common Stock at $0.05 per
share. As of March 31, 2002 and 2003, the principal due to these executive
officers of $375,000 is included in notes payable.
Warren Colodner, a former director of our company, is a partner in the
law firm of Kirkpatrick & Lockhart LLP, which provides legal services to us,
including handling legal matters related to our planned initial public offering.
For the years ended March 31, 2002 and 2003, we purchased approximately $213,000
and $124,000, respectively, of legal services from this firm. Mr. Colodner was
granted options to purchase 4,000 shares of our Class A Common Stock.
Robert Davidoff, a director of our company, is also the general partner
of CMNY Capital II, L.P., which holds 157,927 shares of our Class A Common
Stock, and a director of Sterling/Carl Marks Capital, Inc., which holds 51,025
shares of our Class A Common Stock. CMNY Capital II, L.P. also invested $1
million in our offering of one-year notes, which was repaid in March 2002, and
invested $1 million in our offering of five-year notes, which is outstanding at
August 31, 2003. The warrants attached to the one-year and five-year notes were
exercised in August 2003 and are included in the share numbers above. Mr.
Davidoff has also been granted options to purchase 4,000 shares of Class A
Common Stock.
Harvey Marks, a member of our board of advisors, is the father of Brett
E. Marks, one of our founders and executive officers, and is a partner in an
entity that performs real estate services for us. We incurred real estate
commissions of $26,000 related to services provided by this entity during the
fiscal year ended March 31, 2002. Harvey Marks also has been granted options to
purchase 41,025 shares of our Class A Common Stock at a weighted average
exercise price of $6.83 per share.
Wayne Clevenger and Matthew Finlay, two of our directors, are also
directors of MidMark Equity Partners II, L.P. , or MidMark, which holds all of
our outstanding preferred stock and related contingent warrants. MidMark also
purchased $333,000 of one-year notes, which was repaid in April 2002, and was
issued 6,902 of the one-year notes warrants. We pay MidMark a management fee of
$50,000 per year. In addition, we paid a $75,000 investment banking fee in
connection with the issuance of the Series A and Series B Preferred Stock
financings.
39
In September 2003, we entered into the Exchange Agreement with MidMark
in connection with its agreement to convert all of its shares of preferred
stock. See "--Liquidity and capital resources."
John L. O'Hara, a member of our board of advisors, is the President of
John O'Hara Contracting, Inc., which performs construction and other work at our
IDCs. Mr. O'Hara has invested $50,000 in our five-year notes, and holds 5,000
five-year notes warrants. This contractor has been paid $194,000 and $18,000 for
the years ended March 31, 2002 and 2003, respectively. In addition, John O'Hara
Contracting, Inc. owns 8,000 shares of our Class A Common Stock, issued as
partial consideration for work performed during the fiscal year ended March 31,
2001.
Edward H. Herbst, a member of our board of advisors, is a partner in
Herbst-Musciano Architects/Planners, an architectural services firm that
performs work at our IDCs. This firm has been paid $5,000 for the year ended
March 31, 2002. In addition, Mr. Herbst holds options to purchase 600 shares of
our Company's Class A Common Stock at an exercise price of $12.50 per share.
In January 2003, our board of directors approved the purchase of two
separate ten-year, term life insurance policies on the life of A. Dale Mayo.
Each policy carries a death benefit of $5 million, and we are the beneficiary of
each policy. Under one policy, however, the proceeds will be used to repurchase,
after reimbursement of all premiums paid by us, some or all of the shares of our
capital stock held by Mr. Mayo's estate at the then-determined fair market
value.
On the closing of the Hollywood SW acquisition, we will purchase all of
the outstanding capital stock of Hollywood SW from its stockholders, David Gajda
and Robert Jackovich. Messrs. Gajda and Jackovich will continue as executive
officers of Hollywood SW, under new employment agreements, and will receive
initially an aggregate of 400,000 shares of our Class A Common Stock, less any
shares that may be issued, at their direction, to certain optionees of Hollywood
SW. See "Business - Hollywood Software."
Hollywood SW and Hollywood Media Center, LLC, a limited liability
company that is 95% owned by David Gajda, one of the sellers of Hollywood SW,
entered into a Commercial Property Lease, dated January 1, 2000, for 2,115
square feet of office space at 1604 Cahuenga Blvd., Hollywood, CA. Under the
terms of our acquisition of Hollywood SW, we will assume Hollywood SW's
obligations under this lease, including the monthly rental payments of $2,335.
The term of the lease expires on December 31, 2003. The company expects to
extend this lease for at least one year on substantially similar terms. Mr.
Gajda will be the President of Hollywood SW following its acquisition by us.
In connection with Russell J. Wintner's employment arrangement with
AccessDM, AccessIT has agreed to pay Mr. Wintner a finder's fee of between
$10,000 to $25,000 upon the closing of the Hollywood SW acquisition based on the
amount of time he spends in connection with the completion of that acquisition.
We entered into a consulting agreement with Kevin A. Booth, a
co-founder and director of our company, following the termination of his
employment with our company as of July 5, 2003. Under the terms of the
agreement, Mr. Booth will provide consulting services to our company in
connection with this offering and our acquisition of Hollywood SW, for which we
pay him $10,500 per month (plus any reasonable out-of-pocket expenses) for the
period beginning on July 5, 2003 through September 30, 2003. We also will pay
Mr. Booth a $10,000 bonus if this offering is completed and Mr. Booth may also
receive such additional bonus as may be determined by our Chief Executive
Officer in his sole discretion. After September 30, 2003, we may, in our sole
discretion, retain Mr. Booth's services for future projects on mutually agreed
to terms. Mr. Booth has agreed that the term of his confidentiality,
non-solicitation and non-compete agreement, which he entered into as of April
10, 2000, will remain in effect through July 4, 2004.
40
Quantitative and Qualitative Disclosures About Market Risk
Our business is currently principally in the United States. As a
result, our financial results are not affected by factors such as changes in
foreign currency exchange rates or economic conditions in foreign markets. We do
not engage in hedging transactions to reduce our exposure to changes in currency
exchange rates, although if our business broadens in geographical scope we may
do so in the future.
Our exposure to market risk for changes in interest rates relates
primarily to the increase or decrease in the amount of interest income that we
can earn on our invested cash. Because we currently do not have any
variable-rate debt, there is no risk associated with fluctuating interest
expense. We do not plan to use any derivative financial instruments. We plan to
help ensure the safety and preservation of invested principal funds by limiting
default risks, market risk and investment risk. We plan to mitigate our default
risk by investing generally in low-risk securities.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board, or the FASB,
issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and/or the normal operation of long-lived assets, except for certain
obligations of lessees. Our adoption of SFAS No. 143 in June 2002 did not have a
material effect on our results of operations, financial position or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB
Statements No. 4, 44, 64, Amendment of FASB No. 13 and Technical Corrections."
This statement eliminates the requirement that gains and losses from the
extinguishment of debt be aggregated and classified as an extraordinary item,
net of the related income tax, in certain instances. In addition, SFAS No. 145
requires that capital leases that are modified so that the resulting lease
agreement is classified as an operating lease be accounted for in the same
manner as sale-lease back transactions. SFAS No. 145 is generally effective for
transactions occurring after May 15, 2002. Our adoption of SFAS No. 145 in June
2002 did not have a material impact on our results of operations, financial
position or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. EITF 94-3 allowed for an
exit cost liability to be recognized at the date of an entity's commitment to an
exit plan. SFAS No. 146 also requires that liabilities recorded in connection
with exit plans be initially measured at fair value. The provisions of SFAS No.
146 are effective for exit or disposal activities that were initiated after
December 31, 2002, with early adoption encouraged. The adoption of SFAS No. 146
will impact the types and timing of costs associated with any future exit
activities. Our adoption of SFAS No. 146 in January 2003 did not have a material
impact on our results of operations, financial position or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosures," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides alternate
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends
the disclosure requirements of SFAS No. 123 to require more prominent and
frequent disclosures in the financial statements about the effects of
stock-based compensation. The company has adopted the disclosure provisions of
SFAS No. 148 for the year ended March 31, 2003. We expect to continue to account
for our stock options under APB Opinion No. 25.
41
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement of Financial Accounting
Standards No. 133. SFAS No. 149 clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a derivative as
discussed in SFAS No. 133. In addition, it clarifies when a derivative contains
a financing component that warrants special reporting in the statement of cash
flows. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003, except as specifically noted in SFAS No. 149. SFAS No. 149 should
be applied prospectively. At this time, the adoption of SFAS No. 149 is not
expected to materially impact the company's financial condition or results of
operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This Statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. For nonpublic entities,
mandatorily redeemable financial instruments are subject to the provisions of
this Statement for the first fiscal period beginning after December 15, 2003.
Although SFAS No. 150 would have an impact on the Company's Series A and Series
B Preferred Stock, we entered into an agreement with the holder of all
outstanding Series A and Series B Preferred Stock in September 2003, under which
the holder has agreed to exchange, subject to completion of this offering, all
of its shares of Preferred Stock for shares of Class A Common Stock, including
accrued dividends thereon, and to exercise or exchange certain warrants held by
it. See "Related party transactions."
In November 2002, the EITF reached a consensus on EITF 00-21, "Revenue
Arrangements with Multiple Deliverables," related to the separation and
allocation of consideration for arrangements that include multiple deliverables.
The EITF requires that when the deliverables included in this type of
arrangement meet certain criteria they should be accounted for separately as
separate units of accounting. This may result in a difference in the timing of
revenue recognition but will not result in a change in the total amount of
revenues recognized in a bundled sales arrangement. The allocation of revenues
to the separate deliverables is based on the relative fair value of each item.
If the fair value is not available for the delivered items then the residual
method must be used. This method requires that the amount allocated to the
undelivered items in the arrangement is their full fair value. This would result
in the discount, if any, being allocated to the delivered items. This consensus
is effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. We do not expect the adoption of EITF 00-21 to
have a material impact on our consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of FASB
Statements Nos. 5, 57 and 107 and a rescission of FASB Interpretation No. 34."
This Interpretation, among other things, clarifies that a guarantor is required
to recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable for guarantees issued or modified after December
31, 2002 and we do not expect them to have a material effect on our financial
statements.
42
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities -- an Interpretation of Accounting Research Bulletin No. 51."
FIN No. 46 requires the primary beneficiary to consolidate a variable interest
entity (VIE) if it has a variable interest that will absorb a majority of the
entity's expected losses if they occur, receive a majority of the entity's
expected residual returns if they occur, or both. FIN No. 46 applies immediately
to VIEs created after January 31, 2003, and to VIEs in which the entity obtains
an interest after that date. The adoption of FIN No. 46 in February 2003 did not
have a material impact on our results of operations, financial position or cash
flows.
43
Business
We were organized on March 31, 2000 and have been in the business of
operating Internet data centers. Internet data centers are facilities leased by
us through which we, for monthly and variable fees, provide our customers with:
a secure location for their computer and telecommunications equipment; access to
voice and data transmission services from a choice of network providers;
services to monitor their computer and telecommunications equipment; and
services, to store, back-up and protect their programs and data. Our Internet
data centers, or AccessColocentersSM or IDCs, provide fail-safe environments for
our customers' equipment by using back-up power generators as well as back-up
battery power and specialized air conditioning systems. Our customers include
major and mid-level network and Internet service providers, such as KMC Telecom,
AT&T, OnFiber Communications, NorVergence and Zone Telecom, as well as various
users of network services. The network and Internet service providers named
above, collectively, comprised approximately 69% and 76% of our revenues for the
fiscal year ended March 31, 2003 and the three months ended June 30, 2003,
respectively.
We currently operate nine IDCs in eight states: Arkansas, Kansas,
Maine, New Hampshire, New Jersey, New York, Texas and Virginia. We developed our
first two IDCs, which are located in Jersey City, New Jersey and Brooklyn, New
York. Subsequently, we acquired seven additional IDCs; we acquired one IDC,
located in Manhattan, New York, in December 2001; we acquired the other six in
November 2002. As of August 31, 2003, we had 60 contracts with 41 separate
customers, under which such customers pay us average monthly fees of
approximately $8,000, ranging from $500 to $75,000 (for one of our customers),
with average remaining terms of approximately 33 months. In August 2003, we also
entered into an agreement with a company that operates data centers, which
provides us with the option, subject to certain conditions, to cause its lease
of such centers to be assigned to us.
We were incorporated as AccessColo, Inc. and, in September 2000, our
then parent, Fibertech & Wireless, Inc., a holding company formed on March 29,
2000 with no material assets or business activity, merged with and into us. In
November 2001, we changed our name from AccessColo, Inc. to Access Integrated
Technologies, Inc.
Our company is actively seeking to expand into two new and interrelated
business areas relating to the delivery and management of digital content to
entertainment venues worldwide. We expect these new businesses, enhanced by our
IDC business activities, to become our primary focus.
In February 2003, we organized Access Digital Media, Inc., or AccessDM.
AccessDM is an 80%-owned subsidiary of ours that has developed proprietary
software designed to enable worldwide delivery of digital data - including
movies, advertisements and alternative content such as concerts, seminars and
sporting events - to movie theaters and other venues having digital projection
equipment. We anticipate that the demand for services delivering digital content
will increase as distributors, movie theaters and other entertainment venues
increasingly employ a digital format for their presentations for reasons of cost
savings, added flexibility and improved image quality. Our delivery services
will consist of: secure storage of digital content on our equipment; secure
transmission of such content to locations having digital projection equipment;
and tracking of the delivered digital content.
On July 17, 2003, we signed an agreement to acquire the capital stock
of Hollywood Software, Inc., or Hollywood SW, the leading developer of
proprietary transactional support software for movie distributors in the U.S.
Hollywood SW's licensed software records and manages information relating to the
planning, booking and scheduling of movies, as well as their financial results.
We believe that this acquisition will complement AccessDM's digital content
delivery software by enabling Hollywood SW's customers to track and manage
digital content delivery to entertainment venue operators. We will use a
substantial portion of the net proceeds of this offering to complete our
acquisition of Hollywood SW.
44
Following our acquisition of Hollywood SW, we expect to be able to
offer interrelated services that use aspects of each of our businesses and that
have been specifically tailored for the delivery and management of digital
content to entertainment venue operators. We believe that our ability to offer a
wide range of services will differentiate us from other service providers,
including digital media distributors.
Business strategy
The principal elements of our business strategy are to:
o Market digital content delivery services as a complement to our other
interrelated services by using our management's experience and relationships
We will seek to use the software developed by AccessDM to complement, and be
complemented by, the various products and services offered by Hollywood SW
and our IDCs. In doing so, we will make modifications and enhancements
requested by our customers. In addition, our management team, including A.
Dale Mayo, our Chief Executive Officer, and Russell J. Wintner, expected to
become the President and Chief Operating Officer of AccessDM, have
considerable experience in the motion picture exhibition industry; we intend
to take advantage of their experience and relationships to promote and
effectuate AccessDM's business plan.
o Expand our service and product offerings through additional acquisitions
We have acquired, and expect to continue to acquire, assets and businesses
for income and/or strategic purposes. We will seek to expand our service and
product offerings by acquiring additional cash-flow positive businesses in
strategic markets, including businesses providing complementary services and
products and additional data center operations.
We will continue to seek acquisitions of related and/or complementary
businesses that will allow us to enhance and/or expand our existing services
and products. Our acquisition of Hollywood SW will provide us with
industry-leading software and project management capability in the
entertainment industry that complements the digital content delivery service
of AccessDM and Hollywood SW will benefit from the use of our IDCs and
related service offerings.
We also intend to increase the number of our IDCs by acquiring additional
data center operations and/or related businesses that are cash-flow positive,
have excess capacity for future growth and/or are located in strategic
geographic locations. Our management has tentatively identified several
operations consisting of between one and four data centers as potential
targets.
There can be no assurance we will actually acquire any related and/or
complementary businesses or additional IDCs. In seeking these acquisitions,
however, we will focus on businesses that can provide such additional
services and products as hosting services, system integrators, disaster
recovery solutions, software development, application service provider
solutions, system monitoring and management, network design and/or
development and voice and data bandwidth services. The types of services and
products that we may acquire will depend, among other things, on our working
capital and the purchase price of these businesses and/or operations.
Depending upon our then financial condition, including our cash availability
and projected revenues, we presently expect to finance, in whole or in part,
acquisitions through public or private offerings of our securities. In
addition, we may seek bank financing to the extent reasonably available and
permitted by any agreements to which we are then a party.
45
o Enter into key strategic relationships to expand our sales reach, increase
revenues and provide additional services
In order to expand our ability to market our IDC network and related service
offerings, we have entered into both formal agreements and informal sales,
marketing and referral relationships with various bandwidth providers,
including AT&T, Con Edison Communications, Qwest and KeySpan, and system
integrators and service providers, such as The Casey Group, CoreTech
Consulting Group, ManagedStorage International and Rockefeller Group
Technology Services. These agreements provide us with the ability to provide
various services to our data centers, primarily including disaster recovery
solutions, software development, system monitoring and management, and voice
and data bandwidth services. We intend to enter into additional strategic and
commercial relationships with communications service providers and
application service providers, through which we will seek to attract
additional IDC customers. By entering into these relationships, we have
gained and expect to gain access to other companies' sales forces to market
our services without having to expand our own sales force. We believe that
these relationships could accelerate our revenue growth, support the
AccessColocenterSM branding process, decrease the cost of sales, extend our
sales reach and lead to greater network provider diversity at our facilities.
Access Digital Media, Inc.
Formation/Background
Access Digital Media, Inc., or AccessDM, is our 80%-owned subsidiary.
We organized it to develop and provide software and systems enabling the
worldwide delivery of digital content - such as movies, advertising, trailers
and alternative content, including concerts, seminars and sporting events - to
movie theaters and other venues having digital projection equipment. We have,
with the assistance of a vendor engaged by us, developed digital content
delivery software that has undergone final testing. We intend to make additional
modifications and enhancements to increase such software's functionality and
marketability. AccessDM is an example of how our company's IDCs can be used to
increase our product and service offerings. See " - Business Strategy." We
expect AccessDM to use our IDCs to store and, through its software, deliver
digital content to movie theaters and other venues. We expect the demand for
systems that deliver digital content to increase as the movie, advertising and
entertainment industries continue to convert to a digital format. We believe
that such industries will continue to convert to a digital format in order to
achieve cost savings, greater flexibility and/or improved image quality.
AccessDM's software will use our IDCs and their managed data storage services to
deliver digital content using satellite and land-based transmission providers.
AccessDM also intends to co-market its products and services with those of
Hollywood SW, although the products and services of each may be provided
independently.
AccessDM has been, and will continue in the foreseeable future to be,
financed principally by AccessIT. We incorporated AccessDM as a wholly owned
Delaware subsidiary in February 2003. On July 23, 2003, we agreed to issue
shares of capital stock to The Casey Group, Inc., a software consulting company,
as compensation for its assistance in developing software enabling the delivery
of digital content. We have agreed to issue to The Casey Group 8,700 shares of
our Class A Common Stock if this offering is completed by December 31, 2003. If
this offering is not completed by December 31, 2003, The Casey Group may require
us to pay to it $43,500 in lieu of the 8,700 shares. In September 2003, we
issued 750,000 shares of AccessDM's common stock, representing, after giving
effect to such issuance, 20% of AccessDM's capital stock, following the final
testing of our software. All software developed for or on behalf of AccessDM is
the exclusive property of AccessDM, and The Casey Group has agreed not to
develop a substantially similar product for three years. The operations of
AccessDM will be controlled by AccessIT, and certain members of the senior
management of AccessIT are also members of the senior management of AccessDM.
Russell J. Wintner, who is expected to become AccessDM's President and Chief
Operating Officer, will, upon his employment, receive options to purchase
200,000 shares of AccessDM's common stock and options to purchase 25,000 shares
of AccessIT's Class A Common Stock at their then fair market values. Mr. Wintner
is expected to receive compensation that is comparable to our senior vice
presidents and he also will be paid a finder's fee in connection with our
acquisition of Hollywood SW. See "Related party transactions." All intercompany
transactions between AccessIT and AccessDM are expected to be conducted on
competitive terms, including the terms of any future AccessIT investments in
AccessDM and the terms of any intercompany sales.
46
The software developed with The Casey Group is operational and we have
begun to commercially market it. AccessDM, however, has not yet generated any
revenues from the sale of this software and we anticipate that AccessDM will not
generate any revenues in the current fiscal year, and will generate minimal
revenue, if any, in fiscal year 2005. No assurance, therefore, can be given that
AccessDM will ever be able to generate any revenues. In addition, based on
customer needs and preferences, we may adapt or tailor the developed software.
AccessDM's market opportunity
We believe that digital content delivery eventually will replace the
current method used for film delivery. Existing film delivery generally involve
the time-consuming, somewhat expensive and cumbersome process of receiving bulk
printed film, rebuilding the film into shipping reels, packaging the film reels
into canisters and physically delivering the reels (by traditional ground modes
of transportation) to movie theaters. We believe that the expanding use of
digital movie projection equipment will lead to an increasing need for digital
content delivery services. We have organized AccessDM to store and securely
deliver, via electronic transmission (through copper wire, fiber optics or
satellite), digital content, including movies, advertisements, alternative
content and educational products.
The movie exhibition industry now has the capability to present
advertisements, trailers and alternative entertainment in a digital format and
in a commercially viable manner. We believe the presentation of alternative
entertainment at movie theaters can both expand their hours of operation and
increase their occupancy rates. Movie theater owners may also be able to profit
from the presentation of new and/or additional advertising in their theaters.
Both the National Association of Theater Owners, or NATO, and Digital
Cinema Initiatives, LLC, a consortium of seven major Hollywood studios, have
publicly announced their intention jointly to develop and set universal
standards and to develop a business model designed to allow the movie industry
to effect a general transition to digital presentations. According to NATO,
these standards and the business model are expected to be completed in the
Spring of 2004. In 2003, there were approximately 160 high-end digital
projectors and more than 2,700 digital advertiser screens installed worldwide
according to Screen Digest. We believe that AccessDM's growth will correspond to
growth in the digital movie, alternative entertainment and advertisement
markets.
AccessDM's products and services
AccessDM's principal service offering is the secure and reliable
distribution of digital content through our IDC platform. We will name our
services "Digital Express e-Courier Services." See "--AccessDM's intellectual
property." This service entails AccessDM's obtaining a digital master of an
audio and/or visual presentation from the content owner, storing and delivering
the digital content and tracking and confirming its delivery. AccessDM expects
to offer its delivery service to the owners of digital content through a broad
choice of bandwidth providers within each platform (i.e., copper wire, fiber
optics or satellite). We intend to use our existing and any additional IDCs to
accommodate the services to be provided by AccessDM.
For entities, like theaters, that receive digital content, AccessDM may
also develop a series of interfaces that work with third-party playback devices
to enable theaters and other venues to receive error-free programming through an
automated system. Initially, AccessDM may develop a simple in-theater playback
device of its own to facilitate initial testing and implementation. Existing
companies (e.g., Thomson, Avica, EVS and Kodak), however, have already developed
these devices and we expect new hardware companies will eventually develop these
playback devices as well. Consequently, developing and providing an in-theater
playback device will not be a principal service of AccessDM.
47
AccessDM expects to charge its customers a one-time set-up fee based on
the size of its content file; a distribution or delivery fee based on the size
of its content file and the number of destinations to which the content file
will be delivered; a customization fee, if required; and a fee for changes to
the content file or the destination(s) to which the content file is to be
delivered. We anticipate that AccessDM will also provide professional consulting
services to users of its delivery services.
AccessDM intends to co-market its services and products with the
products and services offered by Hollywood SW. Although the services of each
could be used independently, using AccessDM's delivery service in conjunction
with the services of Hollywood SW would enable owners of digital content to
deliver securely such content to their customers and, thereafter, to manage and
track data regarding the presentation of the digital content, including
different forms of audio and/or visual entertainment. We believe that no other
company presently provides such combined services.
AccessDM's intellectual property
Although it has developed, through The Casey Group, proprietary
software, AccessDM currently owns no registered intellectual property. AccessDM
expects to seek servicemark registrations in respect of the name AccessDM and
the phrases "Digital Express e-Courier Services" and "The courier for the
digital era." AccessIT has applied for trademark protection of the name Access
Digital Media.
AccessDM's target customers
We desire to provide AccessDM's services ultimately to major movie
studios, particularly through relationships that we and Hollywood SW have
developed or may develop with these studios. AccessDM's initial marketing focus,
however, will be on independent studios and distributors, alternative content
providers and advertising agencies. We believe that our initial target customers
have made progress in developing digital presentations but that high-quality
delivery services are currently unavailable to them. Over time, we believe that
major movie studios will expand beyond their traditional distribution methods,
involving the physical delivery of digital files, to include electronic digital
content delivery for the reasons discussed above. See "-- AccessDM's market
opportunity." AccessDM currently has no customers.
AccessDM's competition
Companies that have developed forms of digital content delivery to
entertainment venues include:
o Regal Entertainment Group, which has developed a system for
delivering certain digital content to its own theaters, including
non-motion picture content and advertising;
o National Cinema Network, a wholly owned subsidiary of AMC
Entertainment that has developed a system known as Digital Theatre
Distribution System for delivering advertising to movie theaters;
o Boeing Digital Cinema, which has provided satellite-only delivery of
major motion pictures on a limited basis to in-theater systems owned
by The Boeing Company; and
o Technicolor Digital Cinema, an affiliate of the Thomson company, has
concentrated on an in-theater system to manage content file(s) that
are delivered physically, and not electronically, to theaters.
48
AccessDM has only recently completed development, with the assistance
of The Casey Group, of software that will enable the delivery of digital
content. Although AccessDM currently does not have any customers, we believe
that AccessDM, through its technology and management experience, and the
expected acquisition of Hollywood SW, can differentiate itself from these
companies by providing a competitive alternative to their forms of digital
content delivery.
AccessDM's sales and marketing
AccessDM intends to market its products and services primarily through
networking and relationship-building activities, supported by presentations at
industry trade shows and similar events. We believe that the entertainment
business is largely based on and driven by personal and business relationships.
We have, therefore, selected two individuals - A. Dale Mayo and Russell J.
Wintner - who have significant experience and relationships in the movie and
emerging entertainment markets - to lead AccessDM's marketing efforts.
A. Dale Mayo, AccessDM's Chief Executive Officer, is a co-founder and
the Chief Executive Officer of AccessIT, and previously co-founded and developed
Clearview Cinema Group, Inc., or Clearview, a large theater circuit in the New
York metropolitan area which was later sold to Cablevision Cinemas, LLC. In his
tenure as the Chief Executive Officer of Clearview, Mr. Mayo developed close
working relationships with many of the top theater operators in the United
States, as well as heads of distribution in Hollywood and New York. Mr. Mayo is
on the advisory board of the Will Rogers Motion Picture Pioneers Foundation. See
"Management."
Russell J. Wintner, who is expected to become AccessDM's President and
Chief Operating Officer, is a member of the Society of Motion Picture and
Television Engineers, and serves on the Digital Cinema Group standards
committee; he is a board member of NATO and a member of its Technical Committee
that is working directly with Digital Cinema Initiatives, a consortium of seven
major Hollywood studios created to develop standards and a business model for
the digital cinema industry. Mr. Wintner frequently sits on industry panels at
seminars and conventions. See "Management."
We expect to co-market the services of AccessDM to the current and
prospective customers of Hollywood SW, using marketing and sales efforts and
resources of both companies. As the digital content industry continues to
develop, and the services of AccessDM are refined, we may engage in other
marketing methods, such as advertising and service bundling, and may hire
additional sales personnel.
Hollywood Software
Acquisition
On July 17, 2003, we entered into an agreement to purchase all the
capital stock of Hollywood SW from David Gajda and Robert Jackovich, or the
sellers. Hollywood SW is the leading developer of proprietary transactional
software for movie distributors in the U.S.
The closing of the Hollywood SW acquisition is subject to several
conditions, the principal one of which is our receipt of at least $3 million in
net proceeds from this offering. We expect to close the acquisition at the time
of completion of this offering. We will use $2.45 million of the net proceeds of
this offering to pay the remaining cash portion of the purchase price of
Hollywood SW. We paid $50,000 in cash to the sellers in July 2003. The balance
of the purchase price will be paid by our issuing 8% promissory notes in the
aggregate principal amount of $3 million and 400,000 shares of our restricted
Class A Common Stock. Under the Hollywood SW acquisition agreement, we have
agreed to issue to the sellers an aggregate of 400,000 shares of our Class A
Common Stock, less the number of shares to be issued by us, at the direction of
the sellers, to certain optionees of Hollywood SW. We will provide the sellers
and the optionees with a price guarantee of $3.60 per share because these shares
may not be resold during the 18-month lock-up period commencing on the effective
date of the registration statement of which this prospectus forms a part,
subject to certain exceptions. See "Shares eligible for future resale." As and
to the extent that the sellers and the optionees become able to resell their
shares without contractual or legal restriction (other than volume restrictions
under Rule 144(e) of the Securities Act), we will be required to issue
additional shares of our Class A Common Stock if the market price of the Class A
Common Stock is less than $3.60. The number of additional shares will be equal
to the number of saleable shares multiplied by the quotient obtained by dividing
(a) the difference between $3.60 and the market price by (b) the market price.
For this purpose, market price means the average closing price of our Class A
Common Stock for a set number of days prior to the date on which the shares
could have been freely sold by the sellers. In no event, however, will we be
required to issue more than 80,000 additional shares of our Class A Common
Stock. Our price guarantee will operate even if the sellers and optionees do not
resell any shares when they are able to do so.
49
The purchase price for Hollywood SW is subject to increase during each
of the three years after the closing of the acquisition if Hollywood SW achieves
fixed annual targets of earnings before interest, income taxes, depreciation and
amortization expense, or EBITDA; any additional payment is to be made in the
same proportionate combination of cash, promissory notes and shares of our Class
A Common Stock as the purchase price payable at closing, prior to giving effect
to any direct payments of cash and shares made to the optionees.
o In each of the three years after the closing of the Hollywood SW
acquisition, we will be required to pay an additional purchase price
if EBITDA for such year exceeds $1 million.
o Even if EBITDA does not exceed $1 million for such year, we will be
required to pay an additional purchase price for any subsequent year
in such three-year period if EBITDA for the subsequent year exceeds
$1 million plus 120% of the shortfall from the immediately prior
year.
o If, for example, Hollywood SW's EBITDA in the first year were
$800,000, then no additional purchase price would be payable in the
first year and none would be payable for the second year unless
Hollywood SW's EBITDA for the second year exceeded $1.24 million
(i.e., $1 million plus 120% of $200,000, the shortfall from the
first year).
o Assuming Hollywood SW's EBITDA in the first year were $800,000, if
Hollywood SW's EBITDA for the second year is only $1.1 million, then
no additional purchase price would be payable in the second year
(i.e., because there would be a shortfall of $140,000 between EBITDA
in the second year and the new earnings target of $1.24 million). An
additional purchase price also would not be payable in the third
year unless Hollywood SW's EBITDA for the third year exceeded $1.168
million (i.e., $1 million plus 120% of $140,000, the shortfall from
the prior year).
In each year that the applicable EBITDA target is achieved, we will pay an
additional purchase price of $0.67 for each $1.00 in excess of the applicable
EBITDA target.
Under the terms of the promissory notes, the principal amount of $3
million and interest at the rate of 8% per year are due and payable in 20 equal
quarterly installments commencing on the first day of the first full month after
the closing of the Hollywood SW acquisition. All or part of any of the
promissory notes may be prepaid at any time without premium or penalty. We have
agreed not to incur any indebtedness other than the following: purchase money
indebtedness; indebtedness subordinate and junior in payment to the sellers'
notes; indebtedness used to repay the sellers' notes; indebtedness incurred in
connection with the acquisition of all or substantially all of the assets or
equity of a business that is unsecured or secured only by such assets or equity,
is in a principal amount not greater than 50% of the acquisition price and does
not provide for amortization less favorable to the company than equal monthly
installments over a five-year period; indebtedness of up to $1 million provided
by a bank or institutional lender, which may be secured by our company's assets;
and indebtedness incurred solely to repay or refinance any of the foregoing
permitted indebtedness. Our obligations to repay the promissory notes and to pay
any additional purchase price will be secured by a pledge of all of Hollywood
SW's capital stock.
50
We expect that all current employees of Hollywood SW will continue as
employees of Hollywood SW after its acquisition by us. Upon our acquisition of
Hollywood SW, Mr. Gajda and Mr. Jackovich will enter into employment agreements
with Hollywood SW, and confidentiality and non-compete agreements with AccessIT,
under which they will agree not to compete with the business of Hollywood SW for
any period during which they receive any severance payments from Hollywood SW.
See "Management - employment agreements." Our stock purchase agreement with the
sellers separately prohibits their competition with the business of Hollywood SW
for five years from the closing of the acquisition.
In connection with this offering, the sellers and Hollywood SW have
agreed to cooperate with us and the underwriter in completing this public
offering, including assisting us with, and providing any materials necessary in,
the preparation of the registration statement of which this prospectus forms a
part. The sellers and we have agreed to indemnify each other for any losses
incurred as a result of breaches by the other of any of its/his agreements,
representations or warranties, subject to certain exceptions and limitations.
Hollywood SW's market opportunity
Hollywood SW is the leading developer of proprietary transactional
software for movie distributors in the U.S. Hollywood SW's software products
enable its customers to record and manage information relating to the planning,
booking and scheduling of movies in movie theaters, as well as to track the
financial operating results of exhibited movies.
The customers for Hollywood SW's existing software and consulting
services consist principally of distributors and exhibitors of filmed
entertainment. Hollywood SW has focused on licensing its products to North
American feature film distributors and movie theater chains.
We believe that Hollywood SW's products have become the generally
accepted method used by film distributors to manage and track data regarding the
presentation of filmed entertainment. We believe also that distributors using
Hollywood SW's distribution software system, so called TDS2000, have, since
1999, generated approximately 36%, cumulatively, of U.S. theater box office
revenues. In addition to providing its system currently to analog film industry
customers, we believe that Hollywood SW can easily adapt this system to serve
the expanding digital entertainment industry as well. Because of its established
leadership position, we expect that Hollywood SW's products and services to be
accepted as an important component in the digital content delivery and
management business.
We believe that the anticipated transition to digital content delivery
will require a high degree of coordination among content providers, customers
and intermediary service providers. Producing, buying and delivering media
content through worldwide distribution channels is a highly fragmented and
inefficient process that we expect to become streamlined and enhanced through
the continuing development of and general transition to digital forms of media.
Hollywood SW's principal objective is to provide its transactional software to
current film industry customers and, through AccessDM's digital content delivery
software, to the expanding digital entertainment industry.
Hollywood SW's products and services
Hollywood SW has developed software applications that are available to
customers of varying sizes, through both software licenses and its application
service provider, or ASP service. Current proprietary software products of
Hollywood SW consist of the TDS2000 - Theatrical Distribution System, or
TDS2000, which manages key operational and financial elements of film
distribution for film distributors and studios; EMS - Exhibition Management
System, or EMS, which manages key operational and financial elements of film
exhibition for theater circuits; MPPS - Motion Picture Planning System, or MPPS,
which uses various film criteria and historical performance data to plan and
initiate film release strategies; and the Media Manager System, or MMS, which
facilitates the planning and tracking of newspaper advertising campaigns.
51
These products are provided to film distributors and theater circuits
through either software licenses or Hollywood SW's ASP service. Under a software
license, a customer pays a significant up-front license fee and, depending on
the agreement, may make periodic payments for the right to use Hollywood SW's
software on its computer systems. Customers also pay software maintenance fees
under separate annual support agreements, under which Hollywood SW provides
maintenance services and technical support. The license arrangement is designed
primarily for larger customers with sufficient capital and the resources to own
and manage complex database applications. Under its ASP service, a customer
makes periodic payments under an annual service agreement for the right to
access and use Hollywood SW's software through the Internet. The ASP service is
designed primarily for medium- to smaller-sized distributors and exhibitors.
Hollywood SW's intellectual property
Although Hollywood SW currently holds no patents or registered
trademarks or service marks, it does have intellectual property consisting of
licensable software products, including TDS2000; internet data services,
including the On-Line Release Schedule (as described below, "--Hollywood SW's
other data services"); domain names; unregistered trademarks and service marks;
know-how and logos.
Domestic theatrical distribution
Hollywood SW's first, and most mature, software product, TDS2000,
enables U.S. film distributors to plan, book and account for theatrical film
releases. It also allows distributors to collect and analyze related financial
operations data. We believe that TDS2000 has become the U.S. industry standard
in recording and monitoring domestic distribution of theatrical films. According
to the 2003 edition of Screen Digest, Hollywood SW has "a virtual monopoly on
the accounting software for tracking and controlling the releases of film prints
to distributors." TDS2000 is currently licensed to 20th Century Fox, Fox
Searchlight Pictures, Paramount Pictures, Paramount Classics, Universal
Pictures, Artisan Entertainment Films and Lions Gate Films, which, collectively,
comprised approximately 36% and 58% of Hollywood SW's revenues for the fiscal
year ended March 31, 2003 and the three months ended June 30, 2003,
respectively. Also, IFC Films, First Look/Overseas Film Group, Newmarket Films
and Gold Circle Films subscribe to Hollywood SW's ASP service. These customers,
collectively, comprised approximately 22% and 27% of Hollywood SW's revenues for
the fiscal year ended March 31, 2003 and the three months ended June 30, 2003,
respectively. In addition, Hollywood SW licenses to customers other
distribution-related software, including MPPS and MMS, that further automate and
manage related aspects of film distribution, including advertising, strategic
theater selection and competitive release planning. We do not expect any of
these customers to terminate their relationship with Hollywood SW as a result of
its acquisition by us.
Hollywood SW generates revenues from its software products through
various fees: software license fees, ASP service fees, software maintenance
fees, software development fees and consulting service fees. Under its software
license arrangements, significant up-front fees are paid and periodic payments
are generally made upon the occurrence of certain milestones: for example,
execution of the license agreement, delivery of the software and acceptance on
use of the software by the customer. Software maintenance fees are paid under
separate annual support agreements, under which Hollywood SW provides
maintenance services and technical support. Under Hollywood SW's ASP service,
periodic payments are made for the right to access and use Hollywood SW's
software through the Internet, based on the occurrence of certain milestones.
Maintenance services are included as part of the annual service agreement for
Hollywood SW's ASP service. Customers that license Hollywood SW's products also
may pay for product feature enhancements, which include software developments;
Hollywood SW has generated a significant portion of its revenues from consulting
fees that it charges on an hourly basis for implementation of the applicable
product and training of the personnel of the licensed or ASP service customers.
52
International theatrical distribution
Hollywood SW intends to enhance TDS2000 to cover and support
international theatrical film distribution. We believe that many U.S.-based
studio distributors are re-evaluating their general strategy of distinguishing
between domestic and international film distribution operations and are
considering a move toward worldwide theatrical distribution under a unitary
operational structure. We believe that this strategic change, if it were to
occur, would likely create international demand for Hollywood SW's software
applications. Hollywood SW is currently working separately with the Walt Disney
Company and 20th Century Fox to analyze the benefits of replacing their
international distribution systems. Separately, Hollywood SW is working with
20th Century Fox to document the specifications for a viable international
version of TDS2000.
Film exhibition
Hollywood SW also has developed the Exhibitor Management System, or
EMS, a web-enabled application. This web-enabled theater management application
is designed to manage certain aspects of theater operations, record all
transactions with film distributors, and consolidate transactional data from
each theater's box office ticketing and concession software. EMS is currently
licensed to five customers.
Hollywood SW's other data services
Hollywood SW, through the sales efforts of Movieline International,
currently offers the On-Line Release Schedule, which provides automated,
real-time industry data on a subscription basis. The On-Line Release Schedule
debuted in October 2001. Twenty film distributors and exhibitors currently
subscribe to the On-Line Release Schedule.
Widespread use of Hollywood SW's products and services, if it were to
occur, would enable Hollywood SW to collect industry data and provide additional
value-added services. Hollywood SW also may use EMS, which operates directly
with various box office ticketing systems, to gather and sell film performance
and demographic data.
Hollywood SW's competition
Within the major movie studios and exhibition circuits, Hollywood SW's
principal competitors for its products are in-house development teams, which
generally are assisted by outside contractors and other third-parties. We
believe that Hollywood SW's TDS2000 software is currently the preferred solution
for U.S. film distributors. Most distributors that do not use the TDS2000
software use their own systems. Internationally, Hollywood SW is not aware of
any significant similar software on the market. Hollywood SW's film exhibition
product, EMS, competes principally with customized solutions developed by the
large exhibition circuits and at least one other competitor that has been
targeting mid- to small-sized exhibitors.
Hollywood SW's marketing sales and business development
Hollywood SW's senior management team is involved in its sales and
business development efforts. Hollywood SW intends to co-market its products and
services with the services of AccessDM, although each will be able to market
their products and services independently. Although new customers are generated
usually through referrals, Hollywood SW also selectively advertises in trade
journals and its representatives regularly attend trade shows, such as ShowEast
and ShowWest.
53
IDCs
Market opportunity/Industry background
Shift to outsourcing. We believe that the overall market for IDC
services has been largely driven by the rapid growth in Internet usage and a
significant shift by companies to outsourcing, or engaging third parties to
provide, their data center services. These services are not the principal focus
of these companies, divert them from their core businesses and require
significant investment.
A fragmented industry presents consolidation opportunities. We believe
that currently there is no significant concentration of ownership of independent
and carrier-owned data centers and that many smaller operators are attempting
either to exit the data center business or become part of larger organizations.
Tier1Research's January 2003 Internet Data Center Supply Update, which included
a survey of 133 data center operators in the U.S. - consisting both of those
operated by carrier-owned operators and those operated by independent
non-carrier operators - reported an average of only 3.5 data centers per
operator. In addition, various investors, landlords, entrepreneurs and
communications carriers that have entered the data center business are exploring
ways to obtain an improved return on their investments. We believe that, because
we have considerable experience in acquiring IDCs, these events present a
valuable opportunity to us.
Data center utilization rates are improving. We believe there was an
overbuilding of data centers that occurred as a result of the increased demand
from Internet-based companies in 1999 and 2000. Many of these Internet-based
companies, however, did not become, or did not continue to be, data center
tenants when they went out of business. According to Tier1Research, the average
utilization rate (the amount of data center square footage used compared to
available square footage) in January 2003 was approximately 33% in the U.S. and
32% worldwide, reflecting an improvement in domestic and foreign utilization
rates from 27.3% each for the six months ended January 2003. Tier1Research
projects that utilization rates will increase even more rapidly during 2003.
Growth in data use is driving complex data management services. We
believe that the demand for services that store data will continue to grow as a
result of increasing amounts of stored data, increasing storage complexity,
increasing value of certain information and a potential shortage of in-house
information technology personnel. In February 2003, Gartner Dataquest estimated
that aggregate revenues generated by providers of outsourced managed data
storage services in North America could approach $17 billion by 2006, up from
$12.2 billion in 2001, representing a 7% compounded annual growth rate. Since
September 11, 2001, we believe that there has been an increasing awareness of
the need for the back-up and disaster recovery services that data centers can
provide.
Our IDCs
We operate IDCs through which we provide our customers with secure and
fail-safe locations for their computer and telecommunications equipment, access
to voice and data transmission services from a choice of network providers, and
services to monitor their computer and telecommunications equipment and to
store, back-up and protect their programs and data, including our
AccessStorage-On-DemandSM managed storage services, which store and copy data.
The company currently operates nine IDCs, called AccessColocentersSM,
in eight states: Arkansas, Kansas, Maine, New Hampshire, New Jersey, New York,
Texas and Virginia. The company's AccessColocentersSM serve a variety of
customers, including traditional voice and data transmission providers, long
distance carriers and commercial businesses. The company provides IDC services
under agreements generally having terms of from one to ten years. As of August
31, 2003, we had 60 contracts, with 41 separate customers, requiring payment of
average monthly fees of approximately $8,000, ranging from $500 to $75,000 (for
one of our customers), with average remaining terms of 33 months.
54
We developed our first two IDCs - in Jersey City, New Jersey and
Brooklyn, New York - and acquired the additional seven; one in December 2001 and
six more in November 2002.
On December 21, 2001, we acquired one IDC from BridgePoint
International (USA) Inc., or BridgePoint, consisting principally of customer
contracts, leasehold improvements, furniture and fixtures, machinery and
equipment used at the IDC, which is located in Manhattan, New York. The company
purchased this IDC for an initial purchase price of $335,000. The company agreed
to pay an additional purchase price of $500,000 to be paid (under certain
circumstances) in 12 monthly installments of $41,667 after the closing of the
acquisition. After payment by the company of two of the installments, the
company and BridgePoint's parent, Bridgepoint International (Canada) Inc., had a
dispute that was resolved by our payment of $200,000, or roughly half of the
remaining purchase price payments. In connection with the acquisition, we
assumed obligations arising under data center customer agreements and a capital
lease of certain machinery and equipment.
On November 27, 2002, the company acquired six IDCs from Ronald
Stafford, Scott Wilmont, R.E. Stafford, Inc. d/b/a ColoSolutions and Colo
Solutions Global Services, Inc., collectively, ColoSolutions, consisting
principally of customer contracts, leasehold improvements and machinery and
equipment used at the six IDCs. The six IDCs are located in Little Rock,
Arkansas; Manchester, New Hampshire; Portland, Maine; Roanoke, Virginia; Waco,
Texas; and Wichita, Kansas. The company purchased these IDCs for $3.5 million,
$1 million in the form of a 9% one-year promissory note that is secured by all
of the assets underlying the IDCs purchased by us from ColoSolutions and is due
and payable on November 27, 2003. A portion of the net proceeds of this offering
will be used to repay this note. See "Use of proceeds." In connection with this
acquisition, we assumed obligations arising under data center customer
agreements, the leases in respect of the six IDCs and capital leases of certain
machinery and equipment.
In August 2003, the company entered into an agreement with Universal
Access, Inc., or UA, whereby the company has the option to license data center
space, at prescribed rates, in any one or more of ten specified UA data centers
nationwide. The company, in turn, may license the space it licenses from UA to
the company's customers under separate agreements. The term of the agreement
with UA is initially for six months, and will automatically be extended to two
years if the company licenses 750 or more square feet in the aggregate, across
all UA data centers. If the company licenses 1,500 or more square feet at a
single UA data center, the company has the option to demand that UA's data
center lease, in its entirety, be assigned by its landlord to the company.
Although UA has agreed to assist the company in obtaining such assignment, there
can be no assurance that the company can successfully negotiate an assignment
with the respective landlord(s). In the event that a UA data center lease is
assigned to the company, UA and the company have agreed on some of the terms
under which UA would license space from the company in order for UA to continue
operations in the data center. As of August 31, 2003, the company had not
licensed any space under the UA agreement.
We do not intend to build any additional IDCs. Instead, we intend to
continue to expand our IDC base by acquiring additional existing, operational
IDCs from third parties.
Our overall utilization rate as of August 31, 2003 is 25%; our
utilization rate would be 39% if the results of our Brooklyn, New York facility,
which was the first IDC we built, were not included. The purchase prices that we
paid for our additional IDCs reflect such overall 25% utilization rate and
therefore, we believe, present us with an opportunity to increase significantly
our results of operations, largely because the variable costs in adding new
customers are relatively low.
IDC's colocation services
We provide our customers with flexible space in our IDCs to house data
and voice transmission equipment, as well as their computer equipment. Our
customers can choose from a variety of space offerings, including a
single-locking cabinet, a private cage (under 500 square feet) or a private
suite (over 500 square feet). Colocation services require an initial
installation fee and a monthly charge based on the size of the space offering
selected by the customer. The terms of our IDC customer agreements, covering 40
separate customers, generally range from one to ten years.
55
IDC's power availability
Our colocation service fees typically include a charge for a minimum
amount of electrical power (i.e., a certain number of amps) connected to a
back-up generator so that power can be provided even if electricity from the
electrical company is lost or becomes unavailable. We, however, provide our
customers with access to additional amperage for AC and/or DC power. Additional
power availability is provided for an initial installation fee and a separate
monthly charge. We currently bill seven customers for additional power
availability.
Cross-Connect/Direct Interconnections. Customers have the ability to
connect cables (both fiber and copper) directly to another IDC customer for
voice and data transmission services. These cross-connect services are provided
for an initial installation fee and a separate monthly charge. We currently bill
13 customers for cross-connect services.
"Smart Hands" Services. We offer our so-called "Smart Hands" service,
which provides customers with access to our IDC staff for a variety of tasks
when their own staff is not on site. These tasks may include equipment
rebooting, power cycling, card swapping and performing emergency equipment
replacements. Services are available on demand or by customer contract and are
provided for set hourly fees.
Riser Access. Customers have the ability to use our risers, which are
pipes used to connect cables (both fiber optic and copper) from our customers'
computer equipment to other companies' computer equipment located outside of our
IDCs but within the building that our IDC is located. To do so, they must pay a
monthly charge to use a portion of our risers. We currently bill five customers
for use of our risers.
IDC's managed storage services
We offer managed storage services that use hardware and software from
such industry leaders as EMC, Brocade, StorageTek and Veritas. We presently have
one customer for such services. Our managed storage services, known as
AccessStorage-on-DemandSM, are generally priced on a per gigabyte of usage basis
and include the following:
o AccessStoreSM: Provides customers with reliable primary data storage
that is connected to their computers.
o AccessBackupSM: Provides customers that have their computers located
within one of our IDCs with a tape back-up copy of their data that
can then be sent to the customer's computer if the customer's data
is lost, damaged or inaccessible.
o AccessBusinessContinuanceSM: Provides a choice of services designed
with a high level of access to data to maintain customer systems.
Services include remote tape back-up, up-to-the-minute copies and
restoration of customers' data and automatic switchover to a remote
server in the event a customer's server crashes.
o AccessData VaultSM: Enables our customers, in a cost-effective
manner, to protect and back-up their data. It combines advanced data
storage and recovery software with the security of our IDCs. It
allows users to schedule data back-up time and frequencies and is
fully automated after initial set-up. During the back-up process, it
compresses and encrypts the user's data and transmits the data to
our IDC for storage on our EMC Symmetrix Storage Array. It also
detects ongoing changes to files and backs-up only those changes,
making daily back-ups more efficient.
56
Our managed storage services, or AccessStorage-on-DemandSM, are
provided through a non-exclusive Distribution Agreement that we entered into
with ManagedStorage International, Inc., or ManagedStorage, on July 16, 2001.
Under the agreement, ManagedStorage agreed to grant us certain rights to market
and resell its hardware and software products under our
AccessStorage-on-DemandSM brand. We agreed to purchase, through ManagedStorage,
certain equipment, pay ManagedStorage a one-time set-up and configuration fee
and pay ManagedStorage a variable monthly fee based on subscriber use of the
software products. The Distribution Agreement expires on July 16, 2004, but it
will automatically be extended for additional one-year periods unless we or
ManagedStorage provide 90 days' written notice prior to the expiration of the
term or any extension period.
All managed storage services are available separately or may be bundled
together with other services. Monthly pricing is based on the type of storage
(tape or disk), the capacity used and the level of the access required.
Our managed storage services are designed to provide the following
benefits to customers:
o Choice of IDC products and services
o Choice of bandwidth providers
o Access to easily expandable storage and disaster recovery solutions
o Reliable, fail-safe environments
o Rapid speed of implementation
Our IDC customers
Our AccessColocentersSM provide services to a variety of customers,
including traditional voice and data transmission providers, long distance
carriers and commercial businesses.
Our principal customers are KMC Telecom, AT&T, NorVergence, OnFiber
Communications, Zone Telecom, KPN INS and Con Edison Communications. Our four
largest customers collectively accounted for approximately 60% of our revenues
for fiscal year 2003 and approximately 69% of our revenues for the three months
ended June 30, 2003.
Sales and business development
We market our services through a program using a variety of media and
channels, including a small direct sales force, sales channels and referral
programs.
The IDC direct sales force presently consists of our President and five
other employees. This team is supported by both our operations and legal
personnel.
Our sales channels and referral programs include:
o Providers of complementary services, including system integrators,
such as The Casey Group (a stockholder of AccessDM), Blue Element
and CoreServe;
o Communications carriers, such as Qwest, Cogent, Con Edison
Communications and others that sell their bandwidth services to our
customers;
o Landlords, real estate brokers and other IDC providers;
o Colocation brokers and online directories;
o Storage hardware and software vendors, such as Brocade
Communications Systems, Inc., VERITAS Software and EMC2 Corporation,
with which we share leads and opportunities; and
o AccessDM and Hollywood SW will co-market IDC services as an integral
component of or complement to their own services.
57
Our principal marketing objective for our IDCs is to develop sales
opportunities by increasing market awareness of our products and services and of
the potential cost-savings and other benefits of using our IDC services rather
than attempting to replicate the services internally. Our marketing strategy
includes an active public relations campaign, print advertisements, online
advertisements, trade shows, speaking engagements, strategic partnerships and
ongoing customer and vendor communications programs. We are focusing our
marketing efforts on public relations, developing referral relationships and
participating in industry conferences and similar events.
Research and development
AccessIT has not expended any monies on research and development
activities during either of its past two fiscal years in connection with its IDC
business.
Employees
Immediately after our acquisition of Hollywood SW, we expect to have 21
employees, one of whom will be part-time. Six of our employees will be in sales
and marketing, six will be in research and development and technical services
and nine will be in accounting and administration. None of our employees is
represented by a labor union; we believe that our employee relations are
satisfactory.
Properties
The company's executive offices are located in Morristown, New Jersey.
Our nine IDC facilities are located in Jersey City, New Jersey; the Manhattan
and Brooklyn Boroughs of New York City; Portland, Maine; Manchester, New
Hampshire; Roanoke, Virginia; Wichita, Kansas; Little Rock, Arkansas; and Waco,
Texas. Our executive offices and all of our IDC facilities are leased. We do not
own any real property.
We are a party to separate leases for each of our nine IDC facilities.
These leases cover an aggregate square footage of 67,200, under which we are
paying an aggregate monthly rent of $192,000. The rental periods remaining on
these leases range from approximately three months (under our Roanoke, Virginia
facility lease, the term of which we intend to extend if our customer at that
facility renews its agreement with us) to 13 years and, with the exception of
our leases for the Jersey City, New Jersey and Brooklyn, New York facilities,
which expire in 2009 and 2016, respectively, include options to renew the
leases. The lease of our executive offices expires on May 31, 2005, has a
five-year renewal option, covers 5,237 square feet and has a monthly rent of
$12,219. 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.
In connection with our acquisition of Hollywood SW, we will assume the
obligations of Hollywood SW under a Commercial Property Lease, dated January 1,
2000, between Hollywood SW and Hollywood Media Center, LLC, or HMC, the
landlord. The lease is for the executive offices of Hollywood SW, has a monthly
rent of $2,335 and covers 2,115 square feet. The lease expires on December 31,
2003. We expect to extend this lease for at least one year on substantially
similar terms. HMC is a limited liability company 95% owned by David Gajda, one
of the sellers of the capital stock of Hollywood SW. See "Related party
transactions."
In August 2003, we entered into an agreement with UA, which provides us
with an option to license data center space in any one or more of ten specified
UA data centers nationwide. We, in turn, may license the UA space to our
customers under separate agreements. We also have the option, subject to certain
conditions, to cause the UA's data center lease to be assigned to us by its
landlord. As of August 31, 2003, we had not licensed any data center space under
our agreement with UA. See "IDCs - Our IDCs.
58
Management
Directors, executive officers and key employees
The following table sets forth information concerning our directors,
executive officers and key employees as of August 31, 2003.
Name Age Position(s)
--------------------------- ------ ----------------------------------------------------------------
A. Dale Mayo 62 President, Chief Executive Officer and Chairman of our Board of
Directors
Jeff Butkovsky 43 Senior Vice President - Managed Services
Kevin J. Farrell 42 Senior Vice President - Data Center Operations and a director
Brett E. Marks 41 Senior Vice President - Business Development and a director
Gary S. Loffredo 38 Senior Vice President - Business Affairs; General Counsel; and
Secretary; and a director
Brian D. Pflug 36 Senior Vice President - Accounting and Finance
Kevin A. Booth 34 Director
Robert Davidoff 76 Director
Wayne L. Clevenger 60 Director
Matthew W. Finlay 36 Director
Gerald C. Crotty 51 Director
David Gajda* 47 Key employee
Robert Jackovich* 43 Key employee
Russell J. Wintner** 51 Key employee
* Presently, the stockholders and executive officers of Hollywood Software,
Inc., or Hollywood SW.
** Expected to become President and Chief Operating Officer of AccessDM, our
80%-owned subsidiary, upon completion of this offering.
------------------------
The following biographical information about our directors, executive officers
and key employees is based solely on information provided to us by them. There
are no familial relationships between or among any of our directors, executive
officers and key employees.
A. Dale Mayo is a co-founder of the company and has been Chairman, President and
Chief Executive Officer since our inception on March 31, 2000. From January to
March 2000, Mr. Mayo explored various business opportunities, including data
center operations. From December 1998 to January 2000, he had been the President
and Chief Executive Officer of Cablevision Cinemas, LLC. In December 1994, Mr.
Mayo co-founded Clearview Cinema Group, Inc., which was sold to Cablevision
Cinemas in 1998. Mr. Mayo was also the founder, chairman and chief executive
officer of Clearview Leasing Corporation, a lessor of computer peripherals and
telecommunications equipment founded in 1976. Mr. Mayo began his career as a
computer salesman with IBM in 1965.
Jeff Butkovsky has been our Senior Vice President - Managed Services since
October 2000. Previously, Mr. Butkovsky had served as Eastern Regional Director
for LogicStream, Inc., a managed service provider and colocation company from
March 2000 to October 2000. He served as a sales executive with Auspex Systems,
Inc., a network attached storage company, from June 1999 to March 2000. Mr.
Butkovsky was employed by Micron Electronics Incorporated from May 1996 to June
1999, where he was the Northeast Regional Director.
59
Kevin J. Farrell is a co-founder of our company and has been Senior Vice
President - Data Center Operations and a director since our inception on March
31, 2000. From December 1998 to March 2000, he had served as Director of
Operations of Gateway Colocation, LLC, of which he was also a co-founder, where
he was responsible for the completion of 80,000 square feet of carrier-neutral
colocation space and supervised infrastructure build-out, tenant installations
and daily operations. Prior to joining Gateway, Mr. Farrell had served, from
1993 to 1998, as Building Superintendent and Director of Facility Maintenance at
the Newport Financial Center in Jersey City, NJ. He is a former officer of the
International Union of Operating Engineers.
Brett E. Marks is a co-founder of our company and has been Senior Vice President
- Business Development and a director since our inception on March 31, 2000.
From December 1998 to March 2000, Mr. Marks had been Vice President of Real
Estate and Development of Cablevision Cinemas, LLC. From June 1998 until
December 1998, he was Vice President of First New York Realty Co., Inc. In
December 1994, Mr. Marks co-founded, with Mr. Mayo, Clearview Cinema Group, Inc.
and was instrumental in the site selection process that helped to increase its
number of theater locations.
Gary S. Loffredo has been Senior Vice President - Business Affairs; General
Counsel; and Secretary and a director since September 2000. From March 1999 to
August 2000, he had been Vice President, General Counsel and Secretary of
Cablevision Cinemas, LLC. At Cablevision Cinemas, Mr. Loffredo was responsible
for all aspects of the legal function, including negotiating and drafting
commercial agreements, with emphases on real estate, construction and lease
contracts. He was also significantly involved in the business evaluation of
Cablevision Cinemas' transactional work, including site selection and analysis,
negotiation and new theater construction oversight. Mr. Loffredo was an attorney
at the law firm of Kelley Drye & Warren LLP from September 1992 to February
1999.
Brian D. Pflug has been Senior Vice President - Accounting and Finance since
January 2003. From September 2000 to December 2002, he had been our Vice
President - Controller. From July 1998 to September 2000, Mr. Pflug was the
Controller of Cablevision Cinemas, LLC, where he was responsible for all
accounting functions, including financial reporting, payroll and accounts
payable. Prior to that, Mr. Pflug was employed for four years at GPU, Inc.
(which later merged with FirstEnergy Corp.), a large energy provider, in the
areas of the Securities and Exchange Commission reporting and accounting
research. Mr. Pflug began his career as an auditor at Coopers & Lybrand and is a
Certified Public Accountant.
Kevin A. Booth is a co-founder of our company and has been a director since our
inception on March 31, 2000. Since July 2003, Mr. Booth has provided consulting
services in connection with this offering and our acquisition of Hollywood SW.
See "Related party transactions." From January 2000 until July 2003, Mr. Booth
had been our Senior Vice President - Corporate Development and from April 2000
to December 2002, he was our Senior Vice President - Finance. From April 1999 to
March 2000, Mr. Booth was Director of Finance at Gateway Colocation, LLC. Prior
to joining Gateway Colocation, LLC, he held vice president positions in the
mergers and acquisitions groups of two large New York City-based real estate
firms: The Witkoff Group, from May 1998 to April 1999, and Insignia Financial
Group, from June 1996 to April 1998. Mr. Booth, a Certified Public Accountant,
began his career with KPMG.
Robert Davidoff has been a director since July 2000 and was the Chairman of our
Compensation Committee from November 2000 to July 2003. Mr. Davidoff currently
serves on our Audit Committee. Since 1990, Mr. Davidoff has been a Managing
Director of Carl Marks & Co., Inc. and, since 1989, the General Partner of CMNY
Capital II, L.P., a venture capital affiliate of Carl Marks & Co. Since 1998,
Mr. Davidoff has served as a director of Sterling/Carl Marks Capital, Inc. He is
also the Chairman and Chief Investment Officer of CM Capital Corporation, the
firm's leveraged buyout affiliate. Mr. Davidoff is a director of Hubco
Exploration, Inc., Rex Stores Corporation and Marisa Christina, Inc. Mr.
Davidoff served as a director of Clearview Cinema Group, Inc. from December 1994
to December 1998.
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Wayne L. Clevenger has been a director since October 2001. Mr. Clevenger has
served on our Compensation Committee since February 2002. He has more than 20
years of private equity investment experience. He has been a Managing Director
of MidMark Equity Partners II, L.P., or MidMark, and its predecessor company
since 1989. Mr. Clevenger was President of Lexington Investment Company from
1985 to 1989, and, previously, had been employed by DLJ Capital Corporation
(Donaldson, Lufkin & Jenrette) and INCO Securities Corporation, the venture
capital arm of INCO Limited. Mr. Clevenger served as a director of Clearview
Cinema Group, Inc. from May 1996 to December 1998.
Matthew W. Finlay has been a director since October 2001 and was a member of our
Audit Committee from February 2002 to July 2003. Mr. Finlay currently serves on
our Compensation Committee. He is a director of MidMark, which he joined in
1997. Previously, he had been a Vice President with the New York merchant
banking firm Juno Partners and its investment banking affiliate, Mille Capital,
from 1995 to 1997. Mr. Finlay began his career in 1990 as an analyst with the
investment banking firm Southport Partners.
Gerald C. Crotty has been a director since August 2002 and has served on our
Audit Committee since July 2003. Mr. Crotty co-founded and, since June 2001, has
directed, Weichert Enterprise LLC, a private and public equity market investment
firm. Weichert Enterprise oversees the holdings of Excelsior Ventures
Management, a private equity and venture capital firm that Mr. Crotty co-founded
in 1999. From 1991 to 1998, he held various executive positions with ITT
Corporation, including President and Chief Operating Officer of ITT Consumer
Financial Corp. and Chairman, President and Chief Executive Officer of ITT
Information Services, Inc. Mr. Crotty also serves as a director of AXA Premier
Funds Trust.
David Gajda is a co-founder of Hollywood SW and has been its Chief Executive
Officer since its inception in 1997. Prior to co-founding Hollywood SW, Mr.
Gajda owned and managed a strategic consulting company, DWG International Inc.,
from 1990 to 1997. At DWG, he helped many entertainment companies develop their
three- to five-year strategic systems plans. Following the completion of our
acquisition of Hollywood SW, Mr. Gajda will be the President and Chief Operating
Officer of Hollywood SW.
Robert Jackovich is a co-founder of Hollywood SW and has been its President and
Chief Technology Officer since its inception in 1997. Prior to co-founding
Hollywood SW, Mr. Jackovich was the Chief Information Officer of Savoy Pictures,
Inc., from 1993 to 1996, where he managed and facilitated the efforts associated
with establishing the organization and systems of this start-up film
distribution studio. Following the completion of our acquisition of Hollywood
SW, Mr. Jackovich will resign as President and remain as the Chief Technology
Officer of Hollywood SW.
Russell J. Wintner is expected to become President and Chief Operating Offer of
AccessDM following completion of this offering. Mr. Wintner was the President of
WinterTek, Inc., a digital media consultant to various clients, from November
2002 to July 2003. From November 2000 to November 2002, he served as Principal,
Exhibitor Relations, Alternative Programming and Marketing for Technicolor
Digital Cinema, LLC. From October 1999 until November 2000, Mr. Wintner founded
and served as President of WinterTek, Inc. In 1996, he co-founded CineComm
Digital Cinema, LLC and served as President of Exhibition and Alternative
Programming and Chief Operating Officer until October 1999.
61
Board of directors
Under our bylaws, our board of directors must have at least two but not
more than ten members. Our board of directors currently has nine members and is
elected annually by the plurality vote of our stockholders. Vacancies and
newly-created directorships resulting from an increase in the authorized number
of directors may be filled by a majority vote of the directors then in office,
even if less than a quorum. All members of our board of directors hold office
until the next annual meeting of stockholders and the election and qualification
of their successors, or until their earlier death, resignation or removal. Our
officers, subject to the terms of any applicable employment agreements, serve at
the discretion of our board of directors.
We also have a board of advisors, whose four members are Edward H.
Herbst, an architectural/design consultant; Cary C. Jones, an engineering
consultant; John L. O'Hara, a construction consultant; and Harvey Marks, a site
selection consultant. Mr. Marks is the father of Brett E. Marks, who is our
Senior Vice President - Business Development and a director. No compensation has
been paid to any of these members for their services as members of the board of
advisors.
Our board of directors presently has two independent directors - Robert
Davidoff and Gerald C. Crotty. The independent directors are neither officers
nor employees of the company and are persons whom our entire board of directors
has affirmatively determined have no material relationship with us that would
interfere with their exercise of independent judgment. Our board of directors
intends to meet at least quarterly and the independent directors serving on our
board of directors intend to meet in executive session (i.e., without the
presence of any non-independent directors) at least once a year.
Our board of directors has three standing committees, consisting of an
audit committee, a compensation committee and a nominating committee.
Audit committee
The audit committee consists of Messrs. Davidoff and Crotty. The audit
committee intends to meet at least quarterly with our management and our
independent public accountants to review and help ensure the adequacy of our
internal controls and to review the results and scope of the accountants'
auditing engagement and other financial reporting and control matters. Both
Messrs. Davidoff and Crotty are financially literate, and Mr. Davidoff is
financially sophisticated, as those terms are defined under the rules of the
AMEX. Mr. Davidoff is also a financial expert, as such term is defined under the
Sarbanes-Oxley Act of 2002.
The audit committee will adopt a formal written charter specifying: (i)
the scope of the audit committee's responsibilities and how it is to carry out
those responsibilities, including structure, processes and membership
requirements; (ii) the audit committee's responsibility for ensuring its receipt
from the outside auditor of a formal written statement delineating all
relationships between the auditor and the company, consistent with Independence
Standards Board Standard 1, as adopted in January 1999 by the Independence
Standards Board (the private sector standard-setting body governing the
independence of auditors from their public company clients) and the committee's
responsibility for actively engaging in communications with the auditor with
respect to any relationships or services that may impact the objectivity and
independence of the auditor and for taking, or recommending that the entire
board of directors take, appropriate action to oversee the independence of the
outside auditor; and (iii) the outside auditor's ultimate accountability to the
board of directors and the audit committee, as representatives of our company's
stockholders, and these stockholder representatives' ultimate authority and
responsibility to select, evaluate and, where appropriate, replace the outside
auditor (or to nominate the outside auditor for stockholder approval in a proxy
statement). The audit committee will review and reassess the adequacy of its
written charter on an annual basis.
62
The audit committee will adopt guidelines and procedures: (i) making it
directly responsible for the appointment, compensation and oversight of the work
of any public accounting firm engaged by it (including resolution of any
disagreements between management and the firm regarding financial reporting) for
the purpose of preparing or issuing an audit report or related work, and each
such public accounting firm will report directly to the audit committee; (ii)
providing for the (a) receipt, retention and treatment of complaints received by
the company regarding accounting, internal accounting controls or auditing
matters and (b) confidential, anonymous submission by company employees of
concerns regarding questionable accounting or auditing matters; (iii) affording
it the authority to engage independent counsel and other advisers, as it may
determine to be necessary to carry out its duties; and (iv) providing for
appropriate funding for payment of: (a) the public accounting firm engaged by
the company for the purpose of rendering or issuing an audit report and (b) any
advisers engaged by the audit committee as described under clause (iii) above.
The audit committee will also be responsible for the review, approval
and oversight of all related party transactions between the company and its
officers, directors, employees and principal stockholders.
Compensation committee
The compensation committee consists of Messrs. Mayo, Finlay and
Clevenger. The compensation committee approves the compensation package of our
Chief Executive Officer and reviews and recommends to our board of directors the
levels of compensation and benefits payable to our other executive officers,
reviews general policy matters relating to employee compensation and benefits
and recommends to the entire board of directors, for its approval, stock option
grants and discretionary bonuses to our officers, employees, directors and
consultants.
Nominating committee
The nominating committee consists of Messrs. Mayo and Davidoff. The
nominating committee evaluates and approves nominations for annual elections to,
and to fill any vacancies on, our board of directors.
We intend, after the completion of this offering, to appoint only
independent directors to our audit committee. Whether a director is independent
will be determined in accordance with the applicable rules of the AMEX and the
Exchange Act.
Code of ethics
We intend to adopt a code of ethics, as contemplated by Section 406 of
the Sarbanes-Oxley Act of 2002 and to include it on our website,
www.accessitx.com. We will disclose any amendment to, or waiver of, a provision
of our code of ethics on a Form 8-KSB filed with the Securities and Exchange
Commission or on our website by posting such information within five days after
such amendment or waiver.
63
Executive compensation
The following table sets forth information for fiscal years 2003, 2002
and 2001 in respect of the compensation earned by our Chief Executive Officer
and our four other most highly compensated executive officers during fiscal year
2003 (the "Named Executives"). We awarded or paid compensation for services
rendered by them in all capacities to the company during the applicable fiscal
years.
Summary compensation table
Annual Compensation Long-Term Compensation
-------------------------------------------------- -------------------------------
Restricted Securities
Name and Fiscal Other Annual Stock Underlying All Other
Principal Position(s) Year Salary($) Bonus($) Compensation(1) Awards($)(2) Options(#)(3) Compensation($)(4)
--------------------- ------ ---------- -------- -------------- ------------- ------------- ------------------
A. Dale Mayo 2003 $250,000 $147,973 $ 14,400 -- -- $16,453(5)
Chief Executive 2002 $200,000 $ 66,875 $ 14,400 -- -- $7,435(5)
Officer and President 2001 $121,154(6) $ 2,472 $ 10,800(6) -- -- $2,927(5)
Gary S. Loffredo 2003 $150,000 $ 7,500 $ 10,000 -- 20,000 $22,065(7)
Senior Vice President-- 2002 $150,000 $ 12,500 $ 10,000 -- 20,000 $ 6,646
Business Affairs; 2001 $72,116(6) $ 50,000 $ 5,833(6) -- 70,000 $ 1,496
General Counsel; and
Secretary
Jeff Butkovsky 2003 $125,000 $ 10,000 $ 5,400 -- 20,000 $15,673(8)
Senior Vice President-- 2002 $125,000 $ 7,500 $ -- -- 10,000 $ 3,780
Managed Services 2001 $49,038(6) $ -- $ -- -- 25,000 $ 1,171
Brett E. Marks 2003 $100,000 $ 6,000 $ 9,600 -- -- $ 377
Senior Vice President-- 2002 $100,000 $ 2,500 $ 9,600 -- -- $ 524
Business Development 2001 $80,769(6) $ -- $ 7,200(6) -- -- $ 43
Kevin J. Farrell 2003 $100,000 $ 10,000 $ 7,200 -- -- $ 5,502
Senior Vice President-- 2002 $100,000 $ 10,000 $ 7,200 -- -- $ 5,089
Data Center Operations 2001 $100,000 $ -- $ 7,200 -- -- $ 1,965
------------------
(1) Reflects car allowances paid by the company.
(2) We have not made any restricted stock awards.
(3) Reflects stock options granted under our 2000 Stock Option Plan to Messrs.
Loffredo and Butkovsky.
(4) Includes the company's matching contributions under its 401(k) plan and
the premiums for group term life insurance paid by the company. Under the
company's 401(k) plan, the company automatically matches 50% of employee
contributions up to the lesser of 15% of the employee's pay (on a
per-payroll period basis) or the statutory annual limit set by the
Internal Revenue Service.
(5) Includes premiums for a ten-year term life insurance policy in the
benefits amount of $5 million, under which the company is the beneficiary
and the proceeds of which are to be used to repurchase, after
reimbursement of all premiums paid by the company, shares of our capital
stock held by Mr. Mayo's estate.
(6) Reflects amounts that we paid for a period consisting of less than a full
year.
(7) Includes $16,000 of shares of Class A Common Stock issued by the company
to Mr. Loffredo in December 2002, which shares were valued by an
independent appraiser and are not subject to any contractual restrictions.
(8) Includes $12,000 of shares of Class A Common Stock issued by the company
to Mr. Butkovsky in December 2002, which shares were valued by an
independent appraiser and are not subject to any contractual restrictions.
64
The following table sets forth information concerning stock options
granted to the Named Executives during fiscal year 2003.
Stock option grants in last fiscal year
Individual Grants
----------------------------------------------------------
Shares % of Total Options
Underlying Granted to
Options Employees in Exercise Expiration
Name Granted(#) Fiscal Year Price($) Date
------------------- --------- ----------------- --------- -----------
A. Dale Mayo
Gary S. Loffredo 20,000 28% $2.50 12/18/2012
Jeff Butkovsky 10,000 14% $7.50 7/12/2012
10,000 14% $2.50 12/18/2012
Brett E. Marks - - - -
Kevin J. Farrell - - - -
The following table sets forth information regarding the number of
stock options exercised by the Named Executives during fiscal year 2003 and, as
of March 31, 2003, the number of securities underlying unexercised stock options
and the value of the in-the-money options held by the Named Executives. We have
not granted any stock appreciation rights.
Aggregate option exercises in last fiscal year and fiscal year-end
option values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at FY-End (#) at FY-End ($)(1)
Acquired on Value ----------------------------------- ------------------------------
Name Exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
--------------------- --------------- ------------ --------------- --------------- --------------- --------------
A. Dale Mayo -- -- -- -- -- --
Gary S. Loffredo -- -- 53,333 56,667 $0 $50,000
Jeff Butkovsky -- -- 20,000 35,000 $0 $25,000
Brett E. Marks -- -- -- -- -- --
Kevin J. Farrell -- -- -- -- -- --
--------------
(1) Based on the fair market value of a share of our Class A Common Stock as
of March 31, 2003 (as determined by our board of directors).
65
The following table sets forth certain information, as of September
17, 2003, regarding the shares of our common stock authorized for issuance under
our only equity compensation plan.
Equity compensation plan information
Number of shares of common Number of shares of
stock issuable upon Weighted average common stock remaining
exercise of exercise price of available for
Plan outstanding options (#) outstanding options ($) future issuance (#)
------------------------ --------------------------- ----------------------- -------------------
Equity compensation plan approved by
our stockholders:
Amended and Restated 2000 Stock
Option Plan 306,397 $6.90 293,603
Stock option plan
Our board of directors adopted our 2000 Stock Option Plan, or the Plan,
on June 1, 2000 and, in July 2000, the company's stockholders approved the Plan
by written consent. Under the Plan, which was amended and restated in January
2003 and September 2003, we grant both incentive and non-statutory stock options
to our employees, non-employee directors and consultants. The primary purpose of
the Plan is to enable us to attract, retain and motivate our employees,
non-employee directors and consultants. The Plan, as amended, authorizes up to
600,000 shares of our Class A Common Stock for issuance upon the exercise of
options granted under the Plan. As of August 31, 2003, stock options covering
306,397 shares of our Class A Common Stock had been granted under the Plan. We
intend to grant, prior to and/or immediately after the completion of this
offering, additional options to purchase up to approximately 100,000 shares of
Class A Common Stock.
Under the Plan, stock options covering no more than 100,000 shares may
be granted to any participant in any single calendar year and no participant may
be granted incentive stock options with an aggregate fair market value, as of
the date on which such options were granted, of more than $100,000 becoming
exercisable for the first time in any given calendar year. Options granted under
the Plan expire ten years following the date of grant (or such shorter period of
time as may be provided in a stock option agreement or five years in the case of
incentive stock options granted to stockholders who own greater than 10% of the
total combined voting power of the company) and are subject to restrictions on
transfer. Options granted under the Plan vest generally over three-year periods.
The Plan is administered by our board of directors.
The Plan provides for the granting of incentive stock options with
exercise prices of not less than 100% of the fair market value of our common
stock on the date of grant. Incentive stock options granted to holders of more
than 10% of the total combined voting power of the company must have exercise
prices of not less than 110% of the fair market value of our common stock on the
date of grant. Incentive and non-statutory stock options granted under the Plan
are subject to vesting provisions, and exercise is subject to the continuous
service of the optionee. The exercise prices and vesting periods (if any) for
non-statutory options are set in the discretion of our board of directors. Upon
a change of control of our company, all options (incentive and non-statutory)
that have not previously vested will become immediately and fully exercisable.
In connection with the grants of options under the Plan, we and the participants
have executed stock option agreements setting forth the terms of the grant.
66
Employee Benefit Plans
In July 2002, we terminated our then existing benefits plans, including
medical, dental and disability, and our 401(k) plan, and joined a Professional
Employer Organization, or a PEO. Through the PEO, the company purchases all of
its benefits and payroll services, along with other PEO member companies. For
tax filing and for benefits purposes, the employees of our company are
considered to be employees of the PEO.
Through the PEO, the company has a 401(k) plan that permits eligible
employees to contribute up to 15% of their compensation, not to exceed the
statutory limit. The company automatically matches 50% of all our employees'
contributions. Employee contributions, employer matching contributions and
related earnings vest immediately. Total expenses for our prior 401(k) plan and
the PEO 401(k) plan were $43,000 and $37,000 for the fiscal years ended March
31, 2002 and 2003, respectively.
Employment agreements
A. Dale Mayo. In July 2000, we entered into an employment agreement
with A. Dale Mayo, which was amended on December 1, 2000. The amended employment
agreement provides for our payment of an annual base salary of $250,000, plus
annual bonuses equal to 3.5% of our annual gross revenues up to $10 million and
2% of any annual gross revenues in excess of $10 million. The employment
agreement expires on July 1, 2004; however, it will be automatically renewed for
successive one-year terms unless written notice is given by either the company
or Mr. Mayo at least six months prior to the end of the term (as it may be
extended) that such party desires to terminate the agreement. We and Mr. Mayo
have agreed that his employment term will be extended through September 30, 2006
and his combined annual salary and bonus will be limited to $1.2 million. Under
his employment agreement, Mr. Mayo has agreed to not disclose or use any
confidential information of the company and, for a period of one year after the
termination or expiration of his agreement, not to compete with the company,
within certain geographical limitations. We may terminate Mr. Mayo's employment
if Mr. Mayo is convicted of theft or embezzlement, fraud, unauthorized
appropriation of any assets or property or any felony involving dishonesty or
moral turpitude. In the event of such termination, the company will pay only any
earned but unpaid salary up to the date of termination. If the company
terminates Mr. Mayo for any other reason, Mr. Mayo will be entitled to receive
his salary until the scheduled expiration of the agreement, during which time
Mr. Mayo will be obligated to seek other employment.
Kevin J. Farrell. In April 2000, we entered into an employment
agreement with Kevin Farrell. The employment agreement provides for our payment
of an annual base salary of $100,000. A bonus may be granted in the sole
discretion of our board of directors. The employment agreement expires on
December 31, 2003; however, it will be automatically renewed for successive
one-year terms unless written notice is given by either the company or Mr.
Farrell at least 120 days prior to the end of the term (as it may be extended)
that such party desires to terminate the agreement. No such notice has been
given in 2003. Mr. Farrell's employment will terminate on his death, disability
or termination for cause (as defined therein). In addition, Mr. Farrell has
entered into a confidentiality, non-solicitation and non-compete agreement with
us, under which Mr. Farrell has agreed to not disclose or use any confidential
information of the company, to assign all intellectual property made, developed
or conceived by Mr. Farrell in connection with his employment by the company and
to not compete with, or to solicit employees from, the company for a period of
one year after his employment agreement is terminated or expires.
Upon its acquisition, Hollywood Software, Inc., or Hollywood SW (which
will then become our wholly owned subsidiary), will enter into employment
agreements with David Gajda and Robert Jackovich.
67
David Gajda. Under his employment agreement with Hollywood SW, Mr.
Gajda will serve as the President and Chief Operating Officer of Hollywood SW.
The employment agreement provides for payment by Hollywood SW of an annual base
salary of $175,000 plus a bonus, if and as determined in the sole discretion of
Hollywood SW's board of directors based upon any performance targets that may be
adopted by that board. The employment agreement expires on October 31, 2005;
however, it will be automatically renewed for successive one-year terms unless
written notice is given by either Hollywood SW or Mr. Gajda at least 90 days
prior to the end of the term (as it may be extended) that such party desires to
terminate the agreement. Mr. Gajda's employment will terminate on his death,
disability, by Mr. Gajda for good reason (as defined therein) or by Hollywood SW
for cause (as defined therein). If Mr. Gajda's employment is terminated by him
for good reason or by Hollywood SW without cause, Mr. Gajda is entitled to
receive his base salary until the expiration of his employment term. In
addition, Mr. Gajda will enter into a confidentiality, non-solicitation and
non-compete agreement with our company, under which Mr. Gajda will agree to keep
secret and treat confidentially all confidential information of the company, to
assign to our company all intellectual property made, developed or conceived by
him in connection with his employment by Hollywood SW and to not compete with
the business of Hollywood SW or to solicit employees from our company or
Hollywood SW for any period during which he receives severance payments from
Hollywood SW. These restrictions are in addition to those in the Hollywood SW
stock purchase agreement. See "Business - Hollywood Software."
Robert Jackovich. Under his employment agreement with Hollywood SW, Mr.
Jackovich will serve as the Chief Technology Officer of Hollywood SW. The
employment agreement provides for payment by Hollywood SW of an annual base
salary of $175,000 plus a bonus, if and as determined in the sole discretion of
Hollywood SW's board of directors based upon any performance targets that may be
adopted by that board. The employment agreement expires on October 31, 2005;
however, it will be automatically renewed for successive one-year terms unless
written notice is given by either Hollywood SW or Mr. Jackovich at least 90 days
prior to the end of the term (as it may be extended) that such party desires to
terminate the agreement. Mr. Jackovich's employment will terminate on his death,
disability, by Mr. Jackovich for good reason (as defined therein) or by
Hollywood SW for cause (as defined therein). If Mr. Jackovich's employment is
terminated by him for good reason or by Hollywood SW without cause, Mr.
Jackovich is entitled to receive his base salary until the expiration of his
employment term. In addition, Mr. Jackovich will enter into a confidentiality,
non-solicitation and non-compete agreement with our company, under which Mr.
Jackovich will agree to keep secret and treat confidentially all confidential
information of the company, to assign to our company all intellectual property
made, developed or conceived by him in connection with his employment by
Hollywood SW and to not compete with the business of Hollywood SW or to solicit
employees from our company or Hollywood SW for any period during which he
receives severance payments from Hollywood SW. These restrictions are in
addition to those in the Hollywood SW stock purchase agreement. See "Business -
Hollywood Software." If, however, Mr. Jackovich's employment is terminated by
Hollywood SW without cause or by him for good reason, he may work for a
consulting company or a company in the film production, exhibition or
distribution business if such company does not provide outsourced solutions
similar to those of Hollywood SW to third parties.
Directors' compensation
Our directors do not presently receive any cash compensation for
serving as directors or participating on any committee of our board of
directors, but are reimbursed for the out-of-pocket expenses that they incur in
attending board meetings. Non-employee directors are eligible for grants under
our 2000 Stock Option Plan and, to date, two present directors and one former
director have been granted options covering an aggregate of 10,000 shares of
common stock for services provided by them as directors.
68
Related party transactions
Promoters. In April 2000, A. Dale Mayo, a founder and our President and
Chief Executive Officer, and Brett E. Marks, a founder and an executive officer
and director of our company, invested $200,000 and $100,000, respectively, in
Fibertech & Wireless, Inc, a holding company formed on March 29, 2000 with no
material assets or business activity, and received 10,000,000 and 5,000,000
shares, respectively, of the common stock of Fibertech & Wireless, Inc. Upon the
merger of Fibertech & Wireless, Inc. into AccessColo, Inc. in September 2000,
each of such shares was exchanged for 0.6205 of a share of common stock of
AccessColo, Inc., and resulted in A. Dale Mayo owning 1,241,000 shares of our
Class A Common Stock and Brett E. Marks owning 620,500 shares of our Class A
Common Stock. We changed our name from AccessColo, Inc. to Access Integrated
Technologies, Inc.
Kevin Booth, a co-founder and director of our company (and a former
employee), and Kevin Farrell, a co-founder and our Senior Vice President - Data
Center Operations, each received 400,000 shares of our Class A Common Stock in
April 2000, upon formation of AccessColo, Inc. and in connection with their
employment and status as co-founders. At the time of their receipt of such
shares, our company was a subsidiary of Fibertech & Wireless, Inc. See
"Business."
In October 2001, A. Dale Mayo returned 153,333 shares of our Class B
Common Stock and Brett E. Marks, Kevin Booth and Kevin Farrell returned 76,667,
85,000 and 85,000 shares, respectively, of our Class A Common Stock and received
no consideration from us for such returned shares.
In December 2002, A. Dale Mayo returned 30,000 shares of our Class B
Common Stock and Brett E. Marks, Kevin Booth and Kevin Farrell returned 10,000,
10,000 and 10,000 shares, respectively, of our Class A Common Stock and received
no consideration from us for such returned shares.
Series A and Series B Preferred Stock Financings. In October 2001,
MidMark Equity Partners II, L.P., or MidMark, invested $2 million in the company
for 3,226,538 shares of our Series A Preferred Stock, which are convertible into
645,307 shares of our Class C Common Stock. MidMark additionally received
certain contingent warrants to purchase up to 430,205 shares of our Class A
Common Stock. In connection with its investment, MidMark was afforded the right
to designate two persons for election to our board of directors and veto rights
in respect of certain corporate actions by us. Midmark's two director designees
are Wayne L. Clevenger and Matthew W. Finlay. The contractual provisions
affording Midmark its board designation and veto rights will terminate on
completion of this offering.
In connection with its purchase of shares of our Series A Preferred
Stock, we paid MidMark a $75,000 investment banking fee and, in October 2001,
entered into a consulting agreement with MidMark. Under the consulting
agreement, our company has agreed to pay $50,000 per year for strategic advice
and management consulting services. In fiscal year 2003, we paid MidMark $50,000
in consulting fees. The consulting agreement terminates on the earlier of the
sixth anniversary of the consulting agreement and the date on which no officer
of MidMark serves on our board of directors.
In November 2002, MidMark invested an additional $2.5 million in the
company for 4,976,391 shares of our Series B Preferred Stock, which are
convertible into 995,278 shares of our Class D Common Stock. MidMark
additionally received certain warrants to purchase up to 680,091 shares of our
Class A Common Stock. In connection with its purchase of shares of our Series B
Preferred Stock, we paid MidMark a $75,000 investment banking fee.
69
Series A and Series B Preferred Stock Conversion. In September 2003, we
entered into an exchange agreement with MidMark, under which we agreed to issue
2,202,848 additional shares of Class A Common Stock to MidMark in exchange for
all of its outstanding shares of Series A and Series B Preferred Stock,
including accrued dividends thereon, and through the exercise and exchange of
certain warrants. Upon and subject to the completion of this offering, MidMark
will (i) convert all 8,202,929 shares of its Series A and Series B Preferred
Stock into 1,640,585 shares of Class A Common Stock; (ii) exchange warrants that
were exercisable, subject to certain future conditions, for up to 951,041 shares
of Class A Common Stock, for 320,000 shares of Class A Common Stock; (iii)
exercise a warrant currently exercisable for up to 144,663 shares of Class A
Common Stock (143,216 shares on a cashless-exercise basis); and (iv) accept
99,047 shares of Class A Common Stock as payment of all accrued dividends on
shares of Series A and Series B Preferred Stock held by such stockholder. The
number of shares of Class A Common Stock to be issued as payment of accrued
dividends has been calculated assuming that the effective date of this offering
will be October 15, 2003 and the offering price will be $5.00 (rather than the
contractual provision of converting accrued dividends into shares of Class A
Common Stock at the conversion price). Any variation in the offering price will,
therefore, affect the number of shares of Class A Common Stock to be issued as
payment of accrued dividends. Upon issuance by us of these shares, 2,202,848
additional shares will be entitled to piggy-back registration rights, of which
1,739,632 shares also will be entitled to demand registration rights. See
"Description of securities - general."
Debt financings. From December 2001 to February 2002, we borrowed from,
and issued one-year promissory notes (bearing interest at 8% per year) to, A.
Dale Mayo, our President and Chief Executive Officer, Brett E. Marks, an
executive officer and director of our company, CMNY Capital II, L.P., or CMNY,
whose General Partner is Robert Davidoff, a director of our company, MidMark, a
principal stockholder of our company, two of whose designees, Wayne L. Clevenger
and Matthew Finlay, serve on our board of directors, and other investors in the
aggregate principal amount of $1.345 million. In connection with these one-year
notes, we granted to these investors ten-year warrants with an exercise price of
$0.05 per share to purchase up to an aggregate of 25,305 shares of our Class A
Common Stock, which warrants, unless exercised before the completion of this
offering, will be cancelled by the company. The net proceeds of these note
issuances were used primarily to fund our acquisition of a data center located
in Manhattan, New York from BridgePoint International (USA) Inc. and the costs
of such acquisition.
From March 2002 to August 2002, we borrowed from, and issued five-year
promissory notes (each bearing interest at 8% per year) to, Mr. Mayo, Mr. Marks,
CMNY, John L. O'Hara, a member of our board of advisors, and several other
investors in the aggregate principal amount of $3.175 million. In connection
with these five-year notes, we granted to these investors ten-year warrants with
an exercise price of $0.05 per share to purchase up to an aggregate of 317,500
shares of our Class A Common Stock, which warrants, unless exercised before the
completion of this offering, will be cancelled by the company. The net proceeds
of the five-year note issuances were used to repay the one-year notes and to
fund our working capital requirements.
Guarantees. In connection with the execution of one of the company's
long-term real property leases, A. Dale Mayo and Brett E. Marks, two of our
company's co-founders and executive officers, posted a letter of credit in the
aggregate amount of $525,000 in July 2000. This letter of credit was reduced by
one-third in each of the three successive years and terminated in June 2003. The
company reimbursed Messrs. Mayo and Marks for the issuance costs of the letter
of credit.
Consulting arrangement. Harvey Marks, a member of our board of
advisors, is the father of Brett E. Marks, who is our Senior Vice President -
Business Development and one of our directors. Under a consulting agreement,
dated June 1, 2000, Harvey Marks has provided certain real estate advisory
services to us in connection with the build-out of our data center facilities.
Since June 2000, the company has paid him $26,000 for such services. The company
has additionally granted to him options to purchase 41,025 shares of Class A
Common Stock at a weighted average exercise price of $6.83 per share.
Construction services. John L. O'Hara, a member of our board of
advisors, is the President of John O'Hara Company, Inc. Under a stock
subscription agreement, dated August 30, 2000, we issued 8,000 restricted shares
of our Class A Common Stock to John O'Hara Company, Inc. as partial
consideration for certain construction services it provided to us. John O'Hara
Company, Inc. has been paid $194,000 and $18,000 for the fiscal years ended
March 31, 2002 and 2003, respectively. In addition, Mr. O'Hara has purchased
$50,000 of our five-year notes, and holds warrants to purchase 5,000 shares of
our Class A Common Stock.
70
Edward H. Herbst, a member of our board of advisors, is a partner at
Herbst-Musciano Architects/Planners, an architectural services firm that has
performed certain services at our IDCs. We have paid Mr. Herbst's firm $5,000
for services performed by it for our company for the year ended March 31, 2002.
The company has additionally granted to Mr. Herbst options to purchase 600
shares of our Class A Common Stock at an exercise price of $12.50 per share.
Insurance. In January 2003, our board of directors approved the
purchase of two separate ten-year term life insurance policies on the life of A.
Dale Mayo, each carrying a death benefit of $5 million, and our company is the
beneficiary of each policy in the benefit amount of $5 million and under each of
which the company is the beneficiary. Under one of the policies, the proceeds
will be used to repurchase, after reimbursement of all premiums paid by the
company, shares of our capital stock held by Mr. Mayo's estate. See "Management
- executive compensation."
Hollywood SW acquisition. On the closing of the Hollywood SW
acquisition, we will purchase all of the outstanding capital stock of Hollywood
SW from its stockholders, David Gajda and Robert Jackovich. Messrs. Gajda and
Jackovich will continue as executive officers of Hollywood SW, under new
employment agreements, and will receive initially an aggregate of 400,000 shares
of our Class A Common Stock, less any shares that may be issued, at their
direction, to certain optionees of Hollywood SW. See "Business - Hollywood
Software."
Hollywood SW lease. Hollywood SW and Hollywood Media Center, LLC, a
limited liability company that is 95% owned by David Gajda, one of the sellers
of Hollywood SW, entered into a Commercial Property Lease, dated January 1,
2000, for 2,115 square feet of office space at 1604 Cahuenga Blvd., Hollywood,
CA. Under the terms of our acquisition of Hollywood SW, we will assume Hollywood
SW's obligations under this lease, including the monthly rental payments of
$2,335. The term of the lease expires on December 31, 2003. The company expects
to extend this lease for at least one year on substantially similar terms. Mr.
Gajda will be the President of Hollywood SW following its acquisition by us.
Wintner finder's fee. In connection with Russell J. Wintner's
employment arrangement with AccessDM, AccessIT has agreed to pay Mr. Wintner a
finder's fee of between $10,000 to $25,000 upon the closing of the Hollywood SW
acquisition based on the amount of time he spends in connection with the
completion of that acquisition.
Consulting arrangement. We entered into a consulting agreement with
Kevin A. Booth, a co-founder and director of our company, following the
termination of his employment with our company as of July 5, 2003. Under the
terms of the agreement, Mr. Booth will provide consulting services to our
company in connection with this offering and our acquisition of Hollywood SW,
for which we pay him $10,500 per month (plus any reasonable out-of-pocket
expenses) for the period beginning on July 5, 2003 through September 30, 2003.
We also will pay Mr. Booth a $10,000 bonus if this offering is completed and Mr.
Booth may also receive such additional bonus as may be determined by our Chief
Executive Officer in his sole discretion. After September 30, 2003, we may, in
our sole discretion, retain Mr. Booth's services for future projects on mutually
agreed to terms. Mr. Booth has agreed that the term of his confidentiality,
non-solicitation and non-compete agreement, which he entered into as of April
10, 2000, will remain in effect through July 4, 2004.
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Principal stockholders
The following table sets forth information regarding the beneficial
ownership of our Class A Common Stock as of the date of this prospectus, and
beneficial ownership as adjusted to reflect the effect of this offering, by:
o each person that we know owns more than 5% of our common stock;
o each of the Named Executive Officers and each of our current
directors; and
o all of our current executive officers and directors as a group.
Pursuant to rules issued under the Securities Exchange Act of 1934, as
amended, or the Exchange Act, a person is deemed to be a beneficial owner of an
equity security if such person has or shares the power to vote or to direct the
voting of such security and/or to dispose or to direct the disposition of such
security. More than one person may be deemed to be a beneficial owner of the
same equity security. In general, a person is deemed to be a beneficial owner of
any equity security that the person has the right to acquire within 60 days of a
determination date. Except as otherwise specifically noted, we believe that the
persons named below have sole dispositive and voting power with respect to the
shares of Class A Common Stock indicated as owned by them, except to the extent
shared with spouses under applicable law. Unless otherwise noted, the business
address for each person named below, for purposes hereof, is c/o Access
Integrated Technologies, Inc., 55 Madison Avenue, Morristown, NJ 07960.
Beneficially owned shares (1)
------------------------------------------------------
Prior to the offering After the
offering
-------------------------------------- ------------
Name and address of beneficial owner Number Percent Percent
------------------------------------ ---------------------- ------------ ------------
A. Dale Mayo (3)(4)...................................... 10,087,707(2) 55.5% 62.4%
(voting power)
1,035,412 21.2% 14.5%
(economic interest)
Brett E. Marks (3)(5).................................... 533,563 11.0% 7.5%
Kevin A. Booth........................................... 305,000 6.3% 4.3%
Kevin J. Farrell......................................... 305,000 6.3% 4.3%
Gary S. Loffredo (6)..................................... 96,667 2.0% 1.3%
Jeff Butkovsky (6)....................................... 38,333 * *
David Gajda ............................................. -- -- 5.6%(7)
c/o Hollywood Software, Inc.
1604 North Cahuenga Blvd., Suite 115
Hollywood, CA 90028
Robert Jackovich ........................................ -- -- 5.6%(7)
c/o Hollywood Software, Inc.
1604 North Cahuenga Blvd., Suite 115
Hollywood, CA 90028
Robert Davidoff (6) (8).................................. 2,000 * *
Wayne L. Clevenger (9)................................... -- -- --
Matthew W. Finlay (9).................................... -- -- --
Gerald C. Crotty ........................................ -- -- --
MidMark Equity Partners II, L.P. (2)(10)................. 6,017,213(2)
(voting power) 33.0% 13.7%
177 Madison Avenue 1,792,150
Morristown, NJ 07960 (economic interest) 35.8% 31.1%
All current executive officers and directors as a group
(11 persons) (3)(4)(5)(6).............................. 2,371,161 47.7% 38.1%
72
----------------------
* Less than 1%.
(1) Assumes the conversion of all outstanding shares of our preferred stock
into shares of common stock.
(2) We note that A. Dale Mayo, our Chief Executive Officer and President, owns
1,005,810 shares of Class B Common Stock, each share of which entitles him
to ten votes (i.e., voting power equal to 10,058,100 shares, or 55.6% of
our voting power). MidMark Equity Partners II, L.P., or MidMark, owns
3,226,538 shares of Series A and 4,976,391 shares of Series B Preferred
Stock, which are convertible into 645,307 shares of Class C and 995,278
shares of Class D Common Stock, respectively. MidMark is presently
entitled to four votes for each share of Class C Common Stock deemed to be
held by it and 3.3 votes for each share of Class D Common Stock deemed to
be held by it (i.e., aggregate voting power equal to 5,865,645 shares, or
32.5% of our voting power). Upon and subject to completion of this
offering, all shares of MidMark's Series A and Series B Preferred Stock
will be converted into shares of Class A Common Stock and, thereafter,
will entitle the holder of those shares to only one vote per share. See
"Related party transactions."
(3) Includes the following shares of Class A Common Stock that may be acquired
upon the exercise of warrants that may be exercised on or before November
22, 2003: Mr. Mayo - 29,601; and Mr. Marks - 14,801.
(4) Includes 100,000 shares of Class B Common Stock transferred by Mr. Mayo to
his wife, Sueanne Mayo, as to all of which shares he disclaims beneficial
ownership.
(5) Includes 17,764 shares of Class A Common Stock transferred by Mr. Marks to
his wife, Illissa Marks, as to all of which shares he disclaims beneficial
ownership.
(6) Includes the following shares of Class A Common Stock that may be acquired
upon the exercise of stock options that are or will be vested and
exercisable on or before November 22, 2003 under our 2000 Stock Option
Plan: Mr. Loffredo - 76,667; Mr. Butkovsky - 23,333; Mr. Davidoff - 2,000;
and all of our current executive officers and directors as a group -
137,186. Excludes the following shares of Class A Common Stock covered by
stock options that may become exercisable after such date: Mr. Loffredo -
33,333; Mr. Butkovsky - 31,667; and all of our current executive officers
and directors as a group - 89,000.
(7) Messrs. Gajda and Jackovich will initially be issued an aggregate of up to
400,000 shares of our Class A Common Stock (i.e., 6.1% collectively). Such
number of shares will be reduced by the number of shares of Class A Common
Stock that are issued by us, at their direction, to certain optionees
of Hollywood SW, pursuant to the stock purchase agreement signed by both
of them in connection with our acquisition of Hollywood SW. Excludes any
price protection and additional earnout shares that may be issued to them
under the terms of the Hollywood SW acquisition. See "Business - Hollywood
Software."
(8) Excludes 157,927 shares of Class A Common Stock beneficially owned by CMNY
Capital II, L.P., for which he serves as a Director, and 51,025 shares of
Class A Common Stock beneficially owned by Sterling Equities/Carl Marks
Capital, Inc., for which Mr. Davidoff serves as a Director, as to all of
which shares he disclaims beneficial ownership.
73
(9) Excludes (i) prior to the offering, 1,792,150 shares beneficially owned by
MidMark (see footnote 10), and (ii) after the offering, 2,202,848 shares
of common stock to be issued to MidMark in connection with its agreement
to convert all of its shares of preferred stock into common stock,
including accrued dividends thereon, and through the exercise and exchange
of certain warrants held by MidMark (see "Related party transactions"),
for which Mr. Clevenger serves as a Managing Director and Mr. Finlay
serves as a Director, as to all of which shares each disclaims beneficial
ownership.
(10) The general partner of MidMark is MidMark Advisors II, LLC, the Managing
Members of which are Wayne L. Clevenger, Denis Newman and Joseph R.
Robinson. Reflects (i) prior to the offering, 1,640,585 shares of Class A
Common Stock, into which the 8,202,929 shares of Series A and Series B
Preferred Stock held by MidMark are convertible, and 151,565 shares of
Class A Common Stock that may be acquired upon exercise of warrants that
may be exercised on or before November 22, 2003 and (ii) after the
offering, 2,202,848 shares of Class A Common Stock to be issued to MidMark
in connection with its agreement to convert all of its shares of preferred
stock into common stock, including accrued dividends thereon, and through
the exercise and exchange of certain warrants certain warrants held by
MidMark (see "Related party transactions") and 6,902 shares of Class A
Common Stock upon exercise of warrants that may be exercised on or before
November 22, 2003.
Lock-up agreements
The underwriting agreement between us and the underwriter of this
offering requires holders of all outstanding shares of our common stock and
preferred stock issued prior to the date of this prospectus and persons who have
been granted options or warrants to purchase shares of our Class A Common Stock
prior to such date not to, directly or indirectly, offer, sell, announce an
intention to sell, contract to sell, pledge, hypothecate, grant an option to
purchase, or otherwise dispose of any shares of our common stock or any
securities convertible into or exercisable for shares of our common stock for a
period of 18 months following the date of this prospectus without the prior
written consent of the underwriter. The period will be 12 months following the
date of this prospectus, however, for stockholders that own 20,000 shares of our
common stock or less, and stockholders that own more than 20,000 shares of our
common stock will be permitted to sell up to 10,000 shares per quarter beginning
12 months following the date of this prospectus. In addition, those persons who
will receive shares of our Class A Common Stock in connection with our
acquisition of Hollywood SW have agreed to the same lock-up period; however, we
have agreed that, subject to the underwriter's agreement, they will be released
from their lock-up restrictions with respect to at least 50,000 shares per
quarter if any of our other stockholders that hold at least 100,000 shares are
permitted to sell any of their shares during the lock-up period. As of the date
of this prospectus, holders of the company's common stock, preferred stock,
warrants and options representing approximately 93% of our outstanding capital
stock, determined on an as if converted, fully-diluted basis, have executed and
delivered to the underwriter appropriate lock-up agreements. In addition, the
underwriter has agreed that the shares of Class A Common Stock underlying the
warrants granted to it by the company in connection with this offering may not
be sold or otherwise disposed of by it for a period of six months following the
date of this prospectus.
74
Description of securities
The following summary description of our capital stock is not intended
to be complete and is subject, and qualified in its entirety by reference, to
our amended and restated certificate of incorporation and our bylaws, copies of
each of which are filed as exhibits to the registration statement of which this
prospectus forms a part.
On July 28, 2003, our board of directors approved a transaction to
issue one share in exchange for each five shares of common stock held by our
stockholders of record on July 28, 2003, giving effect, subject to stockholder
approval, to a one-for-five reverse stock split. Our stockholders approved this
reverse stock split, by written consent, on September 17, 2003.
On September 17, 2003, in connection with our agreement with the only
holder of shares of our preferred stock (see "Related party transactions"), our
board of directors approved an amendment, upon and subject to the completion of
this offering, of our amended and restated certificate of incorporation to,
among other matters, eliminate the designations for our Series A and Series B
Preferred Stock and our Class C and Class D Common Stock into which such
Preferred Stock is presently convertible. Our board of directors will continue
to retain the authority to fix and designate all of the powers, preferences and
rights, and the qualifications, limitations and restrictions of our preferred
stock and to divide our preferred stock into one or more classes and designate
all of the powers, preferences and rights. Our board of directors also approved
giving effect to the one-for-five reverse stock as of September 18, 2003. Our
stockholders approved this amendment and the effective date of the reverse stock
split, by written consent, on September 17, 2003. The description of our capital
stock below gives effect to this amendment of our certificate of incorporation
and the agreement of the holder of our outstanding shares of Preferred Stock to
exchange such shares into shares of Class A Common Stock and exercise and
exchange certain of its warrants, or the Exchange.
All outstanding common stock and common stock equivalent shares and per
share amounts in our accompanying consolidated financial statements and the
notes thereto have been retroactively adjusted to give effect to the reverse
stock split.
General
We have authorized capital stock consisting of 80,000,000 shares of
common stock, par value $0.001 per share, and 15,000,000 shares of preferred
stock, par value $0.001 per share. Of our authorized shares of common stock,
40,000,000 shares are designated as Class A and 15,000,000 are designated as
Class B. Of our authorized shares of preferred stock, no shares are designated
or issued.
We have reserved 600,000 shares of Class A Common Stock authorized for
issuance under our 2000 Stock Option Plan, of which stock options covering
306,397 shares of our Class A Common Stock had been granted as of August 31,
2003; 265,088 shares of our Class A Common Stock for issuance upon the exercise
of warrants granted in connection with our issuances of one- and five-year
promissory notes (which warrants, unless exercised prior to the completion of
this offering, will be cancelled by us); 400,000 shares of our Class A Common
Stock to be issued initially in connection with our acquisition of Hollywood SW
and 80,000 shares of our Class A Common Stock for potential issuance in
connection with our price guarantee in respect of the initially-issued shares
(see "Business - Hollywood Software"); 8,700 shares of our Class A Common Stock
to be issued to The Casey Group upon the completion of this offering in
connection with its assistance in the development of software for Access Digital
Media, Inc., our 80%-owned subsidiary (see "Business - Access Digital Media,
Inc.").
Holders of a majority of our outstanding shares of capital stock
present or represented by proxy at any meeting of our stockholders constitute a
quorum. If a quorum exists, holders of a majority of the voting power of the
shares of capital stock present at the meeting may generally approve matters
coming before any stockholders meeting. The affirmative vote of the holders of a
majority of the voting power of the outstanding shares of our capital stock is
required to approve significant corporate transactions, including a liquidation,
merger or sale of substantially all of our assets. The holder of our Class B
Common Stock is entitled to ten votes per share. See "Principal stockholders."
75
Common stock
Voting rights. Holders of our common stock are entitled to the
following vote(s) per share on all matters submitted to a vote of our
stockholders: the Class A Common Stock, one vote per share; and the Class B
Common Stock, ten votes per share. The holders of our outstanding shares of
common stock vote together as a single class on all matters submitted to a vote
(or consent) of our stockholders.
Conversion. 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 of such share.
Dividends; Liquidation; Preemptive Rights. Holders of our common stock
are entitled to receive dividends only if, as and when declared by our board of
directors out of funds legally available for that purpose. See "Dividend
policy." In the event of our liquidation, dissolution or winding up, holders of
our common stock are entitled, subject to any priorities due to any holders of
our preferred stock, ratably to share in all assets remaining after payment of
our liabilities. Holders of our common stock have no preemptive rights or other
rights to subscribe for shares or securities convertible into or exchangeable
for shares of our common stock.
Preferred stock
Our amended and restated certificate of incorporation authorizes the
issuance of up to 15,000,000 shares of preferred stock. Our board of directors,
within the limitations set forth in our certificate of incorporation, is
authorized to issue preferred stock from time to time in one or more series or
classes and to fix the number of shares, fix or alter the dividend rights,
dividend rates, rights and terms of redemption, redemption price or prices,
liquidation preference, conversion rights, voting rights and any other rights,
preferences or limitations of any unissued shares of preferred stock, and to fix
and amend the number of shares constituting any issued or unissued series or
class and the designation thereof, or any of the foregoing. To the extent that
shares of preferred stock with voting rights are issued, such issuance would
affect the voting rights of the holders of our common stock by increasing the
number of outstanding shares entitled to vote and, if applicable, by creating
separate class or series voting rights. Additionally, the issuance of preferred
stock in certain circumstances may have the effect of delaying, deterring or
preventing a change of control of our company, may discourage bids for our
common stock at a premium over market price and may adversely affect the market
price, and the voting and other rights of the holders, of our common stock. Upon
completion of this offering, no shares of our preferred stock will be
outstanding.
Options
We have adopted a stock option plan under which we have reserved
600,000 shares of our Class A Common Stock for issuance upon the exercise of
stock options. Options vest generally over a three-year period. See "Management
- stock option plan."
Warrants
Warrants in connection with promissory notes. In December 2001 through
February 2002, we issued ten-year warrants to purchase up to 25,305 shares of
our Class A Common Stock, with exercise prices of $0.05 per share, in connection
with our issuance of one-year promissory notes (each bearing interest at 8% per
year) in the aggregate principal amount of $1.345 million. From March 2002
through August 2002, we issued ten-year warrants to purchase up to 317,500
shares of our Class A Common Stock, with exercise prices of $0.05 per share, in
connection with our issuance of five-year promissory notes (each bearing
interest at 8% per year) in the aggregate principal amount of $3.175 million. In
June and July 2003, we issued an aggregate principal amount of $1.23 million in
five-year promissory notes to, among other things, help fund the costs of this
offering and, in connection therewith, issued ten-year warrants to purchase up
to 123,000 shares of our Class A Common Stock, with exercise prices of $0.05 per
share. The exercise price and the number of shares of our Class A Common Stock
issuable upon the exercise of these warrants are subject to adjustments upon
stock dividends, subdivisions, stock splits or combinations in respect of our
capital stock. All of these warrants will be cancelled by us unless exercised
prior to the completion of this offering. As of September 17, 2003, of the
460,805 total warrants, warrants to purchase 195,717 shares of Class A Common
Stock had been exercised.
76
None of the warrants described above confer upon the holders any
voting, dividend or other rights as a stockholder of our company.
Registration rights
Immediately after this offering and after giving effect to the
Exchange, the owners of 6,093,936 shares of our common stock issued or issuable
upon the exercise of warrants will be entitled to registration of those shares
under the Securities Act of 1933, as amended, or the Securities Act. Under the
terms of agreements between us and the holders of those registrable securities,
if we propose to register any of our securities under the Securities Act, either
for our own account (excluding this offering) or for the account of other
security holders exercising registration rights, such owners are entitled to
notice of such registration and, subject to customary underwriting cutbacks, to
include their shares in the registration. Additionally, of the 6,093,936 shares
entitled to registration, the owner of 1,739,632 shares of Class A Common Stock
issuable in connection with the Exchange is entitled to demand registration
rights pursuant to which it may require us on two occasions, commencing 180 days
following this public offering, to file a registration statement under the
Securities Act with respect to its shares of common stock; we would then be
required to use our reasonable efforts to effect the registration. Further, the
owners of the above-referenced 6,093,936 shares may require us to file an
unlimited number of registration statements on Form S-3 (to the extent that we
are eligible to use such Form). The company has agreed to pay all registration
rights expenses, except for underwriting discounts, selling commissions and
counsel fees of, the seller in excess of $20,000 in connection with each
applicable registration of shares. In connection with our acquisition of
Hollywood SW, we will initially issue 400,000 shares of our Class A Common Stock
and, potentially, additional price protection and earnout shares, which will be
afforded the registration rights described above, other than the demand
registration rights.
All of the above registration rights terminate with respect to each
holder if and when, after the completion of this public offering, such
stockholder either holds less than 1% of our outstanding common stock or is
eligible to sell all of his or its registrable securities under Rule 144(d) of
the Securities Act within any three-month period without volume restrictions or
under Rule 144(k) of the Securities Act. Accordingly, if a holder is not an
"affiliate" of ours, then such holder's registration rights will terminate no
later than two years after its purchase of the applicable registrable shares.
Anti-takeover law
Delaware takeover statute. We are subject to Section 203 of the
Delaware General Corporation Law, or DGCL Section 203, which regulates corporate
business combinations and similar events. DGCL Section 203 prevents certain
Delaware corporations, including those whose securities are listed on a national
securities exchange, like the AMEX, from engaging in a business combination with
any interested stockholder during the three-year period following the date that
such stockholder became an interested stockholder, unless appropriate approvals
by its board of directors or stockholders have been obtained. For purposes of
DGCL Section 203, a business combination includes a merger or consolidation
involving our company and the interested stockholder or the sale of 10% or more
of our assets to an interested stockholder. In general, DGCL Section 203 defines
an interested stockholder of us as any entity or person beneficially owning 15%
or more of our outstanding voting stock and any entity or person affiliated
with, controlling or controlled by such entity or person. A Delaware corporation
may opt out of DGCL Section 203 through an express provision in its original
certificate of incorporation or an express provision in its certificate of
incorporation or bylaws resulting from amendments approved by the holders of a
majority of its outstanding voting shares. We have not opted out of DGCL
Section 203.
77
Director and officer liability and indemnification
Our amended and restated certificate of incorporation eliminates the
monetary liability of our directors to the fullest extent permitted by the DGCL.
Consequently, no director will be personally liable to us or our stockholders
for monetary damages resulting from his or her conduct as a director of our
company, except liability for:
o any breach of the director's duty of loyalty to the company or its
stockholders;
o any act or omission not in good faith or that involves intentional
misconduct or a knowing violation of law;
o any acts under Section 174 of the DGCL; or
o any transaction from which the director derives an improper personal
benefit.
Additionally, under recent Delaware court decisions, a director's liability may
not be limited or eliminated for a "conscious disregard of a known risk" that
calls into question whether the director acted in good faith.
Our amended and restated certificate of incorporation and bylaws both
provide for indemnification of our directors, officers and other authorized
persons, which may include employees and agents, to the maximum extent permitted
by Delaware law. Our directors and officers may also be protected against costs
and liabilities that they incur by virtue of serving in those capacities under a
liability insurance policy maintained by us, which currently provides coverage
of up to $5 million.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of a small
business issuer, like our company, pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
78
Shares eligible for future resale
Prior to this offering, there has been no public market for our common
stock, including our Class A Common Stock. Resales of a substantial amount of
our Class A Common Stock in the public market, or even the perception that such
resales may occur, could adversely affect the market price of our Class A Common
Stock prevailing from time to time and could impair our ability to raise
additional capital through future sales of equity securities.
Upon completion of this offering and after giving effect to the
Exchange, there will be 7,093,936 shares of our common stock outstanding,
consisting of the 1,000,000 shares of Class A Common Stock being offered in this
prospectus, 5,356,402 restricted shares of common stock issued, 400,000
restricted shares of our Class A Common Stock to be issued in connection with
our acquisition of Hollywood SW and 265,088 restricted shares of our Class A
Common Stock issuable upon the expected exercise of warrants granted in
connection with our issuances of one- and five-year notes. In addition, we have
reserved up to 600,000 shares of common stock for issuance under our 2000 Stock
Option Plan, of which 306,397 shares were subject to outstanding options and
293,603 shares were available for future issuance as of September 17, 2003.
The shares of Class A Common Stock being offered by this prospectus
will be freely tradable without restriction or further registration under the
Securities Act by all persons other than our affiliates. The restricted shares
will be freely tradable if subsequently registered under the Securities Act or
as and to the extent permitted by Rules 144 or 701 or some other exemption from
registration under the Securities Act, subject to the lock-up restrictions
agreed to by our existing stockholders, optionees and warrantholders.
In general, under Rule 144, if one year has elapsed since the date of
the acquisition of restricted shares by a holder from Access Integrated
Technologies, Inc. or from an affiliate of Access Integrated Technologies, Inc.,
the holder is entitled to resell, in the public market, within any three-month
period, the number of shares of common stock that does not exceed the greater of
1% of the total number of our then outstanding shares of common stock or the
average weekly trading volume of our common stock during the four calendar weeks
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Resales under Rule 144 are subject also to requirements as
to the manner of sale, notice and availability of current public information
about Access Integrated Technologies, Inc. If two years have elapsed, a holder,
other than an affiliate of Access Integrated Technologies, Inc., is entitled to
resell restricted shares in the public market under Rule 144(k), without regard
to the Rule's volume limitation or manner of sale, current public information or
notice requirements.
Rule 701 permits our employees, officers, directors and consultants who
purchased shares under a written compensatory plan to resell such shares in
reliance upon Rule 144, but without compliance with certain of its restrictions.
Rule 701 provides that, commencing 90 days after an issuer becomes subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended,
affiliates of an issuer may resell their Rule 701 shares under Rule 144 without
complying with the holding-period requirement and non-affiliates may resell such
shares in reliance on Rule 144 without complying with the holding-period,
current public information, volume limitation or notice requirements of Rule
144.
Of our outstanding shares of restricted common stock, _______ shares
will be eligible for resale under Rule 144 under the Securities Act 90 days
after the date of this prospectus, subject to the lock-up provisions described
below.
79
The underwriting agreement between us and the underwriter of this
offering requires holders of all of our outstanding shares of common stock and
preferred stock issued prior to the date of this prospectus and persons who have
been granted options or warrants to purchase shares of our Class A Common Stock
prior to such date not to, directly or indirectly, offer, sell, announce an
intention to sell, contract to sell, pledge, hypothecate, grant any option to
purchase, or otherwise dispose of any shares of our common stock or any
securities convertible into or exercisable for shares of our common stock for a
period of 18 months following the date of this prospectus without the prior
written consent of the underwriter. However, the period will be 12 months
following the date of this prospectus for stockholders that own 20,000 shares of
our common stock or less, and stockholders that own more than 20,000 shares of
our common stock will be permitted to sell up to 10,000 shares per quarter
beginning 12 months following the date of this prospectus. In addition, those
persons who will receive shares of our Class A Common Stock in connection with
our acquisition of Hollywood SW have agreed to the same lock-up period; however,
we have agreed that, subject to the underwriter's agreement, they will be
released from their lock-up restrictions with respect to at least 50,000 shares
per quarter if any of our other stockholders that hold at least 100,000 shares
are permitted to sell any of their shares during the lock-up period. As of the
date of this prospectus, holders of the company's common stock, preferred stock,
warrants and options representing approximately 93% of our outstanding capital
stock, determined on an as if converted, fully-diluted basis, have executed and
delivered to the underwriter lock-up agreements. The shares of Class A Common
Stock being offered by this prospectus will not be subject to any lock-up
provisions and will be freely tradable.
80
Underwriting
Subject to the terms and conditions of the underwriting agreement
between us and the underwriter named below, the underwriter has agreed to
purchase from us, and we have agreed to sell to the underwriter, the number of
shares of Class A Common Stock set forth opposite the underwriter's name, at the
initial public offering price per share less the underwriting discounts and
commissions set forth on the cover page of this prospectus.
Number
Underwriter of shares
----------- ---------
Joseph Gunnar & Co., L.L.C....................... 1,000,000
The underwriting agreement sets forth the obligation of the underwriter
to pay for and accept delivery of the shares and provides that the underwriter
will purchase all of the shares, if any of the shares are purchased.
The underwriter proposes to offer the shares of Class A Common Stock
directly to the public at the initial public offering price per share set forth
on the cover page of this prospectus and to selected dealers at such price less
a concession not in excess of $0.__ per share. The underwriter may allow, and
these dealers may re-allow, a concession not in excess of $0.__ per share to
other dealers. After this offering, the public offering price, concession and
re-allowance may be changed.
We have granted to the underwriter an option, exercisable during the
30-day period after the date of this prospectus, to purchase up to 150,000
additional shares of Class A Common Stock at the initial public offering price
per share less the underwriting discounts and commissions set forth on the cover
page of this prospectus. The underwriter may exercise this option only to cover
overallotments, if any, made in connection with the sale of the shares of Class
A Common Stock offered by this prospectus.
We have agreed to pay the underwriter a non-accountable expense
allowance equal to 3% of the gross proceeds of this offering (including any
overallotment shares) to cover the underwriting costs and due diligence expenses
relating to this offering, $25,000 of which we have already paid. We have also
agreed to pay the reasonable expenses of underwriter's counsel up to $25,000
(excluding reasonable expenses of such counsel in connection with state
securities law filings), of which $14,586 has already been paid.
We have agreed to permit the underwriter to have a non-voting observer
attend meetings of our board of directors for a period of two years from and
after the effective date of the registration statement of which this prospectus
forms a part. The underwriter's observer will be reimbursed for all
out-of-pocket expenses incurred in connection with his attendance at meetings of
our board of directors and will receive such cash compensation equal to any
payable by us to our outside directors for attendance at such meetings. The
underwriter's observer shall also be entitled to the same coverage under our
directors' and officers' insurance policy that is extended to our officers and
directors. None of the members of our board of directors is a representative of
the underwriter.
81
The underwriter has engaged a finder/due diligence consultant, Synergy
Capital, LLC, and shall be responsible for any fees payable as a result of such
engagement. A Managing Director of the parent company of the finder/due
diligence consultant is the President of Sterling/Carl Marks Capital, Inc., one
of our stockholders, and of which Robert Davidoff, one of our directors, is a
director. We have granted the underwriter, for a period of two years from the
effective date of the registration statement of which this prospectus forms a
part, the right of first refusal to act as lead manager or investment banker
with respect to any underwritten public distribution of our securities. The
underwriter will have the right to lead manage a public financing transaction
involving gross proceeds of $25 million or less (unless such transaction is to
be lead managed by a major-bracket underwriting firm, in which event the
underwriter will have the right to participate as a co-manager), and to be a
member of the selling group with respect to a public financing transaction
involving gross proceeds in excess of $25 million. Additionally, we have
retained the underwriter as an investment banking advisor, on a non-exclusive
basis, for the 12-month period commencing upon the completion of this offering.
For such services, we have agreed to pay the underwriter a monthly fee of
$4,167. Also, if (but only if) we engage the underwriter in connection with a
transaction involving the acquisition of 20% or more of the stock of, or assets
of, any company by us or of our company by another company, or any merger or
other business combination involving our company, we have agreed to pay the
underwriter a success-based fee equal to 5% of the first $5 million in total
consideration, 4% of the next $5 million in total consideration and 3% of the
total consideration above $10 million.
In connection with this offering, we have agreed to sell warrants to
the underwriter for a nominal price. The underwriter's warrants entitle it to
purchase up to 100,000 shares of our Class A Common Stock (subject to increase
and decrease by reason of anti-dilution provisions contained in the warrants and
to decrease if exercised via cashless exercise). The shares issuable upon
exercise of the underwriter warrants will be in all respects identical to the
shares offered to you. The underwriter's warrants will be limited to a term of
two years from the date of this prospectus and will become exercisable
commencing six months after the completion of this offering at a per share
exercise price equal to 120% of the initial public offering price per share set
forth on the cover page of this prospectus. The underwriter's warrants may not
be sold, assigned, transferred, pledged or hypothecated except to the officers,
directors or members of the underwriter and to members of the selling group
and/or their officers or partners. In accordance with the terms of the
underwriting agreement, we are registering the shares issuable upon exercise of
the underwriter's warrants under the registration statement of which this
prospectus forms a part, and we have agreed to file such post-effective
amendments that may be required in order to permit the public resale of the
shares issued or issuable upon exercise of the underwriter's warrants at our
expense. During the term of the underwriter's warrants, the holder(s) of the
warrants will be given the opportunity to profit from a rise in the market price
of our Class A Common Stock, which may result in a dilution of the interests of
our stockholders. As a result, we may find it more difficult to raise additional
equity capital if it should be needed for our business while the underwriter's
warrants are outstanding. The holder(s) of the underwriter's warrants might be
expected to exercise them at a time when we would, in all likelihood, be able to
obtain additional equity capital on terms more favorable to us than those
provided by the underwriter's warrants. Any profit realized on the sale of the
shares issuable upon the exercise of the underwriter's warrants may be deemed to
be additional underwriting compensation.
We and the underwriter have agreed to indemnify each other against, or
to contribute to losses arising out of, untrue statements or omissions of
material facts contained in this prospectus and the registration statement of
which the prospectus forms a part in connection with this offering. We and the
underwriter are each aware that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and, therefore, unenforceable. As a result of our agreement to
maintain the effectiveness of the registration statement of which this
prospectus forms a part in order to permit the public resale of the shares
underlying the underwriter's warrants, we will remain subject to liability under
the Securities Act even well after we have received and applied the net proceeds
of this offering.
The underwriter may engage in overallotment, stabilizing transactions,
syndicate and covering transactions in accordance with Regulation M under the
Securities Exchange Act. Overallotment involves sales in excess of the offering
size, which create a short position. Stabilizing transactions permit bids to
purchase shares so long as the stabilizing bids do not exceed a prescribed
maximum and may begin before the effective date of the registration statement of
which this prospectus forms a part. Covering transactions involve purchases of
shares in the open market after the distribution has been completed in order to
cover short positions. Such overallotment and covering transactions may cause
the price of our Class A Common Stock to be higher than it would be in the
absence of such transactions. These transactions may be effected on the AMEX
and, if commenced, may be discontinued at any time.
82
The preceding description includes a summary of the principal terms of
the underwriting agreement and the underwriter's warrant agreement and does not
purport to be complete. The underwriting agreement and the underwriter's warrant
agreement are filed as exhibits to the registration statement of which this
prospectus forms a part and should be referenced for the complete contents of
these documents.
Prior to this offering, there has been no public trading market for our
Class A Common Stock. The public offering price of the shares of Class A Common
Stock offered in this prospectus was determined by negotiation between us and
the underwriter. Factors considered in determining the initial public offering
price, in addition to prevailing market conditions, included the history of and
prospects for the industry in which we operate, an assessment of our management,
our prospects, our financial condition, our capital structure and such other
factors as were deemed relevant. We cannot assure you that an active trading
market will develop or be sustained upon the completion of this offering or that
the market price of our Class A Common Stock will not decline below the initial
public offering price.
This prospectus will be delivered by mail only.
Transfer agent
The transfer agent for our Class A Common Stock will be American Stock
Transfer & Trust Company.
Legal matters
The validity of the shares of Class A Common Stock being sold in this
offering will be passed on for us by Kirkpatrick & Lockhart LLP of New York, NY.
A partner of this law firm is a former director of our company and has been
granted options to purchase 4,000 shares of our Class A Common Stock, half of
which have an exercise price of $12.50 per share and the other half of which
have an exercise price of $5.00 per share.
Legal matters related to this offering will be passed on for the
underwriter by Heller, Horowitz & Feit, P.C. of New York, NY.
Experts
The consolidated financial statements of Access Integrated
Technologies, Inc. at March 31, 2002 and 2003 and for each of the two fiscal
years in the period ended March 31, 2003 included in this prospectus have been
so included in reliance on the report (which contains an explanatory paragraph
relating to the company's ability to continue as a going concern as described in
Note 1 to the consolidated financial statements) of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of Hollywood Software at March 31, 2003 and
2002 and for each of the two fiscal years in the period ended March 31, 2003
appearing elsewhere in this prospectus have been audited by BDO Seidman, LLP,
independent certified public accountants, to the extent and for the periods set
forth in their report thereon, and are included in reliance upon said report
given upon the authority of such firm as experts in accounting and auditing.
83
The financial statements of R.E. Stafford, Inc. d/b/a Colo Solutions at
and for the fiscal year ended December 31, 2001, and at November 27, 2002 and
for the period January 1, 2002 to November 27, 2002, appearing elsewhere in this
prospectus have been audited by Bray, Beck & Koetter, independent auditors, as
set forth in their reports thereon, and are included in reliance upon said
reports given on the authority of such firm as experts in accounting and
auditing.
Where you can find more information
We have filed with the Securities and Exchange Commission, or the
Commission, a registration statement on Form SB-2 under the Securities Act of
1933, as amended, with respect to the shares of Class A Common Stock being
offered for sale in this offering. This prospectus, filed as a part of the
registration statement, does not contain all of the information set forth in the
registration statement, portions of which have been omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to us and the Class A Common Stock we are offering, we refer you to the
registration statement. Statements made in this prospectus as to the contents of
any contract or other document are not necessarily complete and, in each
instance, we refer you to a copy of the contract or other document filed as an
exhibit to the registration statement and each such statement is qualified in
its entirety by such reference. The registration statement, including exhibits
and schedules, may be inspected without charge at the Public Reference Room of
the Commission, Judiciary Plaza Building, 450 Fifth Street, N.W., Washington DC
20549. Copies may be obtained, at prescribed rates, from the Public Reference
Room of the Commission at Room 1024, Judiciary Plaza Building, 450 Fifth Street,
N.W. Washington DC 20549. You may obtain information regarding the Public
Reference Room by calling the Securities and Exchange Commission at
1-800-SEC-0330. The Commission maintains a web site that contains registration
statements, reports, proxy statements and other information regarding
registrants that file electronically with the Commission. The address of the
Commission's web site is www.sec.gov.
As a result of this offering, we will become subject to the reporting
and other requirements of the Exchange Act. For as long as we are subject to the
reporting requirements of the Exchange Act, we will provide our stockholders
with annual reports containing audited financial statements and interim
quarterly reports containing unaudited financial information.
84
Index to financial statements
Audited consolidated financial statements of Access
Integrated Technologies, Inc.:
Report of Independent Auditors.......................................... F-2
Consolidated balance sheets as of March 31, 2002 and 2003................ F-3
Consolidated statements of operations for the years ended
March 31, 2002 and 2003 ................................................. F-4
Consolidated statements of stockholders' equity for the
years ended March 31, 2002 and 2003...................................... F-5
Consolidated statements of cash flows for the years ended
March 31, 2002 and 2003.................................................. F-6
Notes to consolidated financial statements .........................F-7 - F-33
Unaudited consolidated financial statements of Access
Integrated Technologies, Inc.:
Consolidated balance sheet as of June 30, 2003............................ F-34
Consolidated statements of operations for the
three months ended June 30, 2002 and 2003 ................................ F-35
Consolidated statements of stockholders' equity for the
three months ended June 30, 2003.......................................... F-36
Consolidated statements of cash flows for the
three months ended June 30, 2002 and 2003................................. F-37
Notes to consolidated financial statements ........................F-38 - F-46
Audited financial statements of Hollywood Software, Inc.:
Report of Independent Certified Public Accountants........................ F-47
Balance sheets as of March 31, 2002 and 2003.............................. F-48
Statements of operations for the years ended
March 31, 2002 and 2003................................................... F-49
Statements of stockholders' equity for the years ended
March 31, 2002 and 2003................................................... F-50
Statements of cash flows for the years ended
March 31, 2002 and 2003................................................... F-51
Notes to financial statements.......................................F-52 - F-62
Unaudited financial statements of Hollywood Software, Inc.:
Balance sheet as of June 30, 2003......................................... F-63
Statements of operations for the three months ended
June 30, 2002 and 2003.................................................... F-64
Statement of stockholders' equity for the three months ended
June 30, 2003............................................................. F-65
Statements of cash flows for the three months ended
June 30, 2002 and 2003.................................................... F-66
Notes to financial statements.......................................F-67 - F-77
Audited financial statements of R.E. Stafford, Inc.
d/b/a Colo Solutions:
Report of Bray, Beck & Koetter............................................ F-78
Balance sheet as of November 27, 2002 .................................... F-79
Statement of operations and location equity for the
period January 1, 2002 to November 27, 2002............................... F-80
Statement of cash flows for the period January 1, 2002
to November 27, 2002...................................................... F-81
Notes to financial statements.......................................F-82 - F-86
Audited financial statements of R.E. Stafford, Inc.
d/b/a Colo Solutions:
Report of Bray, Beck & Koetter............................................ F-87
Balance sheet as of December 31, 2001..................................... F-88
Statement of operations and location equity
for the year ended December 31, 2001...................................... F-89
Statement of cash flows for the year ended
December 31, 2001......................................................... F-90
Notes to financial statements.......................................F-91 - F-95
Unaudited pro forma consolidated combined financial data............P-1 - P-9
F-1
Report of Independent Auditors
To the Shareholders of
Access Integrated Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Access
Integrated Technologies, Inc. (formerly known as AccessColo, Inc.) as of
March 31, 2002 and 2003, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America. 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 of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred significant net
losses since inception and it is not generating positive cash flows from
operations. In addition, the Company will require additional capital resources
to achieve its long-term business objectives and is dependent upon obtaining
such financing. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
July 17, 2003
F-2
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Consolidated Balance Sheets
(In thousands except share data)
----------------------------------------------------------------------------------------------------------------------
March 31,
2002 2003
Assets
Current assets
Cash and cash equivalents $ 1,001 $ 956
Restricted cash 951 -
Accounts receivable 129 41
Prepaids and other current assets 211 287
Unbilled revenue - 43
-------- --------
Total current assets 2,292 1,327
Property and equipment, net 5,498 5,133
Intangible asset, net - 2,309
Deferred costs 245 212
Unbilled revenue, net of current portion 48 444
Security deposits 533 469
-------- --------
Total assets $ 8,616 $ 9,894
======== ========
Liabilities, Mandatorily Redeemable Convertible Preferred Stock and Stockholders' Equity
Current liabilities
accounts payable and accrued expenses $ 535 $ 792
Accrued construction costs 487 -
Current portion of notes payable 333 1,152
Bridgepoint acquisition payable 417 -
Current portion of capital leases 133 261
Deferred revenue 9 76
-------- --------
Total current liabilities 1,914 2,281
Notes payable, net of current portion 921 1,730
Customer security deposits 98 138
Deferred revenue, net of current portion - 287
Capital leases, net of current portion 307 252
Deferred rent expense 412 667
-------- --------
Total liabilities 3,652 5,355
-------- --------
Commitments and contingencies
Mandatorily redeemable convertible preferred stock
Series A mandatorily redeemable convertible preferred stock, $0.001 par value,
3,500,000 shares authorized 3,226,538 shares issued and outstanding 251 879
as of March 31, 2002 and 2003
Series B mandatorily redeemable convertible preferred stock, $0.001 par
value, 5,000,000 shares authorized; 4,976,391 shares issued and
outstanding as of March 31, 2003 - 2,032
Stockholders' equity
Class A common stock, $0.001 par value per share; 40,000,000 shares
authorized; 1,958,770 and 2,015,770 shares issued and outstanding as of
March 31, 2002 and 2003, respectively 2 2
Class B common stock, $0.001 par value per share; 15,000,000 shares authorized;
1,067,811 and 1,005,811 shares issued and outstanding as of March 31, 2002 and
2003, respectively 1 1
Additional paid-in capital 11,277 11,530
Deferred stock-based compensation (77) (11)
Accumulated deficit (6,490) (9,894)
-------- --------
Total stockholders' equity 4,713 1,628
-------- --------
Total liabilities, mandatorily redeemable convertible preferred stock
and stockholders' equity $ 8,616 $ 9,894
======== ========
See accompanying notes to consolidated financial statements.
F-3
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Consolidated Statements of Operations
(In thousands except share and per share data)
----------------------------------------------------------------------------------------------------------
Year Ended
March 31,
2002 2003
Revenues $ 1,911 $ 4,228
Cost of revenues (exclusive of depreciation shown below) 1,833 3,101
----------- -----------
Gross profit 78 1,127
Operating expenses
Selling, general and administrative (excludes non-cash stock-based
compensation of $235 in 2002 and $99 in 2003) 2,267 2,305
Non-cash stock-based compensation 235 99
Depreciation and amortization 993 1,687
----------- -----------
Total operating expenses 3,495 4,091
----------- -----------
Loss from operations (3,417) (2,964)
Interest income 30 13
Interest expense (83) (364)
Non-cash interest expense (140) (282)
Other income - 8
----------- -----------
Net loss before income taxes (3,610) (3,589)
Income tax benefit - 185
----------- -----------
Net Loss (3,610) (3,404)
Accretion related to redeemable convertible preferred stock (251) (628)
Accretion of preferred dividends (72) (229)
----------- -----------
Net loss available to common stockholders $ (3,933) $ (4,261)
=========== ===========
Net loss available to common stockholders per common share
Basic and diluted $ (1.21) $ (1.41)
=========== ===========
Weighted average number of common shares outstanding
Basic and diluted 3,238,084 3,027,865
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
----------------------------------------------------------------------------------------------------------------------------------
Class A Class B Additional
Common Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
Balances as of March 31, 2001 2,205,437 $ 2 1,221,144 $ 1 8,679
Shares forfeited by founders (246,667) - (153,333) - -
Issuance of warrants to purchase common stock
(attached to Series A Preferred Stock) - - - - 719
Beneficial conversion feature on Series A Preferred Stock - - - - 1,078
Issuance of warrants to purchase common stock
(attached to notes payable) - - - - 1,034
Stock-based compensation, net of forfeitures - - - - 18
Amortization of stock-based compensation - - - - -
Accretion of preferred stock to redemption amount - - - - (251)
Net loss - - - - -
--------- ---------- ---------- ---------- ----------
Balances as of March 31, 2002 1,958,770 2 1,067,811 1 11,277
Issuance of common stock for cash 20,000 - - - 125
Exercise of warrants to purchase common stock 5,000 - - - -
Issuance of warrants to purchase common stock
(attached to Series B Preferred Stock) - - - - 343
Issuance of warrants to purchase common stock
(attached to notes payable) - - - - 680
Conversion of Class B Common Stock to Class A Common Stock 62,000 - (62,000) - -
Cancellation of stock issued for goods and services (30,000) - - - (300)
Contribution of Class A Common Stock from founders (60,000) - - - (48)
Issuance of Class A Common Stock to employees 60,000 - - - 48
Stock-based compensation - - - - 51
Forfeiture of non-employee stock options - - - - (18)
Amortization of stock-based compensation - - - - -
Accretion of preferred stock to redemption amount - - - - (628)
Net loss - - - - -
--------- ---------- ---------- ---------- ----------
Balances as of March 31, 2003 2,015,770 $ 2 1,005,811 $ 1 $ 11,530
========= ========== ========== ========== ==========
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
---------------------------------------------------------------------------------------------------------
Deferred
Stock- Total
Based Cumulative Stockholders'
Compensation Deficit Equity
Balances as of March 31, 2001 $ (294) $ (2,880) $ 5,508
Shares forfeited by founders - - -
Issuance of warrants to purchase common stock
(attached to Series A Preferred Stock) - - 719
Beneficial conversion feature on Series A Preferred Stock - - 1,078
Issuance of warrants to purchase common stock
(attached to notes payable) - - 1,034
Stock-based compensation (18) - -
Amortization of stock-based compensation 235 - 235
Accretion of preferred stock to redemption amount - - (251)
Net loss - (3,610) (3,610)
---------- ---------- ----------
Balances as of March 31, 2002 (77) (6,490) 4,713
Issuance of common stock for cash - - 125
Exercise of warrants to purchase common stock - - -
Issuance of warrants to purchase common stock
(attached to Series B Preferred Stock) - - 343
Issuance of warrants to purchase common stock
(attached to notes payable) - - 680
Conversion of Class B Common Stock to Class A Common Stock - - -
Cancellation of stock issued for goods and services - - (300)
Contribution of Class A Common Stock from founders - - (48)
Issuance of Class A Common Stock to employees - - 48
Stock-based compensation (3) - 48
Forfeiture of non-employee stock options 18 - -
Amortization of stock-based compensation 51 - 51
Accretion of preferred stock to redemption amount - - (628)
Net loss - (3,404) (3,404)
---------- ---------- ----------
Balances as of March 31, 2003 $ (11) $ (9,894) $ 1,628
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Consolidated Statements of Cash Flows
(In thousands)
-----------------------------------------------------------------------------------------------------
March 31,
2002 2003
Cash flows from operating activities
Net loss $(3,610) $(3,404)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 993 1,687
Non-cash stock-based compensation 235 99
Non-cash interest expense 140 282
Changes in operating assets and liabilities
Accounts receivable (122) 88
Prepaids and other current assets (54) (76)
Other assets (462) (342)
Accounts payable and accrued expenses 89 257
Deferred revenue (125) 354
Other liabilities 295 295
------- -------
Net cash used in operating activities (2,621) (760)
------- -------
Cash flows from investing activities
Purchases of property and equipment (813) (327)
Settlement of Bridgepoint obligation - (200)
Settlement of Tower obligation - (750)
Increase (decrease) in restricted cash (951) 951
Acquisition of data centers (455) (2,309)
------- -------
Net cash used in investing activities (2,219) (2,635)
------- -------
Cash flows from financing activities
Net proceeds from issuance of preferred stock 1,797 2,375
Net proceeds from issuance of notes payable and warrants 3,087 1,360
Repayment of notes payable (1,012) (333)
Principal payments on capital leases (32) (177)
Proceeds from issuance of common stock - 125
------- -------
Net cash provided by financing activities 3,840 3,350
------- -------
Net decrease in cash and cash equivalents (1,000) (45)
Cash and cash equivalents at beginning of year 2,001 1,001
------- -------
Cash and cash equivalents at end of year $ 1,001 $ 956
======= =======
See accompanying notes to consolidated financial statements.
F-6
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
1. Nature of Operations and Basis of Presentation
Nature of Operations
Access Integrated Technologies, Inc. ("AccessIT" or the "Company"),
formerly known as AccessColo, Inc. ("AccessColo"), was incorporated in
Delaware on March 31, 2000. Access Digital Cinema, Inc. a wholly-owned
subsidiary of AccessIT, was incorporated in Delaware on February 4,
2003 and in May 2003 was renamed Access Digital Media, Inc.
("AccessDM"). AccessIT and Access Digital are referred to herein
collectively as the "Company". The Company designs, builds, and
operates a national platform of carrier-diverse Internet Data Centers
("IDCs") in which the Company's customers have access to: secure,
flexible space for installing network and server equipment; multiple
fiber providers for connecting to the Internet and/or other carrier
networks; and a broad range of value-added data center services
including the Company's AccessStorage-on-Demand managed storage service
("MSS") solutions. The Company's IDCs, called AccessColocenters, are
designed to serve a variety of customers, including traditional
voice/data competitive local exchange carriers ("CLECs"), other
integrated communication providers ("IXPs"), Internet Service Providers
("ISPs"), Application Service Providers ("ASPs"), Streaming and Content
Delivery Service Providers ("CDSPs"), storage outsourcers, and small
and medium sized enterprises. AccessDM was formed to utilize AccessIT's
existing infrastructure to store and distribute digital content to
movie theaters and other remote venues. The Company currently operates
nine IDC's located in eight states: Arkansas, Kansas, Maine, New
Hampshire, New Jersey, New York, Texas and Virginia.
Basis of Presentation
The accompanying consolidated financial statements have been prepared
on the assumption that the Company will continue as a going concern.
During the years ended March 31, 2002 and 2003, the Company incurred
losses of $3,610 and $3,404 respectively, and negative cash flows from
operating activities of $2,621 and $760, respectively. In addition, the
Company has an accumulated deficit of $9,894 as of March 31, 2003. The
Company will require additional financing to support its ongoing
operations and further service development efforts. Management expects
that the Company will continue to generate operating losses and
negative cash flows for the foreseeable future due to the continued
efforts related to the identification of acquisition targets, marketing
and promotional activities and the development of relationships with
other businesses. These matters raise substantial doubt regarding the
Company's ability to continue as a going concern. The Company is
attempting to raise additional capital from various sources. There is
no assurance that such financing will be completed as contemplated or
under terms acceptable to the Company or its existing shareholders. The
accompanying consolidated financial statements do not reflect any
adjustments which may result from the outcome of such uncertainties.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity
from the date of purchase of three months or less to be cash
equivalents. Cash equivalents consist of money market mutual funds.
F-7
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
Financial Instruments and Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and cash equivalents to
the extent these exceed federal insurance limits and accounts
receivable. Risks associated with cash and cash equivalents are
mitigated by the Company's investment policy, which limits the
Company's investing of excess cash and cash equivalents to only money
market mutual funds.
The Company places its cash with high credit quality financial
institutions. These balances, as reflected in the financial
institution's records, are insured in the U.S. by the Federal Deposit
Insurance Corporation for up to $100. As of March 31, 2003, uninsured
cash balances in the U.S. aggregated $856 with one financial
institution.
The Company's customer base is primarily composed of businesses
throughout the United States. As of March 31, 2003, four customers
accounted for 21%, 17%, 11% and 10% of revenues, respectively, and four
customers accounted for 16%, 13%, 12% and 10% of accounts receivable,
respectively. As of March 31, 2002, three customers accounted for 31%,
11% and 10% of revenues, respectively, and four customers accounted for
22%, 18%, 17% and 13% of accounts receivable, respectively. No other
single customer accounted for greater than 10% of accounts receivable
or revenues during the years ended March 31, 2002 and 2003. As of March
31, 2002 and 2003, the Company had established bad debt reserves of $0
and $12, respectively.
Property and Equipment
Property and equipment are stated at original cost. Depreciation is
computed using the straight-line method over the estimated useful lives
of the respective assets as follows:
Computer equipment 3-5 years
Machinery and equipment 3-6 years
Furniture and fixtures 3-6 years
Leasehold improvements are 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, betterments
and additions are capitalized. Included in property and equipment as of
March 31, 2002 and 2003 was $400 and $100, respectively, of
construction services for which the Company issued common stock as
consideration (see Note 9).
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which
include cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and other obligations, approximate their fair
value due to the short-term maturities of the related instruments.
Based on borrowing rates currently available to the Company for loans
with similar terms, the carrying value of long-term debt and capital
lease obligations approximates fair value. The carrying value of the
Company's Series A and Series B mandatorily redeemable convertible
preferred stock is recorded below its liquidation value (See Note 5).
The fair value of the Company's outstanding preferred securities is not
readily determinable since there is no market for such securities.
F-8
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" as of April 1, 2002. SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and of
Long-Lived Assets to be Disposed Of", and portions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," and amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements". SFAS No. 144 generally conforms,
among other things, impairment accounting for assets to be disposed of,
including those in discontinued operations. The Company reviews the
recoverability of its long-lived assets on a periodic basis in order to
identify business conditions which may indicate a possible impairment.
The assessment for potential impairment is based primarily on the
Company's ability to recover the carrying value of its long-lived
assets from expected future undiscounted cash flows. If the total
expected future undiscounted cash flows is less than the carrying
amount of the assets, a loss is recognized for the difference between
the fair value (computed based upon the expected future discounted cash
flows) and the carrying value of the assets.
Intangible Assets
The Company has adopted SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and other Intangible Assets." SFAS No. 141 requires
all business combinations to be accounted for using the purchase method
of accounting and that certain intangible assets acquired in a business
combination must be recognized as assets separate from goodwill. SFAS
No. 142 addressed the recognition and measurement of goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 also
addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination whether acquired
individually or with a group of other assets. This statement provides
that intangible assets with indefinite lives and goodwill will not be
amortized but will be tested at least annually for impairment. If an
impairment is indicated then the asset will be written down to its fair
value typically based upon its future expected discounted cash flows.
Intangible assets of the Company as of March 31, 2003 consist of a
customer agreement determined to be a finite-lived intangible asset
amortized over its useful life, which is estimated to be three years
(see Note 7).
Revenue Recognition
Revenues consist of license fees for colocation, riser access charges,
electric and cross connect fees, and non-recurring installation and
consulting fees. Revenues from colocation, riser access charges,
electric and cross connect fees are billed monthly and, in accordance
with Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements," are recognized ratably over the term of the
contract, generally two to nine years. Installation fees are recognized
on a time and materials basis in the period in which the services were
provided and represent the culmination of the earnings process as no
significant obligations remain. Amounts collected prior to satisfying
the above revenue recognition criteria are classified as deferred
revenue. Amounts satisfying the above revenue recognition criteria
prior to billing are classified as unbilled revenue.
F-9
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
Income Taxes
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized based upon the differences arising from the
carrying amounts of the Company's assets and liabilities for tax and
financial reporting purposes using enacted tax rates in effect for the
year in which the differences are expected to reverse. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period when the change in tax rates is
enacted. A valuation allowance is established when it is determined
that it is more likely than not that some portion of the deferred tax
assets will not be realized.
The Company has a tax net operating loss ("NOL"). A full valuation
allowance has been applied against this NOL and its other deferred
tax assets.
Net Loss Per Share Available to Common Stockholders
Computations of basic and diluted net loss per share of common stock
have been made in accordance with SFAS No. 128, "Earnings Per Share".
Basic net loss per share is computed by dividing net loss available to
common stockholders (the numerator) by the weighted average number of
common shares outstanding (the denominator) during the period. Shares
issued during the period are weighted for the portion of the period
that they are outstanding. The computation of diluted net loss per
share is similar to the computation of basic net loss per share except
that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive
potential common shares had been issued. The Company has incurred a net
loss for the years ending March 31, 2002 and 2003, therefore, the
impact of dilutive potential common shares has been excluded from the
computation as it would be anti-dilutive.
The following outstanding stock options and warrants (prior to the
application of the treasury stock method), and redeemable convertible
preferred stock (on an as-converted basis) were excluded from the
computation of diluted net loss per share:
2002 2003
Stock options 242,957 306,397
1-Year Notes Warrants 25,305 25,305
5-Year Notes Warrants 181,500 312,500
2001 Warrants 430,205 430,205
Contingent Warrants A-C - 680,092
Mandatorily redeemable convertible preferred stock 3,226,538 8,202,929
F-10
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
Stock-Based Compensation
At March 31, 2003, the Company has stock based employee compensation
plans which are described more fully in Note 6. The Company accounts
for its stock based employee compensation plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation is recorded on the date of grant
only if the current fair value of the underlying stock exceeds the
exercise price. The Company has adopted the disclosure standards of
SFAS No. 123, "Accounting for Stock-Based Compensation", which requires
the Company to provide pro forma net loss and earnings per share
disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method of accounting for stock options
as defined in SFAS No. 123 had been applied. The following table
illustrates the effect on net loss if the Company had applied the fair
value recognition provisions of SFAS No. 123 to stock based employee
compensation for the years ended March 31, 2002 and 2003:
2002 2003
Net loss as reported $(3,610) $(3,404)
Deduct: Total stock-based employee compensation expense
determined under fair value based method, net of related income
tax benefits (444) (524)
------- -------
Pro forma net loss $(4,054) $(3,928)
======= =======
Basic and diluted net loss available to common
stockholders per share
As reported $ (1.21) $ (1.41)
Pro forma $ (1.35) $ (1.58)
The fair value of each stock option granted during the year is
estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions:
2002 2003
Expected life (years) 10 10
Expected volatility 110% 110%
Expected dividend yield 0% 0%
Risk-free interest rate 5.66% 5.26%
Weighted average fair value per share of employee options granted
during the year $0.94 $1.05
Advertising Costs
The Company has incurred advertising costs of $7 and $6, respectively,
during the fiscal years ended March 31, 2002 and 2003. Advertising
costs are expensed as incurred.
F-11
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company's most significant estimates related to
revenue recognition, depreciation of fixed assets and amortization of
intangible assets. Actual results could differ from those estimates.
Risk and Uncertainties
The Company is subject of all of the risks inherent in an early stage
business in the collocation, managed storage, and software development
industry. These risks include, but are not limited to, limited
operating history, limited senior management resources, rapidly
changing technology business environments, the need for substantial
cash investments to fund its operations, reliance on third parties, the
competitive nature of the industry, development and maintenance of
efficient information technologies, and uncertainty regarding the
protection of proprietary intellectual properties.
Reclassification
Certain prior year amounts have been reclassified to conform to current
year presentation.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board, or FASB,
issued SFAS No. 143, "Accounting for Asset Retirement Obligations."
This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the
normal operation of long-lived assets, except for certain obligations
of lessees. Our adoption of SFAS No. 143 in June 2002 did not have a
material effect on our results of operations, financial position or
cash flows.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB
Statements No. 4, 44, 64, Amendment of FASB No. 13 and Technical
Corrections." This statement eliminates the requirement that gains and
losses from the extinguishment of debt be aggregated and classified as
an extraordinary item, net of the related income tax, in certain
instances. In addition, SFAS No. 145 requires that capital leases that
are modified so that the resulting lease agreement is classified as an
operating lease be accounted for in the same manner as sale-lease back
transactions. SFAS No. 145 is generally effective for transactions
occurring after May 15, 2002. Our adoption of SFAS No. 145 in June 2002
did not have a material impact on our results of operations, financial
position or cash flows.
F-12
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." SFAS No. 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. EITF 94-3 allowed for an exit cost
liability to be recognized at the date of an entity's commitment to an
exit plan. SFAS No. 146 also requires that liabilities recorded in
connection with exit plans be initially measured at fair value. The
provisions of SFAS No. 146 are effective for exit or disposal
activities that were initiated after December 31, 2002, with early
adoption encouraged. The adoption of SFAS No. 146 will impact the types
and timing of costs associated with any future exit activities. Our
adoption of SFAS No. 146 in January 2003 did not have a material impact
on our results of operations, financial position or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosures," which amends SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS 148 provides
alternate methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require more prominent and frequent disclosures in the financial
statements about the effects of stock-based compensation. The company
has adopted the disclosure provisions of SFAS 148 for the year ended
March 31, 2003. The company expects to continue to account for stock
options under APB Opinion No. 25.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities
under Statement of Financial Accounting Standards No. 133. SFAS No. 149
clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in
SFAS No. 133. In addition, it clarifies when a derivative contains a
financing component that warrants special reporting in the statement of
cash flows. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, except as specifically noted in SFAS No.
149. SFAS No. 149 should be applied prospectively. At this time, the
adoption of SFAS No. 149 is not expected to materially impact the
Company's financial condition or results of operations.
In May 2003, the FASB Issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. This Statement is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. For nonpublic
entities, mandatorily redeemable financial instruments are subject to
the provisions of this Statement for the first fiscal period beginning
after December 15, 2003. The Company has not yet evaluated its
mandatorily redeemable financial instruments and related financial
instruments for purposes of determining the impact of SFAS No. 150.
F-13
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
In November 2002, the EITF reached a consensus on EITF 00-21, "Revenue
Arrangements with Multiple Deliverables," related to the separation and
allocation of consideration for arrangements that include multiple
deliverables. The EITF requires that when the deliverables included in
this type of arrangement meet certain criteria they should be accounted
for separately as separate units of accounting. This may result in a
difference in the timing of revenue recognition but will not result in
a change in the total amount of revenues recognized in a bundled sales
arrangement. The allocation of revenues to the separate deliverables is
based on the relative fair value of each item. If the fair value is not
available for the delivered items then the residual method must be
used. This method requires that the amount allocated to the undelivered
items in the arrangement is their full fair value. This would result in
the discount, if any, being allocated to the delivered items. This
consensus is effective prospectively for arrangements entered into in
fiscal periods beginning after June 15, 2003. We do not expect the
adoption of EITF 00-21 to have a material impact on our consolidated
financial statements.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements Nos. 5, 57 and 107 and a rescission
of FASB Interpretation No. 34." This Interpretation, among other
things, clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement
provisions of the Interpretation are applicable for guarantees issued
or modified after December 31, 2002 and are not expected to have a
material effect on our financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities -- an Interpretation of Accounting Research Bulletin
No. 51." FIN No. 46 requires the primary beneficiary to consolidate a
variable interest entity ("VIE") if it has a variable interest that
will absorb a majority of the entity's expected losses if they occur,
receive a majority of the entity's expected residual returns if they
occur, or both. FIN No. 46 applies immediately to VIEs created after
January 31, 2003, and to VIEs in which the entity obtains an interest
after that date. The adoption of FIN No. 46 in February 2003 did not
have a material impact on our results of operations, financial
position, or cash flows.
3. Consolidated Balance Sheet Components
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, AccessDM. All intercompany
transactions and balances have been eliminated.
F-14
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
Cash and Cash Equivalents
Cash and cash equivalents consisted of the following as of March 31,
2002 and 2003:
2002 2003
Bank balances $ 105 $ 375
Money market fund 896 581
------ ------
Total cash and cash equivalents $1,001 $ 956
====== ======
As of March 31, 2002 and 2003, cost approximated market value of cash
and cash equivalents.
Restricted Cash
During the year ended March 31, 2002 the Company funded a standby
letter of credit of $951 to cover a mechanic's lien in connection with
certain litigation which was settled in July 2002 (see Note 9).
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following as
of March 31, 2002 and 2003:
2002 2003
Insurance $ 22 $ 34
Deposits 31 107
Deferred costs, current 91 91
Other 67 55
------- -------
$ 211 $ 287
======= =======
Property and Equipment, Net
Property and equipment, net was comprised of the following as of March
31, 2002 and 2003:
2002 2003
Leasehold improvements $ 3,838 $ 3,888
Computer equipment 2,143 2,651
Machinery and equipment 283 621
Furniture and fixtures 268 285
Other 13 26
------- -------
6,545 7,471
Less - Accumulated depreciation (1,047) (2,338)
------- -------
Total property and equipment, net $ 5,498 $ 5,133
======= =======
F-15
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
Leasehold improvements consist primarily of costs incurred in the
construction of the Company's Jersey City, New Jersey and Brooklyn, New
York IDCs, and from the Bridgepoint purchase price allocation. Included
in leasehold improvements as of March 31, 2002 and 2003 was $400 and
$100, respectively, of construction services for which the Company
issued common stock as consideration. Computer equipment and software
consists primarily of costs incurred for equipment and related software
used in the Company's MSS business.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following as of
March 31, 2002 and 2003:
2002 2003
Accounts payable $ 216 $ 430
Accrued compensation and benefits 197 134
Interest payable 19 70
Other 103 158
------ ------
Total accounts payable and accrued expenses $ 535 $ 792
====== ======
4. Notes Payable
During the period from December 2001 through February 2002, the Company
raised $1,345 from the issuance of 1-year subordinated promissory notes
(the "1-Year Notes") with detachable warrants to several investors. Of
these amounts, $333 of the notes payable were issued to two of the
Company's founders, who also received warrants to purchase common stock
(see Note 11). The 1-Year Notes were issued primarily to fund the
Company's acquisition of a data center from Bridgepoint (see Note 7)
and the related fees, costs and expenses arising from this acquisition.
The 1-Year Notes have an initial term of one year from the respective
dates of issuance and bear interest at an initial rate of 8% per annum.
The full amount of principal and interest are due at the maturity date.
However, in the event any portion of the 1-Year Notes remain
outstanding on March 31, 2002, June 30, 2002 or September 30, 2002, the
interest rate increases to 10%, 12% and 14%, respectively, on any
unpaid principal and interest, and additional warrants will be issued
in accordance with the agreement. The Company may prepay the 1-Year
Notes at any time. As of March 31, 2002, the Company had repaid $1,012
of the 1-year notes, plus accrued interest of $15. In April 2003 the
Company repaid the remaining $333 of the 1-year Notes, plus accrued
interest of $17. The related additional warrants were waived by the
noteholder in conjunction with this payment.
F-16
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
In February 2002, the Company commenced an offering of 5-year
subordinated promissory notes (the "5-Year Notes") with detachable
warrants. Through March 31, 2002 and 2003 the Company raised an
aggregate of $1,742 and $1,360, respectively, from the issuance of
5-Year Notes to several investors, including two of the Company's
founders, net of issuance costs of approximately $73. Of these amounts,
$375 of the notes payable were issued to two of the Company's founders
during the years ended March 31, 2002. These founders also received
warrants to purchase common stock (see Note 11). The 5-Year Notes were
issued primarily to repay the 1-Year Notes and to fund the Company's
working capital needs. The 5-Year Notes bear interest at 8% per annum
with repayment terms as follows: i) for a period of two years after the
issuance date, interest-only payments are to be paid quarterly in
arrears and ii) for the remaining three years until the final maturity
date, the Company shall pay a) quarterly payments of principal in equal
installments and b) quarterly payments of interest on the remaining
unpaid principal amount of the 5-Year Notes. The Company may prepay the
5-Year Notes at any time. As of March 31, 2003 there have not been any
repayments of the 5-year Notes.
Concurrent with the issuance of the 1-Year Notes and the 5-Year Notes,
the Company issued 25,305 1-Year Notes warrants and 317,500 5-Year
Notes warrants (see Note 6).
In November 2002, the Company issued a $1,000 note payable as part of
the purchase price for six data centers acquired from ColoSolutions,
Inc. (see Note 7). The note is due in November 2003 and has an interest
rate of 9%, with interest payable quarterly. The principal, including
accrued interest, may be prepaid at any time.
5. Mandatorily Redeemable Convertible Preferred Stock
Preferred Stock
On October 8, 2001, the Company authorized the issuance of 3,226,538
shares of the Series A Preferred Stock at approximately $0.62 per
share, resulting in gross proceeds of $2,000, before considering
expenses of $203. Concurrent with this issuance, the Company issued
warrants to purchase up to 430,205 shares of Class A Common Stock (the
"2001 Warrant"). On November 27, 2002, the Company authorized the
issuance of 4,976,391 shares of the Series B Preferred Stock to the
existing Series A Preferred Stock holder at approximately $0.50 per
share, resulting in gross proceeds of $2,500, before considering
expenses of $125. Concurrent with this issuance, the Company issued
381,909, 144,663 and 100,401 warrants to purchase Class A Common Stock
("Contingent Warrant A", "Contingent Warrant B" and "Contingent Warrant
C", respectively). The issuance of the Series A Preferred Stock
resulted in a beneficial conversion feature of $1,078, calculated in
accordance with EITF Issue No. 00-27, "Application of Issue No. 98-5 to
Certain Convertible Instruments." The beneficial conversion feature is
reflected as an issuance cost and therefore has been reflected as a
charge against the Series A Preferred Stock and an increase to
additional paid-in capital.
F-17
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
Each holder of outstanding shares of the Series A Preferred Stock and
Series B Preferred Stock shall be entitled to the number of votes equal
to the number of whole shares of Class C Common Stock and Class D
Common Stock, respectively, into which the shares of Series A Preferred
Stock and Series B Preferred Stock are convertible. The shares of
Series A Preferred Stock and Series B Preferred Stock are convertible
into shares of Class C Common Stock and Class D Common Stock,
respectively, at a 1:1 ratio (subject to adjustments in certain
events): (i) automatically in the event of a firm commitment and an
underwritten public offering with gross proceeds of $15,000 or more and
a total pre-offering valuation of $75,000 or more; or (ii) at any time
at the holder's option. The holders of the Series A Preferred Stock and
Series B Preferred Stock are entitled to an 8% cumulative dividend
[Series A - $0.0496 per share, Series B - $0.0402 per share] which is
payable on a share of Series A Preferred Stock and Series B Preferred
Stock upon the first to occur of: (i) a liquidation or sale of the
Company, (ii) a redemption of such share; (iii) upon conversion if not
accounted for in calculating the number of shares of Class C Common
Stock or Class D Common Stock into which the Series A Preferred Stock
or Series B Preferred Stock, respectively, is convertible or (iv) when
and if declared by the Company. Unpaid dividends for the Series A
Preferred Stock and Series B Preferred Stock are accrued annually from
the issue date of the Series A Preferred Stock and Series B Preferred
Stock until such time that they are paid. No dividends shall be paid on
any common stock unless the same dividends have been paid to the
shareholders of the Series A Preferred Stock and Series B Preferred
Stock.
The holders of shares of Series A Preferred Stock and Series B
Preferred Stock have liquidation rights senior to all other classes of
stock. In the event of liquidation of the Company, the holders of the
Series A Preferred Stock and Series B Preferred Stock are entitled to
receive a distribution of the original price per share, as adjusted for
any stock dividends, combinations or splits with respect to such
shares, plus any cumulative unpaid dividends. The carrying value of the
Company's Series A Preferred Stock is below its liquidation value, as
the Company incurred aggregate costs of $2,000 related to the issuance
of the preferred stock, of which $203 represents cash payments, $719
represents the estimated fair value of the 2001 Warrants issued as
consideration for the issuance of the Company's Series A Preferred
Stock and $1,078 is the beneficial conversion feature. The Company's
carrying value of the Series B Preferred Stock is below its liquidation
value, as the Company incurred aggregate costs of $468 related to the
issuance of the preferred stock, of which $125 represents cash
payments, and $343 represents the estimated fair value of Contingent
Warrant A and Contingent Warrant B, issued as consideration for the
issuance of the Company's Series B Preferred Stock. As of March 31,
2003, the liquidation preference of the Series A Preferred Stock and
the Series B Preferred Stock was $2,231 and $2,568, respectively.
F-18
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
The Series A Preferred Stock and Series B Preferred Stock is redeemable
at the election of each of the holders of the then-outstanding shares
of Series A Preferred Stock and Series B Preferred Stock at any time on
or after the fifth anniversary of the original issuance date of the
Series A Preferred Stock if certain liquidity events shall not have
occurred by then, at a redemption price equal to the greater of the (i)
Company's gross revenue from all sources or (ii) five times the
Corporation's combined earnings from its data center operations, before
deduction for certain defined expenses, for the twelve months
immediately preceding the month of exercise of the redemption rights,
in each case divided by the number of fully-diluted, as converted
shares of common stock outstanding. The Company has the option of first
redeeming only 25% of the redeemed Series A Preferred Stock and Series
B Preferred Stock, with the remainder then to be redeemed in 3 annual
installments. However, in the event that the Company completes an
underwritten public offering of its common stock, the Company can
terminate the Series A and Series B Preferred Stock redemption rights
and instead issue new warrants with an exercise price of $0.01 equal to
10% of the number of shares of common stock into which the Series A and
Series B Preferred Stock may be converted, respectively. Total
accretion for the Series A Preferred Stock to its estimated
redemption value was $251 and $628 during the years ended March 31,
2002 and 2003, respectively, of which $185 and $412 related to the
accretion to the estimated redemption amount, respectively, and $66
and $216 related to the accretion of the beneficial conversion
feature, respectively. There was no accretion recorded for the
Series B Preferred Stock, as the estimated redemption amount was
below the original carrying amount of the Series B Preferred Stock.
6. Stockholders' Equity
Capital Stock
The Company is authorized to issue 95,000,000 shares of capital stock
of which 40,000,000 shares were designated as Class A Common Stock,
15,000,000 shares were designated as Class B Common Stock, 10,000,000
were designated as Class C Common Stock, and 15,000,000 shares were
designated as Class D Common Stock, par value $0.001 per share and
15,000,000 shares were designated as Preferred Stock, of which
3,500,000 were designated as Series A 8% Mandatorily Redeemable
Convertible Preferred Stock (the "Series A Preferred Stock") and
5,000,000 shares were designated as Series B 8% Cumulative Convertible
Preferred Stock, par value $0.001 (the "Series B Preferred Stock").
Each share of Class B Common Stock has voting rights equal to 10 votes
to 1 vote per share for each share of the Class A Common Stock. Each
share of Class C Common Stock has voting rights equal to 4 votes to 1
vote per share for each share of Class A Common Stock. Each share of
Class D Common Stock has voting rights equal to 3.3 votes to 1 vote per
share for each share of Class A Common Stock. Shares of Class B Common
Stock, Class C Common Stock and Class D Common Stock shares may be
converted into Class A Common Stock shares at any time, at the option
of the holder of shares thereof. However, upon the conversion of Class
B Common Stock, Class C Common Stock and Class D Common Stock shall
automatically convert to Class A Common Stock.
F-19
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
In April 2000, two founders of the Company purchased 1,861,500 shares
of common stock, of which 620,500 were shares of Class A Common Stock
and 1,241,000 were shares of Class B Common Stock. During the year
ended March 31, 2001, one of the Company's founders converted 19,856
shares of Class B Common Stock into Class A Common Stock. In April
2000, two founders of the Company each received a grant of 100,000
shares of Class A Common Stock in connection with the execution of
certain agreements. Additionally, each of these two founders purchased
300,000 shares of Class A Common Stock at par value. The Company
recorded stock-based compensation expense of approximately $129 for
these share issuances for the year ended March 31, 2001. During the
year ended March 31, 2003, one of the Company's founders converted
62,000 shares of Class B Common Stock into Class A Common Stock.
In October 2001, in connection with the sale of Series A Preferred
Stock to an outside investor, the founders of the Company forfeited an
aggregate of 246,667 shares of Class A Common Stock and 153,333 shares
of Class B Common Stock to the Company. No consideration was paid by
the Company for the return of these shares.
During the year ended March 31, 2003, 20,000 shares of Class A Common
Stock was sold to one investor, one investor exercised 5-Year Notes
Warrants to purchase 5,000 shares of Class A Common Stock (see Note 6),
and 30,000 shares of Class A Common Stock, previously issued to a
vendor in exchange for construction services, were returned to the
Company under a settlement agreement (see Note 9).
In December 2002, the Company's founders contributed 60,000 shares of
Class A Common Stock back to the Company, and those shares were
simultaneously granted to certain employees of the Company at the then
estimated fair value of the common stock. The Company recorded
stock-based compensation expense of $48 for these share grants. In
addition, the Company also agreed to pay the employees' tax on these
grants, and recorded an additional $19 to Selling, General and
Administrative expense for the estimated tax impact.
Stock Option Plan
In June 2000, the Company adopted the 2000 Stock Option Plan (the
"Plan") under which incentive and nonstatutory stock options may be
granted to employees, outside directors, and consultants. The purpose
of the Plan is to enable the Company to attract, retain and motivate
employees, directors, advisors and consultants. The Company has
reserved a total of 400,000 shares of the Company's Class A Common
Stock for issuance upon the exercise of options granted in accordance
with the Plan. Options granted under the Plan expire 10 years following
the date of grant (5 years for stockholders who own greater than 10% of
the outstanding stock) and are subject to limitations on transfer. The
Plan is administered by the Company's Board of Directors.
F-20
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
The Plan provides for the granting of incentive stock options at not
less than 100% of the fair value of the underlying stock at the grant
date. Option grants under the Plan are subject to various vesting
provisions, all of which are contingent upon the continuous service of
the optionee. Options granted to stockholders who own greater than 10%
of the outstanding stock must be issued at prices not less than 110% of
the fair value of the stock on the date of grant as determined by the
Company's Board of Directors. The purchase price and vesting period of
nonstatutory options is at the discretion of the Company's Board of
Directors. Upon a change of control, all shares granted under the Plan
shall immediately vest.
The following table summarizes the activity of the Plan:
Options Outstanding
Weighted-
Shares Average
Available Exercise
for Number of Price Per
Grant Shares Share
Balances, March 31, 2001 175,563 224,437 $ 9.25
Options granted (51,920) 51,920 $ 5.85
Options forfeited 33,400 (33,400) $ 12.45
------- -------
Balances, March 31, 2002 157,043 242,957 $ 8.10
------- -------
Options granted (78,000) 78,000 $ 4.10
Options forfeited 14,560 (14,560) $ 11.85
------- -------
Balances, March 31, 2003 93,603 306,397 $ 6.90
======= =======
The following table summarizes information about stock options
outstanding as of March 31, 2003:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Number Weighted-
Number Remaining Average of Average
of Contractual Exercise Shares Exercise
Exercise Prices Shares Life Price Exercisable Price
$ 2.50 50,000 9.72 $ 2.50 - $ 2.50
$ 5.00 83,397 8.33 $ 5.00 36,389 $ 5.00
$ 7.50 118,400 7.64 $ 7.50 64,267 $ 7.50
$ 12.50 54,600 7.58 $12.50 18,200 $12.50
------- -------
306,397 8.16 $ 6.90 118,856 $ 7.50
======= =======
F-21
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
Non-Employee Stock-Based Compensation
The Company uses the fair value method to value options granted to
non-employees. In connection with its grant of options to
non-employees, the Company has recorded deferred stock-based
compensation of $69 and $3 for the years ended March 31, 2002 and 2003,
respectively. The Company has amortized $235 and $51 for the years
ended March 31, 2002 and 2003, respectively, to stock-based
compensation expense on an accelerated basis over the vesting period of
the individual options, in accordance with FASB Interpretation No. 28,
"Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans-an Interpretation of APB Opinions No. 15 and 25."
The Company's calculations for non-employee grants were made using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Year Ended
March 31,
2002 2003
Dividend yield 0% 0%
Expected volatility 110% 110%
Risk-free interest rate 5.66% 5.26%
Expected life (in years) 10 10
Warrants
In connection with the sale of the shares of Series A Preferred Stock,
the Company issued the 2001 Warrants to purchase up to 430,205 shares
of the Class A Common Stock at $0.05 per share, subject to certain call
and put rights upon the occurrence of certain events. These warrants
are exercisable during the period commencing on the earlier of (i)
October 1, 2006, (ii) a change of control or other liquidity event of
the Company, or (iii) 120 days following the Company's listing on any
major U.S. stock exchange and ending on November 1, 2011. If the fair
value of the Company's common stock exceeds certain target prices at
certain dates between the issuance date and October 26, 2011, the 2001
Warrants will terminate in their entirety. Additionally, if the holders
of shares of Series A Preferred Stock exercise their redemption rights,
they may also require the Company to redeem the 2001 Warrants (the
"Warrant Put Rights") using the same formula described herein for the
redemption of the Series A Preferred Stock. However, in the event that
the Company plans to undertake an underwritten public offering of its
common stock, the Company can terminate the Warrant Put Rights and
instead issue a new warrant equal to 10% of the warrant shares.
Management has determined that the value of these put rights is
immaterial. The value of the warrants was ascribed an estimated fair
value of $719 and has been recognized as issuance cost and therefore
has been charged against the carrying value of the Company's Series A
Preferred Stock.
F-22
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
In connection with the issuance of 1-Year Notes (see Note 4) payable to
certain investors, the Company also issued to the holders of the 1-Year
Notes warrants to purchase shares of the Company's Class A Common Stock
(the "1-Year Notes Warrants"). As of March 31, 2002, the Company had
issued an aggregate amount of 25,305 1-Year Notes Warrants to the
holders of the 1-Year Notes. Of these warrants, 6,902 warrants were
issued to two of the Company's founders (see Note 11). The 1-Year Notes
Warrants have an exercise price of $0.05 per share and are exercisable
at any time from the date of issuance through the earlier of i) 10
years from the date of issuance or ii) the closing of a firm commitment
underwritten public offering of the Company's common stock. In the
event the holders of the Company's Series A Preferred Stock exercise
their redemption rights, certain investors holding an aggregate of
20,705 of the 1-Year Notes Warrants may, but are not obligated, require
the Company, simultaneous with its redemption of the Series A Preferred
Stock, to redeem their respective 1-Year Notes Warrants (the "1-Year
Notes Warrants Put Rights") for cash. The purchase price for the 1-Year
Notes Warrants Put Rights is based on the same formula as described
herein as the Series A Preferred Stock redemption rights. However, if
the Company completes an initial public offering of its' common stock
before the 1-Year Notes Warrants Put Rights are exercised, such put
rights will be terminated and will not be exercisable. Management has
determined that the value of these put rights is immaterial. The 25,305
warrants were ascribed an estimated fair value of $127, which has been
recognized as issuance cost and therefore has been charged against the
carrying value of the related notes payable. During the years ended
March 31, 2002, a total of $126, was amortized to non-cash interest
expense to accrete the value of the notes to their face value over the
expected term of the related notes. The remainder was amortized in
2003.
In connection with the issuance of the 5-Year Notes (see Note 4)
payable to certain investors, the Company also issued warrants to the
holders of the 5-Year Notes to purchase shares of the Company's Class A
Common Stock (the "5-Year Notes Warrants"). During the years ended
March 31, 2002 and 2003, the Company issued an aggregate amount of
181,500 and 136,000 5-Year Notes Warrants, respectively, to the holders
of the 5-Year Notes in the ratio of one-half of a 5-Year Note Warrant
for every dollar of 5-Year Notes issued. Of these warrants, 37,500 were
issued during the year ended March 31, 2002 to two of the Company's
founders (see Note 11). During the year ended March 31, 2003, one
investor exercised his 5-Year Notes Warrants for 5,000 shares of Class
A Common Stock. The 5-Year Notes Warrants have an exercise price of
$0.05 per share and are exercisable at any time from the date of
issuance through the earlier of i) 10 years from the date of issuance
or ii) the closing of a firm commitment underwritten public offering of
the Company's common stock. In the event that the Company repays any
investor's 5-Year Note (plus accrued interest) within one year of its
respective issuance date, the number of Warrants granted to such
investor shall be reduced by 20%. The 181,500 and 136,000 of 5-Year
Note Warrants were ascribed an estimated fair value of $907 and $680,
respectively, which has been recognized as issuance cost and therefore
has been charged against the carrying value of the related notes
payable. During the years ended March 31, 2002 and 2003, a total of $14
and $282 was amortized to non-cash interest expense to accrete the
value of the notes to their face value over the expected term of the
related notes.
F-23
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
In connection with the issuance of the Series B Preferred Stock during
the year ended March 31, 2003, the Company issued Contingent Warrant A
to purchase an aggregate of 381,909 shares of Class A Common Stock at
$0.05 per share, subject to certain call and put rights upon the
occurrence of certain events. In the event that any portion of the 2001
Warrant is exercised, then Contingent Warrant A will be increased by
8.955% of the number of shares of Class A Common Stock so issued
pursuant to the 2001 Warrant exercise, up to a maximum of 38,526
additional shares. Contingent Warrant A is exercisable during the
period commencing on the earlier of (i) November 27, 2007, or (ii) a
change of control or other liquidity event of the Company, and ending
on November 27, 2012. If the fair value of the Company's common stock
exceeds certain target prices at certain dates between the issuance
date and November 26, 2012, Contingent Warrant A will terminate in its
entirety. Additionally, if the holders of shares of Series B Preferred
Stock exercise their redemption rights, they may also require the
Company to redeem Contingent Warrant A (the "Contingent Warrant A Put
Rights") using the same formula described herein for the redemption of
the Series B Preferred Stock. However, in the event that the Company
completes an underwritten public offering of its common stock, the
Company can terminate the Contingent Warrant A Put Rights and
instead issue a new warrant equal to 10% of the Contingent Warrant A
shares. Management has determined that the value of these put rights
is immaterial. The value of Contingent Warrant A was ascribed an
estimated fair value of $249 and has been recognized as issuance
cost and therefore has been charged against the carrying value of
the Company's Series B Preferred Stock.
Also, in connection with the issuance of the Series B Preferred Stock,
the Company issued Contingent Warrant B to purchase an aggregate of
144,663 shares of Class A Common Stock at $0.05 per share, subject to
certain call and put rights upon the occurrence of certain events. In
the event that any portion of the 2001 Warrant is exercised, Contingent
Warrant B will be increased by 3.4%, up to a maximum of 14,593
additional shares. Contingent Warrant B is exercisable during the
period commencing on March 31, 2003 and ending on March 31, 2008.
However, if the Company has met certain revenue targets by March 31,
2003, this warrant will terminate in its entirety. The Company has not
met the stipulated revenue targets, and therefore Contingent Warrant B
is exercisable. Additionally, if the holders of shares of Series B
Preferred Stock exercise their redemption rights, they may also require
the Company to redeem Contingent Warrant B (the "Contingent Warrant B
Put Rights") using the same formula described herein for the redemption
of the Series B Preferred Stock. However, in the event that the Company
completes an underwritten public offering of its common stock, the
Company can terminate the Contingent Warrant B Put Rights and
instead issue a new warrant equal to 10% of the Contingent Warrant B
shares. Management has determined that the value of these put rights
is immaterial. The value of Contingent Warrant B was ascribed an
estimated fair value of $94 and has been recognized as issuance cost
and therefore has been charged against the carrying value of the
Company's Series B Preferred Stock.
F-24
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
Additionally, in connection with the issuance of the Series B Preferred
Stock, the Company issued Contingent Warrant C to purchase an aggregate
of up to 100,401 shares of Class A Common Stock at $0.05 per share,
subject to certain call and put rights upon the occurrence of certain
events. Contingent Warrant C is exercisable during the period
commencing on November 27, 2002 and ending on November 27, 2012.
Contingent Warrant C may be exercised only in the event that the 2001
Warrant is exercised. Contingent Warrant C shall be exercisable for a
number of shares of Class A Common Stock equal to 23.4% of the number
of shares so issued in accordance with the 2001 Warrant, up to 100,401
shares. Additionally, if the holders of shares of Series B Preferred
Stock exercise their redemption rights, they may also require the
Company to redeem Contingent Warrant C (the "Contingent Warrant C Put
Rights") using the same formula described herein for the redemption of
the Series B Preferred Stock. However, in the event that the Company
completes an underwritten public offering of its common stock,
the Company can terminate the Contingent Warrant C Put Rights and
instead issue a new warrant equal to 10% of the Contingent Warrant C
shares. No value was ascribed to Contingent Warrant C or the related
put rights because of the uncertainty surrounding the exercise of the
2001 warrant.
7. Acquisitions
In December 2001, the Company acquired one data center from Bridgepoint
for $370 in cash including acquisition costs. The asset purchase
agreement also provides for additional payments to Bridgepoint totaling
$500 to be made in equal monthly installments for one year, based on
the satisfactory collection of accounts receivable from a specified
customer. As of March 31, 2002, $83 of these payments had been made and
the Company recorded the full amount of the remaining payments as
purchase price. In connection with the acquisition, the Company also
assumed a capital lease in amount of $135 on certain machinery and
equipment (See Note 9). In June 2002, the Company and Bridgepoint
became involved in a dispute over the terms of the asset purchase
agreement and the contingent payments, and in January 2003, the Company
and Bridgepoint settled the $417 of remaining contingent payments for a
cash payment to Bridgepoint of $200. The Company has adjusted the
purchase price accordingly. The acquired assets consist mainly of
leasehold improvements, furniture and fixtures and machinery and
equipment. The acquisition has been accounted for using the purchase
method and accordingly, the purchase price has been allocated to the
assets acquired based on the estimated fair values at the date of
acquisition. The acquired operations have been included in the
Company's results of operations since the date of acquisition. The
purchase price was allocated as follows:
Leasehold improvements $ 515
Machinery and equipment 247
Computer equipment 20
Furniture and fixtures 6
------
Total $ 788
======
F-25
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
In November 2002, the Company acquired six data centers from
ColoSolutions, Inc. for $3,550, including acquisition costs and the
assumption of capital leases in the aggregate amount of $249 on certain
machinery and equipment (see Note 9). The purchase price consisted of
cash plus a $1,000 1-Year Note payable (see Note 4). The acquired
assets consist mainly of customer contracts, leasehold improvements,
and machinery and equipment. The acquisition has been accounted for
using the purchase method and accordingly, the purchase price has been
allocated to the assets acquired based on the estimated fair values of
the date of acquisition. The acquired operations have been included in
the Company's results of operations since the date of acquisition. The
purchase price was allocated as follows:
Customer contracts $2,705
Leasehold improvements 87
Machinery and equipment 758
------
Total $3,550
======
The purchase price was allocated among the identifiable tangible and
intangible assets based on the fair market value of those assets. The
customer contracts were valued using the income approach. Under this
approach, indications of value are developed by discounting future
debt-free net cash flows to measure the intrinsic value by reference to
an enterprises expected annual debt-free cash flows. This analysis
resulted in an allocation of approximately $2,705 to a contract
intangible, which was capitalized and being amortized over three years.
Total amortization expense related to this asset for the fiscal year
ended March 31, 2003 was $396.
Amortization of this asset in future years is expected to be as
follows:
Year ended March 31,
2004 $ 912
2005 838
2006 558
8. Income Taxes
The benefit from income taxes for the years ended March 31, 2002 and
2003 consisted of the following:
2002 2003
Current $ - $ 185
Deferred - -
------ ------
Total - 185
====== ======
F-26
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
Net deferred tax assets consist of the following as of March 31, 2002
and 2003:
2002 2003
Deferred tax assets
Net operating loss carryforwards $ 1,425 $ 2,183
Amortization 497 514
Depreciation 141 237
Other 479 659
------- -------
Total deferred tax assets 2,542 3,593
Deferred tax liabilities
Deferred customer acquisition cost (21) -
------- -------
Total deferred tax liabilities (21) -
------- -------
Net deferred tax assets before valuation allowance 2,521 3,593
Valuation allowance (2,521) (3,593)
------- -------
Net deferred tax asset $ - $ -
======= =======
The Company has provided a valuation allowance for the full amount of
its net deferred tax assets since realization of any future benefits
from deductible temporary differences and net operating loss cannot be
sufficiently assured at March 31, 2002 or 2003. The change in the
valuation allowance in the current year is approximately $1,072.
As of March 31, 2003, the Company has federal and state net operating
loss carryforwards of approximately $5,786 available to reduce future
taxable income. The federal net operating loss carryforwards will begin
to expire in 2020. In the event of certain ownership changes, the
Company's ability to utilize the tax benefits from net operating loss
carryforwards could be substantially limited.
During the year ended March 31, 2003, the Company received approval to
sell a portion of its unused cumulative New Jersey Net Operating Loss
("NOLs") carryforwards under the State of New Jersey's Technology
Business Tax Certificate Transfer Program (the "Program"). The Program
allows qualified technology and biotechnology businesses in New Jersey
to sell unused amounts of NOL carryforwards and defined research and
development credits for cash. The Company recognized a tax benefit of
approximately $185 on the sale of the NOLs, net of expenses.
F-27
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
The differences between the United States federal statutory tax rate
and the Company's effective tax rate are as follows as of March 31,
2002 and 2003:
2002 2003
Tax benefit at the U.S. Statutory Federal Rate (34.0%) (34.0%)
State tax benefit 0.0% (3.4%)
Change in Federal valuation allowance 31.6% 29.1%
Disallowed interest 1.3% 2.7%
Other 1.1% 0.5%
------- -------
Effective tax rate (0.0%) (5.1%)
======= =======
9. Commitments and Contingencies
Leases
The Company leases its IDCs and corporate office under noncancelable
operating lease agreements expiring through 2015. The IDC's lease
agreements provide for base rental rates which increase at defined
intervals during the term of the lease. The Company accounts for rent
abatements and increasing base rentals using the straight-line method
over the life of the lease. The difference between the straight-line
expense and the cash payment is recorded as deferred rent expense.
The Company leases certain equipment for use in its IDC's and corporate
headquarters under noncancelable capital lease agreements that expire
through 2006.
Minimum future operating and capital lease payments as of March 31,
2003 are summarized as follows:
Capital Operating
Leases Leases
Year ending March 31,
2004 $ 314 $ 2,195
2005 234 2,258
2006 42 2,222
2007 7 2,139
2008 - 2,167
Thereafter - 8,161
----- --------
Total minimum lease payments 597 $ 19,142
========
Less amount representing interest 84
-----
Present value of net minimum lease payments, including current
maturities of $261 $ 513
=====
F-28
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
Total rent expense was approximately $1,542 and $2,318 for the years
ended March 31, 2002 and 2003, respectively.
Assets recorded under capitalized lease agreements included in property
and equipment consist of the following:
2002 2003
Computer equipment $ 338 $ 338
Machinery and equipment 134 383
----- -----
472 721
Less: Accumulated amortization (67) (236)
----- -----
Net assets under capital lease $ 405 $ 485
===== =====
Employment Agreements
The Company has employment agreements with two executives which provide
for compensation and certain other benefits. These agreements provide
for base salaries in the aggregate of $350,000, as well as for bonus
payments to one of the executives based on revenue results.
Other
During the year ended March 31, 2002, the Company became involved in a
dispute with one of its contractors. The contractor filed a mechanic's
lien in the amount of $951 representing the amount the contractor
alleged was due under the contract. As described in Note 3, the Company
has funded a standby letter of credit for $951 to cover this lien. In
July 2002, the Company settled the dispute for the cash payment of $750
and the return by the contractor of $300 of common stock the Company
had issued as partial consideration for construction services.
10. Employee Benefit Plan
In July 2002, the Company terminated its then existing benefits plans,
including its 401(k) plan, and joined a Professional Employer
Organization ("PEO"). Through the PEO, the Company purchases all of its
benefits and payroll services, together with other PEO member
companies. For tax filing and for benefits purposes, the employees of
the Company are considered to be employees of the PEO.
Through the PEO, the Company has a 401(k) Plan that allows eligible
employees to contribute up to 15% of their compensation, not to exceed
the statutory limit. The Company matches 50% of all employee
contributions. Employee contributions, employer matching contributions
and related earnings vest immediately. Total expense under this plan
and the prior 401(k) plan totaled $43 and $37, respectively, for the
years ended March 31, 2002 and 2003.
F-29
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
11. Related Party Transactions
In connection with the execution of one of the Company's long-term
operating leases, two of the Company's founders posted a letter of
credit in the amount of $525. This letter of credit is reduced each
year for three years until it reaches zero in June 2003.
Two executives of the Company were investors in the 1-Year Notes
discussed in Note 4. These executives received 6,902 warrants to
purchase Class A Common Stock at $0.05 per share. These notes were
repaid prior to March 31, 2002. Both executives also participated in
the 5-Year Notes, and received 37,500 additional warrants. As of March
31, 2002 and 2003 the principal due to these executives amounted to
$375, and is included in notes payable.
A former director of the Company is also a partner of a law firm which
performs legal services for the Company. For the years ended March 31,
2002 and 2003 the Company purchased approximately $213 and $124,
respectively, of legal services from this firm. The former director was
granted options to purchase 4,000 shares of Class A Common Stock.
A director of the Company is also a director of an investment firm
which holds approximately 102,000 shares of the Company's Class A
Common Stock. This firm also invested $1,000 in the Company's 1-Year
Notes, which was repaid in March 2002, and invested $1,000 in the
Company's 5-Year Notes, which is outstanding at March 31, 2003 (See
Note 4). The director has been granted options to purchase 4,000
shares of Class A Common Stock.
A member of the Company's board of advisors is related to one of the
Company's executives, and is a partner in an entity that performs real
estate services for the Company. The Company incurred real estate
commissions of $26 related to services provided by this entity during
the fiscal year ended March 31, 2002. This individual also has been
granted options to purchase 41,025 shares of Class A Common Stock.
Two directors of the Company are also directors of an investment firm
which holds all of the Company's outstanding Preferred Stock and
related contingent warrants. The Company pays this related party a
management fee of $50 per year. In addition, the Company paid a $75,000
investment banking fee in connection with the issuance of the Series A
and Series B Preferred Stock financings. This firm also invested $333
in the Company's 1-Year Notes (see Note 4), which was repaid in
April 2002.
One of the members of the Company's board of advisors owns a
contracting firm that performs work at the Company's IDC's, and the
owner of this company is also an investor in the Company's 5-Year
Notes. This contractor has been paid $194 and $18 for the years ended
March 31, 2002 and 2003, respectively, and in March 2002, the owner of
this company purchased $50 of the Company's 5-Year Notes. In addition,
this company owns 8,000 shares of Class A Common Stock, issued as
partial consideration for work performed during the year ended March
31, 2001.
One of the members of the Company's board of advisors owns an
architectural services firm that performs work at the Company's IDC's.
This firm has been paid $5 for the year ended March 31, 2002. In
addition, this individual holds options to purchase 600 shares of the
Company's Class A Common Stock.
F-30
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
The Company has purchased two separate ten-year, term life insurance
policies on the life of one of its executives. Each policy carries a
death benefit of $5 million, and the Company is the beneficiary of each
policy. Under one policy, however, the proceeds will be used to
repurchase, after reimbursement of all premiums paid by the Company,
some or all of the shares of the Company's capital stock held by the
executive's estate at the then-determined fair market value.
12. Segment Information
The Company has adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
requires disclosures of selected segment-related financial information
about products, major customers and geographic areas.
The Company is principally engaged in the design, build-out and
operation of carrier-diverse IDCs. All revenues result from the
operation of these IDCs. Accordingly, the Company considers itself to
operate in a single segment for purposes of disclosure under SFAS No.
131. The Company's chief operating decision-maker evaluates
performance, makes operating decisions and allocates resources based on
financial data consistent with the presentation in the accompanying
consolidated financial statements.
As of March 31, 2003, the Company had operations and assets in New
Jersey, New York, Arkansas, New Hampshire, Maine, Texas, Kansas and
Virginia. As of March 31, 2002, all of the Company's operations and
assets were based in the New York/New Jersey area.
13. Supplemental Cash Flow Disclosure
March 31,
2002 2003
Interest paid $ 58 $ 15
Assets acquired under capital leases 472 242
Liability incurred in Bridgepoint acquisition 417 -
Notes issued in ColoSolutions acquisition - 1,000
Adjustment to Bridgepoint purchase price - 217
Accretion on mandatorily redeemable convertible preferred stock 251 628
14. Subsequent Events
In May 2003, the Company and a New York based underwriter entered into
a firm commitment letter of intent to undertake an initial public
offering ("IPO") of the Company's common stock. Preparation for the IPO
is underway, however there can be no assurance that the IPO will occur
in the near term.
F-31
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
In July 2003, in connection with the planned IPO, the Company's Board
of Directors approved a reverse stock split where each share of Class A
Common Stock, Class B Common Stock, Class C Common Stock and Class D
Common Stock will be exchanged for one-fifth of a share of each
respective class of common stock (the "1-5 Reverse Split"). The Series
A and Series B Preferred Stock are unaffected by the 1-5 Reverse Split,
until they are converted into Class C Common Stock and Class D Common
Stock, respectively. The 1-5 Reverse Split is contingent upon the
Company's filing of the IPO. The accompanying consolidated financial
statements have been adjusted retroactively to reflect the reverse
split of all outstanding common stock.
In June and July 2003, the Company issued an additional $1,230 of
5-Year Notes to various investors, along with 123,000 5-Year Notes
Warrants, for the primary purpose of funding the IPO-related fees and
expenses and repaying capital lease obligations. These notes have the
same terms as the previously issued 5-Year Notes (see Note 4).
In May 2003, AccessDM authorized the issuance of 3,000,000 shares of
Common Stock, $0.001 par value ("AccessDM") to the Company in exchange
for $3,000.
In July 2003, the Company entered into an agreement with an information
technology consulting firm to develop the initial phase of software for
use by AccessDM in the receipt, storage, and distribution of digital
media. The cost of this phase of software development is $174, 25%
of which is to be paid in the form of 8,700 shares of Class A Common
Stock, and 75% of which is to be paid in the form of AccessDM Common
Stock as of the date of the agreement. Based on the 3,000,000 shares
of AccessDM Common Stock outstanding, AccessDM will issue 750,000
shares of its common stock when the software is delivered, and
accepted in accordance with the terms of the agreement. If the IPO
is not completed by December 31, 2003, the Company is required to
pay cash in lieu of its Class A Common Stock in the amount of $43.
Pending Hollywood Software Acquisition
On July 17, 2003, the Company entered into an agreement to purchase
substantially all of the common stock of Hollywood Software ("HS"). HS,
a California corporation, is in the business of developing,
distributing and licensing proprietary back office transactional
software for both distributors and exhibitors of filmed and digital
entertainment in the United States and Canada. The Company believes
that the acquisition of HS will expand its existing capabilities and
solutions, and will provide cross-marketing opportunities with its
newly formed subsidiary, Access Digital Media Inc. The acquisition of
HS is contingent upon the successful completion of the IPO and the
receipt of IPO proceeds of at least $3,000. The Company plans to
complete the acquisition concurrent with, or shortly after the IPO.
The Company's management believes that the acquisition of HS is
probable.
The initial purchase price is $7,500 consisting of $2,500 of cash;
$2,000 of the Company's Class A Common Stock valued at the IPO price,
less the underwriter's discount; and $3,000 of promissory notes. In
addition, a contingent purchase price is payable each year for the
three years following the closing if certain earnings targets are
achieved. The Company has also agreed to issue additional shares to the
sellers in accordance with a formula if the Company's Class A Common
Stock declines in value beyond certain levels.
F-32
Access Integrated Technologies, Inc.
(fka AccessColo, Inc.)
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
--------------------------------------------------------------------------------
The total purchase price of $7,655, including estimated fees and
expenses of the acquisition, will be allocated to the net assets
acquired, including tangible and intangible assets, and liabilities
assumed, based upon management's best preliminary estimate of fair
value with any excess purchase price being allocated to goodwill. The
preliminary allocation of the purchase price may be subject to further
adjustment as the Company finalizes its allocation of the purchase
price in accordance with accounting principles generally accepting in
the United States of America. The estimate of fair value of the
tangible and intangible assets acquired and liabilities assumed is
expected to be allocated as follows:
Tangible and intangible assets acquired
Current assets $ 604
Property and equipment, net 31
Capitalized software cost, net 479
Intangible assets 4,000
Goodwill 3,210
------
Total tangible and intangible assets acquired 8,324
------
Less liabilities assumed
Current liabilities 669
------
Total liabilities assumed 669
------
Total purchase price $7,655
======
The intangible assets are expected to consist of customer contracts and
non-compete agreements. These assets are expected to be amortized over
their estimated useful lives of 3 and 5 years, respectively.
The acquisition has been structured as stock purchase for tax purposes
and as a result, the Company estimates that the entire amount of
goodwill will be deductible and will be amortized over fifteen years
for tax purposes.
The following unaudited pro forma consolidated results of operations
for the year ended March 31, 2003 assume the acquisition of Hollywood
Software occurred as of April 1, 2002:
March 31,
2003
(Unaudited)
Revenues $ 6,136
Net loss (4,511)
F-33
Access Integrated Technologies, Inc.
Consolidated Balance Sheets
(in thousands except share data)
(Unaudited)
Pro forma
June 30, June 30,
2003 2003
-------- --------
Assets
Current assets
Cash and cash equivalenets $ 1,407 $ 1,407
Accounts receivable 96 96
Prepaids and other current assets 395 395
Unbilled revenue 85 85
-------- --------
Total current assets 1,983 1,983
Property and equipment, net 4,809 4,809
Intangible asset, net 2,071 2,071
Deferred costs 306 306
Unbilled revenue 486 486
Security deposits 469 469
-------- --------
Total assets $ 10,124 $ 10,124
======== ========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses $ 767 $ 767
Current portion of notes payable 1,325 1,325
Current portion of capital leases 263 263
Deferred revenue 34 34
-------- --------
Total current liabilities 2,389 2,389
Notes payable, net of current portion 2,165 2,165
Customer security deposits 153 153
Deferred revenue, net of current portion 280 280
Capital leases, net of current portion 174 174
Deferred rent expense 723 723
-------- --------
Total liabilities 5,884 5,884
-------- --------
Commitments and contingencies
Mandatorily redeemable convertible preferred stock
Series A mandatorily redeemable convertible preferred stock, $0.001 par value,
3,500,000 shares authorized, 3,226,538 shares issued and outstanding 1,105 -
Series B mandatorily redeemable convertible preferred stock, $0.001 par value,
5,000,000 shares authorized, 4,976,391 shares issued and outstanding 2,032 -
Stockholders' equity
Class A common stock, $0.001 par value per share; 40,000,000 shares authorized; 2 3
2,015,770 shares issued and outstanding as of June 30, 2003
Class B common stock, $0.001 par value per share; 15,000,000 shares authorized; 1 1
1,005,811 shares issued and outstanding as of June 30, 2003
Additional paid-in capital 11,831 14,967
Deferred stock-based compensation (5) (5)
Accumulated deficit (10,726) (10,726)
-------- --------
Total stockholders' equity 1,103 4,240
-------- --------
Total liabilities and stockholders' equity $ 10,124 $ 10,124
======== ========
See accompanying notes to consolidated financial statements.
F-34
Access Integrated Technologies, Inc.
Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended
June 30, June 30,
2002 2003
----------- -----------
Revenues $ 888 $ 1,421
Costs of revenues (exclusive of depreciation shown below) 705 869
----------- -----------
Gross profit 183 552
Operating expenses
Selling, general and administrative (excludes non-cash stock- 553 558
based compensation of $23 in 2002 and $6 in 2003)
Non-cash stock-based compensation 23 6
Depreciation and amortization 299 619
----------- -----------
Total operating expenses 875 1,183
----------- -----------
Loss from operations (692) (631)
Interest income 3 1
Interest expense (66) (116)
Non-cash interest expense (48) (80)
Other income/expense, net - (6)
----------- -----------
Net loss (803) (832)
Accretion related to redeemable convertible preferred stock (155) (226)
Accretion of preferred dividends (40) (90)
----------- -----------
Net loss available to common stockholders $ (998) $ (1,148)
=========== ===========
Net loss available to common stockholders per common share
Basic and diluted $ (0.33) $ (0.38)
=========== ===========
Weighted average number of common shares outstanding
Basic and diluted 3,042,841 3,021,577
=========== ===========
See accompanying notes to consolidated financial statements.
F-35
Access Integrated Technologies, Inc.
Consolidated Statement of Stockholders' Equity
(In thousands, except share data)
(Unaudited)
Class A Class B Additional
Common Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
Balances as of March 31, 2003 2,015,770 $ 2 1,005,811 $ 1 $ 11,530
Issuance of warrants to purchase common stock (attached to notes 527
payable)
Amortization of stock-based compensation
Accretion of preferred stock to redemption amount (226)
Net loss
--------- ---- --------- --- --------
Balances as of June 30, 2003 2,015,770 $ 2 1,005,811 $ 1 $ 11,831
========= ==== ========= === ========
Deferred
Stock- Total
Based Accumulated Stockholders'
Compensation Deficit Equity
Balances as of March 31, 2003 $ (11) $ (9,894) $ 1,628
Issuance of warrants to purchase common stock (attached to notes 527
payable)
Amortization of stock-based compensation 6 6
Accretion of preferred stock to redemption amount (226)
Net loss (832) (832)
----- --------- -------
Balances as of June 30, 2003 $ (5) $ (10,726) $ 1,103
===== ========= =======
See accompanying notes to consolidated financial statements.
F-36
Access Integrated Technologies, Inc.
Consolidated Statements of Cash Flows
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended
June 30, June 30,
2002 2003
-------- --------
Cash flows from operating activities
Net loss $ (803) $ (832)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 299 619
Non-cash stock-based compensation 23 6
Non-cash interest expense 48 80
Changes in operating assets and liabilities
Accounts receivable - (55)
Prepaids and other current assets (284) (108)
Other assets (246) (178)
Accounts payable and accrued expenses 237 (25)
Deferred revenue 198 (49)
Other liabilities 72 71
------- -------
Net cash used in operating activities (456) (471)
Cash flows from investing activities
Purchases of property and equipment (143) (57)
------- -------
Net cash used in investing activities (143) (57)
Cash flows from financing activities
Net proceeds from issuance of notes payable and warrants 260 1,055
Repayment of notes payable (333) -
Proceeds from issuance of common stock 125
Principal payments on capital leases (33) (76)
------- -------
Net cash provided by financing activities 19 979
Net decrease in cash and cash equivalents (580) 451
Cash and cash equivalents at beginning of period 1,001 956
------- -------
Cash and cash equivalents at end of period $ 421 $ 1,407
======= =======
See accompanying notes to consolidated financial statements.
F-37
Access Integrated Technologies, Inc.
Notes to Consolidated Financial Statements (unaudited)
(In thousands, except share and per share data)
1. Nature of Operations and Basis of Presentation
Nature of Operations
Access Integrated Technologies, Inc. ("AccessIT" or the "Company"), was
incorporated in Delaware on March 31, 2000. Access Digital Media Inc.
("AccessDM" or "Access Digital") a wholly-owned subsidiary of AccessIT, was
incorporated in Delaware on February 4, 2003. AccessIT and Access Digital are
referred to herein collectively as the "Company". The Company designs, builds,
and operates a national platform of carrier-diverse Internet Data Centers
("IDCs") in which the Company's customers have access to: secure, flexible space
for installing network and server equipment; multiple fiber providers for
connecting to the Internet and/or other carrier networks; and a broad range of
value-added data center services including the Company's AccessStorage-on-Demand
managed storage service ("MSS") solutions. The Company's IDCs, called
AccessColocenters, are designed to serve a variety of customers, including
traditional voice/data competitive local exchange carriers ("CLECs"), other
integrated communication providers ("IXPs"), Internet Service Providers
("ISPs"), Application Service Providers ("ASPs"), Streaming and Content Delivery
Service Providers ("CDSPs"), storage outsourcers, and small and medium sized
enterprises. AccessDM was formed to utilize AccessIT's existing infrastructure
to store and distribute digital content to movie theaters and other remote
venues. The Company currently operates nine IDC's located in eight states:
Arkansas, Kansas, Maine, New Hampshire, New Jersey, New York, Texas and
Virginia.
Basis of Presentation
The accompanying consolidated interim financial information has been prepared by
AccessIT. The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States
for interim financial information and in accordance with Regulation S-B.
Accordingly, they do not include all of the financial information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included.
The accompanying consolidated financial statements have been prepared on the
assumption that the Company will continue as a going concern. During the year
ended March 31, 2003 and the three months ended June 30, 2003, the Company
incurred losses of $3,404 and $832, respectively, and negative cash flows from
operating activities of $760 and $471, respectively. In addition, the Company
has an accumulated deficit of $10,726 as of June 30, 2003. The Company will
require additional financing to support its ongoing operations and further
service development efforts. Management expects that the Company will continue
to generate operating losses and negative cash flows for the foreseeable future
due to the continued efforts related to the identification of acquisition
targets, marketing and promotional activities and the development of
relationships with other businesses. These matters raise substantial doubt
regarding the Company's ability to continue as a going concern. The Company is
attempting to raise additional capital from its planned Initial Public Offering
("IPO") as described in Note 8 and from other sources. There is no assurance
that such financing will be completed as contemplated or under terms acceptable
to the Company or its existing shareholders. The accompanying consolidated
financial statements do not reflect any adjustments which may result from the
outcome of such uncertainties.
F-38
Access Integrated Technologies, Inc.
Notes to Consolidated Financial Statements (unaudited)
(In thousands, except share and per share data)
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The results of operations for the respective interim periods are not necessarily
indicative of the results to be expected for the full year. The accompanying
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and the notes thereto included in
AccessIT's Form SB-2, as amended, for the year ended March 31, 2003 filed with
the Securities and Exchange Commission.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, AccessDM. All intercompany transactions and
balances have been eliminated.
Net Loss per Share Available to Common Stockholders
Computations of basic and diluted net loss per share of common stock have been
made in accordance with SFAS No. 128, "Earnings Per Share". Basic net loss per
share is computed by dividing net loss available to common stockholders (the
numerator) by the weighted average number of common shares outstanding (the
denominator) during the period. Shares issued during the period are weighted for
the portion of the period that they are outstanding. The computation of diluted
net loss per share is similar to the computation of basic net loss per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued. The Company has incurred a net loss for the three months
ending June 30, 2002 and 2003, therefore, the impact of dilutive potential
common shares has been excluded from the computation as it would be
anti-dilutive.
The following outstanding stock options and warrants (prior to the application
of the treasury stock method), and redeemable convertible preferred stock (on an
as-converted basis) were excluded from the computation of diluted net loss per
share:
June 30, June 30,
2002 2003
--------- ---------
Stock options 249,957 306,397
1-Year Notes Warrants 25,305 25,305
5-Year Notes Warrants 202,500 418,000
2001 Warrants 430,205 430,205
Contingent Warrants A-C - 680,092
Mandatorily redeemable convertible preferred stock 3,226,538 8,202,929
Pro Forma Balance Sheet
The Pro Forma Balance Sheet gives effect to the conversion of all of the
Company's outstanding shares of Series A and Series B Preferred Stock, including
accrued dividends, into shares of Class A Common Stock, as well as the exercise
and exchange of certain warrants (see Note 8).
Stock-Based Compensation
The Company accounts for its stock based employee compensation plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation is recorded on the date of grant only if the current fair
value of the underlying stock exceeds the exercise price. The Company has
adopted the disclosure standards of SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosures," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation," which requires the Company to provide
pro forma net loss and earnings per share disclosures for employee stock option
grants as if the fair-value-based method of accounting for stock options as
defined in SFAS No. 123 had been applied. The following table illustrates the
effect on net loss if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock based employee compensation for the three
months ended June 30, 2002 and 2003:
F-39
Access Integrated Technologies, Inc.
Notes to Consolidated Financial Statements (unaudited)
(In thousands, except share and per share data)
2002 2003
------ ------
Net loss as reported $ (803) $ (832)
Deduct: Total stock-based employee compensation expense determined under
fair value based method, net of related income tax benefits
(124) (134)
Pro forma net loss $ (927) $ (966)
====== ======
Basic and diluted net loss available to common stockholders per share:
As reported $ (0.33) $ (0.38)
Pro forma $ (0.37) $ (0.42)
3. Notes Payable
In April 2002, the Company repaid the remaining 1-year 8% subordinated
promissory notes, totaling $333, that were outstanding as of March 31, 2002
In February 2002, the Company commenced an offering of 5-year 8% subordinated
promissory notes (the "5-Year Notes") with detachable warrants. During the three
months ended June 30, 2002 and 2003, the Company raised an aggregate of $260 and
$1,055, respectively, from the issuance of 5-Year Notes to several investors. As
of June 30, 2003, $4,230 of these notes payable were outstanding, of which $375
was outstanding to two of the Company's founders. The 5-Year Notes were issued
primarily to repay prior issuances of 1-Year 8% subordinated promissory notes
(the "1-Year Notes") and to fund the Company's working capital needs. The 5-Year
Notes bear interest at 8% per annum with repayment terms as follows: i) for a
period of two years after the issuance date, interest-only payments are to be
paid quarterly in arrears and ii) for the remaining three years until the final
maturity date, the Company shall pay a) quarterly payments of principal in equal
installments and b) quarterly payments of interest on the remaining unpaid
principal amount of the 5-Year Notes. The Company may prepay the 5-Year Notes at
any time. Principal repayments of the 5-Year Notes begin in March 2004. As of
June 30, 2003 there have not been any repayments of the 5-year Notes.
Concurrent with the issuance of the 5-Year Notes, the Company issued a total of
423,000 5-Year Notes warrants (see Note 5), of which 26,000 and 105,500 were
issued during the three months ended June 30, 2002 and 2003, respectively.
F-40
Access Integrated Technologies, Inc.
Notes to Consolidated Financial Statements (unaudited)
(In thousands, except share and per share data)
4. Mandatorily Redeemable Convertible Preferred Stock
On October 8, 2001, the Company authorized the issuance of 3,226,538 shares of
the Series A Preferred Stock at approximately $0.62 per share, resulting in
gross proceeds of $2,000, before considering expenses of $203. Concurrent with
this issuance, the Company issued warrants to purchase up to 430,205 shares of
Class A Common Stock (the "2001 Warrant"). On November 27, 2002, the Company
authorized the issuance of 4,976,391 shares of the Series B Preferred Stock to
the existing Series A Preferred Stock holder at approximately $0.50 per share,
resulting in gross proceeds of $2,500, before considering expenses of $125.
Concurrent with this issuance, the Company issued 381,909, 144,663 and 100,401
warrants to purchase Class A Common Stock ("Contingent Warrant A", "Contingent
Warrant B" and "Contingent Warrant C", respectively). The issuance of the Series
A Preferred Stock resulted in a beneficial conversion feature of $1,078,
calculated in accordance with EITF Issue No. 00-27, "Application of Issue No.
98-5 to Certain Convertible Instruments." The beneficial conversion feature is
reflected as an issuance cost and therefore has been reflected as a charge
against the Series A Preferred Stock and an increase to additional paid-in
capital.
The carrying value of the Company's Series A Preferred Stock is below its
liquidation value, as the Company incurred aggregate costs of $2,000 related to
the issuance of the preferred stock, of which $203 represents cash payments,
$719 represents the estimated fair value of the 2001 Warrants issued as
consideration for the issuance of the Company's Series A Preferred Stock and
$1,078 is the beneficial conversion feature. The Company's carrying value of the
Series B Preferred Stock is below its liquidation value, as the Company incurred
aggregate costs of $468 related to the issuance of the preferred stock, of which
$125 represents cash payments, and $343 represents the estimated fair value of
Contingent Warrant A and Contingent Warrant B, issued as consideration for the
issuance of the Company's Series B Preferred Stock. As of June 30, 2003, the
liquidation preference of the Series A Preferred Stock and the Series B
Preferred Stock was $2,271 and $2,618, respectively.
The Series A Preferred Stock and Series B Preferred Stock is redeemable at the
election of each of the holders of the then-outstanding shares of Series A
Preferred Stock and Series B Preferred Stock at any time on or after the fifth
anniversary of the original issuance date of the Series A Preferred Stock if
certain liquidity events shall not have occurred by then, at a redemption price
equal to the greater of the (i) Company's gross revenue from all sources or (ii)
five times the Corporation's combined earnings from its data center operations,
before deduction for certain defined expenses, for the twelve months immediately
preceding the month of exercise of the redemption rights, in each case divided
by the number of fully-diluted, as converted shares of common stock outstanding.
The Company has the option of first redeeming only 25% of the redeemed Series A
Preferred Stock and Series B Preferred Stock, with the remainder then to be
redeemed in 3 annual installments. However, in the event that the Company
completes an underwritten public offering of its common stock, the Company can
terminate the Series A and Series B Preferred Stock redemption rights and
instead issue new warrants with an exercise price of $0.01 equal to 10% of the
number of shares of common stock into which the Series A and Series B Preferred
Stock may be converted, respectively. Total accretion for the Series A Preferred
Stock to its estimated redemption value was $155 and $226 during the three
months ended June 30, 2002 and 2003, respectively, of which $101 and $172
related to the accretion to the estimated redemption amount, respectively, and
$54 related to the accretion of the beneficial conversion feature in each
period. There was no accretion recorded for the Series B Preferred Stock, as the
estimated redemption amount was below the original carrying amount of the Series
B Preferred Stock.
F-41
Access Integrated Technologies, Inc.
Notes to Consolidated Financial Statements (unaudited)
(In thousands, except share and per share data)
5. Stockholders' Equity
Common Stock
In April 2002, 20,000 shares of Class A Common Stock were issued to one existing
investor for proceeds of $125.
Stock Option Plan
There were no stock options granted during the three months ended June 30, 2003.
Amortization of deferred stock compensation amounted to $23 and $6 for the three
months ended June 30, 2002 and June 30, 2003, respectively, and has been
recorded as non-cash stock compensation expense in the unaudited consolidated
statements of operations.
As of June 30, 2003, there were 93,603 options available for grant under the
2000 Stock Option Plan.
In May 2003, Access Digital adopted the 2003 Stock Option Plan (the "Access
Digital Plan") under which incentive and nonstatutory stock options may be
granted to employees, outside directors, and consultants. The purpose of the
Plan is to enable the Company to attract, retain and motivate employees,
directors, advisors and consultants. Access Digital has reserved a total of
400,000 shares of the its common stock for issuance upon the exercise of options
granted in accordance with the Plan. As of June 30, 2003, no stock options were
issued under the Access Digital Plan. In July 2003, 800,000 stock options were
issued (see Note 8).
Warrants
At June 30, 2003, the Company had warrants outstanding to purchase 430,205
shares of Class A Common Stock at a price of $0.05 per share that were issued in
connection with the sale of the shares of Series A Preferred Stock (the "2001
Warrants). These warrants are exercisable during the period commencing on the
earlier of (i) October 1, 2006, (ii) a change of control or other liquidity
event of the Company, or (iii) 120 days following the Company's listing on any
major U.S. stock exchange and ending on November 1, 2011. If the fair value of
the Company's common stock exceeds certain target prices at certain dates
between the issuance date and October 26, 2011, the 2001 Warrants will terminate
in their entirety. Additionally, if the holders of shares of Series A Preferred
Stock exercise their redemption rights, they may also require the Company to
redeem the 2001 Warrants (the "Warrant Put Rights") using the same formula
described herein for the redemption of the Series A Preferred Stock. However, in
the event that the Company plans to undertake an underwritten public offering of
its common stock, the Company can terminate the Warrant Put Rights and instead
issue a new warrant equal to 10% of the warrant shares. Management has
determined that the value of these put rights is immaterial. The value of the
warrants was ascribed an estimated fair value of $719 and has been recognized as
issuance cost and therefore has been charged against the carrying value of the
Company's Series A Preferred Stock.
The Company also issued to the holders of the 1-Year Notes 25,305 warrants to
purchase shares of the Company's Class A Common Stock (the "1-Year Notes
Warrants"). Of these warrants, 6,902 warrants were issued to two of the
Company's founders. The 1-Year Notes Warrants have an exercise price of $0.05
per share and are exercisable at any time from the date of issuance through the
earlier of i) 10 years from the date of issuance or ii) the closing of a firm
commitment underwritten public offering of the Company's common stock.
F-42
Access Integrated Technologies, Inc.
Notes to Consolidated Financial Statements (unaudited)
(In thousands, except share and per share data)
As of June 30, 2003, the Company had 418,000 warrants outstanding to purchase
shares of Class A Common Stock at $0.05 per share that were issued in connection
with the issuance of the 5-Year Notes (the "5-Year Notes Warrants"). This
consists of the original 423,000 5-Year Notes Warrants, less 5,000 5-Year Notes
Warrants that were exercised in May 2002. 105,500 5-Year Notes warrants were
issued during the three month period ending June 30, 2003. Two of the Company's
founders hold an aggregate of 37,500 5-Year Notes Warrants. The 5-Year Notes
Warrants are exercisable at any time from the date of issuance through the
earlier of i) 10 years from the date of issuance or ii) the closing of a firm
commitment underwritten public offering of the Company's common stock. The
423,000 warrants were ascribed an estimated fair value of $2,115, which has been
recognized as issuance cost and therefore has been charged against the carrying
value of the related notes payable. During the three months ended June 30, 2003,
a total of $80 was amortized to non-cash interest expense to accrete the value
of the notes to their face value over the expected term of the related notes.
In connection with the issuance of the Series B Preferred Stock during the year
ended March 31, 2003, the Company issued Contingent Warrant A to purchase an
aggregate of 381,909 shares of Class A Common Stock at $0.05 per share, subject
to certain call and put rights upon the occurrence of certain events. In the
event that any portion of the 2001 Warrant is exercised, then Contingent Warrant
A will be increased by 8.955% of the number of shares of Class A Common Stock so
issued pursuant to the 2001 Warrant exercise, up to a maximum of 38,526
additional shares. Contingent Warrant A is exercisable during the period
commencing on the earlier of (i) November 27, 2007, or (ii) a change of control
or other liquidity event of the Company, and ending on November 27, 2012. If the
fair value of the Company's common stock exceeds certain target prices at
certain dates between the issuance date and November 26, 2012, Contingent
Warrant A will terminate in its entirety. Additionally, if the holders of shares
of Series B Preferred Stock exercise their redemption rights, they may also
require the Company to redeem Contingent Warrant A (the "Contingent Warrant A
Put Rights") using the same formula described herein for the redemption of the
Series B Preferred Stock. However, in the event that the Company completes an
underwritten public offering of its common stock, the Company can terminate the
Contingent Warrant A Put Rights and instead issue a new warrant equal to 10% of
the Contingent Warrant A shares. Management has determined that the value of
these put rights is immaterial. The value of Contingent Warrant A was ascribed
an estimated fair value of $249 and has been recognized as issuance cost and
therefore has been charged against the carrying value of the Company's Series B
Preferred Stock.
Also, in connection with the issuance of the Series B Preferred Stock, the
Company issued Contingent Warrant B to purchase an aggregate of 144,663 shares
of Class A Common Stock at $0.05 per share, subject to certain call and put
rights upon the occurrence of certain events. In the event that any portion of
the 2001 Warrant is exercised, Contingent Warrant B will be increased by 3.4%,
up to a maximum of 14,593 additional shares. Contingent Warrant B is exercisable
during the period commencing on March 31, 2003 and ending on March 31, 2008.
Additionally, if the holders of shares of Series B Preferred Stock exercise
their redemption rights, they may also require the Company to redeem Contingent
Warrant B (the "Contingent Warrant B Put Rights") using the same formula
described herein for the redemption of the Series B Preferred Stock. However, in
the event that the Company completes an underwritten public offering of its
common stock, the Company can terminate the Contingent Warrant B Put Rights and
instead issue a new warrant equal to 10% of the Contingent Warrant B shares.
Management has determined that the value of these put rights is immaterial. The
value of Contingent Warrant B was ascribed an estimated fair value of $94 and
has been recognized as issuance cost and therefore has been charged against the
carrying value of the Company's Series B Preferred Stock.
Additionally, in connection with the issuance of the Series B Preferred Stock,
the Company issued Contingent Warrant C to purchase an aggregate of up to
100,401 shares of Class A Common Stock at $0.05 per share, subject to certain
call and put rights upon the occurrence of certain events. Contingent Warrant C
is exercisable during the period commencing on November 27, 2002 and ending on
November 27, 2012. Contingent Warrant C may be exercised only in the event that
the 2001 Warrant is exercised. Contingent Warrant C shall be exercisable for a
number of shares of Class A Common Stock equal to 23.4% of the number of shares
so issued in accordance with the 2001 Warrant, up to 100,401 shares.
Additionally, if the holders of shares of Series B Preferred Stock exercise
their redemption rights, they may also require the Company to redeem Contingent
Warrant C (the "Contingent Warrant C Put Rights") using the same formula
described herein for the redemption of the Series B Preferred Stock. However, in
the event that the Company completes an underwritten public offering of its
common stock, the Company can terminate the Contingent Warrant C Put Rights and
instead issue a new warrant equal to 10% of the Contingent Warrant C shares. No
value was ascribed to Contingent Warrant C or the related put rights because of
the uncertainty surrounding the exercise of the 2001 warrant.
F-43
Access Integrated Technologies, Inc.
Notes to Consolidated Financial Statements (unaudited)
(In thousands, except share and per share data)
6. Supplemental Cash Flow Disclosure
June 30, 2002 June 30, 2003
------------- -------------
Interest paid $ 62 $93
Accretion on mandatorily redeemable convertible preferred
stock $155 $226
7. Related Party Transactions
In June 2003, one of the members of the Company's board of directors resigned.
This individual is a partner in a law firm that is handling the Company's
planned IPO.
8. Subsequent Events
In July 2003, in connection with the Company's planned IPO, the Company's Board
of Directors approved a reverse stock split where each share of Class A Common
Stock, Class B Common Stock, Class C Common Stock and Class D Common Stock will
be exchanged for one-fifth of a share of each respective class of common stock
(the "1-5 Reverse Split"). The Series A and Series B Preferred Stock are
unaffected by the 1-5 Reverse Split, until they are converted into Class C
Common Stock and Class D Common Stock, respectively. The 1-5 Reverse Split is
contingent upon the Company's filing of the IPO. The accompanying consolidated
financial statements have been adjusted retroactively to reflect the reverse
split of all outstanding common stock. In September 2003, the Company's Board of
Directors and stockholders passed a resolution that the 1-5 Reverse Split is to
be effective as of September 18, 2003.
In July 2003, the Company issued an additional $175 of 5-Year Notes to various
investors, along with 17,500 5-Year Notes Warrants, for the primary purpose of
funding the IPO-related fees and expenses and repaying capital lease
obligations. These notes and related warrants have the same terms as the
previously issued 5-Year Notes (see Note 3).
In July 2003, the Company entered into an agreement with an information
technology-consulting firm to develop the initial phase of software for use by
AccessDM in the receipt, storage, and distribution of digital media. As
compensation for assisting the Company in the development of the software, the
cost of which was estimated to be $174 (subject to a final valuation analysis),
the Company has agreed to issue 8,700 shares of Class A Common Stock, subject to
completion of the IPO, as well as 750,000 shares of Access DM common stock,
representing, after giving effect to such issuance, 20% of AccessDM's
outstanding capital stock. If the IPO is not completed by December 31, 2003, the
Company may be required to pay cash in lieu of its Class A Common Stock in the
amount of $43. In September 2003 the final testing and acceptance of the
software occurred and the AccessDM shares were issued.
F-44
Access Integrated Technologies, Inc.
Notes to Consolidated Financial Statements (unaudited)
(In thousands, except share and per share data)
In July 2003, Access Digital issued 800,000 stock options to four employees of
AccessIT. These stock options have an exercise price of $0.20 per share, the
fair value of which has been determined by the Board of Directors.
In August 2003, the Company filed its initial registration statement on form
SB-2 (the SB-2) with the Securities and Exchange Commission. The Company intends
to issue 1,000,000 shares of Class A Common Stock at a price of $5.00 per share,
before considering the underwriter's over-allotment and other factors.
In July 2003, we repaid the capital lease covering generators at our Manhattan,
New York IDC for $49. In August 2003, we entered into an agreement to repay the
capital lease covering certain data storage equipment at our Jersey City, New
Jersey IDC for payments totaling $228 including all principal and interest
currently due. Payments of $48 and $62 were made in August 2003 and September
2003, respectively and a final payment of $118 will be made in October 2003. The
creditor will continue to perform maintenance on this equipment through May
2005, which is the original expiration of the lease.
In August 2003, two holders of 5-Year Notes Warrants exercised such warrants to
purchase a total of 106,000 shares of Class A Common Stock, and one holder of
1-Year Notes Warrants exercised such warrants to purchase 6,902 shares of Class
A Common Stock. The company received total proceeds of $6 from these
transactions.
Between September 1, 2003 and September 17, 2003, several holders of 1-Year and
5-Year Notes Warrants exercised such warrants to purchase a total of 6,651 and
76,167 shares of Class A Common Stock, respectively. The company received total
proceeds of $4 from these transactions.
In August 2003, the Company entered into an agreement with Universal Access,
Inc. ("UA) (the "UA Agreement"), whereby the Company has the option to license
data center space, at predetermined rates, in any of ten specified UA
datacenters nationwide. The Company in turn can license the UA space to its
customers under separate agreements. The term of the UA Agreement is initially
six months, and will automatically extend to two years, if the Company licenses
750 or more square feet in the aggregate, across all UA datacenters. Further, if
the Company leases 1,500 or more square feet at a single UA datacenter, the
Company will have the option to request that the datacenter lease, in its
entirety, be assigned by the landlord to the Company. While UA has agreed to
assist the Company in obtaining such assignment, there can be no assurance that
the Company can successfully negotiate an assignment with the respective
landlord(s). In the event that a UA datacenter lease was assigned to the
Company, UA and the Company have agreed on terms under which UA would lease
space from the Company, in order for UA to continue operations in the
datacenter. As of September 17, 2003, the Company has not licensed any
datacenter space under the UA agreement.
F-45
Access Integrated Technologies, Inc.
Notes to Consolidated Financial Statements (unaudited)
(In thousands, except share and per share data)
In September 2003, in connection with the planned IPO and to simplify its
capital structure, the Company entered into an agreement (the "Exchange
Agreement") with the holder of the Series A and Series B Preferred Stock to 1)
convert all of the outstanding shares of Series A and Series B Preferred Stock,
totaling 8,202,929 preferred shares, into 1,640,585 shares of Class A Common
Stock: 2) exchange the 2001 Warrant, Contingent Warrant A, and Contingent
Warrant C for 320,000 shares of Class A Common Stock; 3) exercise Contingent
Warrant B to purchase 143,216 shares of Class A Common Stock on a cashless
basis; and 4) issue Class A Common Stock at the IPO price as consideration for
the conversion of all accumulated dividends on the Series A and Series B
Preferred Stock through the effective date of the IPO. Assuming a $5.00 IPO
price and an October 15, 2003 IPO effective date, the Company will issue 99,047
shares of Class A Common Stock as payment of the accumulated preferred
dividends of $495. The Exchange Agreement is to be effective concurrent with the
IPO, and is contingent upon the completion of the IPO. A valuation of the
warrants being exchanged and the corresponding shares issued for them will be
performed to determine if any dividend charge will be required to be recorded as
a result of this transaction. The Company has estimated that the fair value of
the common stock to be issued to the holder is less than or equal to the fair
value of the warrants to be exchanged, and therefore believes no related
dividend charge will result from this transaction.
In September 2003, the Company's Board of Directors passed a resolution
increasing the number of stock options available for grant by 200,000, to a
total authorized amount of 600,000 shares.
In September 2003, the Company's Board of Directors passed a resolution amending
the employment agreement of its President and Chief Executive officer to extend
the agreement's term until September 30, 2006 and to limit the total annual
compensation that may be earned under such agreement to $1,200.
9. Recent Accounting Pronouncements
In May 2003, the FASB Issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. For nonpublic entities, mandatorily
redeemable financial instruments are subject to the provisions of this Statement
for the first fiscal period beginning after December 15, 2003. The Company has
not yet evaluated its mandatorily redeemable financial instruments and related
financial instruments for purposes of determining the impact of SFAS No. 150.
While the Company's Series A and Series B Preferred Stock would be impacted by
SFAS No. 150, we have entered into an agreement with the holder of all of our
outstanding Series A and Series B Preferred Stock in September 2003 under which
the holder has agreed to exchange all of those shares for shares of Class A
Common Stock, contingent on the completion of the IPO. See Note 8.
F-46
Report of Independent Certified Public Accountants
Hollywood Software, Inc.
Hollywood, California
We have audited the accompanying balance sheets of Hollywood Software, Inc. (the
"Company") as of March 31, 2002 and 2003, and the related statements of
operations, stockholders' equity, and cash flows 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 auditing standards generally accepted
in the United States of America. 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 referred to above, present fairly, in
all material respects, the financial position of Hollywood Software, Inc. as of
March 31, 2002 and 2003, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
BDO Seidman, LLP
July 3, 2003
Los Angeles, California
F-47
Hollywood Software, Inc.
Balance Sheets
March 31,
---------------------------
2002 2003
---------- ----------
Assets
Current assets
Cash and cash equivalents $ 235,195 $ 262,297
Accounts receivable, net of allowance for doubtful accounts
of $0 and $5,325, respectively 187,099 332,322
Prepaids and other current assets 16,260 9,510
---------- ----------
Total current assets 438,554 604,129
Property and equipment, net (Note 3) 45,244 30,678
Capitalized software costs, net (Note 3) 380,407 479,317
---------- ----------
Total assets $ 864,205 $1,114,124
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses (Note 3) $ 53,381 $ 79,191
Current portion of notes payable (Note 5) 12,500 8,333
Deferred taxes (Note 6) 3,200 51,300
Deferred revenue (Note 3) 459,853 530,124
---------- ----------
Total current liabilities 528,934 668,948
Notes payable, net of current portion (Note 5) 8,333 -
---------- ----------
Total liabilities 537,267 668,948
---------- ----------
Commitments and contingencies (Note 8)
Stockholders' equity
Common stock, no par value, 50,000,000 shares authorized,
10,000,000 shares issued and outstanding as of March 31, 2002 and
2003 20,000 20,000
Retained earnings 306,938 425,176
---------- ----------
Total stockholders' equity 326,938 445,176
---------- ----------
Total liabilities and stockholders' equity $ 864,205 $1,114,124
========== ==========
See accompanying notes to financial statements.
F-48
Hollywood Software, Inc.
Statements of Operations
Years ended March 31
------------------------------------
2002 2003
------------ ------------
Revenues
License fees $ 296,476 $ 546,914
Maintenance fees 474,138 489,329
Development fees 230,500 189,205
Consulting fees 890,451 682,798
------------ ------------
Total revenues 1,891,565 1,908,246
------------ ------------
Costs and operating expenses
Costs of revenues 367,593 318,710
Research and development 387,477 289,424
General and administrative 1,176,004 1,131,256
------------ ------------
Total costs and operating expenses 1,931,074 1,739,390
------------ ------------
Income (loss) from operations (39,509) 168,856
Interest expense (4,769) (2,264)
Other income 7,473 546
------------ ------------
Income (loss) before income taxes (36,805) 167,138
Income taxes 800 48,900
------------ ------------
Net income (loss) $ (37,605) $ 118,238
============ ============
Earning (loss) per share (Note 2):
Basic $ (0.00) $ 0.01
------------ ------------
Diluted (0.00) 0.01
------------ ------------
Weighted average number of shares (Note 2):
Basic 10,000,000 10,000,000
------------ ------------
Diluted 10,000,000 10,293,167
============ ============
See accompanying notes to financial statements.
F-49
Hollywood Software, Inc.
Statements of Stockholders' Equity
Common Retained
Stock Earnings Total
---------- ----------- -------
Balance, April 1, 2001 $ 20,000 $ 344,543 $ 364,543
Net loss - (37,605) (37,605)
--------- --------- ---------
Balance, March 31, 2002 20,000 306,938 326,938
Net income - 118,238 118,238
--------- --------- ---------
Balance, March 31, 2003 $ 20,000 $ 425,176 $ 445,176
========= ========= =========
See accompanying notes to financial statements.
F-50
Hollywood Software, Inc.
Statements of Cash Flows
Years ended March 31,
----------------------------
2002 2003
--------- ---------
Cash flows from operating activities
Net income (loss) $ (37,605) $ 118,238
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation 21,020 27,067
Amortization of software development costs 129,688 186,837
Provision for doubtful accounts - 5,325
Deferred taxes - 48,100
Changes in operating assets and liabilities:
Accounts receivable (104,583) (150,548)
Prepaids and other current assets 13,560 6,750
Accounts payable and accrued liabilities (97,166) 25,810
Deferred revenue 95,645 70,271
--------- ---------
Net cash provided by operating activities 20,559 337,850
--------- ---------
Cash flows from investing activities
Purchases of property and equipment (14,790) (12,501)
Capitalized software development costs (204,895) (285,747)
--------- ---------
Net cash used in investing activities (219,685) (298,248)
--------- ---------
Cash flows from financing activities
Proceeds from issuance of notes payable 25,000 -
Repayment of notes payable (4,167) (12,500)
--------- ---------
Net cash provided (used) in financing activities 20,833 (12,500)
--------- ---------
Net (decrease) increase in cash and cash equivalents (178,293) 27,102
Cash and cash equivalents, beginning of year 413,488 235,195
--------- ---------
Cash and cash equivalents, end of year $ 235,195 $ 262,297
========= =========
Supplemental cash flow disclosures:
Interest paid $ 4,769 $ 2,264
Taxes paid - -
========= =========
See accompanying notes to financial statements.
F-51
Hollywood Software, Inc.
Notes to Financial Statements
Note 1 - Company Organization and Nature of Operations
Hollywood Software, Inc. ("Company") was incorporated in California in October
1997. The Company is a leading provider of proprietary enterprise software and
consulting services for distributors and exhibitors of filmed entertainment in
the United States and Canada. Its software applications manage the planning,
booking, scheduling, revenue sharing, cash flow, and reporting associated with
the distribution and exhibition of theatrical films. Services include strategic
and technical consulting, systems implementation and training.
Note 2 - Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all liquid assets with an initial maturity date that is
less than three months from the date of purchase to be cash equivalents.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist of cash and cash equivalents, to the extent they exceed
federal depository insurance limits, and accounts receivable. The Company places
its cash with high credit quality financial institutions. As of March 31, 2002
and 2003, uninsured cash balances aggregated $135,195 and $162,297,
respectively.
The Company customer base primarily includes film distributors and theatre
owners through the United States and Canada. Allowances for doubtful accounts
are recorded for estimated losses resulting from the inability of customers to
make required payments. The amount of the reserves is based on historical
experience and the Company's analysis of the accounts receivable balances
outstanding. As of March 31, 2002, four customers accounted for 26%, 24%, 21%
and 10% of revenues and three customers accounted for 45%, 23% and 14% of
accounts receivable. As of March 31, 2003, three customers accounted for 28%,
14% and 13% of revenues and five customers accounted for 26%, 16%, 15%, 10% and
10% of accounts receivable.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the double-declining balance method over the
useful lives of the respective assets as follows:
Useful Lives
-----------------
Computer software 3
Computer equipment 5
Furniture and fixtures 7
Lease term or
Leasehold improvements useful life
Leasehold improvements are depreciated 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.
F-52
Hollywood Software, Inc.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company reviews the recoverability of its long-lived assets on a periodic
basis in order to identify business conditions which may indicate a possible
impairment. The assessment for potential impairment is based primarily on the
Company's ability to recover the carrying value of its long-lived assets from
expected future undiscounted cash flows. If the total expected future
undiscounted cash flows are less than the carrying amount of the assets, a loss
is recognized for the difference between the fair value (computed based upon the
expected future discounted cash flows) and the carrying value of the assets. No
impairment was recorded during the years ended March 31, 2002 and 2003.
Capitalized Software Costs
The Company has adopted SFAS No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed." Software development costs
that are incurred subsequent to establishing technological feasibility are
capitalized. Amounts capitalized as software development costs are generally
amortized on a straight-line basis over five years. The company reviews
capitalized software costs for impairment on an annual basis. To the extent that
the carrying amount exceeds the estimated net realizable value of the
capitalized software cost, an impairment charge is recorded. No impairment was
recorded in 2002 and 2003.
During the years ended March 31, 2002 and 2003, the company capitalized $204,895
and $285,747, respectively. Amortization of capitalized software development
costs, included in costs of revenues, for the years ended March 31, 2002 and
2003 amounted to $129,688 and $186,837, respectively.
Revenue Recognition
The Company accounts for software revenue recognition in accordance with
Statement of Position 97-2, "Software Revenue Recognition," ("SOP 97-2"). The
Company's revenues are generated from the following primary sources: i) software
licensing, including customer licenses and ASP service agreements, ii) software
maintenance contracts, iii) professional consulting services, which includes
systems implementation, training, custom software development services and other
professional services.
Software licensing revenue is recognized when the following criteria are met: a)
persuasive evidence of an arrangement exists, b) delivery has occurred and no
significant obligations remain, c) the fee is fixed or determinable and d)
collectivity is determined to be probable. Significant upfront fees are received
in addition to periodic amounts upon achievement of contractual milestones
for licensing of the Company's products. Such amounts are deferred until the
revenue recognition criteria has been met, which typically occurs after delivery
and acceptance.
F-53
Hollywood Software, Inc.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
For arrangements with multiple elements (e.g. delivered and undelivered
products, maintenance and other services), the Company separately negotiates
each element of the arrangement based on the fair value of the elements. The
fair values for ongoing maintenance and support obligations are based upon
separate sales of renewals to customers or upon substantive renewal rates quoted
in the agreements. The fair values for services, such as training or consulting,
are based upon hourly billing rates of these services when sold separately to
other customers.
Customers not wishing to license and operate the Company's software themselves
may use the software through an ASP arrangement, in which the Company hosts the
application and provides customer access via the internet. Annual minimum ASP
service fees are recognized ratably over the contract term. Overage revenues for
usage in excess of stated minimums are recognized monthly.
Maintenance services and website subscription fees are recognized ratably over
the contract term. Professional consulting services, sales of third party
products and resale hardware revenues are recognized as services are provided.
Software development revenues are recognized when delivery has occurred and no
significant obligations remain.
Deferred revenue is recorded when i) a portion or the entire contract amount
cannot be recognized as revenue due to non-delivery or acceptance of licensed
software or custom programming, ii) incomplete implementation of ASP service
arrangements, or iii) 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 included in the Company's balance sheet under the caption "Deferred
Revenue," and are recognized as revenue in accordance with the Company's revenue
recognition policies described above.
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are determined based upon the temporary
differences between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates expected to be in effect in the
year in which the temporary differences are expected to reverse. A valuation
allowance is established when it is more likely than not that some portion, or
all, of the deferred tax asset will not be realized.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Research and Development
Research and development costs are expensed as incurred. Research and
development costs amounted to $387,477 and $289,424 for the years ended March
31, 2002 and 2003, respectively.
F-54
Hollywood Software, Inc.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
Advertising Expenses
Advertising costs are expensed as incurred. Advertising costs totaled $17,058
and $7,912 for the years ended March 31, 2002 and 2003, respectively.
Employee Stock Compensation
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. Under the intrinsic value
method, the Company recognizes compensation expense on the date of grant only if
the estimated fair value of the underlying stock exceeds the exercise price. The
Company recorded no stock based employee compensation cost for the years ended
March 31, 2002 and 2003.
The Company has adopted the disclosure standards of SFAS No. 123, "Accounting
for Stock-Based Compensation", which requires the Company to provide pro forma
net income disclosures for employee stock option grants made as if the
fair-value-based method of accounting for stock options as defined in SFAS 123
had been applied. The following table illustrates the effect on net income
(loss) if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock based employee compensation for the years ended March 31, 2002
and 2003:
March 31,
---------------------------
2002 2003
---------- -----------
Net income (loss), as reported $ (37,605) $ 118,238
Additional stock-based employee compensation expense
determined under the fair value based method, net of income
tax benefits (39,598) (42,757)
---------- -----------
Pro forma net income (loss) $ (77,203) $ 75,481
========== ===========
Income (loss) per share:
As reported:
Basic $ (0.00) $ 0.01
========== ===========
Diluted $ (0.00) $ 0.01
========== ===========
Pro forma:
Basic $ (0.01) $ 0.01
========== ===========
Diluted $ (0.01) $ 0.01
========== ===========
F-55
Hollywood Software, Inc.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
The fair value of each stock option granted during the year is estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions:
March 31,
----------------------
2002 2003
------ ------
Expected life (years) 10 10
Expected volatility 0% 0%
Expected dividend yield 0% 0%
Risk-free interest rate 5.33% 5.11%
The weighted-average fair value of options granted during the year totaled $0.05
and $0.00 for March 31, 2002 and 2003, respectively.
Earnings (Loss) Per Share
The Company accounts for earnings per share in accordance with SFAS No. 128,
"Earnings per Share". SFAS No. 128 requires presentation of basic and diluted
earnings per share. Basic earnings (loss) per share is computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares outstanding for the reporting period. Diluted earnings per share
is computed based on the same shares plus the potential shares issuable upon
assumed exercise of outstanding stock options or other security contracts, but
does not include the impact of dilutive securities that would be anti-dilutive.
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
Year ended March 31
-------------------------------
2002 2003
------------ ------------
Numerator:
Net income (loss) available to common shareholders $ (37,605) $ 118,238
------------ ------------
Denominator:
Basic earnings per share - weighted average shares 10,000,000 10,000,000
Effect of dilutive securities:
Stock options - 293,167
------------ ------------
Denominator for diluted earnings per share -
weighted average shares 10,000,000 10,293,167
------------ ------------
Earnings (loss) per share:
Basic $ (0.00) $ 0.01
============ ============
Diluted $ (0.00) $ 0.01
============ ============
For the years ended March 2002 and 2003, total stock options of 1,790,000 and
1,311,000 were not included in the computation of diluted income (loss) per
share because their effect was anti-dilutive.
F-56
Hollywood Software, Inc.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This statement requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. The provisions of this statement are effective for exit
or disposal activities that are initiated after December 31, 2002. The Company
adopted SFAS No. 146 on January 1, 2003 and it has had no effect on the
Company's financial position or operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosures" which amends SFAS No. 123, "Accounting
for Stock-Based Compensation". SFAS 148 provides alternate methods of transition
for a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require more prominent and more frequent disclosures in the
financial statement about the effects of stock-based compensation. The Company
has adopted the disclosure provision of SFAS 148 for the year ended March 31,
2003.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement of Financial Accounting
Standards No. 133. SFAS No. 149 clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a derivative as
discussed in SFAS No. 133. In addition, it clarifies when a derivative contains
a financing component that warrants special reporting in the statement of cash
flows. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003, except as specifically noted in SFAS No. 149. SFAS No. 149 should
be applied prospectively. At this time, the adoption of SFAS No. 149 is not
expected to materially impact the Company's financial condition or results of
operations.
In May 2003, the FASB Issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This Statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. For nonpublic entities,
mandatorily redeemable financial instruments are subject to the provisions of
this Statement for the first fiscal period beginning after December 15, 2003.
The Company has not yet evaluated its mandatorily redeemable financial
instruments and related financial instruments for purposes of determining the
impact of SFAS No. 150.
In November 2002, the EITF reached a consensus on EITF 00-21, "Revenue
Arrangements with Multiple Deliverables," related to the separation and
allocation of consideration for arrangements that include multiple deliverables.
The EITF requires that when the deliverables included in this type of
arrangement meet certain criteria they should be accounted for separately as
separate units of accounting. This may result in a difference in the timing of
revenue recognition but will not result in a change in the total amount of
revenues recognized in a bundled sales arrangement. The allocation of revenues
to the separate deliverables is based on the relative fair value of each item.
If the fair value is not available for the delivered items then the residual
method must be used. This method requires that the amount allocated to the
undelivered items in the arrangement is their full fair value. This would result
in the discount, if any, being allocated to the delivered items. This consensus
is effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. We do not expect the adoption of EITF 00-21 to
have a material impact on our consolidated financial statements.
In November 2002, the FASB issued interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees. Including indirect Guarantees of
Indebtedness of Others," which disclosures are effective for financial
statements for periods ending after December 15, 2002. While the Company has
various guarantees included in contracts in the normal course of business,
primarily in the form of indemnities, these guarantees would only result in
immaterial increases in future costs, but do not represent significant
commitments or contingent liabilities of the indebtedness of others.
In January 2003, the FASB issued interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46) which requires the consolidation of
variable interest entities, as defined. FIN 46 is applicable immediately for
variable interest entities created after January 1, 2003. For variable interest
entities created prior to January 1, 2003, the provisions of FIN 46 are
applicable no later than July 1, 2003. The Company does not currently believe
that any material entities will be consolidated as a result of FIN 46.
Note 3 - Balance Sheet Components
Property and Equipment
Property and equipment consisted of the following as of March 31, 2002 and 2003:
March 31,
--------------------------
2002 2003
--------- ---------
Furniture and fixtures $ 9,426 $ 9,426
Computer equipment 120,454 131,455
Computer software 11,482 12,982
Office furniture 10,792 10,792
--------- ---------
152,154 164,655
Less: Accumulated depreciation (106,910) (133,977)
--------- ---------
Total property and equipment, net $ 45,244 $ 30,678
========= =========
F-57
Hollywood Software, Inc.
Notes to Financial Statements
Note 3 - Balance Sheet Components (Continued)
Computer equipment consists primarily of costs incurred for computers, servers
and backup battery devices used in the Company's operations. Depreciation
expense for the years ended March 31, 2002 and 2003 was $21,020 and $27,067,
respectively.
Capitalized Software Development Costs
The Company capitalizes the cost of software development in accordance with SFAS
No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed." Capitalized software development costs consisted of the
following as of March 31, 2002 and 2003:
March 31,
--------------------------
2002 2003
--------- ---------
Development costs $ 648,440 $ 934,187
Less: Accumulated amortization (268,033) (454,870)
--------- ---------
Unamortized development costs, net $ 380,407 $ 479,317
========= =========
Accounts payable and accrued expenses consisted of the following as of March 31,
2002 and 2003:
March 31,
--------------------
2002 2003
------- -------
Accounts payable $ 383 $16,013
Accrued compensation and benefits 47,265 36,615
Other accrued liabilities 5,733 26,563
------- -------
Total accounts payable and accrued expenses $53,381 $79,191
======= =======
Accrued compensation and benefits primarily relate to accrued employee vacation
costs. Other accrued liabilities relate to general business obligations incurred
prior to the balance sheet date, which were paid in subsequent reporting
periods.
Deferred Revenues
Deferred revenues consisted of the following as of March 31, 2002 and 2003:
March 31,
-------------------------
2002 2003
-------- --------
License fees $100,000 $ -
ASP service fees 85,687 168,901
Maintenance fees 249,749 238,826
Web site subscription fees 24,417 35,533
Development fees - 86,864
-------- --------
Total $459,853 $530,124
======== ========
F-58
Hollywood Software, Inc.
Notes to Financial Statements
Note 3 - Balance Sheet Components (Continued)
Deferred revenues represent amounts collected from customers prior to satisfying
the Company's revenue recognition criteria.
Note 4 - Line of Credit
In November 2001, the Company received a $200,000 line of credit from Wells
Fargo Bank for general corporate purposes. The credit line bears interest at
7.50% per annum. The Company has not borrowed any funds, nor incurred any
interest charges under the credit line. The line of credit expires in November
2003.
Note 5 - Notes Payable
In November 2001, the Company incurred a $25,000 term loan from Wells Fargo Bank
for the purchase of a battery backup system to mitigate risks from rolling
blackouts due to an energy crisis in California. In addition to receivables and
other assets of the Company, two shareholders pledged certain personal assets as
collateral for the loan. The Company makes monthly payments of principal and
interest on the loan, which is schedule to expire in November 2003. The term
loan bears interest at 8.25% per annum.
A summary of Notes Payable is as follows:
March 31,
------------------------
2002 2003
-------- --------
Notes payable $ 20,833 $ 8,333
Less: Current portion (12,500) (8,333)
-------- --------
Notes payable, less current portion $ 8,333 $ -
======== ========
Note 6 - Income Taxes
Provision for income taxes consists of the following:
Years ended March 31,
---------------------------
2002 2003
------- -------
Current:
Federal $ - $ -
State 800 800
Deferred:
Federal - 36,300
State - 11,800
------- -------
$ 800 $48,900
======= =======
F-59
Hollywood Software, Inc.
Notes to Financial Statements
Note 6 - Income Taxes (Continued)
Net deferred tax liabilities consist of the following as of March 31, 2002 and
2003:
March 31,
--------------------------
2002 2003
--------- ---------
Deferred tax assets:
Net operating loss carryforwards $ 22,200 $ 33,200
Deferred revenues 183,200 211,200
Accounts payable and accruals 21,300 31,500
--------- ---------
Total deferred tax assets 226,700 275,900
--------- ---------
Deferred tax liabilities:
Accounts receivable (74,500) (132,400)
Capitalized software costs (151,500) (190,900)
Depreciation (3,900) (3,900)
--------- ---------
Total deferred tax liabilities (229,900) (327,200)
--------- ---------
Net deferred tax liability $ (3,200) $ (51,300)
========= =========
At March 31, 2003, the Company has net operating loss carryforwards of
approximately $90,000 and $45,000 for Federal and State, respectively, which
will expire at various dates through 2020.
Note 7 - Stockholder's Equity
Stock Dividend
On November 7, 2000 the Board of Directors declared a 1,000:1 stock dividend and
increased the common shares authorized from 50,000 to 50,000,000 and issued and
outstanding from 10,000 shares to 10,000,000 shares. All stock related data in
the financial statements reflect the stock dividend for all periods presented.
The amendment to the Company's articles of incorporation was filed with the
State of California subsequent to March 31, 2003.
Stock Option Plan
In December 2000, the Company adopted the 2000 Stock Option Plan (the "Plan")
under which non-qualified stock options may be granted to employees, outside
directors and consultants. The purpose of the Plan is to enable the Company to
attract, retain and motivate employees, directors, advisors and consultants. The
Company has reserved a total of 5,000,000 shares of the Company's common stock
for issuance upon the exercise of options granted in accordance with the Plan.
Options granted under the Plan expire in 10 years following the date of grant (5
years for stockholders who own greater than 10% of outstanding stock) and are
subject to limitation on transfer. The Plan is administered by the Board of
Directors.
F-60
Hollywood Software, Inc.
Notes to Financial Statements
Note 7 - Stockholder's Equity (Continued)
The Plan provides for granting of incentive stock options at not less than 100%
of the fair market value of the underlying stock at the grant date. Option
grants under the Plan are subject to various vesting provisions, all of which
are contingent upon the continuous service of the optionee. Options granted to
stockholders who own greater than 10% of the outstanding stock must be issued at
prices not less than 100% of the fair market value of the stock on the date of
grant as determined by the Company's Board of Directors. Upon a change in
control of the Company, all shares granted under the Plan shall immediately
vest.
The following table summarizes the activity of the Plan:
Options Weighted
Shares Granted- Average
Available Number of Exercise Price
for Grant Shares Per Share
--------- --------- --------------
Balances, March 31, 2001 3,379,000 1,621,000 $ .55
Options granted (224,000) 224,000 $ .78
Options forfeited 55,000 (55,000) $ .60
---------- ---------- -----
Balances, March 31, 2002 3,210,000 1,790,000 $ .58
Options granted (300,000) 300,000 $1.00
---------- ---------- -----
Balances, March 31, 2003 2,910,000 2,090,000 $ .64
========== ========== =====
The following summarizes stock options outstanding as of March 31, 2003:
Options Outstanding Options Exercisable
-------------------------------------------------------------- -------------------------
Weighted
Average
Weighted Average Weighted Average Shares Exercise
Exercise Prices Shares Life (Years) Exercise Price Exercisable Price
------------------ --------------- ------------------- ------------------ ----------- ----------
$.25 150,000 7.7 $.25 75,000 $.25
$.40 605,000 7.7 $.40 302,500 $.40
$.50 24,000 8.2 $.50 6,000 $.50
$.60 561,000 7.7 $.60 280,500 $.60
$.75 150,000 8.1 $.75 37,500 $.75
$1.00 600,000 8.4 $1.00 137,500 $1.00
--------------- ------------------- ------------------ ----------- ------------
2,090,000 8.0 $.64 839,000 $.57
=============== =================== ================== =========== ============
Note 8 - Commitments and Contingencies
Leases
The Company leases its development and Corporate offices under non-cancelable
operating lease agreements, which expire at various dates through August 2005.
The lease agreements provide for base rental rates, which increase at defined
intervals during the term of the lease. The Company does not account for
increasing base rentals using a straight-line method over the lease term as the
differences between the straight-line method and cash payment is not material.
F-61
Hollywood Software, Inc.
Notes to Financial Statements
Note 8 - Commitments and Contingencies
The Company's rental expense for operating leases was $67,282 and $79,309 for
the years ended March 31, 2002 and 2003, respectively. Future minimum payments
under non-cancelable operating leases with initial or remaining terms of one
year or more consist of the following at March 31, 2003:
Years ending March 31, Amount
--------------------- --------------
2004 $ 49,087
2005 28,804
2006 10,944
--------------
$ 88,835
==============
Employee Benefit Plans
The Company's employees are covered by a profit sharing plan qualified under IRS
section 401. The plan provides for the Company to make discretionary profit
contributions on behalf of eligible employees. The Company made no contributions
in 2002 or 2003.
Note 9 - Related Party Transactions
The Company leases office space from a company controlled by the Company's CEO.
Office rental rates approximate market value for the size, type and office
location. Rents paid under this lease totaled $28,260 and $31,170 for the years
ended March 31, 2002 or 2003, respectively.
From time to time, the Company uses an outside contractor related to the
Company's president. Rates paid for work provided are consistent with comparable
contractors. Fees paid during the years ended March 31, 2002 or 2003 amounted to
$11,695 and $47,483, respectively.
F-62
Hollywood Software, Inc.
Balance Sheets
June 30,
2003
--------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $186,207
Accounts receivable, net of allowance for doubtful accounts of $5,325 278,377
Prepaids and other current assets 9,485
--------
Total current assets 474,069
Property and equipment, net (Note 3) 34,178
Capitalized software costs, net (Note 3) 435,835
--------
Total assets $944,082
========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses (Note 3) $ 76,324
Current portion of notes payable (Note 5) 5,208
Deferred taxes (Note 6) 41,300
Deferred revenue (Note 3) 478,207
--------
Total current liabilities 601,039
--------
Total liabilities 601,039
--------
Commitments and contingencies
Stockholders' equity
Common stock, no par value, 50,000,000 shares authorized,
10,000,000 shares issued and outstanding as of June 30, 2003 20,000
Retained earnings 323,043
--------
Total stockholders' equity 343,043
--------
Total liabilities and stockholders' equity $944,082
========
See accompanying notes to financial statements.
F-63
Hollywood Software, Inc.
Statements of Operations
(Unaudited)
Three Months Ended June 30,
----------------------------
2002 2003
------------ ------------
Revenues
License fees $ 201,165 $ 95,092
Maintenance fees 126,638 105,664
Development fees 71,855 54,752
Consulting fees 182,648 38,989
------------ ------------
Total revenues 582,306 294,497
------------ ------------
Costs and operating expenses
Costs of revenues 129,868 44,467
Research and development 56,325 147,525
General and administrative 250,222 215,366
------------ ------------
Total costs and operating expenses 436,415 407,358
------------ ------------
Income (loss) from operations 145,891 (112,861)
Interest expense (440) (131)
Other income and expenses 258 859
------------ ------------
Income (loss) before income taxes 145,709 (112,133)
Provision (benefit) for income taxes 42,256 (10,000)
------------ ------------
Net income (loss) $ 103,453 $ (102,133)
============ ============
Earning (loss) per share (Note 2):
Basic $ 0.01 $ (0.01)
============ ============
Diluted $ 0.01 $ (0.01)
============ ============
Weighted average number of shares (Note 2):
Basic 10,000,000 10,000,000
============ ============
Diluted 10,293,167 10,000,000
============ ============
See accompanying notes to financial statements.
F-64
Hollywood Software, Inc.
Statements of Stockholders' Equity
(Unaudited)
Common Retained
Stock Earnings Total
--------- --------- ---------
Balance, April 1, 2003 $ 20,000 $ 425,176 $ 445,176
Net loss -- (102,133) (102,133)
--------- --------- ---------
Balance, June 30, 2003 $ 20,000 $ 323,043 $ 343,043
========= ========= =========
F-65
Hollywood Software, Inc.
Statements of Cash Flows
(Unaudited)
Three Months Ended
June 30,
----------------------
2002 2003
--------- ---------
Cash flows from operating activities
Net income (loss) $ 103,453 $(102,133)
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Depreciation 6,767 7,000
Amortization of software development costs 49,357 43,482
Deferred taxes 42,256 (10,000)
Changes in operating assets and liabilities:
Accounts receivable (209,233) 53,945
Prepaids and other current assets 1,835 25
Accounts payable and accrued liabilities 14,505 (2,867)
Deferred revenue (82,260) (51,917)
--------- ---------
Net cash used in operating activities (73,320) (62,465)
--------- ---------
Cash flows from investing activities
Purchases of property and equipment (8,738) (10,500)
Capitalized software development costs (84,674) --
--------- ---------
Net cash used in investing activities (93,412) (10,500)
--------- ---------
Cash flows from financing activities
Repayment of notes payable (3,125) (3,125)
--------- ---------
Net cash used in financing activities (3,125) (3,125)
--------- ---------
Net decrease in cash and cash equivalents (169,857) (76,090)
Cash and cash equivalents, beginning of period 235,195 262,297
--------- ---------
Cash and cash equivalents, end of period $ 65,388 $ 186,207
========= =========
Supplemental cash flow disclosures
Cash paid during the three-months ended for:
Interest paid $ 440 $ 131
Taxes paid -- --
========= =========
F-66
Hollywood Software, Inc.
Notes to Financial Statements
Note 1 - Company Organization, Nature of Operations and Basis of Presentation
Hollywood Software, Inc. ("Company") was incorporated in California in October
1997. The Company is a leading provider of proprietary enterprise software and
consulting services for distributors and exhibitors of filmed entertainment in
the United States and Canada. Its software applications manage the planning,
booking, scheduling, revenue sharing, cash flow, and reporting associated with
the distribution and exhibition of theatrical films. Services include strategic
and technical consulting, systems implementation and training.
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial statements. In the opinion of management, all adjustments
and normal recurring accruals considered necessary for a fair presentation have
been included. Operating results for the three months ended June 30, 2003 are
not necessarily indicative of the results that may be expected for the year
ending March 31, 2004. The interim financial statements and notes thereto should
be read in conjunction with the Company's audited financial statements and notes
thereto for the year ended March 31, 2003.
Note 2 - Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all liquid assets with an initial maturity date that is
less than three months from the date of purchase to be cash equivalents.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist of cash and cash equivalents, to the extent they exceed
federal depository insurance limits, and accounts receivable. The Company places
its cash with high credit quality financial institutions. As of June 30, 2003
uninsured cash balances aggregated $86,207.
The Company customer base primarily includes film distributors and theatre
owners through the United States and Canada. Allowances for doubtful accounts
are recorded for estimated losses resulting from the inability of customers to
make required payments. The amount of the reserves is based on historical
experience and the Company's analysis of the accounts receivable balances
outstanding. As of June 30, 2002, two customers accounted for 34% and 30% of
revenues and three customers accounted for 38%, 25%, and 22% of accounts
receivable. As of June 30, 2003, two customers accounted for 36% and 14% of
revenues and two customers accounted for 58% and 14% of accounts receivable.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the double-declining balance method over the
useful lives of the respective assets as follows:
Useful Lives
-----------------
Computer software 3
Computer equipment 5
Furniture and fixtures 7
Lease term or
Leasehold improvements useful life
Leasehold improvements are depreciated 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.
F-67
Hollywood Software, Inc.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company reviews the recoverability of its long-lived assets on a periodic
basis in order to identify business conditions which may indicate a possible
impairment. The assessment for potential impairment is based primarily on the
Company's ability to recover the carrying value of its long-lived assets from
expected future undiscounted cash flows. If the total expected future
undiscounted cash flows are less than the carrying amount of the assets, a loss
is recognized for the difference between the fair value (computed based upon the
expected future discounted cash flows) and the carrying value of the assets. No
impairment was recorded during the three months ended June 30, 2002 and 2003.
Capitalized Software Costs
The Company has adopted SFAS No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed." Software development costs
that are incurred subsequent to establishing technological feasibility are
capitalized. Amounts capitalized as software development costs are generally
amortized on a straight-line basis over five years. The company reviews
capitalized software costs for impairment on an annual basis. To the extent that
the carrying amount exceeds the estimated net realizable value of the
capitalized software cost, an impairment charge is recorded. No impairment was
recorded during the three months ended June 30, 2002 and 2003.
Amortization of capitalized software development costs, included in costs of
revenues, for the three months ended June 30, 2002 and 2003 amounted to $49,357
and $43,482, respectively.
Revenue Recognition
The Company accounts for software revenue recognition in accordance with
Statement of Position 97-2, "Software Revenue Recognition," ("SOP 97-2"). The
Company's revenues are generated from the following primary sources: i) software
licensing, including customer licenses and ASP service agreements, ii) software
maintenance contracts, iii) professional consulting services, which includes
systems implementation, training, custom software development services and other
professional services.
Software licensing revenue is recognized when the following criteria are met: a)
persuasive evidence of an arrangement exists, b) delivery has occurred and no
significant obligations remain, c) the fee is fixed or determinable and d)
collectivity is determined to be probable. Significant upfront fees are received
in addition to periodic amounts upon achievement of contractual milestones for
licensing of the Company's products. Such amounts are deferred until the revenue
recognition criteria has been met, which typically occurs after delivery and
acceptance.
For arrangements with multiple elements (e.g. delivered and undelivered
products, maintenance and other services), the Company separately negotiates
each element of the arrangement based on the fair value of the elements. The
fair values for ongoing maintenance and support obligations are based upon
separate sales of renewals to customers or upon substantive renewal rates quoted
in the agreements. The fair values for services, such as training or consulting,
are based upon hourly billing rates of these services when sold separately to
other customers.
F-68
Hollywood Software, Inc.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
Customers not wishing to license and operate the Company's software themselves
may use the software through an ASP arrangement, in which the Company hosts the
application and provides customer access via the internet. Annual minimum ASP
service fees are recognized ratably over the contract term. Overage revenues for
usage in excess of stated minimums are recognized monthly.
Maintenance services and website subscription fees are recognized ratably over
the contract term. Professional consulting services, sales of third party
products and resale hardware revenues are recognized as services are provided.
Software development revenues are recognized when delivery has occurred and no
significant obligations remain.
Deferred revenue is recorded when i) a portion or the entire contract amount
cannot be recognized as revenue due to non-delivery or acceptance of licensed
software or custom programming, ii) incomplete implementation of ASP service
arrangements, or iii) 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 included in the Company's balance sheet under the caption "Deferred
Revenue," and are recognized as revenue in accordance with the Company's revenue
recognition policies described above.
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are determined based upon the temporary
differences between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates expected to be in effect in the
year in which the temporary differences are expected to reverse. A valuation
allowance is established when it is more likely than not that some portion, or
all, of the deferred tax asset will not be realized.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Research and Development
Research and development costs are expensed as incurred. Research and
development costs amounted to $56,325 and $147,525 for the three months ended
June 30, 2002 and 2003, respectively.
F-69
Hollywood Software, Inc.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
Advertising Expenses
Advertising costs are expensed as incurred. Advertising costs totaled $282 and
$25 for the three months ended June 30, 2002 and 2003, respectively.
Employee Stock Compensation
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. Under the intrinsic value
method, the Company recognizes compensation expense on the date of grant only if
the current market price of the underlying stock exceeds the exercise price. The
Company recorded no stock based employee compensation cost for the three months
ended June 30, 2002 and 2003.
The Company has adopted the disclosure standards of SFAS No. 123, "Accounting
for Stock-Based Compensation", which requires the Company to provide pro forma
net income disclosures for employee stock option grants made as if the
fair-value-based method of accounting for stock options as defined in SFAS 123
had been applied. The following table illustrates the effect on net income
(loss) if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock based employee compensation for the three months ended June 30,
2002 and 2003:
Three Months Ended
June 30,
---------------------------
2002 2003
------------- -----------
Net income (loss), as reported $ 103,453 $ (102,133)
Additional stock-based employee compensation expense
determined under the fair value based method, net of income
tax benefits (6,413) (6,413)
------------- -----------
Pro forma net income (loss) $ 97,040 $ (108,546)
============= ===========
Income (loss) per share:
As reported:
Basic $ 0.01 $ (0.01)
============= ===========
Diluted $ 0.01 $ (0.01)
============= ===========
Pro forma:
Basic $ 0.01 $ (0.01)
============= ===========
Diluted $ 0.01 $ (0.01)
============= ===========
F-70
Hollywood Software, Inc.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
Earnings (Loss) Per Share
The Company accounts for earnings per share in accordance with SFAS No. 128,
"Earnings per Share". SFAS No. 128 requires presentation of basic and diluted
earnings per share. Basic earnings (loss) per share is computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares outstanding for the reporting period. Diluted earnings per share
is computed based on the same shares plus the potential shares issuable upon
assumed exercise of outstanding stock options or other security contracts, but
does not include the impact of dilutive securities that would be anti-dilutive.
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
Three Months Ended
June 30,
---------------------------
2002 2003
------------ ------------
Numerator:
Net income (loss) available to common shareholders $ 103,453 $ (102,133)
------------ ------------
Denominator:
Basic earnings per share - weighted average shares 10,000,000 10,000,000
Effect of dilutive securities:
Stock options 293,167 --
------------ ------------
Denominator for diluted earnings per share - weighted average shares 10,293,167 10,000,000
------------ ------------
Earnings (loss) per share:
Basic $ 0.01 $ (0.01)
============ ============
Diluted $ 0.01 $ (0.01)
============ ============
For the three months ended June 30, 2002 and 2003, total stock options of
1,311,000 and 2,090,000 were not included in the computation of diluted income
(loss) per share because their effect was anti-dilutive.
Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement of Financial Accounting Standards No. 133. SFAS No. 149 clarifies
under what circumstances a contract with an initial net investment meets the
characteristic of a derivative as discussed in SFAS No. 133. In addition, it
clarifies when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, except as specifically
noted in SFAS No. 149. SFAS No. 149 should be applied prospectively. At this
time, the adoption of SFAS No. 149 is not expected to materially impact the
Company's financial condition or results of operations.
F-71
Hollywood Software, Inc.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting Policies (Continued)
In May 2003, the FASB Issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. For nonpublic entities, mandatorily
redeemable financial instruments are subject to the provisions of this Statement
for the first fiscal period beginning after December 15, 2003. The Company has
not yet evaluated its mandatorily redeemable financial instruments and related
financial instruments for purposes of determining the impact of SFAS No. 150.
In November 2002, the FASB issued interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees. Including indirect Guarantees of
Indebtedness of Others," which disclosures are effective for financial
statements for periods ending after December 15, 2002. While the Company has
various guarantees included in contracts in the normal course of business,
primarily in the form of indemnities, these guarantees would only result in
immaterial increases in future costs, but do not represent significant
commitments or contingent liabilities of the indebtedness of others.
In January 2003, the FASB issued interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46) which requires the consolidation of
variable interest entities, as defined. FIN 46 is applicable immediately for
variable interest entities created after January 1, 2003. For variable interest
entities created prior to January 1, 2003, the provisions of FIN 46 are
applicable no later than July 1, 2003. The Company does not currently believe
that any material entities will be consolidated as a result of FIN 46.
In November 2002, the EITF reached a consensus on EITF 00-21, "Revenue
Arrangements with Multiple Deliverables," related to the separation and
allocation of consideration for arrangements that include multiple deliverables.
The EITF requires that when the deliverables included in this type of
arrangement meet certain criteria they should be accounted for separately as
separate units of accounting. This may result in a difference in the timing of
revenue recognition but will not result in a change in the total amount of
revenues recognized in a bundled sales arrangement. The allocation of revenues
to the separate deliverables is based on the relative fair value of each item.
If the fair value is not available for the delivered items then the residual
method must be used. This method requires that the amount allocated to the
undelivered items in the arrangement is their full fair value. This would result
in the discount, if any, being allocated to the delivered items. This consensus
is effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. We do not expect the adoption of EITF 00-21 to
have a material impact on our consolidated financial statements.
F-72
Hollywood Software, Inc.
Notes to Financial Statements
Note 3 - Balance Sheet Components
Property and Equipment
Property and equipment consisted of the following as of June 30, 2003:
June 30,
2003
---------
Furniture and fixtures $ 9,426
Computer equipment 133,056
Computer software 21,881
Office furniture 10,792
---------
175,155
Less: Accumulated depreciation (140,977)
---------
Total property and equipment, net $ 34,178
=========
Computer equipment consists primarily of costs incurred for computers, servers
and backup battery devices used in the Company's operations. Depreciation
expense for the three months ended June 30, 2002 and 2003 was $6,767 and $7,000,
respectively.
Capitalized Software Development Costs
The Company capitalizes the cost of software development in accordance with SFAS
No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed." Capitalized software development costs consisted of the
following as of June 30, 2003:
June 30,
2003
---------
Development costs $ 934,187
Less: Accumulated amortization (498,352)
---------
Unamortized development costs, net $ 435,835
=========
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following as of June 30,
2003:
June 30,
2003
---------
Accounts payable $ 768
Accrued compensation and benefits 38,081
Other accrued liabilities 37,475
---------
Total accounts payable and accrued expenses $ 76,324
=========
Accrued compensation and benefits primarily relate to accrued employee vacation
costs. Other accrued liabilities relate to general business obligations incurred
prior to the balance sheet date, which were paid in subsequent reporting
periods.
F-73
Hollywood Software, Inc.
Notes to Financial Statements
Note 3 - Balance Sheet Components (Continued)
Deferred Revenues
Deferred revenues consisted of the following as of June 30, 2003:
June 30,
2003
---------
ASP service fees $ 122,908
Maintenance fees 217,128
Web site subscription fees 27,813
Development fees 110,358
---------
Total $ 478,207
=========
Deferred revenues represent amounts collected from customers prior to satisfying
the Company's revenue recognition criteria.
Note 4 - Line of Credit
In November 2001, the Company entered into a $200,000 line of credit from Wells
Fargo Bank for general corporate purposes. The credit line bears interest at
7.50% per annum. The Company has not borrowed any funds, nor incurred any
interest charges under the credit line. The line of credit expires in November
2003.
Note 5 - Notes Payable
In November 2001, the Company incurred a $25,000 term loan from Wells Fargo Bank
for the purchase of a battery backup system to mitigate risks from rolling
blackouts due to an energy crisis in California. In addition to receivables and
other assets of the Company, two shareholders pledged certain personal assets as
collateral for the loan. The Company makes monthly payments of principal and
interest on the loan, which is schedule to expire in November 2003. The term
loan bears interest at 8.25% per annum.
A summary of Notes Payable is as follows:
June 30,
2003
---------
Notes payable $ 5,208
Less: Current portion (5,208)
---------
Notes payable, less current portion $ --
=========
F-74
Hollywood Software, Inc.
Notes to Financial Statements
Note 6 - Income Taxes
Provision (benefit) for income taxes consists of the following:
Three Months Ended
June 30
-------------------------
2002 2003
-------- --------
Current:
Federal $ -- $ --
State -- --
Deferred:
Federal 31,692 (6,400)
State 10,564 (3,600)
-------- --------
$ 42,256 $(10,000)
======== ========
Net deferred tax liabilities consist of the following as of June 30, 2003:
June 30,
2003
---------
Deferred tax assets:
Net operating loss carryforwards $ 28,300
Deferred revenues 190,500
Accounts payable and accruals 30,400
---------
Total deferred tax assets 249,200
---------
Deferred tax liabilities:
Accounts receivable (113,000)
Capitalized software costs (173,600)
Depreciation (3,900)
---------
Total deferred tax liabilities (290,500)
---------
Net deferred tax liability $ (41,300)
=========
At March 31, 2003, the Company has net operating loss carryforwards of
approximately $90,000 and $45,000 for Federal and State, respectively, which
will expire at various dates through 2020.
Note 7 - Stockholder's Equity
Stock Dividend
On November 7, 2000 the Board of Directors declared a 1,000:1 stock dividend and
increased the common shares authorized from 50,000 to 50,000,000 and issued and
outstanding from 10,000 shares to 10,000,000 shares. All stock related data in
the financial statements reflect the stock dividend for all periods presented.
The amendment to the Company's articles of incorporation was filed with the
State of California on July 31, 2003.
F-75
Hollywood Software, Inc.
Notes to Financial Statements
Note 7 - Stockholder's Equity (Continued)
Stock Option Plan
In December 2000, the Company adopted the 2000 Stock Option Plan (the "Plan")
under which non-qualified stock options may be granted to employees, outside
directors and consultants. The purpose of the Plan is to enable the Company to
attract, retain and motivate employees, directors, advisors and consultants. The
Company has reserved a total of 5,000,000 shares of the Company's common stock
for issuance upon the exercise of options granted in accordance with the Plan.
Options granted under the Plan expire in 10 years following the date of grant (5
years for stockholders who own greater than 10% of outstanding stock) and are
subject to limitation on transfer. The Plan is administered by the Board of
Directors.
The Plan provides for granting of incentive stock options at not less than 100%
of the fair market value of the underlying stock at the grant date. Option
grants under the Plan are subject to various vesting provisions, all of which
are contingent upon the continuous service of the optionee. Options granted to
stockholders who own greater than 10% of the outstanding stock must be issued at
prices not less than 100% of the fair market value of the stock on the date of
grant as determined by the Company's Board of Directors. Upon a change in
control of the Company, all shares granted under the Plan shall immediately
vest.
The following table summarizes the activity of the Plan:
Options Weighted
Shares Granted Exercise
Available Number Price Per
for Grant of Shares Share
--------- --------- ---------
Balances, March 31, 2003 2,910,000 2,090,000 $.64
Options granted -- -- --
Options forfeited -- -- --
--------- --------- ----
Balances, June 30, 2003 2,910,000 2,090,000 $.64
========= ========= ====
The following summarizes stock options outstanding as of June 30, 2003:
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------
Weighted
Average
Weighted Average Weighted Average Shares Exercise
Exercise Prices Shares Life (Years) Exercise Price Exercisable Price
--------------- ---------- ---------------- ---------------- ----------- --------
$.25 150,000 7.5 $ .25 84,375 $ .25
$.40 605,000 7.5 $ .40 340,313 $ .40
$.50 24,000 7.9 $ .50 7,500 $ .50
$.60 561,000 7.5 $ .60 315,564 $ .60
$.75 150,000 7.8 $ .75 46,875 $ .75
$1.00 600,000 8.1 $1.00 175,000 $1.00
---------- --- ----- --------- -----
2,090,000 7.7 $ .64 969,627 $ .57
========== === ===== ========= =====
F-76
Hollywood Software, Inc.
Notes to Financial Statements
Note 8 - Commitments and Contingencies
Leases
The Company leases its development and Corporate offices under non-cancelable
operating lease agreements, which expire at various dates through August 2005.
The lease agreements provide for base rental rates, which increase at defined
intervals during the term of the lease. The Company does not account for
increasing base rentals using a straight-line method over the lease term as the
differences between the straight-line method and cash payment is not material.
The Company's rental expense for operating leases was $22,080 and $14,768 for
the three months ended June 30, 2002 and 2003, respectively. Future minimum
payments under non-cancelable operating leases with initial or remaining terms
of one year or more consist of the following at June 30, 2003:
Years ending March 31, Amount
---------------------- -------
2004 (nine-months) $35,182
2005 28,804
2006 10,944
-------
$74,930
=======
Employee Benefit Plans
The Company's employees are covered by a profit sharing plan qualified under IRS
section 401. The plan provides for the Company to make discretionary profit
contributions on behalf of eligible employees. The Company made no contributions
in 2002 or 2003.
Note 9 - Related Party Transactions
The Company leases office space from a company controlled by the Company's CEO.
Office rental rates approximate market value for the size, type and office
location. Rents paid under this lease totaled $7,938 and $7,065 for the three
months ended June 30, 2002 and 2003, respectively.
From time to time, the Company uses an outside contractor related to the
Company's president. Rates paid for work provided are consistent with comparable
contractors. Fees paid during the three months ended June 30, 2002 or 2003
amounted to $375 and $1,486, respectively.
Note 10 - Subsequent Event
On July 17, 2003, the shareholders entered into an agreement to sell all of the
outstanding common stock to Access Integrated Technologies, Inc. The closing of
the transaction is subject to several conditions, the principal one of which is
the completion of the purchaser's initial public offering.
F-77
Independent Auditor's Report
Board of Directors
R.E. Stafford, Inc.
We have audited the accompanying combined balance sheet of selected operating
locations of R.E. Stafford, Inc. d.b.a. Colo Solutions as of November 27, 2002,
and the related combined statements of operations and location equity, and cash
flows of selected operating locations for the period January 1, 2002 through
November 27, 2002. These financial statements are the responsibility of R.E.
Stafford, Inc. management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statements were prepared to present the combined financial
position and results of operations of certain selected operating locations sold
to Access Integrated Technologies, Inc. pursuant to the purchase agreement
described in Note 7, and is not intended to be a complete presentation of the
R.E. Stafford, Inc. assets, liabilities, revenues and expenses.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of selected operating
locations of R.E. Stafford, Inc. as of November 27, 2002 and the results of
their operations and their cash flows for the period January 1, 2002 through
November 27, 2002 in conformity with accounting principles generally accepted in
the United States of America.
Melbourne, Florida
August 28, 2003
F-78
R.E. STAFFORD, INC. d.b.a. COLO SOLUTIONS
Combined Balance Sheet of Selected Operating Locations
November 27, 2002
--------------------------------------------------------------------------------
ASSETS
Current assets
Intra-company receivable $ 4,222
Property and equipment
Equipment and improvements 1,386,399
Less: accumulated depreciation (663,281)
-----------
Net property and equipment 723,118
Other assets 30,134
-----------
Total assets $ 757,474
===========
LIABILITIES AND EQUITY
Liabilities:
Current liabilities:
Accounts payable and accrued expenses $ 15,810
Current portion of capitalized lease obligation 136,426
Security deposits 134,605
-----------
Total current liabilities 286,841
Long-term debt, net 135,840
-----------
Total liabilities 422,681
Equity:
Location equity 334,793
-----------
Total equity 334,793
-----------
Total liabilities and equity $ 757,474
===========
See accompanying notes to financial statements.
F-79
R.E. STAFFORD, INC. d.b.a. COLO SOLUTIONS
Combined Statement of Operations and Location Equity of Selected Operating
Locations
For the Period January 1, 2002 through November 27, 2002
--------------------------------------------------------------------------------
Revenues:
Colocation income $ 831,565
AC/DC power income 491,843
Other 116,258
----------
Total revenues 1,439,666
Costs and expenses:
Colocation expense 20,683
Utilities 62,291
Repairs and maintenance 29,423
Sales taxes 3,250
Rent 185,166
Sales commission 48,904
Interest expense 23,470
Miscellaneous 6,309
Depreciation and amortization 395,742
General and administrative 537,690
----------
Total costs and expenses 1,312,928
----------
Net income 126,738
Location equity, beginning of period 208,055
----------
Location equity, end of period $ 334,793
==========
See accountant's report and notes to financial statements.
F-80
R.E. STAFFORD, INC. d.b.a. COLO SOLUTIONS
Combined Statement of Cash Flows of Selected Operating Locations
For the Period January 1, 2002 through November 27, 2002
--------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 126,738
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 395,742
Decrease (Increase) in assets:
Accounts receivable 5,774
Other assets (3,500)
Decrease in liabilities:
Accounts payable and accrued expenses (111,748)
---------
Total adjustments 286,268
---------
Net cash provided by operating activities 413,006
Cash flows from investing activities:
Purchase of property and equipment (19,798)
---------
Net cash used by investing activities (19,798)
Cash flows from financing activities:
Repayments of capitalized leases (84,653)
Intra-company loans, net (308,555)
---------
Net cash used by financing activities (393,208)
---------
Net increase in cash --
Cash, beginning of period --
---------
Cash, end of period $ --
=========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 23,470
=========
Supplemental schedule of noncash investing and financing activities:
Equipment acquired through capital leases $ 33,682
=========
See accountant's report and notes to financial statements.
F-81
R.E. STAFFORD, INC. d.b.a. COLO SOLUTIONS
Notes to Combined Financial Statement of Selected Operating Locations
November 27, 2002
--------------------------------------------------------------------------------
1. Accounting policies
Nature of business and organization and financial statement presentation
R.E. Stafford, Inc. d.b.a. Colo Solutions (the "Company"), a Florida
corporation, was formed in January, 1997, (see selected operating location
inception dates below for the purpose of providing managed services and
colocation solutions. The Company services include managed hosting with
managed services, managed colocation, colocation, and disaster
recovery/business continuity within its colocation centers. The Company
operates in tier-2 and tier-3 cities across the United States.
The accompanying financial presentation is limited to presenting the
combined financial statements of selected operating locations that, as
more fully described in Note 7, were sold to an unrelated party on
November 27, 2002. These operating locations and respective operating
inception dates are as follows: Little Rock, Arkansas (03/01/01);
Manchester, New Hampshire (03/01/01); Portland, Maine (01/22/01); Roanoke,
Virginia (10/01/02); Waco, Texas (03/15/01); Wichita, Kansas (06/08/01).
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using an accelerated method over estimated useful
lives of 5 years.
Intra-company payable
All of the selected operating locations of R.E. Stafford, Inc. share the
same bank account. All cash transactions and any non-cash transactions
processed on behalf of the selected operation locations are recorded
through an intra-company account. The balance of the intra-company account
represents non interest bearing advances.
Use of estimates
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and
assumptions regarding certain types of assets, liabilities, revenues and
expenses. Accordingly, actual results may differ from estimated amounts.
S corporation - income tax status
The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be an S corporation. In lieu of corporation
income taxes, the shareholders of an S corporation are taxed on their
proportionate share of the Company's taxable income. Therefore, no
provision or liability for federal income taxes has been included in the
financial statements.
Advertising
The Company expenses advertising costs as they are incurred.
Revenue recognition
The Company's revenue is derived primarily from its leased facilities
which includes recurring fees for occupancy, cross connect fees and power
charges. In addition, the Company charges non-recurring fees for build out
of the colocation space. All recurring fees are billed monthly at the
beginning of each month, revenue is recognized when billed. Revenue from
non-recurring fees is recognized when such services are provided.
F-82
R.E. STAFFORD, INC. d.b.a. COLO SOLUTIONS
Notes to Combined Financial Statement of Selected Operating Locations
November 27, 2002
--------------------------------------------------------------------------------
2. Capital leases
Each of the selected operating locations of R.E. Stafford, Inc. is the
lessee of generators from Caterpillar Financial Services Corporation. In
addition, five of the selected locations (excluding Wichita, Kansas) lease
security systems from ADT Security Systems, Inc. Depreciation of the
assets under the capital leases is included in depreciation expense for
2002. Following is a summary of property held under capital leases at
November 27, 2002:
Equipment and improvements $442,698
Less: Accumulated depreciation 119,070
--------
$323,628
========
Capitalized leases consists of the following:
Capital leases payable to Caterpillar Financial Services
Corporation, monthly payments ranging from $1,115 to
$3,400 including interest ranging from 9.4% to 10.5%,
through May 2005. $248,238
Capital leases payable to ADT Security Systems, Inc.,
monthly payments ranging from $199 to $259 including
imputed interest ranging from 21.4% to 22.6%, through
March 2004. 24,028
--------
Total capital leases 272,266
Less current protion 136,426
--------
Long-term portion $135,840
========
Minimum future annual lease payments under capital leases through
expiration and in the aggregate are:
Month ended December 31, 2002 $ 17,025
Year ended December 31, 2003 133,968
2004 107,762
2005 40,010
--------
Total minimum lease payments 298,765
Less amount representing interest 26,499
--------
Present value of net minimum lease payments $272,266
========
F-83
R.E. STAFFORD, INC. d.b.a. COLO SOLUTIONS
Notes to Combined Financial Statement of Selected Operating Locations
November 27, 2002
--------------------------------------------------------------------------------
3. Operating lease commitments
Each of the selected operating locations of R.E. Stafford, Inc. leases
certain facilities under various operating leases. These leases expire on
various dates ranging from April, 2005 through March, 2006.
Minimum future annual rental payments under the operating leases through
expiration and in the aggregate are:
One month ended December 31, 2002 $ 18,112
Year ended December 31, 2003 238,685
2004 219,281
2005 162,408
2006 36,273
--------
$674,759
========
4. Major customer - operating lease arrangements
From January 1, 2002 through November 27, 2002 all revenue from the
selected operating locations was derived from KMC Telecom VI, LLC. The
Company leases colocation space to KMC that is furnished with certain
equipment, power and cabling under terms of various operating leases.
Minimum future annual rentals to be received under the operating leases
through expiration and in the aggregate are:
One month ended December 31, 2002 $ 134,635
Year ended December 31, 2003 1,615,260
2004 1,615,260
2005 129,443
----------
$3,494,598
==========
In April 2002, the lease agreement was revised and the lease was executed
in the name of Colo Solutions Global Services, Inc. (identical ownership
as R.E. Stafford, Inc.). Those cash flows were assigned in their entirety
to R.E. Stafford, Inc. d.b.a. Colo Solutions, for the remainder of the KMC
Telecom VI, LLC contract period.
F-84
R.E. STAFFORD, INC. d.b.a. COLO SOLUTIONS
Notes to Combined Financial Statement of Selected Operating Locations
November 27, 2002
--------------------------------------------------------------------------------
5. General and administrative
The intra-company receivable recorded in the accompanying combined
financial statements is net of an allocation of general and administrative
expenses of R.E. Stafford, Inc. Management believes the below allocation
of general and administrative expenses to the acquired locations is
reasonable. The expenses were allocated solely at the discretion of
management based on relative revenue of each location to the total as
follows:
Total general and administrative expenses $922,217
Revenue of select operating locations as a approximate
percentage total revenue 58.3%
--------
General and administrative allocated to the selected
operating locations recorded to intra-company account $537,690
========
6. Intra-company receivable
The accompanying combined financial statement includes an intra-company
receivable of $4,222 as of November 27, 2002. There are no specified
repayment terms and the balance is therefore classified as a current
asset.
R.E. Stafford Inc. maintains a pooled cash account for all locations. All
cash transactions and any non-cash transactions processed on behalf of the
selected operation locations are recorded through the intra-company
account. At November 27, 2002 the balance of the intra-company account
represents non interest bearing advances. In addition, R.E. Stafford has
obtained financing to fund operations consisting of a line of credit from
a bank and loans from a former shareholder which are not allocated to
specific locations. The intra-company receivable shown on the balance
sheet represents the excess or deficiency in cash flows from each
location. Shown below are the total outstanding balances and terms on the
bank line of credit and former shareholder loans for R.E. Stafford Inc. as
a company. Although not specifically allocated by location, the cash flows
from these loans may have been utilized to fund operations of the selected
locations identified in the financial statements. At November 27, 2002
R.E. Stafford, Inc. has an outstanding balance of $52,128 on a $500,000
promissory note to a bank. These funds were used to partially finance
operations of the selected operating locations, as well as other locations
of the Company.
The significant terms of the loan are as follows:
Original loan date: 6/28/2000
Maturity date: 12/27/2002
Loan proceeds: $500,000
Balance November 27, 2002: $52,128
Interest rate: Prime plus 1%
Repayment terms: 6 monthly interest payments
beginning 6/28/00 and 23
consecutive principal and
interest payments in the initial
amount of $23,220 beginning
01/27/01 with all outstanding
principal and interest due
12/27/02
Security: All operating equipment owned by
the Company
F-85
R.E. STAFFORD, INC. d.b.a. COLO SOLUTIONS
Notes to Combined Financial Statement of Selected Operating Locations
November 27, 2002
--------------------------------------------------------------------------------
6. Intra-company receivable, continued
R.E. Stafford, Inc. has the following loans from a former shareholder as
of November 27, 2002:
Total
Outstanding
Terms Balance
-----------
Note payable, original amount $225,000 bearing interest at
12.5%, principal and interest due monthly in the amount of
$7,527 beginning September 1, 2001 for 36 months. $141,317
========
Total long-term debt 141,317
Less current portion 100,380
--------
Long-term debt, net of current portion $ 40,937
========
The portion of the outstanding bank loans and former shareholder loans
applicable to the selected operating locations, if any, is reflected in
the intra-company receivable account as of November 27, 2002.
7. Disposition of selected locations
On November 27, 2002, R.E. Stafford, Inc. sold the selected operating
locations included in the financial statement as identified in Note 1 to
an unrelated entity, Access Integrated Technologies, Inc. The total
purchase price was $3,250,000, paid $2,250,000 in cash and $1,000,000 in a
1-year, 9% note due on 11/27/03 with interest paid quarterly. In addition,
Access Integrated Technologies, Inc. assumed six leases covering
Caterpillar generator equipment leased on behalf of the six operating
sites.
8. Concentration of credit risk
The majority of the Company's revenue is derived from KMC Telecom VI, LLC.
As such, the Company is susceptible to credit risk from such customers.
F-86
Independent Auditor's Report
Board of Directors
R.E. Stafford, Inc.
We have audited the accompanying combined balance sheet of selected operating
locations of R.E. Stafford, Inc. d.b.a. Colo Solutions as of December 31, 2001,
and the related combined statements of operations and location equity, and cash
flows of selected operating locations from inception (as described in Note 1)
through December 31, 2001. These financial statements are the responsibility of
R.E. Stafford, Inc. management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statements were prepared to present the combined financial
position and results of operations of certain selected operating locations sold
to Access Integrated Technologies, Inc. pursuant to the purchase agreement
described in Note 8, and is not intended to be a complete presentation of the
R.E. Stafford, Inc. assets, liabilities, revenues and expenses.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of selected operating
locations of R.E. Stafford, Inc. as of December 31, 2001 and the results of
their operations and their cash flows for the period then ended in conformity
with accounting principles generally accepted in the United States of America.
Bray, Beck & Koetter, CPA, P.A.
Melbourne, Florida
March 31, 2003
--------------------------------------------------------------------------------
F-87
R.E. STAFFORD, INC. d.b.a. COLO SOLUTIONS
Combined Balance Sheet of Selected Operating Locations
December 31, 2001
--------------------------------------------------------------------------------
ASSETS
Current assets
Accounts receivable $ 9,996
Property and equipment
Equipment and improvements 1,332,919
Less: accumulated depreciation (267,539)
---------------
Net property and equipment 1,065,380
Other assets 26,634
---------------
Total assets $ 1,102,010
===============
LIABILITIES AND EQUITY
Liabilities:
Current liabilities:
Accounts payable and accrued expenses $ 127,558
Current portion of long-term debt 108,657
Intra-company payable 308,555
Security deposits 134,605
---------------
Total current liabilities 679,375
Long-term debt, net 214,580
---------------
Total liabilities 893,955
Equity:
Location equity 208,055
---------------
Total equity 208,055
---------------
Total liabilities and equity $ 1,102,010
===============
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
F-88
R.E. STAFFORD, INC. d.b.a. COLO SOLUTIONS
Combined Statement of Operations and Location Equity of Selected Operating
Locations
From Inception (Note 1) of Selected Operating Locations Through December 31,
2001
--------------------------------------------------------------------------------
Revenues:
Colocation income $ 949,779
DC power income 490,798
Installation income 76,433
Other 10,327
---------------
Total revenues 1,527,337
Costs and expenses:
Cabling supplies 9,839
Colocation expense 7,282
Utilities 54,659
Repairs and maintenance 75,556
Miscellaneous taxes 3,627
Rent 149,519
Sales commission 127,299
Interest expense 21,065
Miscellaneous 11,631
Depreciation and amortization 266,659
General and administrative 592,146
---------------
Total costs and expenses 1,319,282
---------------
Net income 208,055
Location equity, beginning of period --
---------------
Location equity, end of period $ 208,055
===============
See accompanying notes to financial statements
--------------------------------------------------------------------------------
F-89
R.E. STAFFORD, INC. d.b.a. COLO SOLUTIONS
Combined Statement of Cash Flows of Selected Operating Locations
From Inception (Note 1) of Selected Operating Locations Through December 31,
2001
--------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 208,055
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 266,659
(Increase) in assets:
Accounts receivable (9,996)
Other assets (26,634)
Increase in liabilities:
Accounts payable and accrued expenses 127,558
Security deposits 134,605
---------------
Total adjustments 492,192
---------------
Net cash provided by operating activities 700,247
Cash flows from investing activities:
Purchase of property and equipment (923,023)
---------------
Net cash provided by investing activities (923,023)
Cash flows from financing activities:
Repayments of capitalized leases (85,779)
Intra-company loans, net 308,555
---------------
Net cash provided by financing activities 222,776
---------------
Net increase in cash --
Cash, beginning of period --
---------------
Cash, end of period $ --
===============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 21,065
===============
Supplemental schedule of noncash investing and financing
activities:
Equipment acquired through capital leases $ 409,016
===============
See accompanying notes to financial statements
--------------------------------------------------------------------------------
F-90
R.E. STAFFORD, INC. d.b.a. COLO SOLUTIONS
Notes to Combined Financial Statements of Selected Operating Locations
December 31, 2001
--------------------------------------------------------------------------------
1. Accounting policies
Nature of business and organization and financial statement
presentation
R.E. Stafford, Inc. d.b.a. Colo Solutions (the "Company"), a Florida
corporation, was formed in January, 1997 (see selected location
inception dates below), for the purpose of providing managed services
and colocation solutions. The Company services include managed hosting
with managed services, managed colocation, colocation, and disaster
recovery/business continuity within its colocation centers. The Company
operates in tier-2 and tier-3 cities across the United States.
The accompanying financial presentation is limited to presenting the
combined financial statements of selected operating locations that, as
more fully described in Note 8, were sold to an unrelated party on
November 27, 2002. These operating locations and respective operating
inception dates are as follows: Little Rock, Arkansas (03/01/01);
Manchester, New Hampshire (03/01/01); Portland, Maine (01/22/01); Waco,
Texas (03/15/01); Wichita, Kansas (06/08/01).
Property and equipment
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed using an accelerated method over
estimated useful lives of 5 years.
Intra-company payable
All of the selected operating locations of R.E. Stafford, Inc. share
the same bank account. All cash transactions and any non-cash
transactions processed on behalf of the selected operation locations
are recorded through an intra-company account. The balance of the
intra-company account represents non interest bearing advances.
Use of estimates
The process of preparing financial statements in conformity with
generally accepted accounting principles requires the use of estimates
and assumptions regarding certain types of assets, liabilities,
revenues and expenses. Accordingly, actual results may differ from
estimated amounts.
S corporation - income tax status
The Company, with the consent of its shareholders, has elected under
the Internal Revenue Code to be an S corporation. In lieu of
corporation income taxes, the shareholders of an S corporation are
taxed on their proportionate share of the Company's taxable income.
Therefore, no provision or liability for federal income taxes has been
included in the financial statements.
Advertising
The Company expenses advertising costs as they are incurred.
Revenue recognition
The Company's revenue is derived primarily from its leased facilities
which includes recurring fees for occupancy, cross connect fees and
power charges. In addition, the Company charges non-recurring fees for
build out of the colocation space. All recurring fees are billed
monthly at the beginning of each month, revenue is recognized when
billed. Revenue from non-recurring fees is recognized when such
services are provided.
--------------------------------------------------------------------------------
F-91
R.E. STAFFORD, INC. d.b.a. COLO SOLUTIONS
Notes to Combined Financial Statements of Selected Operating Locations
December 31, 2001
--------------------------------------------------------------------------------
2. Capital leases
Each of the selected operating locations of R.E. Stafford, Inc. is the
lessee of generators from Caterpillar Financial Services Corporation.
In addition, four of the selected locations (excluding Wichita, Kansas)
lease security systems from ADT Security Systems, Inc. Depreciation of
the assets under the capital leases is included in depreciation
expense.
Following is a summary of property held under capital leases at
December 31, 2001:
Equipment and improvements $ 409,016
Less: Accumulated depreciation 81,803
--------------
$ 327,213
==============
Capitalized leases consists of the following:
Capital leases payable to Caterpillar Financial $ 298,959
Services Corporation, monthly payments ranging from
$1,115 to $3,400 including interest ranging from
9.4% to 10.5%, through May 2005.
Capital leases payable to ADT Security Systems,
Inc., monthly payments ranging from $199 to $259
including imputed interest ranging from 21.4% to
22.6%, through March 2004. 24,278
--------------
Total capitalized lease obligations 323,237
Less current portion 108,657
--------------
Long-term portion $ 214,580
==============
Minimum future annual lease payments under capital leases through
expiration and in the aggregate are:
Year ended December 31, 2002 $ 134,938
2003 106,167
2004 101,789
2005 31,898
--------------
Total minimum lease payments 374,792
Less amount representing interest 51,555
--------------
Present value of net minimum lease payments $ 323,237
==============
--------------------------------------------------------------------------------
F-92
R.E. STAFFORD, INC. d.b.a. COLO SOLUTIONS
Notes to Combined Financial Statements of Selected Operating Locations
December 31, 2001
--------------------------------------------------------------------------------
3. Operating leases
Each of the selected operating locations of R.E. Stafford, Inc. leases
certain facilities under various operating leases. These leases expire
on various dates ranging from April, 2005 through March, 2006.
Minimum future annual rental payments under the operating leases
through expiration and in the aggregate are:
Year ended December 31, 2002 $ 188,441
2003 208,333
2004 216,910
2005 191,244
2006 36,273
--------------
$ 841,201
==============
Total rent expense under operating leases for 2001 was $149,519.
4. Major customer
Approximately 99% of total revenue from the selected operating
locations are derived from KMC Telecom VI, LLC. The Company leases
colocation space to KMC that is furnished with certain equipment, power
and cabling under terms of various operating leases.
Minimum future annual rentals to be received under the operating leases
through expiration and in the aggregate are:
Year ended December 31, 2002 $ 1,615,260
2003 1,615,260
2004 1,615,260
2005 129,443
--------------
$ 4,975,223
==============
In April 2002, the lease agreement was revised and the lease was
executed in the name of Colo Solutions Global Services, Inc. (identical
ownership as R.E. Stafford, Inc.). Those cash flows were assigned in
their entirety to R.E. Stafford, Inc. d.b.a. ColoSolutions for the
remainder of the KMC Telecom VI, LLC contract period.
--------------------------------------------------------------------------------
F-93
R.E. STAFFORD, INC. d.b.a. COLO SOLUTIONS
Notes to Combined Financial Statements of Selected Operating Locations
December 31, 2001
--------------------------------------------------------------------------------
5. General and administrative
The accompanying combined financial statements include an allocation of
general and administrative expenses of R.E. Stafford, Inc. Management
believes the below allocation of general and administrative expenses to
the acquired locations is reasonable. The expenses were allocated
solely at the discretion of management based on relative revenue of
each location to the total as follows:
Total general and administrative expenses $ 1,047,136
Revenue of select operating locations as a
approximate percentage total revenue 56.5%
--------------
General and administrative allocated to the
selected operating locations $ 592,146
==============
6. Intra-company payable
The accompanying combined financial statements include an intra-company
payable of $308,555 as of December 31, 2001. There are no specified
repayment terms and the balance is therefore classified as a current
liability.
R.E. Stafford Inc. maintains a pooled cash account for all locations.
All cash transactions and any non-cash transactions processed on behalf
of the selected operation locations are recorded thru the intra-company
account. At December 31, 2001 the balance of the intra-company account
represents non interest bearing advances. In addition, R.E. Stafford
has obtained financing to fund operations consisting of a line of
credit from a bank and loans from a former shareholder which are not
allocated to specific locations. The intercompany payable shown on the
balance sheet represents the excess or deficiency in cash flows from
each location. Shown below are the total outstanding balances and terms
on the bank line of credit and former shareholder loans for R.E.
Stafford Inc. as a company. Although not specifically allocated by
location, the cash flows from these loans may have been utilized to
fund operations of the selected locations identified in the financial
statements.
At December 31, 2001, R.E. Stafford, Inc. has an outstanding balance at
December 31, 2001 of $253,799 on a $500,000 promissory note to a bank.
These funds were used to partially finance operations of the selected
operating locations, as well as other locations of the Company.
The significant terms of the loan are as follows:
Original loan date: 6/28/2000
Maturity date: 12/27/2002
Loan proceeds: $500,000
Balance December 31, 2001: $253,799
Interest rate: Prime plus 1%
Repayment terms: 6 monthly interest payments
beginning 6/28/00 and 23
consecutive principal and interest
payments in the initial amount of
$23,220 beginning 01/27/01 with all
outstanding principal and interest
due 12/27/02
Security: All operating equipment owned by
the Company
--------------------------------------------------------------------------------
F-94
R.E. STAFFORD, INC. d.b.a. COLO SOLUTIONS
Notes to Combined Financial Statements of Selected Operating Locations
December 31, 2001
--------------------------------------------------------------------------------
6. Intra-company payable, continued
R.E. Stafford, Inc. has the following loans from a former shareholder
as of December 31, 2001:
Total
Outstanding
Terms Balance
--------------
Note payable, original amount $75,000 bearing
interest at 15%, principal and interest due
quarterly in the amount of $7,898 beginning May 8,
1999 until paid in full. $ 7,609
==============
Note payable, original amount $225,000 bearing
interest at 12.5%, principal and interest due
monthly in the amount of $7,527 beginning September
1, 2001 for 36 months. $ 203,941
==============
The portion of the outstanding bank loans and former shareholder loans
applicable to the selected operating location, if any, is reflected in
the intra-company payable account as of September 1, 2001.
7. Concentration of credit risk
The majority of the Company's revenue is derived from KMC Telecom VI,
LLC. As such, the Company is susceptible to credit risk from such
customers.
8. Subsequent events
On November 27, 2002, R.E. Stafford, Inc. sold the selected operating
locations included in the financial statements to an unrelated entity,
Access Integrated Technologies, Inc. The total purchase price was
$3,250,000, paid as $2,250,000 in cash and $1,000,000 in a 1-year, 9%
note due on 11/27/03 with interest paid quarterly. In addition, Access
Integrated Technologies, Inc. assumed six leases covering Caterpillar
generator equipment leased on behalf of the six sold sites.
--------------------------------------------------------------------------------
F-95
ACCESS INTEGRATED TECHNOLOGIES, INC.
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Overview
The following selected unaudited financial data should be read in
conjunction with the historical consolidated financial statements of our
company, Hollywood SW and ColoSolutions, including the notes thereto, appearing
elsewhere in this prospectus. The unaudited pro forma condensed combined
information is presented for illustrative purposes only and is not necessarily
indicative of the results of operations or financial position that would have
occurred if the transactions had been actually completed at the dates indicated,
nor is it necessarily indicative of future results of operations or financial
position of the combined companies. The unaudited pro forma condensed combined
balance sheet has been prepared to reflect the probable acquisition of Hollywood
SW by AccessIT as if the acquisition had occurred as of June 30, 2003 by
combining the separate balance sheets of AccessIT and Hollywood SW as of that
date. The unaudited pro forma condensed combined balance sheet also gives effect
to the issuance in July 2003 of $175 of promissory notes with warrants valued at
$88, as well as the assumed repayment of capital lease obligations totaling $437
and the repayment of a $1,000 promissory note. The unaudited pro forma condensed
combined balance sheet also gives effect to the conversion of all of the
outstanding shares of Series A and Series B redeemable convertible preferred
stock, including dividends accrued thereon, as well as the exercise and exchange
of certain warrants. The unaudited pro forma condensed combined statement of
operations for the year ended March 31, 2003 has been prepared to reflect the
probable acquisition of Hollywood SW and the acquisition of ColoSolutions as if
these acquisitions had occurred as of April 1, 2002 by combining the separate
historical statements of operations of Hollywood SW and AccessIT for the fiscal
year ending March 31, 2003 and the historical statement of operations of
ColoSolutions for the period from April 1, 2002 through November 27, 2002. The
unaudited pro forma condensed combined statement of operations of the three
months ended June 30, 2003 has been prepared to reflect the probable acquisition
of Hollywood SW as if the acquisition had occurred as of the beginning of the
period presented by combining the separate historical statements of operations
of Hollywood SW and AccessIT for the three months ended June 30, 2003.
On July 17, 2003, we entered into an agreement to purchase all of the
capital stock of Hollywood SW. The initial purchase consideration includes cash
in the amount of $2,500, promissory notes in the aggregate principal amount of
$3,000 and 400,000 shares of our restricted Class A Common Stock. The cash
consideration will be paid from the proceeds of the sale of 1,000,000 shares of
our Class A Common Stock in this offering at an assumed initial public offering
price of $5.00 per share, after deducting underwriting discounts, commissions
and estimated offering expenses totaling $1,678, and net of direct transaction
costs of $155 related to the Hollywood SW acquisition. Hollywood SW is the
leading developer of proprietary transactional support software for movie
distributors in the United States. The acquisition is contingent on this
offering; the company's management, however, believes that the acquisition is
probable.
Under the Hollywood SW acquisition agreement, we will initially issue
to the sellers an aggregate of 400,000 shares of our Class A Common Stock, less
the number of shares to be issued by us, at the direction of the sellers, to
certain optionees of Hollywood SW. We will provide the sellers and such
optionees with a price guarantee of $3.60 per share because these shares
generally may not be resold during the 18-month lock-up period. In no event,
however, will we be required to issue more than 80,000 additional shares of our
Class A Common Stock in satisfying the price guarantee. Our price guarantee will
operate even if the sellers and optionees do not resell shares when they are
able to do so.
The purchase price for Hollywood SW may increase during each of the
three years after the closing of the acquisition if Hollywood SW achieves fixed
annual targets of earnings before interest, income taxes, depreciation and
amortization expense; any such payment is to be made in the same proportionate
combination of cash, promissory notes and shares of our Class A Common Stock as
the purchase price payable at closing prior to giving effect to any direct
payments of cash and shares to the optionees. Our obligations to repay our
promissory notes and to pay any additional purchase price will be secured by a
pledge of all of Hollywood SW's capital stock. We have also agreed to certain
limitations with respect to the amount and type of indebtedness we incur.
P-1
The acquisition of Hollywood SW is expected to be accounted for using
the purchase method of accounting and, accordingly, the assets, liabilities and
results of operations of Hollywood SW will be included in the company's
consolidated financial statements subsequent to the acquisition date. The
unaudited pro forma condensed combined financial statements include adjustments,
which are based upon preliminary estimates, to reflect the allocation of the
purchase price to the acquired assets and assumed liabilities of Hollywood SW.
The preliminary purchase price allocation is subject to revision as more
detailed analysis is completed and additional information on the fair values of
assets and liabilities becomes available. Any change in fair value of the net
assets will change the amount of the purchase price allocable to goodwill.
Additionally, changes in working capital from June 30, 2003 through the date the
transaction is completed will change the amount of goodwill recorded. The pro
forma adjustments related to the purchase price allocation of the acquisition
represent management's best estimate of the effect of this transaction. The
final purchase accounting adjustments, however, may differ materially from the
pro forma adjustments.
In June and July 2003, we issued a principal amount of $1,055 and $175,
respectively, in five-year promissory notes to, among other things, help fund
$500 of costs for this offering and repay various capital lease obligations.
The five-year notes bear interest at 8%, payable quarterly in arrears, are
interest only for two years and fully amortize over the remaining three years.
The notes include ten-year warrants to purchase an additional 123,000 shares of
Class A Common Stock, with exercise prices of $0.05 per share. The warrant
portion of the note has been valued and recorded as additional paid-in capital.
For pro forma purposes we have assumed that warrants to purchase 460,805 shares
of Class A Common Stock attached to the company's one-year and five-year
promissory notes, which include 123,000 warrants attached to the June and July
2003 five-year promissory notes, will be exercised as of the offering date.
On November 27, 2002, we acquired six IDCs from ColoSolutions. We
purchased these assets for a total purchase price of $3,550, of which $1,000 was
in the form of a one-year promissory note, which is secured by all of the assets
purchased by us from ColoSolutions. The one-year note may be prepaid prior
to its November 27, 2003 due date without penalty and bears interest at 9% with
interest only payments due quarterly in arrears. A portion of the net proceeds
of this offering will be used to repay this note in full.
The ColoSolutions acquisition was accounted for using the purchase
method of accounting and is included in the company's audited March 31, 2003
consolidated financial statements. The unaudited pro forma condensed combined
statement of operations for the year ended March 31, 2003 includes the
ColoSolutions historical results of operations from April 1, 2002 to November
27, 2002. The pro forma adjustments described in the accompanying footnotes
include certain reclassifications to conform to the company's reporting format.
In September 2003, in connection with the planned IPO and to simplify
our capital structure, we entered into an exchange agreement with MidMark, under
which we agreed, upon and subject to the completion of this offering, to issue
2,202,848 shares of Class A Common Stock to MidMark in exchange for all of its
outstanding shares of Series A and Series B Preferred Stock, including accrued
dividends thereon, and certain warrants. Upon and subject to the completion of
this offering, MidMark will (i) convert 8,202,929 shares of its Series A and
Series B Preferred Stock into 1,640,585 shares of Class A Common Stock, (ii)
exchange warrants, which were exercisable, subject to certain future conditions,
for up to 951,041 shares of Class A Common Stock, for 320,000 shares of Class A
Common Stock, (iii) exercise a warrant currently exercisable for up to 144,663
shares of Class A Common Stock (143,216 shares on a cashless-exercise basis);
and (iv) accept 99,047 shares of Class A Common stock as payment for all
acccrued dividends on shares of Series A and Series B Preferred Stock held by
such stockholder. The 99,047 dividend shares was calculated assuming an IPO
effective date of October 15, 2003 and an IPO offering price of $5.00. Any
variation in the Offering Price will, therefore, affect the number of shares of
Class A Common Stock to be issued as payment of accrued dividends. A valuation
of the warrants being exchanged and the corresponding shares issued for them
will be performed to determine if any dividend charge will be required to be
recorded as a result of this transaction. The Company has estimated that the
fair value of the common stock to be issued to the holder is less than or equal
to the fair value of the warrants to be exchanged and, therefore, believes no
related dividend charge will result from this transaction.
P-2
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2003
(In thousands)
Historical Pro Forma
------------------------------ --------------------------------------------
Hollywood Notes Stock
AccessIT Software Issuance Issuance Combined
--------------- ------------ ---------- ------------ -----------
Assets
Current assets
Cash and cash equivalents $ 1,407 $ 186 $ (262) (a) $ (310)(d) $ 1,021
Accounts receivable 96 278 - - 374
Prepaids and other current assets 395 10 - - 405
Unbilled revenue 85 85
------- ----- ------ ------- --------
Total current assets 1,983 474 (262) (310) 1,885
Property and equipment, net 4,809 34 - - 4,843
Capitalized software costs - 436 - - 436
Intangible assets and goodwill, net 2,071 - - 7,312 (e) 9,383
Deferred costs 306 - - - 306
Unbilled revenue, net of current portion 486 - - - 486
Security deposits 469 - - - 469
-------- ----- ------ ------- --------
Total assets $ 10,124 $ 944 $ (262) $ 7,002 $ 17,808
======== ===== ====== ======= ========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses 767 77 - - 844
Current portion of notes payable 1,325 5 - (491)(f) 839
Current portion of capital leases 263 - (263) (b) - -
Deferred taxes - 41 - - 41
Deferred revenue 34 478 - - 512
-------- ----- ------ ------- --------
Total current liabilities 2,389 601 (263) (491) 2,236
Notes payable, net of current portion 2,165 - 88 (c) 2,491 (f) 4,744
Customer security deposits 153 - - - 153
Deferred revenue, net of current portion 280 - - - 280
Capital leases, net of current portion 174 - (174) (b) - -
Deferred rent expense 723 - - - 723
-------- ----- ------ ------- --------
Total liabilities 5,884 601 (349) 2,000 8,136
Mandatorily redeemable convertible
preferred stock
Series A 1,105 - - (1,105)(g) -
Series B 2,032 - - (2,032)(g) -
Stockholders' equity
Class A common stock 2 20 - (16)(h) 6
Class B common stock 1 - - - 1
Additional paid-in capital 11,831 - 87 (c) 8,478 (h) 20,396
Deferred stock-based compensation (5) - - - (5)
Accumulated deficit (10,726) 323 - (323)(i) (10,726)
-------- ----- ------ ------- --------
Total stockholders' equity 1,103 343 87 8,139 9,672
-------- ----- ------ ------- --------
Total liabilities, mandatorily
redeemable convertible preferred
stock and stockholders' equity $ 10,124 $ 944 $ (262) $ 7,002 $ 17,808
======== ===== ====== ======= ========
P-3
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2003
(In thousands, except per share data)
Historical Pro Forma
------------------------ -----------------------------------------------------
Colo Notes
AccessIT Solutions Adjustments Combined Issuance Combined
------------- --------- ------------ ---------- -------- ----------
Revenue $ 4,228 $ 972 $ - $ 5,200 $ - $ 5,200
Cost of revenues 3,101 601 (305) (j) 3,397 - 3,397
------- ----- ----- ------- ------ --------
Gross profit 1,127 371 305 1,803 - 1,803
Operating expenses
Research and development - - - - - -
Selling, general and administrative 2,305 351 - 2,656 - 2,656
Non-cash stock-based compensation 99 - - 99 - 99
Depreciation and amortization 1,687 - 474 (j,k) 2,161 - 2,161
------- ----- ----- ------- ------ --------
Total operating expenses 4,091 351 474 4,916 - 4,916
------- ----- ----- ------- ------ --------
Loss from operations (2,964) 20 (169) (3,113) - (3,113)
Interest income 13 - - 13 13
Interest expense (364) - (76) (j,l) (440) (22) (m) (462)
Non-cash interest expense (282) - - (282) (123) (m) (405)
Other income 8 - - 8 - 8
------- ----- ----- ------- ------ --------
Income before income taxes (3,589) 20 (245) (3,814) (145) (3,959)
Income tax benefit (expense) 185 - - 185 - 185
------- ----- ----- ------- ------ --------
Net income (loss) $(3,404) $ 20 $(245) $(3,629) $ (145) $ (3,774)
======= ===== ===== ======= ====== ========
Accretion related to redeemable
convertible preferred stock (628) - - (628) - (628)
Accretion of preferred dividends (229) - - (229) - (229)
------- ----- ----- ------- ------ --------
Net income (loss) available to
common stockholders $(4,261) $ 20 $(245) $(4,486) $ (145) $ (4,631)
======== ====== ====== ======== ======= ========
Net Loss per share - Basic
and diluted $ (1.41)
Shares used in per share
calculation - Basic and diluted 3,027,865
Historical Pro Forma
---------------- ---------------------------------------
Hollywood Stock Issuance and Combined as
Software Adjustments Adjusted
--------------- ----------------- ---------------
Revenue $ 1,908 $ - $ 7,108
Cost of revenues 319 - 3,716
------- -------- --------
Gross profit 1,589 - 3,392
Operating expenses
Research and development 289 - 289
Selling, general and administrative 1,131 (27) (n) 3,760
Non-cash stock-based compensation - - 99
Depreciation and amortization - 1,027 (n,o) 3,188
------- -------- --------
Total operating expenses 1,420 1,000 7,336
------- -------- --------
Loss from operations 169 (1,000) (3,944)
Interest income - - 13
Interest expense (2) (135) (p) (599)
Non-cash interest expense - - (405)
Other income - - 8
------- -------- --------
Income before income taxes 167 (1,135) (4,927)
Income tax benefit (expense) (49) 136
------- -------- --------
Net income (loss) $ 118 $ (1,135) $ (4,791)
======= ======== ========
Accretion related to redeemable
convertible preferred stock - - (628)
Accretion of preferred dividends - (195) (q) (424)
------- -------- --------
Net income (loss) available to
common stockholders $ 118 $ (1,330) $ (5,843)
======= ======== ========
Net Loss per share - Basic
and diluted $ (0.89)
Shares used in per share
calculation - Basic and diluted 3,559,448 (r) 6,587,313
P-4
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003
(In thousands, except per share data)
Historical Pro Forma
-----------------------------------------
Notes
AccessIT Issuance Combined
----------- --------- --------
Revenue $ 1,421 $ - $ 1,421
Cost of revenues 869 - 869
----------- ---- -------
Gross profit 552 - 552
Operating expenses - -
Research and development - - -
Selling, general and administrative 558 - 558
Non-cash stock-based compensation 6 - 6
Depreciation and amortization 619 - 619
----------- ---- -------
Total operating expenses 1,183 - 1,183
----------- ---- -------
Loss from operations (631) - (631)
Interest income 1 1
Interest expense (116) 8 (s) (108)
Non-cash interest expense (80) (30) (s) (110)
Other income and expenses (6) - (6)
----------- ---- -------
Income before income taxes (832) (22) (854)
Income tax benefit - - -
----------- ---- -------
Net income (loss) $ (832) $(22) $ (854)
=========== ==== =======
Accretion related to redeemable convertible preferred stock (226) - (226)
Accretion of preferred dividends (90) (90)
----------- ---- -------
Net income (loss) available to common stockholders $ (1,148) $(22) $(1,170)
=========== ==== =======
Net Loss per share - Basic and diluted $ (0.38)
Shares used in per share calculation - Basic and diluted 3,021,577
Historical Pro Forma
-------------- ---------------------------------------
Hollywood Stock Issuance Combined as
Software and Adjustments Adjusted
---------------- ------------------ --------------
Revenue $ 294 $ - $ 1,715
Cost of revenues 44 - 913
------ ------ --------
Gross profit 250 - 802
Operating expenses
Research and development 148 - 148
Selling, general and administrative 215 (7) (t) 766
Non-cash stock-based compensation - - 6
Depreciation and amortization - 257 (t,u) 876
------ ------ --------
Total operating expenses 363 250 1,796
------ ------ --------
Loss from operations (113) (250) (994)
Interest income - 1
Interest expense - (37) (v) (145)
Non-cash interest expense - (110)
Other income and expenses 1 - (5)
------ ------ --------
Income before income taxes (112) (287) (1,253)
Income tax benefit 10 10
------ ------ --------
Net income (loss) $ (102) $ (287) $ (1,243)
====== ====== ========
Accretion related to redeemable convertible preferred stock - - (226)
Accretion of preferred dividends (106) (w) (196)
------ ------ --------
Net income (loss) available to common stockholders $ (102) $ (393) $ (1,665)
====== ====== ========
Net Loss per share - Basic and diluted $ (0.25)
Shares used in per share calculation - Basic and diluted 3,559,448 (x) 6,581,025
P-5
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30,
2003;
The following adjustments were applied to the historical balance sheet
to arrive at the pro forma condensed combined balance sheet as of June 30, 2003
(in thousands):
Notes Issuance:
(a) Represents the following adjustments to cash and cash equivalents:
Cash received from issuance of five-year notes $ 175
Cash used to repay existing capital lease obligations (437)
------
Net change in cash and cash equivalents $ (262)
======
(b) Represents the repayment of capital lease obligations.
(c) Represents the issuance of $1,230 principal amount five-year notes
in June and July 2003, of which $175 was issued in July 2003. The
notes include ten-year warrants to purchase an additional 123,000
shares of Class A Common Stock, with exercise prices of $0.05. As
of June 30, 2003, $1,055 notes and 105,500 warrants were issued and
outstanding. In July 2003, in conjunction with the issuance of $175
of the notes, an additional 17,500 warrants were issued. The
warrant portion of the notes issued in July 2003 was valued at
$87.5 and recorded to additional paid-in capital.
Stock Issuance:
---------------
(d) Represents the following adjustments to cash and cash equivalents:
Cash received from initial public offering $ 5,000
Cash paid for underwriting discounts, commissions
and estimated offering expenses (1,678)
Cash received from exercise of 460,805 one-
and five-year promissory note warrants at
an exercise price of $0.05 per share 23
Cash consideration for Hollywood SW (2,500)
Hollywood SW acquisition costs (155)
Cash paid to repay ColoSolutions one-year note (1,000)
---------
Net change in cash and cash equivalents $ (310)
=========
(e) Represents the addition of a non-competition intangible asset of
$2,500 and a customer contract intangible asset of $1,500 at
their estimated fair value, as well goodwill of $3,312, created in
the Hollywood SW acquisition.
(f) Represents the repayment of the $1,000 ColoSolutions one-year note
and the $3,000 note to be issued as partial consideration for the
Hollywood SW acquisition both current and non-current portions, of
which $509 has been classified as current.
(g) Represents the exchange of all outstanding shares of the Series A
and Series B mandatorily redeemable preferred stock for Class A
Common Stock.
P-6
(h) Represents the following adjustments to common stock and additional
paid-in capital:
Additional
Common paid-in
Stock capital
------ ----------
Estimated gross proceeds of the public offering $ 1 4,999
Offering related expenses (1,678)
Proceeds from the exercise of 460,805 warrants attached
to the one-year and five year promissory notes at an
exercise $0.05 per share 23
Estimated value of - 400,000 shares of common stock to be
issued in the acquisition of Hollywood SW 2 1,998
Adjustment to accrete the Series A preferred stock to its
conversion value of $2,000 (895)
Adjustment for the exchange of 8,202,929 preferred shares
(3,226,538 and 4,976,391 shares of Series A and Series B
preferred respectively) on a one-for-one basis or 1,640,585
shares of Class A Common Stock after
considering the 1-5 Reverse Split. 1 4,031
Adjustment to accrete value of the Series A and B
preferred stock cumulative preferred dividends as of
the estimated conversion date. (495)
Issuance of 99,047 shares of common stock as
consideration for the conversion of accumulated preferred
dividends of $495, the cashless exercise of Contingent B
warrants to purchase 143,216 shares of Class A Common Stock,
and the issuance of 320,000 shares of Class A Common Stock
in exchange for certain
outstanding warrants. 495
Elimination of Hollywood SW historical common stock (20)
-------- -----
Net change $ (16) 8,478
======== =====
(i) Represents an adjustment for the elimination of Hollywood SW
historical retained earnings.
Notes to Unaudited Pro Forma Condensed Combined Statement of Operations for the
Fiscal Year Ended March 31, 2003:
The following adjustments were applied to the historical statements of
operations to arrive at the pro forma condensed combined statement of operations
for the fiscal year ended March 31, 2003 (in thousands):
(j) Represents the reclassification of $288 of depreciation expense and
$17 of interest expense included in ColoSolutions cost of revenues
to conform to the company's presentation.
(k) Represents adjustments for decreased depreciation expense of $173
and an increase in amortization expense of $359 based on the
purchase price of the ColoSolutions IDCs allocated to acquired
(i) machinery, equipment and leasehold improvements and (ii)
customer contracts, respectively. Of the total ColoSolutions
purchase price of $3,550, $845 was allocated to property and
equipment and $2,705 to customer contracts, both having estimated
useful lives of 43 months. Included in the company's historical
March 31, 2003 column is $121 and $396 related to ColoSolutions
depreciation and amortization, respectively.
(l) Represents a $59 adjustment for additional interest expense on the
ColoSolutions $1,000 one-year promissory note. The interest-only
note bears interest at 9%, has a one-year term and is
interest-only, payable quarterly in arrears. $31 in interest
expense related to the note is included in the company's historical
March 31, 2003 column.
P-7
(m) Represents (i) additional interest expense associated with the
five-year promissory notes issuance ($98), (ii) the reversal of
interest expense related to the repayment of $513 in capital lease
obligations from the proceeds of the five-year promissory notes
issuance ($76); the capital leases are on various IDC equipment and
have interest rates ranging from 7.6% to 16.9% and (iii) additional
non-cash interest expense related to the warrant portion of the
notes; the warrants are valued at $615 and are amortized to
non-cash interest expense to accrete the value of the notes to
their face value over the expected five-year term ($123).
(n) Represents the reclassification of $27 of depreciation expense
included in Hollywood SW selling, general and administrative
expense to conform to the company's presentation.
(o) Represents amortization of $1,000 related to Hollywood SW
intangible assets of $2,500 and $1,500 related to the proposed
acquisition including (i) non-competition agreements, over an
estimated useful life of five years and (ii) customer contracts,
over an estimated useful life of three years respectively.
(p) Represents adjustments for (i) additional interest expense from the
issuance of $3,000 in notes related to the Hollywood SW
acquisition; the notes bear interest at 8% payable quarterly in
arrears and fully amortize over five years ($225) and (ii) interest
expense savings from the repayment of the ColoSolutions one-year
note ($90).
(q) Represents an adjustment for the accretion of value attributed to
the Series A and Series B preferred stock dividends through the
estimated conversion date of October 15, 2003.
(r) The pro forma combined basic and diluted net loss per share
reflects (i) the issuance of 956,600 shares, at an assumed initial
public offering price of $5.00; of the estimated 1,000,000 shares
issued in this offering, approximately 43,400 shares or $217 will
be used for general corporate purposes, (ii) 400,000 shares issued
to sellers in conjunction with the Hollywood SW acquisition, (iii)
the exchange of 8,202,929 shares of Series A and Series B Preferred
Stock into 1,640,585 shares of Class A Common Stock, (iv) the
exercise of a warrant, which was currently exercisable for 144,663
shares of Class A Common Stock (143,216 shares of Class A Common
Stock on a cashless-exercise basis), (v) the issuance of 99,047
shares as payment of all accrued preferred dividends on shares of
Series A and Series B Preferred Stock, and (vi) the exchange of
warrants, which were exercisable, subject to certain future
conditions, for up to 951,041 shares of Class A Common Stock, for
320,000 shares of Class A Common Stock.
Notes to Unaudited Pro Forma Condensed Combined Statement of Operations for the
Three Months Ended June 30, 2003:
The following adjustments were applied to the historical statements of
operations to arrive at the pro forma condensed combined statement of operations
for the three months ended June 30, 2003 (in thousands):
(s) Represents (i) additional interest expense associated with the
$1,230 of five-year 8% promissory notes issued in June and July
2003 ($24); nominal interest expense related to the notes issued in
June is included in the company's historical June 30, 2003 column,
(ii) the reversal of interest expense related to the repayment of
$437 in capital lease obligations from the proceeds of the
five-year promissory notes issuance ($16); the capital leases are
on various IDC equipment and have interest rates ranging from 7.6%
to 16.9% and (iii) additional non-cash interest expense related to
the warrant portion of the notes issued in June and July 2003; the
warrants are valued at $615 and are amortized to non-cash interest
expense to accrete the value of the notes to their face value over
the expected five-year term ($30); nominal non-cash interest
expense related to the notes is included in the company's
historical June 30, 2003 column.
P-8
(t) Represents the reclassification of $7 of depreciation expense
included in Hollywood SW selling, general and administrative
expense to conform to the company's presentation.
(u) Represents amortization of $250 related to Hollywood SW intangibles
of $2,500 and $1,500 related to the proposed acquisition including
(i) non-competition agreements, over an estimated useful life of
five years and (ii) customer contracts, over an estimated useful
life of three years respectively.
(v) Represents adjustments for (i) additional interest expense from the
issuance of $3,000 in notes related to the Hollywood SW
acquisition; the notes bear interest at 8% payable quarterly in
arrears and fully amortize over 5 years ($60) and (ii) interest
expense savings from the repayment of the ColoSolutions one-year
note ($23).
(w) Represents an adjustment for the accretion of value attributed to
the Series A and Series B preferred stock dividends through the
estimated conversion date of October 15, 2003.
(x) The pro forma combined basic and diluted net loss per share
reflects (i) the issuance of 956,600 shares, at an assumed initial
public offering price of $5.00; of the estimated 1,000,000 shares
issued in this offering, approximately 43,400 shares or $217 will
be used for general corporate purposes, (ii) 400,000 shares issued
to sellers in conjunction with the Hollywood SW acquisition, (iii)
the exchange of 8,202,929 shares of Series A and Series B Preferred
Stock into 1,640,585 shares of Class A Common Stock, (iv) the
exercise of a warrant, which was currently exercisable for 144,663
shares of Class A Common Stock (143,216 shares of Class A Common
Stock on a cashless-exercise basis), (v) the issuance of 99,047
shares as consideration for the conversion of all accrued preferred
dividends on shares of Series A and Series B Preferred Stock, and
(vi) the exchange of warrants, which were exercisable, subject to
certain future conditions, for up to 951,041 shares of Class A
Common Stock, for 320,000 shares of Class A Common Stock.
P-9
==============================================================
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with any
information different from that contained in this prospectus. We are
offering to sell, and seeking offers to buy, shares of our Class A
Common Stock only in jurisdictions where such offers and sales are
permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the date of
delivery of this prospectus or of any sale of our Class A Common
Stock. In this prospectus, "Access Integrated Technologies, Inc.,"
"we," "us", "the company", "AccessIT" and "our company" refer to
Access Integrated Technologies, Inc.
TABLE OF CONTENTS
Page
----
Prospectus summary .......................... 2
Risk factors ................................. 8
Forward-looking statements ................... 18
Use of proceeds .............................. 19
Determination of offering price............... 19
Capitalization ............................... 20
Dilution ..................................... 22
Dividend policy .............................. 23
Selected historical and pro forma
financial data ............................ 24
Management's discussion and analysis of
financial condition and
results of operations...................... 30
Business ..................................... 44
Management ................................... 59
Related party transactions ................... 69
Principal stockholders ....................... 72
Description of securities .................... 75
Shares eligible for future resale ............ 79
Underwriting ................................. 81
Transfer agent................................ 83
Legal matters ................................ 83
Experts ...................................... 83
Where you can find more information .......... 84
Index to financial statements.................F-1
Until _____, 2003, all dealers that buy, sell or trade shares of our
Class A Common Stock, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to such
dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments.
==============================================================
==============================================================
1,000,000 Shares
[ACCESSIT LOGO]
Class A Common Stock
------------
PROSPECTUS
------------
JOSEPH GUNNAR & CO., LLC
_____, 2003
==============================================================
PART II
Information Not Required in Prospectus
Item 24. Indemnification of Directors and Officers.
The amended and restated certificate of incorporation and the bylaws of
the Registrant provide that the Registrant shall indemnify its officers,
directors and certain others to the fullest extent permitted by the Delaware
General Corporation Law. Section 145 of the Delaware General Corporation Law, or
the DGCL, provides in pertinent part as follows:
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
Section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this Section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the present or
former director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in subsections
(a) and (b) of this Section. Such determination shall be made with respect to a
person who is a director or officer at the time of such determination (1) by a
majority vote of directors who are not parties to such action, suit or
proceeding, even though less than a quorum, (2) by a committee of such directors
designated by majority vote of such directors, even though less than a quorum,
(3) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion or (4) by the stockholders.
II-1
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this section. Such expenses (including
attorneys' fees) incurred by former directors and officers or other employees
and agents may be so paid upon such terms and conditions, if any, as the
corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this Section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person, who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this Section.
(h) For purposes of this Section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this Section with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this Section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation, which
imposes duties on, or involves services by, such director, officer, employee, or
agent of the corporation, which imposes duties on, or involves services by, such
director, officer, employee, or agent with respect to an employee benefit plan,
its participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to in
this Section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
II-2
As permitted by Section 102(b)(7) of the DGCL, Article Sixteen of the
Registrant's amended and restated certificate of incorporation eliminates the
personal liability of the Registrant's directors to the Registrant and its
stockholders for monetary damages for breaches of their fiduciary duties as a
director except, as set forth in said Section 102(b)(7), for (i) any breach of
the director's duty of loyalty to the Registrant and its stockholders, (ii) any
act or omission not in good faith or which involves intentional misconduct or a
knowing violation of law, (iii) illegal dividend payments, redemptions or
repurchases under Section 174 of the DGCL or (iv) any transaction from which the
director derives an improper personal benefit.
Reference is made to Section 7 of the Underwriting Agreement (Exhibit
1.1 hereto), which provides for certain indemnification (or contribution) by the
underwriter of the Registrant and certain of its officers and directors.
Item 25. Other Expenses of Issuance and Distribution.
The following table presents the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of the Class A Common Stock being registered. All amounts are estimates
except for the SEC registration fee, the NASD filing fee and the American Stock
Exchange listing fee.
SEC registration fee.................................... $ 514
NASD filing fee......................................... 1,135
American Stock Exchange listing fee..................... 46,500
Printing expenses....................................... 75,000
Legal fees and expenses................................. 350,000
Accounting fees and expenses............................ 380,000
Director's & officer's liability insurance.............. 100,000
Underwriter's counsel fees (including blue sky
fees and expenses).................................. 25,000
Transfer agent fees..................................... 5,000
Miscellaneous fees and expenses......................... 45,000
------------
Total: $ 1,028,149
Item 26. Recent Sales of Unregistered Securities.
Recent Sales of Unregistered Securities
From August 2000 to May 2002, the Registrant entered into stock
purchase agreements with certain investors and issued 1,845,000 shares of Class
A Common Stock for an aggregate purchase price of $4,425,250. The Registrant
received an executed Accredited Investor Certification from each of the
investors and relied on registration exemptions under Rule 506 of Regulation D
under, and Section 4(2) of, the Securities Act.
On August 9, 2000, the Registrant entered into a Restricted Stock
Subscription Agreement with Tower Construction Corporation, or Tower, issuing
Tower Contracting of Miami, Corporation, or TCM, 150,000 shares of Class A
Common Stock valued at $1.50 per share in exchange for certain construction
services, or having an aggregate value of $300,000. Under terms of a settlement
agreement between the Registrant and Tower, 150,000 shares of Class A Common
Stock were returned to the Registrant. The Registrant relied on registration
exemptions under Rule 506 of Regulation D under, and Section 4(2) of, the
Securities Act.
II-3
On August 30, 2000, the Registrant entered into a Restricted Stock
Subscription Agreement with John O'Hara Company, Inc., issuing 40,000 shares of
Class A Common Stock valued at $2.50 per share in exchange for certain
construction services, or having an aggregate value of $100,000. The Registrant
relied on registration exemptions under Rule 506 of Regulation D under, and
Section 4(2) of, the Securities Act.
On September 1, 2000, Fibertech & Wireless, Inc. was merged down and
into its majority-owned subsidiary, the Registrant (formerly Access Colo, Inc.),
pursuant to which each holder of shares of common stock of Fibertech & Wireless,
Inc. was issued 0.6205 shares of common stock of the Registrant. The Registrant
relied on registration exemptions under Rule 506 of Regulation D under, and
Section 4(2) of, the Securities Act.
In March and April of 2001, the Registrant entered into stock purchase
agreements with Simon D. Figg, Ronald C. Finley, Jr. and Chad A. Littleton,
issuing 8,000, 2,000 and 2,000 shares of Class A Common Stock, respectively,
valued at $2.50 per share in exchange for certain commissions owed by the
Registrant, or having an aggregate value of $30,000. The Registrant relied on
registration exemptions under Rule 506 of Regulation D under, and Section 4(2)
of, the Securities Act.
The Registrant and MidMark Equity Partners II, L.P., or MidMark,
entered into a Preferred Stock and Warrant Purchase Agreement, dated as of
October 10, 2001, whereby MidMark purchased from the Registrant (i) 3,226,538
shares of Series A Preferred Stock and (ii) a contingent warrant to purchase up
to 2,151,025 shares of the Class A Common Stock for an aggregate purchase price
of $2 million. In connection with this transaction, four of the Registrant's
founders returned 2,000,000 shares, in the aggregate, of the Registrant's common
stock outstanding consisting of 1,233,333 shares of Class A Common Stock and
766,667 shares of Class B Common Stock. The Registrant received an executed
Accredited Investor Certification from MidMark and relied on registration
exemptions under Rule 506 of Regulation D under, and Section 4(2) of, the
Securities Act.
The Registrant and MidMark entered into a Preferred Stock and Warrants
Purchase Agreement, dated as of November 27, 2002, whereby MidMark purchased
from the Registrant (i) 4,976,391 shares of Series B Preferred Stock, (ii) a
contingent warrant to purchase up to 1,909,545 shares (and, upon certain
conditions, an additional 192,630 shares) of the Class A Common Stock, (iii) a
contingent warrant to purchase up to 723,313 shares (and, upon certain
conditions, an additional 72,965 shares) of the Class A Common Stock, and (iv) a
contingent warrant to purchase up to 502,003 shares of the Class A Common Stock,
for an aggregate purchase price of $2.5 million. The Registrant received an
executed Accredited Investor Certification from MidMark and relied on
registration exemptions under Rule 506 of Regulation D under, and Section 4(2)
of, the Securities Act.
From December 2001 to February 2002, the Registrant borrowed from, and
issued one-year promissory notes (each bearing interest at 8% per year) to, A.
Dale Mayo, Brett E. Marks, CMNY Capital II, L.P., or CMNY, MidMark, and several
other investors the aggregate principal amount of $1.345 million. In connection
with these one-year notes, the Registrant granted to such investors ten-year
warrants to purchase up to an aggregate of 126,527 shares of our Class A Common
Stock at an exercise price of $.01 per warrant share, or $1,265.27 in the
aggregate. The Registrant received an executed Accredited Investor Certification
from each of such investors and relied on registration exemptions under Rule 506
of Regulation D under, and Section 4(2) of, the Securities Act.
From March 2002 to August 2002, the Registrant borrowed from, and
issued five-year promissory notes (each bearing interest at 8% per year) to, A.
Dale Mayo, Brett E. Marks, CMNY, and several other investors the aggregate
principal amount of $3.175 million. In connection with these five-year notes,
the Registrant granted to such investors ten-year warrants to purchase up to an
aggregate of 1,587,500 shares of our Class A Common Stock at an exercise price
of $.01 per warrant share, or $15,875 in the aggregate. The Registrant received
an executed Accredited Investor Certification from each of such investors and
relied on registration exemptions under Rule 506 of Regulation D under, and
Section 4(2) of, the Securities Act.
II-4
On May 9, 2002, one of the investors of the five-year promissory notes
exercised his warrants to purchase 25,000 shares of our Class A Common Stock by
paying $250.
In December 2002, the Registrant granted the following shares of its
Class A Common Stock as compensation for services rendered: Gary Loffredo -
100,000; Jeff Butkovsky - 75,000; Brian Pflug - 100,000; and Dale Morris -
25,000. In connection with the granting of these shares, four of the
Registrant's founders returned 300,000 shares, in the aggregate, of the
Registrant's common stock outstanding, consisting of 150,000 shares of Class A
Common Stock and 150,000 shares of Class B Common Stock.
In June and July 2003, the Registrant borrowed from, and issued
five-year promissory notes to, several other investors the aggregate principal
amount of $1.23 million. In connection with these five-year notes, the
Registrant granted to such investors ten-year warrants to purchase up to an
aggregate of 615,000 shares of our Class A Common Stock at an exercise price of
$.01 per warrant share, or $6,150 in the aggregate. The Registrant received an
executed Accredited Investor Certification from each of such investors and
relied on registration exemptions under Rule 506 of Regulation D and Rule 152
under, and Section 4(2) of, the Securities Act.
In August 2003, one of the investors of the one-year promissory notes
exercised its warrants to purchase 34,508 shares of our Class A Common Stock by
paying $345, and two of the investors of the five-year promissory notes
exercised their warrants to purchase 530,000 shares of our Class A Common Stock
by paying $5,300.
Between September 1 and September 17, 2003, several holders of the
one-year and five-year notes exercised their warrants to purchase 414,089 shares
of Class A Common Stock by paying $4,141.
In September 2003, the Registrant and MidMark entered into an Exchange
Agreement, whereby the Registrant agreed to issue, upon and subject to the
completion of its initial public offering, 11,014,240 shares of Class A Common
Stock to MidMark in exchange for its agreement to (i) convert all of its shares
of Series A and Series B Preferred Stock into shares of Class A Common Stock,
(ii) exchange warrants exercisable for shares of Class A Common Stock for
1,600,000 shares of Class A Common Stock, (ii) exercise a warrant to purchase up
to 723,315 shares of Class A Common Stock (716,080 shares on a cashless-exercise
basis) and (iv) to accept 495,235 shares of Class A Common Stock as payment of
accrued dividends on shares of Series A and Series B Preferred Stock held by
such stockholder.
The sales of the above securities were determined to be exempt from
registration under the Securities Act in reliance on Rule 701 under the
Securities Act, Section 4(2) of the Securities Act and/or Regulation D
promulgated thereunder as transactions by an issuer not involving any public
offering or transactions under compensation benefit plans and contracts relating
to compensation as provided under Rule 701. In addition, the purchasers of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates issue in these transactions. All purchasers had adequate access,
through their relationships with us, to information about us. The above
transactions do not reflect the one-for-five reverse stock split effective as of
September 18, 2003.
II-5
Item 27. Exhibits.
Exhibit No.
-----------
1.1 - Form of Underwriting Agreement between the Registrant and the
underwriter.**
2.1 - Stock Purchase Agreement, dated July 17, 2003, between the
Registrant and Hollywood Software, Inc. and its stockholders.
2.2 - Exchange Agreement, dated as of September 17, 2003, between the
Registrant and MidMark Equity Partners II, L.P.*
3.1 - Amendment to Third Amended and Restated Certificate of
Incorporation of the Registrant.*
3.2 - Bylaws of the Registrant.
4.1 - Form of Warrant Agreement (with Warrant Certificates) between
the Registrant and the underwriter.**
4.2 - Specimen certificates representing Class A Common Stock and the
underwriter's Warrants.**
4.3 - Promissory note issued by the Registrant to ColoSolutions, Inc.,
dated November 27, 2002.
4.4 - Promissory note issued by the Registrant to holders of
ten-year warrants.
4.5 - Form of note to be issued by the Registrant to the selling
stockholders of Hollywood Software, Inc.
4.6 - Form of Pledge and Security Agreement between the Registrant,
the selling stockholders of Hollywood SW and the pledge agent.
5.1 - Opinion of Kirkpatrick & Lockhart LLP.*
10.1 - Employment Agreement, dated as of July 1, 2000 (as amended),
between the Registrant and A. Dale Mayo.
10.2 - Employment Agreement, dated as of April 10, 2000, between the
Registrant and Kevin Farrell.
10.3 - Form of Employment Agreements between Hollywood Software, Inc.
and David Gajda/Robert Jackovich.
10.4 - Amendment to No. 1 to the First Amended and Restated 2000 Stock
Option Plan of the Registrant.*
10.5 - Asset Purchase Agreement, dated as of November 16, 2001,
between the Registrant and BridgePoint International (USA), Inc.
10.6 - Asset Purchase Agreement, dated as of October 10, 2002, between
the Registrant, R.E. Stafford, Inc. d/b/a ColoSolutions and Colo
Solutions Global Services, Inc.
10.7 - Services Distribution Agreement, dated July 17, 2001, between
the Registrant and ManagedStorage International, Inc.
10.8 - License Agreement between the Registrant and AT&T Corp., dated
July 31, 2001.
10.9 - Master Agreement for Colocation Space between the Registrant
(by assignment from Colo Solutions Global Services, Inc.)
and KMC Telecom VI LLC dated April 11, 2002.
10.10 - License Agreement between the Registrant (by assignment from
Bridgepoint International (USA), Inc.) and Zone Telecom, Inc.
dated February 27, 2001.
10.11 - Lease Agreement, dated as of May 23, 2000, between the Registrant
(formerly Fibertech & Wireless, Inc.) and 55 Madison
Associates, LLC.
10.12 - Agreement of Lease, dated as of July 18, 2000, between the
Registrant and 1-10 Industry Associates, LLC.
II-6
Exhibit No.
-----------
10.13 - Lease Agreement, dated as of August 28, 2000, between the
Registrant (formerly Fibertech & Wireless, Inc.) and RFG Co. Ltd.
10.14 - Letter Amendment to the Lease Agreement, dated August 28, 2000,
between the Registrant (formerly Fibertech & Wireless, Inc.)
and RFG Co. Ltd.
10.15 - First Amendment to the Lease, dated August 28, 2000 between the
Registrant (formerly Fibertech & Wireless, Inc.) and RFG Co.
Ltd. dated October 27, 2000.
10.16 - Agreement of Lease, dated as of January 18, 2000, between the
Registrant (by assignment from BridgePoint International
(Canada), Inc.) and 75 Broad, LLC.
10.17 - Additional Space and Lease Modification to the Agreement of
Lease, dated as of January 18, 2000, between the Registrant
(by assignment from BridgePoint International (Canada), Inc.)
and 75 Broad, LLC dated May 16, 2000.
10.18 - Second Additional Space and Lease Modification to the Agreement
of Lease, dated as of January 18, 2000, between the Registrant
(by assignment from BridgePoint International
(Canada), Inc.) and 75 Broad, LLC dated August 15, 2000.
10.19 - Lease Agreement, dated as of January 17, 2001, as amended,
between the Registrant (by assignment from R. E. Stafford, Inc.
d/b/a ColoSolutions) and Union National Plaza I, Inc.
10.20 - Lease Agreement, dated as of February 6, 2001, between the
Registrant (by assignment from R. E. Stafford, Inc.
d/b/a ColoSolutions) and Granite - Wall Street Limited
Partnership (successor in interest to Duffy Wall Street L.L.C.).
10.21 - Indenture Agreement, dated as of May 22, 2001, between the
Registrant (by assignment from R. E. Stafford, Inc.
d/b/a ColoSolutions) and Research Boulevard Partnership.
10.22 - Lease Agreement, dated as of January 22, 2001, between the
Registrant (by assignment from ColoSolutions L.L.C.)
and 340 Associates, L.L.C.
10.23 - Lease Agreement, dated as of September 29, 2002, between the
Registrant (by assignmentfrom R. E. Stafford, Inc.
d/b/a ColoSolutions) and Jerry J. Howard and Eddy D. Howard.
10.24 - Office Lease, dated as of February 22, 2001, between the
Registrant (by assignment from R. E. Stafford, Inc.
d/b/a ColoSolutions) and One Liberty Place, L. C.
10.25 - Commercial Property Lease between Hollywood Software, Inc.
and Hollywood Media Center, LLC, dated January 1, 2000.
10.26 - Lease, dated as of February 1, 1999, between Hollywood Software,
Inc. and Spieker Properties, L. P.
10.27 - First Amendment to Lease, dated as of February 1, 1999, between
Hollywood Software, Inc. and Spieker Properties, L.P.
dated May 10, 2000.
10.28 - Second Amendment to Lease, dated as of February 1, 1999,
between Hollywood Software, Inc. and Spieker Properties, L.P.
dated February 16, 2001.
10.29 - Third Amendment to Lease, dated as of February 1, 1999, between
Hollywood Software, Inc. and EOP-BREA Park Centre, L.P.
(successor in interest to Spieker Properties, L.P.),
dated June 27, 2002.
10.30 - Consulting Agreement between the Registrant (formerly
Fibertech & Wireless, Inc.) and Harvey Marks dated June 2000.
10.31 - Independent Contractor Agreement, dated July 31, 2003,
between the Registrant and Kevin Booth.
II-7
Exhibit No.
-----------
10.32 - Universal Transport Exchange License and Option Agreement,
dated August 13, 2003, by and between the Registrant and
Universal Access, Inc.*
20.1 - Audit committee charter.**
21.1 - List of subsidiaries.
23.1 - Consent of Kirkpatrick & Lockhart LLP (to be included in
Exhibit 5.1).*
23.2 - Consent of PriceWaterhouseCoopers LLP.*
23.3 - Consent of BDO Seidman, LLP.*
23.4 - Consents of Bray, Beck & Koetter.*
--------------------
All non-asterisked Exhibits listed above were previously filed on August 6, 2003
with the Securities and Exchange Commission as exhibits to the Registrant's
Registration Statement on Form SB-2 (File No. 333-107711).
* Filed herewith.
** To be filed by amendment.
II-8
Item 28. Undertakings.
Undertakings Required by Regulation S-B, Item 512(a).
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding
the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in
the form of prospectus filed with the Securities and Exchange
Commission pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement; and
(iii) Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of such securities at that time to be the initial bona
fide offering.
(3) To file a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
Undertaking Required by Regulation S-B, Item 512(d).
The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
Undertaking Required by Regulation S-B, Item 512(e).
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to any arrangement, provision or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-9
Undertakings Required by Regulation S-B, Item 512(f).
The undersigned Registrant hereby undertakes that:
(1) For determining any liability under the Securities Act of 1933, as
amended (the "Securities Act"), treat the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance upon Rule
430A and contained in a form of prospectus filed by the Registrant under Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement for the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering of these securities.
II-10
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant hereby certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized Amendment
No. 1 to this registration statement to be signed on its behalf by the
undersigned, in the City of Morristown, State of New Jersey, on the 22nd day of
September 2003.
ACCESS INTEGRATED TECHNOLOGIES, INC.
By: /s/ A. Dale Mayo
------------------------------------------
A. Dale Mayo, President and Chief
Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to this registration statement was signed by the following
persons in the capacities and on the date(s) stated:
/s/ A. Dale Mayo Chairman of the Board and September 22, 2003
----------------------------------------- President and Chief Executive Officer
A. Dale Mayo (Principal Executive Officer)
* Senior Vice President - Accounting and Finance September 22, 2003
------------------------------------------ (Principal Financial and Accounting Officer)
Brian D. Pflug
* Senior Vice President - Data Center Operations September 22, 2003
------------------------------------------ and director
Kevin J. Farrell
* Senior Vice President - Business Development and September 22, 2003
------------------------------------------ director
Brett E. Marks
* Senior Vice President - Business Affairs; September 22, 2003
------------------------------------------ General Counsel; Secretary and director
Gary S. Loffredo
* Director September 22, 2003
------------------------------------------
Kevin A. Booth
* Director September 22, 2003
------------------------------------------
Robert Davidoff
* Director September 22, 2003
------------------------------------------
Wayne L. Clevenger
* Director September 22, 2003
------------------------------------------
Matthew W. Finlay
* Director September 22, 2003
------------------------------------------
Gerald C. Crotty
*By: /s/ A. Dale Mayo
-----------------
A. Dale Mayo
Attorney-in-Fact for such persons
II-11