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EX-3.1 - FOURTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION - Cinedigm Corp.exh3-1_1385616.htm
EX-2.1 - AMENDMENT AND WAIVER TO SECURITIES PURCHASE AGREEMENT - Cinedigm Corp.exh2-1_1378406.htm
EX-32.3 - CERTIFICATION OF CHIEF ACCOUNTING OFFICER - Cinedigm Corp.exh32-3_1385636.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Cinedigm Corp.exh32-1_1385634.htm
EX-31.2 - OFFICER'S CERTIFICATE - Cinedigm Corp.exh31-2_1385632.htm
EX-31.1 - OFFICER'S CERTIFICATE - Cinedigm Corp.exh31-1_1385630.htm
EX-31.3 - OFFICER'S CERTIFICATE - Cinedigm Corp.exh31-3_1385633.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Cinedigm Corp.exh32-2_1385635.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q
 
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: September 30, 2009
 
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from --- to ---
 

Commission File Number: 001-31810
 
______________________________________
 
Cinedigm Digital Cinema Corp.
(Exact Name of Registrant as Specified in its Charter)
 
______________________________________
 

Delaware
22-3720962
(State or Other Jurisdiction of Incorporation
or Organization)
(I.R.S. Employer Identification No.)

55 Madison Avenue, Suite 300, Morristown New Jersey 07960
(Address of Principal Executive Offices, Zip Code)

(973-290-0080)
(Registrant’s Telephone Number, Including Area Code)

Access Integrated Technologies, Inc.
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x  No o
   
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o  No o
   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
   
Large accelerated filer o                         
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company x
   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No x
   
As of November 12, 2009, 28,032,875 shares of Class A Common Stock, $0.001 par value, and 733,811 shares of Class B Common Stock, $0.001 par value, were outstanding.

 
 

 

CINEDIGM DIGITAL CINEMA CORP.
CONTENTS TO FORM 10-Q


PART I --
FINANCIAL INFORMATION
 
Page
Item 1.
Financial Statements (Unaudited)
 
 
 
Condensed Consolidated Balance Sheets at March 31, 2009 and September 30, 2009 (Unaudited)
 
1
 
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months ended September 30, 2008 and 2009
 
3
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months ended September 30, 2008 and 2009
 
4
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
29
Item 4T.
Controls and Procedures
 
43
PART II --
OTHER INFORMATION
 
 
Item 1.
Legal Proceedings
 
43
Item 1A.
Risk Factors
 
43
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
45
Item 3.
Defaults Upon Senior Securities
 
45
Item 4.
Submission of Matters to a Vote of Security Holders
 
45
Item 5.
Other Information
 
46
Item 6.
Exhibits
 
46
Signatures
 
 
47
Exhibit Index
 
48



 
 

 

PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)
 
CINEDIGM DIGITAL CINEMA CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)

   
March 31,
2009
   
September 30,
2009
 
ASSETS
       
(Unaudited)
 
 
Current assets
           
Cash and cash equivalents
  $ 26,329     $ 19,732  
Restricted short-term investment securities
          5,594  
Accounts receivable, net
    13,884       11,527  
Deferred costs, current portion
    3,936       2,999  
Unbilled revenue, current portion
    3,082       3,522  
Prepaid and other current assets
    1,798       3,159  
Note receivable, current portion
    616       170  
Total current assets
    49,645       46,703  
 
Restricted long-term investment securities
          4,974  
Restricted cash
    255       7,161  
Security deposits
    424       427  
Property and equipment, net
    243,124       235,853  
Intangible assets, net
    10,707       9,192  
Capitalized software costs, net
    3,653       3,738  
Goodwill
    8,024       8,024  
Deferred costs, net of current portion
    3,967       7,735  
Unbilled revenue, net of current portion
    1,253       1,062  
Note receivable, net of current portion
    959       878  
Accounts receivable, net of current portion
    386       386  
Total assets
  $ 322,397     $ 326,133  

See accompanying notes to Unaudited Condensed Consolidated Financial Statements

 
1

 


CINEDIGM DIGITAL CINEMA CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
(continued)

   
March 31,
2009
   
September 30,
2009
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
       
(Unaudited)
 
 
Current liabilities
           
Accounts payable and accrued expenses
  $ 14,954     $ 8,995  
Current portion of notes payable, non-recourse
    24,824       24,758  
Current portion of notes payable
    424       177  
Current portion of capital leases
    175       700  
Current portion of deferred revenue
    5,535       5,860  
Current portion of customer security deposits
    314       314  
Total current liabilities
    46,226       40,804  
                 
Notes payable, non-recourse, net of current portion
    170,624       162,112  
Notes payable, net of current portion
    55,333       65,627  
Capital leases, net of current portion
    5,832       5,778  
Warrant liability
          14,308  
Interest rate swap
    4,529       3,306  
Deferred revenue, net of current portion
    1,057       2,013  
Customer security deposits, net of current portion
    9       9  
Total liabilities
    283,610       293,957  
 
Commitments and contingencies (see Note 7)
               
 
Stockholders’ Equity
               
Preferred stock, 15,000,000 shares authorized;
Series A 10% - $0.001 par value per share; 20 shares authorized; 8 shares issued and outstanding at March 31, 2009 and September 30, 2009, respectively. Liquidation preference $4,050
    3,476       3,529  
Class A common stock, $0.001 par value per share; 65,000,000 shares authorized; 27,544,315 and 28,084,315 shares issued and 27,492,875 and 28,032,875 shares outstanding at March 31, 2009 and September 30, 2009, respectively
    27       28  
Class B common stock, $0.001 par value per share; 15,000,000 shares authorized; 733,811 shares issued and outstanding, at March 31, 2009 and September 30, 2009, respectively
    1       1  
Additional paid-in capital
    173,565       175,281  
Treasury stock, at cost; 51,440 Class A shares
    (172 )     (172 )
Accumulated deficit
    (138,110 )     (146,474 )
Accumulated other comprehensive loss
          (17 )
Total stockholders’ equity
    38,787       32,176  
Total liabilities and stockholders’ equity
  $ 322,397     $ 326,133  

See accompanying notes to Unaudited Condensed Consolidated Financial Statements

 
2

 


CINEDIGM DIGITAL CINEMA CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for share and per share data)
(Unaudited)


 
For the Three
Months Ended
September 30,
 
For the Six
Months Ended
September 30,
     
2008
     
2009
     
2008
     
2009
 
Revenues
 
$
21,849
   
$
19,881
   
$
42,419
   
$
38,547
 
                                 
Costs and Expenses:
                               
Direct operating (exclusive of depreciation and amortization shown below)
   
6,732
     
6,066
     
12,529
     
11,528
 
Selling, general and administrative
   
4,187
     
4,073
     
9,020
     
7,942
 
Provision for doubtful accounts
   
145
     
136
     
173
     
264
 
Research and development
   
93
     
64
     
100
     
104
 
Stock-based compensation
   
200
     
441
     
358
     
766
 
Depreciation and amortization of property and equipment
   
8,133
     
8,323
     
16,268
     
16,476
 
Amortization of intangible assets
   
901
     
750
     
1,848
     
1,515
 
Total operating expenses
   
20,391
     
19,853
     
40,296
     
38,595
 
Income (loss) from operations
   
1,458
     
28
     
2,123
     
(48
)
 
Interest income
   
99
     
95
     
223
     
135
 
Interest expense
   
(6,990
)
   
(8,791
)
   
(14,166
)
   
(16,341
)
Extinguishment of debt
   
     
10,744
     
     
10,744
 
Other expense, net
   
(176
)
   
(158
)
   
(326
)
   
(301
)
Change in fair value of interest rate swap
   
(687
)
   
540
     
1,565
     
1,223
 
Change in fair value of warrants
   
     
(3,576
)
   
     
(3,576
)
Net loss
 
$
(6,296
)
 
$
(1,118
)
 
$
(10,581
)
 
$
(8,164
)
 
Preferred stock dividends
   
     
(100
)
   
     
(200
)
Net loss attributable to common stockholders
 
$
(6,296
)
 
$
(1,218
)
 
$
(10,581
)
 
$
(8,364
)
 
Net loss per Class A and Class B common share - basic and diluted
 
$
(0.23
)
 
$
(0.04
)
 
$
(0.39
)
 
$
(0.29
)
                                 
Weighted average number of Class A and Class B common shares outstanding:
                               
Basic and diluted
   
27,536,371
     
28,663,959
     
27,202,593
     
28,475,217
 

See accompanying notes to Unaudited Condensed Consolidated Financial Statements

 
3

 

CINEDIGM DIGITAL CINEMA CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)

 
For the Six Months Ended September 30,
 
   
2008
     
2009
 
Cash flows from operating activities
             
Net loss
$
(10,581
)
 
$
(8,164
)
Adjustments to reconcile net loss to net cash provided by operating activities:
             
Loss on disposal of assets
 
79
     
4
 
Depreciation and amortization of property and equipment and amortization of intangible assets
 
18,116
     
17,991
 
Amortization of capitalized software costs
 
387
     
323
 
Amortization of debt issuance costs included in interest expense
 
749
     
938
 
Provision for doubtful accounts
 
173
     
264
 
Stock-based compensation
 
358
     
766
 
Non-cash interest expense
 
3,018
     
1,861
 
Change in fair value of interest rate swap and warrant
 
(1,565
)
   
2,353
 
Loss on available-for-sale investments
 
     
2
 
Note payable included in interest expense
 
     
817
 
Gain on extinguishment of debt
 
     
(10,744
)
Accretion of note payable discount included in interest expense
 
     
300
 
Changes in operating assets and liabilities:
             
Accounts receivable
 
4,012
     
2,093
 
Unbilled revenue
 
1,318
     
(250
)
Prepaids and other current assets
 
(1,535
)
   
(1,308
)
Other assets
 
150
     
533
 
Accounts payable and accrued expenses
 
943
     
(2,194
)
Deferred revenue
 
(407
)
   
1,236
 
Other liabilities
 
9
     
 
Net cash provided by operating activities
 
15,224
     
6,821
 
 
Cash flows from investing activities
             
Purchases of property and equipment
 
(16,008
)
   
(12,573
)
Additions to capitalized software costs
 
(508
)
   
(408
)
Maturities of available-for-sale investments
 
     
671
 
Purchase of available-for-sale investments
 
     
(11,265
)
Restricted cash
 
     
(6,906
)
Net cash used in investing activities
 
(16,516
)
   
(30,481
)
               
Cash flows from financing activities
             
Proceeds from notes payable
 
     
76,513
 
Repayment of notes payable
 
(1,100
)
   
(42,862
)
Repayment of credit facilities
 
(3,858
)
   
(18,950
)
Proceeds from credit facilities
 
200
     
8,884
 
Payments of debt issuance costs
 
(368
)
   
(6,064
)
Principal payments on capital leases
 
(53
)
   
(432
)
Costs associated with issuance of preferred stock
 
     
(8
)
Costs associated with issuance of Class A common stock
 
(37
)
   
(18
)
Net cash (used in) provided by financing activities
 
(5,216
)
   
17,063
 
Net decrease in cash and cash equivalents
 
(6,508
)
   
(6,597
)
Cash and cash equivalents at beginning of period
 
29,655
     
26,329
 
Cash and cash equivalents at end of period
$
23,147
   
$
19,732
 


See accompanying notes to Unaudited Condensed Consolidated Financial Statements

 
4

 

CINEDIGM DIGITAL CINEMA CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
($ in thousands, except for per share data)
(Unaudited)
 
1.
NATURE OF OPERATIONS

Cinedigm Digital Cinema Corp. was incorporated in Delaware on March 31, 2000 (“Cinedigm”, and collectively with its subsidiaries, the “Company”).  On September 30, 2009, the Company’s stockholders approved a change in the Company’s name from Access Integrated Technologies, Inc., to Cinedigm Digital Cinema Corp. and such change was effected October 5, 2009.  The Company provides technology solutions, financial services and advice, software services, electronic delivery and content distribution services to owners and distributors of digital content to movie theatres and other venues.  Beginning September 1, 2009, the Company made changes to its organizational structure which impacted its reportable segments, but did not impact its consolidated financial position, results of operations or cash flows. The Company realigned its focus to five primary businesses as follows: the first digital cinema deployment (“Phase I Deployment”), the second digital cinema deployment (“Phase II Deployment”), services (“Services”), media content and entertainment (“Content & Entertainment”) and other (“Other”).  The Company’s Phase I Deployment and Phase II Deployment segments are the non-recourse, financing vehicles and administrators for the Company’s digital cinema equipment (the “Systems”) installed in movie theatres nationwide.  The Company’s Services segment provides services and support to the Phase I Deployment and Phase II Deployment segments as well as to other third party customers.  Included in these services are asset management services for a specified fee via service agreements with Phase I Deployment and Phase II Deployment; software license, maintenance and consulting services; and electronic content delivery services via satellite and hard drive to the motion picture industry.  These services primarily facilitate the conversion from analog (film) to digital cinema and have positioned the Company at what it believes to be the forefront of a rapidly developing industry relating to the delivery and management of digital cinema and other content to theatres and other remote venues worldwide.  The Company’s Content & Entertainment segment provides content distribution services to alternative and theatrical content owners and to theatrical exhibitors and in-theatre advertising.  The Company’s Other segment provides motion picture exhibition to the general public, information technology consulting and managed network monitoring services and hosting services and network access for other web hosting services (“Access Digital Server Assets”).  Overall, the Company’s goal is to aid in the transformation of movie theatres to entertainment centers by providing a platform of hardware, software and content choices. Additional information related to the Company’s reporting segments can be found in Note 9.

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION, USE OF ESTIMATES AND CONSOLIDATION

The Company has incurred net losses historically and has an accumulated deficit of $146,474 as of September 30, 2009. The Company also has significant contractual obligations related to its recourse and non-recourse debt for the remaining part of fiscal year 2010 and beyond. Management expects that the Company will continue to generate net losses for the foreseeable future.  Based on the Company’s cash position at September 30, 2009, and expected cash flows from operations, management believes that the Company has the ability to meet its obligations through September 30, 2010. In August 2009, the Company entered into a private placement of a senior secured note and extinguished its existing senior notes, which provided net proceeds after repayment of existing debt, funding of an interest reserve and transactions fees and expenses of approximately $11,300 of working capital funding.  The Company has signed commitment letters for additional non-recourse debt capital, primarily to meet equipment requirements related to the Company’s Phase II Deployment (see Note 11). Although the Company recently entered into certain agreements related to the Phase II Deployment (see Note 7), there is no assurance that financing for the Phase II Deployment will be completed as contemplated or under terms acceptable to the Company or its existing stockholders. Failure to generate additional revenues, raise additional capital or manage discretionary spending could have a material adverse effect on the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not reflect any adjustments which may result from the Company’s inability to continue as a going concern.

The condensed consolidated balance sheet as of March 31, 2009, which has been derived from audited financial statements, and the condensed consolidated financial statements were prepared following the interim reporting requirements of the Securities and Exchange Commission (“SEC”).  They do not include all disclosures normally

 
5

 

made in financial statements contained in Form 10-K. In management’s opinion, all adjustments necessary for a fair presentation of financial position, the results of operations and cash flows in accordance with accounting principles generally accepted in the United States (GAAP) for the periods presented have been made. The results of operations for the respective interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2009 filed with the SEC on June 15, 2009 (the “Form 10-K”).

The Company’s condensed consolidated financial statements include the accounts of Cinedigm, Access Digital Media, Inc. (“AccessDM”), Hollywood Software, Inc. d/b/a AccessIT Software (“Software”), Core Technology Services, Inc. (“Managed Services”), FiberSat Global Services, Inc. d/b/a AccessIT Satellite and Support Services (“Satellite”), ADM Cinema Corporation (“ADM Cinema”) d/b/a the Pavilion Theatre (the “Pavilion Theatre”), Christie/AIX, Inc. d/b/a AccessIT Digital Cinema (“Phase 1 DC”), PLX Acquisition Corp., UniqueScreen Media, Inc. (“USM”),  Vistachiara Productions, Inc. f/k/a The Bigger Picture, currently d/b/a Cinedigm Content and Entertainment Group  (“CEG”), Access Digital Cinema Phase 2 Corp. (“Phase 2 DC”) and Access Digital Cinema Phase 2 B/AIX Corp. (“Phase 2 B/AIX”). AccessDM and Satellite are together referred to as the Digital Media Services Division (“DMS”). All intercompany transactions and balances have been eliminated.

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. On an on-going basis, the Company evaluates its estimates, including those related to the carrying values of its long-lived assets, intangible assets and goodwill, the valuation of deferred tax assets, the valuation of assets acquired and liabilities assumed in purchase business combinations, stock-based compensation expense, revenue recognition and capitalization of software development costs. The Company bases its estimates on historical experience and on other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Because of the uncertainty inherent in such estimates, actual results could differ materially from these estimates under different assumptions or conditions.

The March 31, 2009 consolidated balance sheets were reclassified to break out the recourse and non-recourse notes payable to conform to the current period presentation.

REVENUE RECOGNITION

Phase I Deployment and Phase II Deployment

Virtual print fees (“VPFs”) are earned pursuant to contracts with movie studios and distributors, whereby amounts are payable to Phase 1 DC and to Phase 2 DC, when movies distributed by the studio are displayed on screens utilizing the Company’s digital cinema equipment (the “Systems”) installed in movie theatres.  VPFs are earned and payable to Phase 1 DC based on a defined fee schedule with a reduced VPF rate year over year until the sixth year (calendar 2011) at which point the VPF rate remains unchanged through the tenth year.  One VPF is payable for every movie title displayed per System. The amount of VPF revenue is therefore dependent on the number of movie titles released and displayed on the Systems in any given accounting period. VPF revenue is recognized in the period in which the movie first opens for general audience viewing in that digitally-equipped movie theatre, as Phase 1 DC’s and Phase 2 DC’s performance obligations have been substantially met at that time.

Phase 2 DC’s agreements with distributors require the payment of VPFs, according to a defined fee schedule, for 10 years from the date each system is installed; however, Phase 2 DC may no longer collect VPFs once “cost recoupment,” as defined in the agreements, is achieved.  Cost recoupment will occur once the cumulative VPFs and other cash receipts collected by Phase 2 DC have equaled the total of all cash outflows, including the purchase price of all Systems, all financing costs, all “overhead and ongoing costs”, as defined and including the Company’s service fees, subject to maximum agreed upon amounts during the three-year rollout period and thereafter, plus a compounded return on any billed but unpaid overhead and ongoing costs, of 15% per year.  Further, if cost recoupment occurs before the end of the eighth contract year, a one-time “cost recoupment bonus” is payable by the studios to Cinedigm.  Any other cash flows, net of expenses, received by Phase 2 DC following the achievement of cost recoupment are required to be returned to the distributors on a pro-rata basis. At this time, the Company cannot estimate the timing or probability of the achievement of cost recoupment.

 
6

 

Alternative content fees (“ACFs”) are earned pursuant to contracts with movie exhibitors, whereby amounts are payable to Phase 1 DC and to Phase 2 DC, generally as a percentage of the applicable box office revenue derived from the exhibitor’s showing of content other than feature films, such as concerts and sporting events (typically referred to as “alternative content”).  ACF revenue is recognized in the period in which the alternative content opens for audience viewing.

Services

For software multi-element licensing arrangements that do not require significant production, modification or customization of the licensed software, revenue is recognized for the various elements as follows: revenue for the licensed software element is recognized upon delivery and acceptance of the licensed software product, as that represents the culmination of the earnings process and the Company has no further obligations to the customer, relative to the software license. Revenue earned from consulting services is recognized upon the performance and completion of these services. Revenue earned from annual software maintenance is recognized ratably over the maintenance term (typically one year).

Revenue is deferred in cases where:  (1) a portion or the entire contract amount cannot be recognized as revenue, due to non-delivery or pre-acceptance of licensed software or custom programming, (2) uncompleted implementation of application service provider arrangements (“ASP Service”), or (3) unexpired pro-rata periods of maintenance, minimum ASP Service fees or website subscription fees. As license fees, maintenance fees, minimum ASP Service fees and website subscription fees are often paid in advance, a portion of this revenue is deferred until the contract ends. Such amounts are classified as deferred revenue and are recognized as earned revenue in accordance with the Company’s revenue recognition policies described above.

Revenues from the delivery of data via satellite and hard drive are recognized upon delivery, as DMS’ performance obligations have been substantially met at that time.

Content & Entertainment

USM has contracts with exhibitors to display pre-show advertisements on their screens, in exchange for certain fees paid to the exhibitors. USM then contracts with businesses of various types to place their advertisements in select theatre locations, designs the advertisement, and places it on-screen for specific periods of time, generally ranging from three to twelve months.  Cinema advertising service revenue, and the associated direct selling, production and support cost, is recognized on a straight-line basis over the period the related in-theatre advertising is displayed, pursuant to the specific terms of each advertising contract. USM has the right to receive or bill the entire amount of the advertising contract upon execution, and therefore such amount is recorded as a receivable at the time of execution, and all related advertising revenue and all direct costs actually incurred are deferred until such time as the an in-theatre advertising is displayed.

The right to sell and display such advertising, or other in-theatre programs, products and services, is based upon advertising contracts with exhibitors which stipulate payment terms to such exhibitors for this right. Payment terms generally consist of fixed annual payments or annual minimum guarantee payments, plus a revenue share of the excess of a percentage of advertising revenue over the minimum guarantee, if any.  The Company recognizes the cost of fixed and minimum guarantee payments on a straight-line basis over each advertising contract year, and the revenue share cost, if any, in accordance with the terms of the advertising contract.

Barter advertising revenue is recognized for the fair value of the advertising time surrendered in exchange for alternative content.  The Company includes the value of such exchanges in both Content & Entertainment’s net revenues and direct operating expenses.  There may be a timing difference between the screening of alternative content and the screening of the underlying advertising used to acquire the content.  The acquisition cost is being recorded and recognized as a direct operating expense by CEG when the alternative content is screened, and the underlying advertising is being deferred and recognized as revenue ratably over the period such advertising is screened by USM.  The Company has not recorded any net revenues or direct operating expenses related to barter advertising during the three and six months ended September 30, 2008 and 2009.

CEG has contracts for the theatrical distribution of third party feature films and alternative content.   CEG’s distribution fee revenue is recognized at the time a feature film and alternative content is viewed, based on CEG’s participation in box office receipts.  CEG has the right to receive or bill a portion of the theatrical distribution fee in advance of the exhibition date, and therefore such amount is recorded as a receivable at the time of execution, and

 
7

 

all related distribution revenue is deferred until the third party feature films’ or alternative content’s theatrical release date.

Other

Movie theatre admission and concession revenues are generated at the Company’s nine-screen digital movie theatre, the Pavilion Theatre. Movie theatre admission revenues are recognized on the date of sale, as the related movie is viewed on that date and the Company’s performance obligation is met at that time. Concession revenues consist of food and beverage sales and are also recognized on the date of sale.

Managed Services’ revenues, which consist of monthly recurring billings pursuant to network monitoring and maintenance contracts, are recognized as revenues in the period the services are provided, and other non-recurring billings are recognized on a time and materials basis as revenues in the period in which the services were provided.

Other revenues, attributable to the Access Digital Server Assets, which consist of monthly recurring billings for hosting and network access fees, are recognized as revenues in the period the services are provided.

Since May 1, 2007, the Company’s three internet data centers (“IDCs”) have been operated by FiberMedia AIT, LLC and Telesource Group, Inc. (together, “FiberMedia”), unrelated third parties, pursuant to a master collocation agreement.  Although the Company is still the lessee of the IDCs, substantially all of the revenues and expenses were being realized by FiberMedia and not the Company and since May 1, 2008, 100% of the revenues and expenses are being realized by FiberMedia. In June 2009, one of the IDC leases expired, leaving two IDC leases with the Company as lessee.

RESTRICTED INVESTMENT SECURITIES

In connection with the $75,000 Senior Secured Note issued in August 2009 (see Note 5), the Company was required to segregate $11,265 of the proceeds into marketable securities which will be used to repay interest over the next two years.  The Company classifies the marketable securities as available-for-sale securities and accordingly, these investments are recorded at fair value.  The maturity dates of these investments coincide with the quarterly interest payment dates through September 2011.  The changes in the value of these securities are recorded in other comprehensive loss in the condensed consolidated financial statements.  Realized gains and losses are recorded in earnings when securities mature or are redeemed.  There were realized losses of $2 recorded during the three months ended September 30, 2009.

The Company held no available-for-sale securities at March 31, 2009.  During the three months ended September 30, 2009, the Company made the first scheduled quarterly interest payment in the amount of $715.  Investment securities with a maturity of twelve months or less are classified as short-term; those that mature in greater than twelve months are classified as long-term.  The carrying value and fair value of investment securities available-for-sale at September 30, 2009 were as follows:

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized Losses
   
Fair Value
 
U.S. Treasury securities
  $ 4,517     $ 1     $ (8 )   $ 4,510  
Obligations of U.S. government agencies and FDIC guaranteed bank debt
    5,099       2       (11 )     5,090  
Corporate debt securities
    506                   506  
Other interest bearing securities
    463             (1 )     462  
    $ 10,585     $ 3     $ (20 )   $ 10,568  


 
8

 

DEFERRED COSTS

Deferred costs primarily consist of the unamortized debt issuance costs related to the credit facility with General Electric Capital Corporation (“GECC”), the $55,000 of 10% Senior Notes issued in August 2007 up to August 2009 (see Note 5) and the $75,000 Senior Secured Note issued in August 2009 (see Note 5), which are amortized on a straight-line basis over the term of the respective debt (see Note 5 for extinguishment of debt).  The straight-line basis is not materially different from the effective interest method.  Also included in deferred costs is advertising production, post production and technical support costs related to developing and displaying advertising in the amount of $778, which are capitalized and amortized on a straight-line basis over the same period as the related cinema advertising revenues of $4,704 are recognized.

DIRECT OPERATING COSTS

Direct operating costs consist of facility operating costs such as rent, utilities, real estate taxes, repairs and maintenance, insurance and other related expenses, direct personnel costs, film rent expense, amortization of capitalized software development costs, exhibitors payments for displaying cinema advertising and other deferred expenses, such as advertising production, post production and technical support related to developing and displaying advertising.

STOCK-BASED COMPENSATION

For the three months ended September 30, 2008 and 2009, the Company recorded stock-based compensation expense of $200 and $441, respectively, and $358 and $766, for the six months ended September 30, 2008 and 2009, respectively.  The Company estimates that the stock-based compensation expense related to current outstanding stock options, using a Black-Scholes option valuation model, and current outstanding restricted stock awards will be approximately $1,432 in fiscal 2010.

The weighted-average grant-date fair value of options granted during the three months ended September 30, 2008 and September 30, 2009 was $0.55 and $0.57, respectively, and $0.58 and $0.57, for the six months ended September 30, 2008 and 2009, respectively. There were no stock options exercised during the three and six months ended September 30, 2008 and 2009.

The Company estimated the fair value of stock options at the date of each grant using a Black-Scholes option valuation model with the following assumptions:

   
For the Three Months Ended September 30,
   
For the Six Months Ended
September 30,
 
   
        2008
   
      2009
   
        2008
   
        2009
 
Range of risk-free interest rates
    2.7-4.4 %            2.7 %            2.5-5.2 %            2.7 %
Dividend yield
                       
Expected life (years)
    5       5       5       5  
Range of expected volatilities
    52.6-58.7 %     77.4 %     52.5-58.7 %     77.4 %

The risk-free interest rate used in the Black-Scholes option valuation model for options granted under the Company’s stock option plan awards is the historical yield on U.S. Treasury securities with equivalent remaining lives. The Company does not currently anticipate paying any cash dividends on common stock in the foreseeable future. Consequently, an expected dividend yield of zero is used in the Black-Scholes option valuation model.  The Company estimates the expected life of options granted under the Company’s stock option plans using both exercise behavior and post-vesting termination behavior, as well as consideration of outstanding options.   The Company estimates expected volatility for options granted under the Company’s stock option plans based on a measure of historical volatility in the trading market for the Company’s common stock.

CAPITALIZED SOFTWARE COSTS

Internal Use Software

The Company accounts for internal use software development costs based on three distinct stages to the software development process for internal use software.  The first stage, the preliminary project stage, includes the conceptual

 
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formulation, design and testing of alternatives.  The second stage, or the program instruction phase, includes the development of the detailed functional specifications, coding and testing.  The final stage, the implementation stage, includes the activities associated with placing a software project into service.  All activities included within the preliminary project stage are considered research and development and expensed as incurred.  During the program instruction phase, all costs incurred until the software is substantially complete and ready for use, including all necessary testing, are capitalized, Capitalized costs are amortized on a straight-line basis over estimated lives ranging from three to five years, beginning when the software is ready for its intended use.

Software to be Sold, Licensed or Otherwise Marketed

Software development costs that are incurred subsequent to establishing technological feasibility are capitalized until the product is available for general release. Amounts capitalized as software development costs are amortized using the greater of revenues during the period compared to the total estimated revenues to be earned or on a straight-line basis over estimated lives ranging from three to five years. The Company reviews capitalized software costs for impairment on a periodic basis with other long-lived assets.  Amortization of capitalized software development costs, included in direct operating costs, for the three months ended September 30, 2008 and 2009 amounted to $194 and $161, respectively and $387 and $323 for the six months ended September 30, 2008 and 2009, respectively.  At September 30, 2009, there were no unbilled receivables under such customized software development contracts included in unbilled revenue in the condensed consolidated balance sheets.

GOODWILL AND INTANGIBLE ASSETS

Goodwill is the excess of the purchase price paid over the fair value of the net assets of the acquired business. The Company assesses its goodwill for impairment at least annually and in interim periods if certain triggering events occur indicating that the carrying value of goodwill may be impaired. The Company also reviews possible impairment of finite lived intangible assets annually. During the six months ended September 30, 2008 and 2009, no impairment charge was recorded.

As of September 30, 2009, the Company’s finite-lived intangible assets consisted of customer relationships and agreements, theatre relationships, covenants not to compete, trade names and trademarks and Federal Communications Commission licenses (for satellite transmission services), which are estimated to have useful lives ranging from two to ten years.  No intangible assets were acquired during the three and six months ended September 30, 2009.  During the six months ended September 30, 2008 and 2009, no impairment charge was recorded.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation expense is recorded using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are being amortized over the shorter of the lease term or the estimated useful life of the improvement. Maintenance and repair costs are charged to expense as incurred. Major renewals, improvements and additions are capitalized.  Upon the sale or other disposition of any property and equipment, the cost and related accumulated depreciation and amortization are removed from the accounts and the gain or loss is included in the condensed consolidated statement of operations.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company reviews the recoverability of its long-lived assets when events or conditions exist that indicate a possible impairment exists. The assessment for recoverability is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future undiscounted net cash flows. If the total of expected future undiscounted net cash flows is less than the total carrying value of the assets the asset is deemed not to be recoverable and possibly impaired.  The Company then estimates the fair value of the asset to determine whether an impairment loss should be recognized.  An impairment loss will be recognized if for the difference between the fair value (computed based upon) and the carrying value of the asset exceeds its fair value.  Fair value is estimated by computing the expected future discounted cash flows.  During the six months ended September 30, 2008 and 2009, no impairment charge for long-lived assets was recorded.


 
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NET LOSS PER SHARE

Basic and diluted net loss per share has been calculated as follows:

Basic and diluted net loss per share =
Net loss
 
 
Weighted average number of Common Stock
 outstanding during the period
 

Shares issued and any shares that are reacquired during the period are weighted for the portion of the period that they are outstanding.

The Company incurred net losses for each of the three and six months ended September 30, 2008 and 2009 and, therefore, the impact of dilutive potential common shares from outstanding stock options, warrants, restricted stock, and restricted stock units, totaling 4,360,882 shares and 23,451,352 shares as of September 30, 2008 and 2009, respectively, were excluded from the computation as it would be anti-dilutive.

ACCOUNTING FOR DERIVATIVE ACTIVITIES

In April 2008, the Company executed an interest rate swap agreement (the “Interest Rate Swap”) (see Note 5) to limit the Company’s exposure to changes in interest rates.  Changes in fair value of derivative financial instruments are either recognized in other comprehensive income (a component of stockholders' equity) or in the condensed consolidated statement of operations depending on whether the derivative is being used to hedge changes in cash flows or fair value.  The Company has determined that this is not a hedging transaction and changes in the value of its Interest Rate Swap were recorded in the condensed consolidated statements of operations (see Note 5).

Fair Value of Financial Instruments

The fair value measurement disclosures are grouped into three levels based on valuation factors:

·  
Level 1 – quoted prices in active markets for identical investments
·  
Level 2 – other significant observable inputs (including quoted prices for similar investments, market corroborated inputs, etc.)
·  
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments)

Assets and liabilities measured at fair value on a recurring basis use the market approach, where prices and other relevant information is generated by market transactions involving identical or comparable assets or liabilities.

The following table summarizes the levels of fair value measurements of the Company’s financial assets:

   
Financial Assets at Fair Value
as of September 30, 2009
 
   
Level 1
   
Level 2
   
Level 3
 
Cash and cash equivalents
  $ 19,732     $     $  
Investment securities, available-for-sale
  $ 885     $ 9,683     $  
Interest rate swap
  $     $ (3,306 )   $  

3.
RECENT ACCOUNTING PRONOUNCEMENTS

Effective July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became the single official source of authoritative, nongovernmental generally accepted accounting principles (“GAAP”) in the United States.  The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the SEC.  Our accounting policies were not affected by the conversion to ASC.  However, references to specific accounting standards in the footnotes to our condensed consolidated financial statements have been changed to refer to the appropriate section of ASC.

 
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At its September 23, 2009 board meeting, the FASB ratified final EITF consensus on revenue arrangements with multiple deliverables (“Issue 08-1”).  This Issue supersedes Issue 00-21 (codified in ASC 605-25).  Issue 08-1 addresses the unit of accounting for arrangements involving multiple deliverables.  It also addresses how arrangement consideration should be allocated to the separate units of accounting, when applicable. However, guidance on determining when the criteria for revenue recognition are met and on how an entity should recognize revenue for a given unit of accounting are located in other sections of the Codification.  Issue 08-1 will ultimately be issued as an Accounting Standards Update (ASU) that will amend ASC 605-25.  Final consensus is effective for fiscal years beginning on or after June 15, 2010.  Entities can elect to apply this Issue (1) prospectively to new or materially modified arrangements after the Issue’s effective date or (2) retrospectively for all periods presented.  The Company does not believe that revisions to ASC 605-25 will have a material impact on the Company’s consolidated financial statements.

At its September 23, 2009 board meeting, the FASB also ratified final EITF consensus on software revenue recognition (“Issue 09-3”).  This Issue amends ASC 985-605 (formerly SOP 97-2) and ASC 985-605-15-3 (formerly Issue 03-5) to exclude from their scope all tangible products containing both software and non-software components that function together to deliver the product’s essential functionality. That is, the entire product (including the software deliverables and non-software deliverables) would be outside the scope of ASC 985-605 and would be accounted for under other accounting literature. The revised scope of ASC 985-605 (Issue 09-3) will ultimately be issued as an Accounting Standards Update (ASU) that will amend the ASC.  The final consensus is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply this Issue (1) prospectively to new or materially modified arrangements after the Issue’s effective date or (2) retrospectively for all periods presented. Early application is permitted.  The Company does not believe that ASC 985-605 (Issue 09-3) will have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”) (which will be codified in ASC 810-10). Revisions to ASC 810-10 improves financial reporting by enterprises involved with variable interest entities and to address (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”, as a result of the elimination of the qualifying special-purpose entity concept in SFAS 166 and (2) constituent concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. Revisions to ASC 810-10 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Company is currently evaluating the impact of adoption and application of revisions to ASC 810-10 will have on the Company’s consolidated financial statements.

4.
NOTES RECEIVABLE

Notes receivable consisted of the following:

   
As of March 31, 2009
   
As of September 30, 2009
 
Note Receivable (as defined below)
 
Current Portion
   
Long Term Portion
   
Current Portion
   
Long Term Portion
 
Exhibitor Note
  $ 54     $ 37     $ 56     $ 8  
Exhibitor Install Notes
    118       908       89       863  
FiberMedia Note
    431                    
Other
    13       14       25       7  
    $ 616     $ 959     $ 170     $ 878  

In March 2006, in connection with Phase 1 DC’s deployment, the Company issued to a certain motion picture exhibitor a 7.5% note receivable for $231 (the “Exhibitor Note”), in return for the Company’s payment for certain financed digital projectors.  The Exhibitor Note requires monthly principal and interest payments through September 2010.  As of September 30, 2009, the outstanding balance of the Exhibitor Note was $64.

In connection with Phase 1 DC’s deployment, the Company agreed to provide financing to certain motion picture exhibitors upon the billing to the motion picture exhibitors by Christie Digital Systems USA, Inc. (“Christie”) for the installation costs associated with the placement of Systems in movie theatres.  In April 2006, certain motion picture exhibitors agreed to issue to the Company two 8% notes receivable for an aggregate of $1,287 (the “Exhibitor Install Notes”). Under the Exhibitor Install Notes, the motion picture exhibitors are required to make

 
12

 

monthly interest only payments through October 2007 and quarterly principal and interest payments thereafter through August 2009 and August 2017, respectively.  As of September 30, 2009, the aggregate outstanding balance of the Exhibitor Install Notes was $952.

In November 2008, FiberMedia issued to the Company a 10% note receivable for $631 (the “FiberMedia Note”) related to certain expenses FiberMedia is required to repay to the Company under a master collocation agreement of the IDCs. FiberMedia is required to make monthly principal and interest payments beginning in January 2009 through July 2009.  As of September 30, 2009, the FiberMedia Note was repaid in full.

The Company has not experienced a default by any party to any of their obligations in connection with any of the above notes.

5.
NOTES PAYABLE

Notes payable consisted of the following:

   
As of March 31, 2009
   
As of September 30, 2009
 
Note Payable (as defined below)
 
Current Portion
   
Long Term Portion
   
Current Portion
   
Long Term Portion
 
First USM Note
  $ 221     $     $     $  
SilverScreen Note
    20                    
2007 Senior Notes
          55,000              
NEC Facility
    168       333       177       242  
2009 Note, net of debt discount
                      65,385  
Other
    15                    
Total recourse notes payable
  $ 424     $ 55,333     $ 177     $ 65,627  
                                 
Vendor Note
  $     $ 9,600     $     $ 9,600  
GE Credit Facility
    24,824       161,024       23,759       143,221  
KBC Related Facility
                952       7,933  
P2 Vendor Note
                32       758  
P2 Exhibitor Notes
                15       600  
Total non-recourse notes payable
  $ 24,824     $ 170,624     $ 24,758     $ 162,112  
Total notes payable
  $ 25,248     $ 225,957     $ 24,935     $ 227,739  

Non-recourse debt is generally defined as debt whereby the lenders’ sole recourse with respect to defaults by the Company is limited to the value of the asset collateralized by the debt.  The Vendor Note and the GE Credit Facility are not guaranteed by the Company or its other subsidiaries, other than Phase 1 DC. The KBC Related Facility, the P2 Vendor Note and the P2 Exhibitor Notes are not guaranteed by the Company or its other subsidiaries, other than Phase 2 DC.

As part of the consideration for the purchase price of USM in 2006,  the Company issued an 8% note payable in the principal amount of $1,204 (the “USM Note”) The First USM Note was payable in twelve equal quarterly installments commencing on October 1, 2006 until July 1, 2009. During the six months ended September 30, 2008 and 2009, the Company repaid principal of $204 and $221, respectively, on the First USM Note.  As of September 30, 2009, the First USM Note was repaid in full.

Prior to the Company’s acquisition of USM, USM had purchased substantially all the assets of SilverScreen Advertising Incorporated (“SilverScreen”) and issued a 3-year, 4% note payable in the principal amount of $333 (the “SilverScreen Note”) as part of the purchase price for SilverScreen. The SilverScreen Note was payable in equal monthly installments until May 2009.  During the six months ended September 30, 2008 and 2009, the Company repaid principal of $28 and $20, respectively, on the SilverScreen Note.  As of September 30, 2009, the SilverScreen Note was repaid in full.

In August 2007, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with the purchasers party thereto (the “Purchasers”) pursuant to which the Company issued 10% Senior Notes (the “2007 Senior Notes”) in the aggregate principal amount of $55,000 (the “August 2007 Private Placement”). The term of

 
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the 2007 Senior Notes was three years which may be extended for one 6 month period at the discretion of the Company if certain conditions were met.  Interest on the 2007 Senior Notes was payable on a quarterly basis in cash or, at the Company’s option and subject to certain conditions, in shares of its Class A Common Stock (“Interest Shares”). In addition, each quarter, the Company issued shares of Class A Common Stock to the Purchasers as payment of additional interest owed under the 2007 Senior Notes based on a formula (“Additional Interest”).  The Company may prepay the 2007 Senior Notes in whole or in part following the first anniversary of issuance of the 2007 Senior Notes, subject to a penalty of 2% of the principal if the 2007 Senior Notes are prepaid prior to the two year anniversary of the issuance and a penalty of 1% of the principal if the 2007 Senior Notes are prepaid thereafter, and subject to paying the number of shares as Additional Interest that would be due through the end of the term of the 2007 Senior Notes.  The Company and its subsidiaries, other than Phase 1 DC and its subsidiaries, were prohibited from paying dividends under the terms of the 2007 Senior Notes.  Interest expense on the 2007 Senior Notes for the three months ended September 30, 2008 and 2009 amounted to $1,375 and $621, respectively and $2,717 and $1,996 for the six months ended September 30, 2008 and 2009, respectively.  In August 2009, in connection with the consummation of the 2009 Private Placement (see below), the Company consummated purchase agreements (the “Note Purchase Agreements”) with the holders of all of its outstanding 2007 Senior Notes pursuant to which the Company purchased all of the 2007 Senior Notes, in satisfaction of the principal and any accrued and unpaid interest thereon, for an aggregate purchase price of $42,500 in cash.  The source of such aggregate cash payment was the proceeds of the 2009 Private Placement discussed below.  Upon such purchase, the 2007 Senior Notes were canceled and the remaining principal of $12,500 along with unamortized debt issuance costs of $(2,377) and accrued interest of $621 resulted in a $10,744 gain on extinguishment of debt included in the condensed consolidated statements of operations.
 
 
In August 2009, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with an affiliate of Sageview Capital LP (the “Purchaser”) pursuant to which the Company agreed to issue a Senior Secured Note (the “2009 Note”) in the aggregate principal amount of $75,000 and warrants (the “Sageview Warrants”) to purchase 16,000,000 shares of its Class A Common Stock (the “2009 Private Placement”).  The remaining proceeds of the 2009 Private Placement after the repayment of existing indebtedness of the Company and one of its subsidiaries, the funding of a cash reserve to pay the cash interest amount required under the 2009 Note for the first two years, the payment of fees and expenses incurred in connection with the 2009 Private Placement and related transactions, and other general corporate purposes was approximately $11,300.  The 2009 Note has a term of five years, which may be extended for up to one 12 month period at the discretion of the Company if certain conditions are satisfied.  Subject to certain adjustments set forth in the 2009 Note, interest on the 2009 Note is 8% per annum to be accrued as an increase in the aggregate principal amount of the 2009 Note (“PIK Interest”) and 7% per annum paid in cash.   The Company may prepay the 2009 Note (i) during the initial 18 months of their term, in an amount up to 20% of the original principal amount of the 2009 Note plus accrued and unpaid interest without penalty and (ii) following the second anniversary of issuance of the 2009 Note, subject to a prepayment penalty equal to 7.5% of the principal amount prepaid if the 2009 Note is prepaid prior to the three year anniversary of its issuance, a prepayment penalty of 3.75% of the principal amount prepaid if the 2009 Note is prepaid after such third anniversary but prior to the fourth anniversary of its issuance and without penalty if the 2009 Note is prepaid thereafter, plus cash in an amount equal to the accrued and unpaid interest amount with respect to the principal amount through and including the prepayment date.  The Company is obligated to offer to redeem all or a portion of the 2009 Note upon the occurrence of certain triggering events described in the 2009 Note.  Subject to limited exceptions, the Purchaser may not assign the 2009 Note until the earliest of (a) August 11, 2011, (b) the consummation of a change in control as defined in the 2009 Note or (c) an event of default as defined under the Notes.  The Purchase Agreement also requires the 2009 Note to be guaranteed by each of the Company’s existing and future subsidiaries, other than AccessDM, Phase 1 DC and its subsidiaries and Phase 2 DC and its subsidiaries and subsidiaries formed after August 11, 2009 which are primarily engaged in the financing or deployment of digital cinema equipment (the "Guarantors"), and that the Company and each Guarantor pledge substantially all of their assets to secure payment on the 2009 Note, except that AccessDM and Phase 1 DC are not required to become Guarantors until such time as certain indebtedness is repaid.  Accordingly, the Company and each of the Guarantors entered into a guarantee and collateral agreement (the “Guarantee and Collateral Agreement”) pursuant to which each Guarantor guaranteed the obligations of the Company under the 2009 Note and the Company and each Guarantor pledged substantially all of their assets to secure such obligations.  The Company agreed to register the resale of the shares of Class A Common Stock underlying the Sageview Warrants (the “Registration Rights Agreement”).  The Purchase Agreement, Note Purchase Agreement, 2009 Note, Warrants, Registration Rights Agreement and Guarantee and Collateral Agreement contain representations, warranties, covenants and events of default as are customary for transactions of this type and nature.


 
14

 

The 2009 Note is shown net of the discount associated with the issuance of the Sageview Warrants (see Note 6) and the PIK Interest.   As of September 30, 2009, the net balance of the 2009 Note was as follows:
 
 
   
As of March 31, 2009
   
As of September 30, 2009
 
2009 Note, at issuance
  $     $ 75,000  
Discount on 2009 Note
          (10,432 )
PIK Interest
          817  
2009 Note, net
  $     $ 65,385  
Less current portion
           
Total long term portion
  $     $ 65,385  

In August 2007, Phase 1 DC obtained $9,600 of vendor financing (the “Vendor Note”) for equipment used in Phase 1 DC’s deployment. The Vendor Note bears interest at 11% and may be prepaid without penalty.  Interest is due semi-annually commencing February 2008.  The balance of the Vendor Note, together with all unpaid interest is due on the maturity date of August 1, 2016.  As of September 30, 2009, the outstanding balance of the Vendor Note was $9,600.

In September 2009, Phase 2 DC obtained $898 of vendor financing (the “P2 Vendor Note”) for equipment used in Company’s Phase II Deployment. The P2 Vendor Note bears interest at 7% and requires quarterly interest-only payments through January 2010.  Quarterly installments commencing in April 2010 are to be repaid with 92.5% of the VPFs and ACFs received on this equipment with the payments being applied to accrued and unpaid interest first and any remaining amounts be applied to the principal.   The balance of the P2 Vendor Note, together with all accrued and unpaid interest is due on the maturity date of December 31, 2018.  The P2 Vendor Note may be prepaid at any time without penalty and is not guaranteed by the Company or its other subsidiaries, other than Phase 2 DC.  During the three months ended September 30, 2009, the Phase 2 DC repaid principal of $108 on the P2 Vendor Note.  As of September 30, 2009, the outstanding balance of the Vendor Note was $790.

During the three months ended September 30, 2009, Phase 2 DC obtained $615 of financing from certain exhibitors (the “P2 Exhibitor Notes”) for equipment used in the Company’s Phase II Deployment.  The P2 Exhibitor Notes bear interest at 7% and may be prepaid without penalty. The P2 Exhibitor Notes requires quarterly interest-only payments through June 2010. Principal is to be repaid in thirty-two equal quarterly installments commencing in September 2010. The P2 Exhibitor Notes may be prepaid at any time without penalty and are not guaranteed by the Company or its other subsidiaries, other than Phase 2 DC.  As of September 30, 2009, the outstanding balance of the P2 Exhibitor Notes was $615.

CREDIT FACILITIES

In August 2006, Phase 1 DC entered into an agreement with GECC pursuant to which GECC and certain other lenders agreed to provide to Phase 1 DC a $217,000 Senior Secured Multi Draw Term Loan (the “GE Credit Facility”). Proceeds from the GE Credit Facility were used for the purchase and installation of up to 70% of the aggregate purchase price, including all costs, fees or other expenses associated with the purchase acquisition, receipt, delivery, construction and installation of Systems in connection with Phase 1 DC’s deployment and to pay transaction fees and expenses related to the GE Credit Facility, and for certain other specified purposes. The remaining cost of the Systems was funded from other sources of capital including contributed equity. Each of the borrowings by Phase 1 DC bears interest, at the option of Phase 1 DC and subject to certain conditions, based on the bank prime loan rate in the United States or the Eurodollar rate, plus a margin ranging from 2.75% to 4.50%, depending on, among other things, the type of rate chosen, the amount of equity contributed into Phase 1 DC and the total debt of Phase 1 DC. Under the GE Credit Facility, Phase 1 DC must pay interest only through July 31, 2008. Beginning August 31, 2008, in addition to the interest payments, Phase 1 DC must repay approximately 71.5% of the principal amount of the borrowings over a five-year period with a balloon payment for the balance of the principal amount, together with all unpaid interest on such borrowings and any fees incurred by Phase 1 DC pursuant to the GE Credit Facility on the maturity date of August 1, 2013. In addition, Phase 1 DC may prepay borrowings under the GE Credit Facility in whole or in part, after July 31, 2007 and before August 1, 2010, subject to paying certain prepayment penalties ranging from 3% to 1%, depending on when the prepayment is made. The GE Credit Facility is required to be guaranteed by each of Phase 1 DC’s existing and future direct and indirect domestic subsidiaries (the “Guarantors”) and secured by a first priority perfected security interest on all of the collective assets of Phase 1 DC and the Guarantors, including real estate owned or leased, and all capital stock or

 
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other equity interests in Phase 1 DC and its subsidiaries, subject to specified exceptions. The GE Credit Facility is not guaranteed by the Company or its other subsidiaries, other than Phase 1 DC. During the six months ended September 30, 2008 and 2009, the Company repaid principal of $3,858 and $18,868, respectively, on the GE Credit Facility.  The 2009 payments include a prepayment of $5,000 in accordance with the GE Fifth Amendment described below, and an additional voluntary prepayment of $2,000.  As of September 30, 2009, the outstanding principal balance of the GE Credit Facility was $166,980 at a weighted average interest rate of 10.7%.

In May 2009, Phase 1 DC entered into the fourth amendment (the “GE Fourth Amendment”) with respect to the GE Credit Facility to (1) increase the interest rate from 4.5% to 6% above the Eurodollar Base Rate; (2) set the Eurodollar Base Rate floor at 2.5%; (3) reduce the required amount to be reserved for the payment of interest from 9 months of forward cash interest to a fixed $6,900, and permitted a one-time payment of $2,600 to be made from Phase 1 DC to its parent Company, AccessDM; (4) increase the quarterly maximum consolidated leverage ratio covenants that Phase 1 DC is required to meet on a trailing 12 months basis; (5) increase the maximum consolidated senior leverage ratio covenants that Phase 1 DC is required to meet on a trailing 12 months basis; (6) reduce the quarterly minimum consolidated fixed charge coverage ratio covenants that Phase 1 DC is required to meet on a trailing 12 months basis and (7) add a covenant requiring Phase 1 DC to maintain a minimum unrestricted cash balance of $2,000 at all times.  All of the changes contained in the GE Fourth Amendment are effective as of May 4, 2009 except for the covenant changes in (4), (5) and (6) above, which were effective as of March 31, 2009.  In connection with the GE Fourth Amendment, Phase 1 DC paid an amendment fee to GE and the other lenders of approximately $1,000.  The amendment fee was recorded as debt issue costs and is being amortized over the remaining term of the GE Credit Facility.  At September 30, 2009, the Company was in compliance with all covenants contained in the GE Credit Facility, as amended.

In August 2009, in connection with the 2009 Private Placement (see Note 5), Phase 1 DC entered into a fifth amendment (the “GE Fifth Amendment”) with respect to the GE Credit Facility, whereby $5,000 of the proceeds of the 2009 Private Placement were used by the Company to purchase capital stock of AccessDM, which in turn used such amount to purchase capital stock of Phase 1 DC. Phase 1 DC then funded the prepayment with respect to the GE Credit Facility. The prepayment is being applied ratably to each of the next 24 successive regularly scheduled monthly amortization payments due under the GE Credit Facility beginning in August 2009.

In October 2009, in connection with the Phase II Deployment, the Company signed commitment letters for financing with GECC and Société Générale (see Note 11).

In April 2008, Phase 1 DC executed the Interest Rate Swap with a counterparty for a notional amount of approximately 90% of the amounts outstanding under the GE Credit Facility or an initial amount of $180,000. Under the Interest Rate Swap, Phase 1 DC will effectively pay a fixed rate of 7.3%, to guard against Phase 1 DC’s exposure to increases in the variable interest rate under the GE Credit Facility. GE Corporate Financial Services arranged the transaction, which took effect commencing August 1, 2008 as required by the GE Credit Facility and will remain in effect until August 2010.  As principal repayments of the GE Credit Facility occur, the notional amount will decrease by a pro rata amount, such that approximately 90% of the remaining principal amount will be covered by the Interest Rate Swap at any time.

Upon any refinance of the GE Credit Facility or other early termination or at the maturity date of the Interest Rate Swap, the fair value of the Interest Rate Swap, whether favorable to the Company or not, would be settled in cash with the counterparty.  As of September 30, 2009, the fair value of the Interest Rate Swap liability was $3,306.  The change in fair value of the interest rate swap for the three months ended September 30, 2008 and 2009 amounted to a loss of $687and a gain of $540, respectively and gains of $1,565 and $1,223 for the six months ended September 30, 2008 and 2009, respectively.
 
In May 2008, AccessDM entered into a credit facility with NEC Financial Services, LLC (the “NEC Facility”) to fund the purchase and installation of equipment to enable the exhibition of 3-D live events in movie theatres as part of the Company’s CineLiveSM product offering.  The NEC Facility provides for maximum borrowings of up to approximately $2,000, repayments over a 47 month period, and interest at annual rates ranging from 8.25-8.44%.  As of September 30, 2009, AccessDM has borrowed $569 and the equipment purchased therewith is included in property and equipment.  During the six months ended September 30, 2008 and 2009, the Company repaid principal of $0 and $82, respectively, on the NEC Credit Facility.  As of September 30, 2009, the outstanding principal balance of the NEC Credit Facility was $419.

 
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In December 2008, Phase 2 B/AIX, a direct wholly-owned subsidiary of Phase 2 DC and an indirect wholly-owned subsidiary of the Company, entered into a credit facility with KBC Bank NV (the “KBC Related Facility”) to fund the purchase of Systems from Barco, Inc. (“Barco”), to be installed in movie theatres as part of the Company’s Phase II Deployment.  The KBC Related Facility provides for borrowings of up to a maximum of $8,900 through December 31, 2009 (the “Draw Down Period”) and requires interest-only payments at 7.3% per annum during the Draw Down Period.  For any funds drawn, the principal is to be repaid in twenty-eight equal quarterly installments commencing in March 2010 (the “Repayment Period”) at an interest rate of 8.5% per annum during the Repayment Period.  The KBC Related Facility may be prepaid at any time without penalty and is not guaranteed by the Company or its other subsidiaries, other than Phase 2 DC.  As of September 30, 2009, $8,885 has been drawn down on the KBC Related Facility.  Interest expense on the KBC Related Facility for the three months ended September 30, 2008 and 2009 amounted to $0 and $152, respectively and $0 and $218 for the six months ended September 30, 2008 and 2009, respectively.  As of September 30, 2009, the outstanding principal balance of the KBC Related Facility was $8,885.

At September 30, 2009, the Company was in compliance with all of its debt covenants.

6.
STOCKHOLDERS’ EQUITY

STOCKHOLDERS’ RIGHTS

On August 10, 2009, the Company entered into a tax benefit preservation plan (the "Tax Preservation Plan"), dated August 10, 2009, between the Company and American Stock Transfer & Trust Company, LLC, as rights agent.  The Company’s board of directors (the "Board") adopted the Tax Preservation Plan in an effort to protect stockholder value by attempting to protect against a possible limitation on its ability to use net operating loss carryforwards (the "NOLs") to reduce potential future federal income tax obligations.  

On August 10, 2009, the Board declared a dividend of one preferred share purchase right (the "Rights") for each outstanding share of the Company’s Class A Common Stock and each outstanding share of the Company’s Class B Common Stock, (the "Class B Common Stock," and together with the Class A Common Stock, the "Common Stock") under the terms of the Tax Preservation Plan.  The dividend is payable to the stockholders of record as of the close of business on August 10, 2009.  Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of the Company’s Series B Junior Participating Preferred Stock, par value $0.001 per share, (the "Preferred B Stock") at a price of $6.00, subject to adjustment.  The Rights are not exercisable, and would only become exercisable when any person or group has acquired, subject to certain conditions, beneficial ownership of 4.99% or more of the Company’s outstanding shares of Class A Common Stock.  As of September 30, 2009, the Company did not record the dividends as a 4.99% or more change in the beneficial ownership of the Company’s outstanding shares of Class A Common Stock had not occurred.

CAPITAL STOCK

In August 2004, the Board authorized the repurchase of up to 100,000 shares of Class A Common Stock, which may be purchased at prevailing prices from time-to-time in the open market depending on market conditions and other factors.    Under the terms of the 2007 Senior Notes (see Note 5), the Company was previously precluded from purchasing shares of its Class A Common Stock.  In a prior year, the Company repurchased 51,440 shares of Class A Common Stock for an aggregate purchase price of $172, including fees, which have been recorded as treasury stock.

Pursuant to the 2007 Senior Notes, in August 2007 the Company issued 715,000 shares of Class A Common Stock (the “Advance Additional Interest Shares”) covering the first 12 months of Additional Interest (see Note 5).  The Company registered the resale of these shares of Class A Common Stock and also registered an additional 1,249,875 shares of Class A Common Stock for future Interest Shares and Additional Interest.  The Company filed a registration statement on Form S-3 on September 26, 2007, which was declared effective by the SEC on November 2, 2007.  The Company is recording the value of the Advance Additional Interest Shares of $4,676 to interest expense over the 36 month term of the 2007 Senior Notes.  For the three months ended September 30, 2008 and 2009, the Company recorded $401 and $134, respectively, and $802 and $534 for the six months ended September 30, 2008 and 2009, respectively, to interest expense in connection with the Advance Additional Interest Shares. See Note 5 on extinguishment of debt.

 
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Commencing with the quarter ended December 31, 2008 and through the maturity of the 2007 Senior Notes in the quarter ended September 30, 2010, the Company was obligated to issue a minimum of 132,000 shares or a maximum of 220,000 shares of Class A Common Stock per quarter as Additional Interest (the “Additional Interest Shares”).  The Company estimated the initial value of the Additional Interest Shares to be $5,244 and is amortizing that amount over the 36 month term of the 2007 Senior Notes.    For the three months ended September 30, 2008 and 2009, the Company recorded $437 and $0, respectively, and $874 and $0 for the six months ended September 30, 2008 and 2009, respectively, to interest expense in connection with the Additional Interest Shares.  In March 2009 and June 2009, the Company issued 220,000 shares of Class A Common Stock, each period, as Additional Interest Shares with a value of $136 and $220, respectively.  No Additional Interest Shares were issued in September 2009, as the 2007 Senior Notes were cancelled in August 2009.

In March 2008 and June 2008, the Company issued 548,572 and 635,847 shares of Class A Common Stock, respectively, as Interest Shares pursuant to the 2007 Senior Notes (see Note 5), which were part of the 1,249,875 shares previously registered on the registration statement on Form S-3 filed on September 26, 2007, which was declared effective by the SEC on November 2, 2007 and the additional 500,000 shares registered on the registration statement on Form S-3 filed on May 6, 2008, which was declared effective by the SEC on June 30, 2008.  For the three months ended September 30, 2008 and 2009, the Company did not record any non-cash interest expense in connection with the Interest Shares.  For the six months ended September 30, 2008 and 2009, the Company recorded $1,342 and $186 as non-cash interest expense in connection with the Interest Shares.  No Interest Shares were issued and no interest was paid in cash in September 2009, as the 2007 Senior Notes were cancelled in August 2009.

In connection with the acquisition of CEG in January 2007, CEG entered into a services agreement (the “SD Services Agreement”) with SD Entertainment, Inc. (“SDE”) to provide certain services, such as the provision of shared office space and certain shared administrative personnel.  The SD Services Agreement is on a month-to-month term and requires the Company to pay approximately $18 per month, of which 70% may be paid periodically in the form of Cinedigm Class A Common Stock, at the Company’s option.  In September 2008 and January 2009, the Company issued 22,010 and 70,432 shares of unregistered Class A Common Stock, respectively, with a value of $33 and $49, respectively, to SDE as partial payment for such services and resources.

In August 2009, in connection with the 2009 Private Placement (see Note 5), the Purchaser agreed with the Company that, subject to limited exceptions, the Purchaser and its affiliates would not, without the Company’s consent, acquire, offer to acquire or join or participate in any group, as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended, that would result in Purchaser and its affiliates beneficially owning more than 42.5% of the Class A Common Stock and the Company’s Class B Common Stock outstanding.  This agreement will terminate upon the earliest of August 11, 2011, a change of control, an event of default (each as defined in the 2009 Note) and the date when the Purchaser and its affiliates own less than 10% of the outstanding Class A Common Stock and the Company’s Class B Common Stock.

In August 2009, in connection with the 2009 Private Placement (see Note 5), the Company entered into an agreement (the “Aquifer Agreement”) with Aquifer Capital Group, LLC (“Aquifer Capital”) pursuant to which Aquifer Capital provided financial advisory services to the Company in connection with the purchase of the 2007 Senior Notes in exchange for the issuance of 200,000 shares of unregistered Class A Common Stock to designees of Aquifer Capital.   In August 2009, 200,000 shares were issued to designees of Aquifer Capital, with a value of $198 as payment for such services and were recorded as a debt issuance cost associated with the 2009 Note.

In September 2009, the Company issued 12,815 shares of Class A Common Stock for restricted stock awards that vested.

PREFERRED STOCK

In February 2009, the Company issued eight shares of Series A 10% Non-Voting Cumulative Preferred Stock (“Preferred Stock”) to two investors.  There is no public trading market for the Preferred Stock. The Preferred Stock has the designations, preferences and rights set forth in the certificate of designations filed with the Secretary of State for the State of Delaware on February 3, 2009 (the “Certificate of Designations”). Pursuant to the Certificate of Designations, holders of Preferred Stock shall have the following rights among others: (1) the holders are entitled to receive dividends at the rate of 10% of the Preferred Stock original issue price per annum on each outstanding share of Preferred Stock (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares). Such dividends shall begin to accrue commencing upon the first date such share is issued and becomes outstanding and shall be payable in cash or, at the Company’s option, by converting the cash amount

 
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of such dividends into Class A Common Stock, and will not be paid until September 30, 2010, as the Company was not permitted to do so under the terms of the 2007 Senior Notes and is not so permitted under the 2009 Note, (2) the holders will not have the right to vote on matters brought before the stockholders of the Corporation, (3) upon any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any Junior Stock (as defined in the Certificate of Designations), subject to the rights of any series of preferred stock that may from time-to-time come into existence and which is expressly senior to the rights of the Preferred Stock, the holders of Preferred Stock shall be entitled to be paid in cash out of the assets of the Company an amount per share of Preferred Stock equal to 100% of the Preferred Stock original issue price (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares), plus accrued but unpaid dividends (the “Liquidation Preference”), for each share of Preferred Stock held by each such holder, (4) the holders will have no rights with respect to the conversion of the Preferred Stock into shares of Class A Common Stock or any other security of the Company and (5) the Preferred Stock may be redeemed by the Company at any time after the second anniversary of the original issue date upon 30 days advance written notice to the holder for a price equal to 110% of the Liquidation Preference, payable in cash or, at the Company’s option, so long as the closing price of the Class A Common Stock is $2.18 or higher (as shall be adjusted for stock splits) for at least 90 consecutive trading days ending on the trading day into Class A Common Stock at the market price, as measured on the original issue date for the initial issuance of shares of Series A Preferred Stock.

In connection with the issuance of Preferred Stock, the Company issued warrants to purchase 700,000 shares of Class A Common Stock, to each holder of Preferred Stock, at an exercise price of $0.63 per share (the “Preferred Warrants”). The Preferred Warrants are exercisable beginning on March 12, 2009 for a period of five years thereafter. The Preferred Warrants are callable by the Company, provided that the closing price of the Company’s Class A Common Stock is $1.26 per share, 200% of the applicable exercise price, for twenty consecutive trading days.  The Company allocated $537 of the proceeds from the Preferred Stock issuance to the estimated fair value of the Preferred Warrants.

STOCK OPTION PLAN

The Company’s equity incentive plan (“the Plan”) provides for the issuance of up to 5,000,000 shares of Class A Common Stock to employees, outside directors and consultants. The Company obtained stockholder approval to expand the size of the Plan to 5,000,000, from the previously authorized 3,700,000, shares of Class A Common Stock at the Company’s 2009 Annual Meeting of Stockholders held on September 30, 2009.

Stock Options

During the six months ended September 30, 2009, under the Plan, the Company granted stock options to purchase 621,000 shares of its Class A Common Stock to its employees at an exercise price of $1.37 per share, of which 171,000 were issued in exchange for the termination of the AccessDM options.  As of September 30, 2009, the weighted average exercise price for outstanding stock options is $5.09 and the weighted average remaining contractual life is 5.3 years.

The following table summarizes the activity of the Plan related to stock option awards:

   
Shares Under Option
   
Weighted Average Exercise Price Per Share
 
Balance at March 31, 2009
    2,313,622     $ 6.11  
Granted
    621,000       1.37  
Exercised
           
Cancelled/Forfeited
    (14,750 )     9.02  
Balance at September 30, 2009
    2,919,872     $ 5.09  

Restricted Stock Awards

The Plan also provides for the issuance of restricted stock and restricted stock unit awards.  During the six months ended September 30, 2009, the Company granted 504,090 restricted stock units, of which 274,750 will vest equally

 
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over a three year period and 229,340 will vest at the end of the third year or sooner depending on the Company’s stock price.

The following table summarizes the activity of the Plan related to restricted stock and restricted stock unit awards:

   
Restricted Stock Awards
   
Weighted Average Market Price Per Share
 
Balance at March 31, 2009
    773,168     $ 1.83  
Granted
    504,090       1.06  
Vested
    (120,000 )     2.06  
Cancelled/Forfeited
    (3,249 )     2.30  
Balance at September 30, 2009
    1,154,009     $ 1.47  

There were 1,101,356 restricted stock units granted which have not vested as of September 30, 2009.  The Company may pay such restricted stock units upon vesting in cash or shares of Class A Common Stock or a combination thereof at the Company’s discretion.

ACCESSDM STOCK OPTION PLAN

In August 2009, in connection with the 2009 Private Placement (see Note 5), AccessDM terminated its stock option plan and all stock options outstanding thereunder.  In exchange for the termination of the AccessDM stock options, the Company issued 171,000 stock options to the holders of AccessDM stock options, pursuant to the Plan.

WARRANTS

Warrants outstanding consist of the following:

Outstanding Warrant (as defined below)
 
March 31,
2009
   
September 30,
2009
 
July 2005 Private Placement Warrants
    467,275       467,275  
August 2005 Warrants
    760,196       760,196  
Preferred Warrants
    1,400,000       1,400,000  
Sageview Warrants
          16,000,000  
Imperial Warrants
          750,000  
      2,627,471       19,377,471  

In July 2005, in connection with the July 2005 Private Placement, the Company issued warrants to purchase 477,275 shares of Class A Common Stock at an exercise price of $11.00 per share (the “July 2005 Private Placement Warrants”). The July 2005 Private Placement Warrants were exercisable beginning on February 18, 2006 for a period of five years thereafter. The July 2005 Private Placement Warrants are conditionally callable by the Company. The underlying shares of these warrants are registered for resale.  As of September 30, 2009, 467,275 July 2005 Private Placements Warrants remained outstanding.

In August 2005, certain then outstanding warrants were exercised for $2,487 and the Company issued to the investors 560,196 shares of Class A Common Stock and warrants to purchase 760,196 shares of Class A Common Stock at an exercise price of $11.39 per share (the “August 2005 Warrants”). The underlying shares of these warrants are registered for resale.  As of September 30, 2009, all 760,196 of the August 2005 Warrants remained outstanding.

In February 2009, in connection with the issuance of Preferred Stock, the Company issued warrants to purchase 700,000 shares of Class A Common Stock, to each holder of Preferred Stock, at an exercise price of $0.63 per share (the “Preferred Warrants”). The Preferred Warrants are exercisable beginning on March 12, 2009 for a period of five years thereafter. The Preferred Warrants are conditionally callable by the Company.  The Company allocated $537 of the proceeds from the Preferred Stock issuance to the estimated fair value of the Preferred Warrants.  As of September 30, 2009, all 1,400,000 of the Preferred Warrants remained outstanding.

 
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In August 2009, in connection with the 2009 Private Placement (see Note 5), the Company issued warrants to purchase 16,000,000 shares of Class A Common Stock at an exercise price of $1.37 per share (the “Sageview Warrants”).  The Sageview Warrants are exercisable beginning on September 30, 2009 and contain customary cashless exercise provision and anti-dilution adjustments, and expire on August 11, 2016 (subject to extension in limited circumstances).   The Company also entered into a Registration Rights Agreement with the Purchaser pursuant to which the Company agreed to register the resale of the underlying shares of the Sageview Warrants from time to time in accordance with the terms of the Registration Rights Agreement.  The fair value of the Sageview Warrants at the date of issuance was $10,732, using a Black-Scholes option valuation model and was recorded as a liability in the condensed consolidated financial statements.  The change in fair value of a $3,576 loss was recognized in the condensed consolidated statement of operations and resulted in a warrant liability fair value of $14,308 at September 30, 2009.  All 16,000,000 of the Sageview Warrants remained outstanding and the underlying shares have not yet been registered.

In August 2009, in connection with the 2009 Private Placement (see Note 5), the Company engaged Imperial Capital, LLC (“Imperial”) to provide financial advisory services.  As partial consideration for such services, the Company issued warrants to Imperial to purchase 750,000 shares of Class A Common Stock (the “Imperial Warrants”).  The Imperial Warrants have a customary cashless exercise feature and a strike price of $1.37 per share, become exercisable on February 11, 2010 and expire on August 11, 2014.  In connection with the issuance of the Imperial Warrants, the Company and Imperial entered into a registration rights agreement (the “Imperial Registration Rights Agreement”) pursuant to which the Company agreed to register the shares of Class A Common Stock underlying the Imperial Warrants from time to time if other registrations are filed, as defined in the terms of the Imperial Registration Rights Agreement.  The fair value of the Imperial Warrants at the date of issuance was $427, using a Black-Scholes option valuation model and was recorded in debt issuance costs and stockholders’ equity in the condensed consolidated financial statements at September 30, 2009.  As of September 30, 2009, all 750,000 of the Imperial Warrants remained outstanding.

7.
COMMITMENTS AND CONTINGENCIES

As of September 30, 2009, in connection with the Phase II Deployment, Phase 2 DC entered into digital cinema deployment agreements with six motion picture studios for the distribution of digital movie releases to motion picture exhibitors equipped with Systems, and providing for payment of VPFs to Phase 2 DC.  As of September 30, 2009, Phase 2 DC also entered into master license agreements with four exhibitors covering a total of 503 screens, whereby the exhibitors agreed to the placement of Systems as part of the Phase II Deployment.  As of September 30, 2009 the Company has installed 160 Systems.  Installation of additional Systems in the Phase II Deployment is still contingent upon the completion of appropriate vendor supply agreements and financing for the purchase of Systems.

In September 2009, in connection with the Company’s Phase II Deployment, Phase 2 DC entered into master license agreements with two additional exhibitors covering a total of 457 screens, bringing the number of screens licensed by Phase 2 DC to 960.  Both exhibitors will purchase its own equipment through their own financing and pay an upfront activation fee to the Company.  The Company will manage the billing and collection of VPFs and the remittance of a percentage of the VPFs collected, less a servicing fee, to the exhibitors for a ten-year term.

In November 2008, in connection with the Phase II Deployment, Phase 2 DC entered into a supply agreement with Christie, for the purchase of up to 10,000 Systems at agreed upon pricing, as part of the Phase II Deployment.  As of September 30, 2009, the Company has purchased 12 Systems under this agreement for $898.

In November 2008, in connection with the Phase II Deployment, Phase 2 DC entered into a supply agreement with Barco, for the purchase of up to 5,000 Systems at agreed upon pricing, as part of the Phase II Deployment.  As of September 30, 2009, the Company has purchased 138 Systems under this agreement for $10,096.

LITIGATION

The Company’s subsidiary, ADM Cinema, was named as a defendant in an action filed on May 19, 2008 in the Supreme Court of the State of New York, County of Kings by Pavilion on the Park, LLC (“Landlord”).  Landlord is the owner of the premises located at 188 Prospect Park West, Brooklyn, New York, known as the Pavilion Theatre.  Pursuant to the relevant lease, ADM Cinema leases the Pavilion Theatre from Landlord and operates it as a movie theatre.

In the complaint, Landlord alleges that ADM Cinema violated its obligations under Article 12 of the lease in that

 
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ADM Cinema failed to comply with an Order of the Fire Department of the City of New York issued on September 24, 2007 calling for the installation of a sprinkler system in the Pavilion Theatre and that such violation constitutes an event of default under the lease.  Landlord seeks to terminate the lease and evict ADM Cinema from the premises and to recover its attorneys’ fees and damages for ADM Cinema’s alleged “holding over” by remaining on the premises. In July 2009, the Company entered into an agreement with Landlord to settle this matter whereby the Company would be responsible for 25% of the cost and expenses related to the installation of a sprinkler system. The Company’s share of the cost to install a sprinkler system is estimated to be $100.   As an additional condition of this agreement, any option to renew or extend this lease has been eliminated.  This lease ends on July 31, 2022.


8.
SUPPLEMENTAL CASH FLOW DISCLOSURE

   
For the Six Months
Ended September 30,
 
   
2008
   
2009
 
Interest paid
  $ 9,413     $ 14,907  
Equipment purchased from Christie included in accounts payable and accrued expenses at end of period
  $ 1,414     $  
Issuance of Class A Common Stock as additional purchase price for Access Digital Server Assets
  $ 129     $  
Issuance of Class A Common Stock as additional purchase price for Managed Services
  $ 82     $  
Issuance of Class A Common Stock to SDE as payment for services and  resources
  $ 93     $  
Assets acquired under capital leases
  $ 92     $ 901  
Accretion of preferred stock discount
  $     $ 54  
Accrued dividends on preferred stock
  $     $ 200  
Issuance of Class A Common Stock to Aquifer Capital for financial advisory services in connection with the purchase of the 2007 Senior Notes
  $     $ 198  
Issuance of Class A Common Stock to Imperial to provide financial advisory services
  $     $ 437  

9.
SEGMENT INFORMATION

During the quarter ended September 30, 2009, the Company modified how its decision makers review and allocate resources to operating segments, which resulted in revised reportable segments.  The Company is comprised of five reportable segments: Phase I Deployment, Phase II Deployment, Services, Content & Entertainment and Other. The segments were determined based on the products and services provided by each segment and how management reviews and makes decisions regarding segment operations. Performance of the segments is evaluated on income (loss) from operations before interest, taxes, depreciation and amortization.  As a result of the change in the Company’s reportable segments, the Company has restated the segment information for the prior periods.  Future changes to this organization structure may result in changes to the reportable segments disclosed.

The Phase I Deployment and Phase II Deployment segments consist of the following:
 
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Operations of:
Products and services provided:
Phase 1 DC
Financing vehicles and administrators for the Company’s 3,724 Systems installed nationwide in Phase 1 DC’s deployment to theatrical exhibitors.  The Company retains ownership of the residual cash flows and the Systems after the repayment of all non-recourse debt and at the expiration of exhibitor master license agreements.
Phase 2 DC
Financing vehicles and administrators for the Company’s second digital cinema deployment, through Phase 2 DC (the “Phase II Deployment”).  The Company retains no ownership of the residual cash flows and digital cinema equipment after the completion of cost recoupment and at the expiration of the exhibitor master license agreements.

The Services segment consists of the following:

Operations of:
Products and services provided:
Digital Cinema Services
Provides monitoring, billing, collection, verification and other management services to the Company’s Phase I Deployment, Phase II Deployment as well as to exhibitors who purchase their own equipment. Collects and disburses VPFs from motion picture studios and distributors and ACFs from alternative content providers, movie exhibitors and theatrical exhibitors.
Software
Develops and licenses software to the theatrical distribution and exhibition industries, provides ASP Service, and provides software enhancements and consulting services.
DMS
Distributes digital content to movie theatres and other venues having digital projection equipment and provides satellite-based broadband video, data and Internet transmission, encryption management services, video network origination and management services and a virtual booking center to outsource the booking and scheduling of satellite and fiber networks and provides forensic watermark detection services for motion picture studios and forensic recovery services for content owners.

The Content & Entertainment segment consists of the following:

Operations of:
Products and services provided:
USM
Provides cinema advertising services and entertainment.
CEG
Acquires, distributes and provides the marketing for programs of alternative content and feature films to movie exhibitors.

The Other segment consists of the following:

Operations of:
Products and services provided:
Pavilion Theatre
A nine-screen digital movie theatre and showcase to demonstrate the Company’s integrated digital cinema solutions.
Managed Services
Provides information technology consulting services and managed network monitoring services through its global network command center.
Access Digital Server Assets
Provides hosting services and provides network access for other web hosting services.

Since May 1, 2007, the Company’s IDCs have been operated by FiberMedia, consisting of unrelated third parties,

 
23

 

pursuant to a master collocation agreement.  Although the Company is still the lessee of the IDCs, substantially all of the revenues and expenses were being realized by FiberMedia and not the Company and since May 1, 2008, 100% of the revenues and expenses are being realized by FiberMedia.

Information related to the segments of the Company and its subsidiaries is detailed below:

   
As of March 31, 2009
 
   
Phase I
   
Phase II
   
Services
   
Content & Entertainment
   
Other
   
Corporate
   
Consolidated
 
Total intangible assets, net
  $ 527     $     $ 156     $ 10,010     $ 14     $     $ 10,707  
Total goodwill
  $     $     $ 4,306     $ 1,568     $ 2,150     $     $ 8,024  
Total assets
  $ 250,030     $ 5,330     $ 19,911     $ 21,391     $ 9,476     $ 16,259     $ 322,397  
                                                         
Notes payable, non-recourse
  $ 195,448     $     $     $     $     $     $ 195,448  
Notes payable
                501       35             55,221       55,757  
Capital leases
                      68       5,939             6,007  
Total debt
  $ 195,448     $     $ 501     $ 103     $ 5,939     $ 55,221     $ 257,212  



   
As of September 30, 2009
 
   
Phase I
   
Phase II
   
Services
   
Content & Entertainment
   
Other
   
Corporate
   
Consolidated
 
Total intangible assets, net
  $ 504     $     $ 76     $ 8,599     $ 13     $     $ 9,192  
Total goodwill
  $     $     $ 4,306     $ 1,568     $ 2,150     $     $ 8,024  
Total assets
  $ 235,261     $ 12,947     $ 20,111     $ 19,759     $ 8,602     $ 29,453     $ 326,133  
                                                         
Notes payable, non-recourse
  $ 176,580     $ 10,290     $     $     $     $     $ 186,870  
Notes payable
                419                   65,385       65,804  
Capital leases
          31       524       54       5,869             6,478  
Total debt
  $ 176,580     $ 10,321     $ 943     $ 54     $ 5,869     $ 65,385     $ 259,152  



Capital Expenditures
 
Phase I
   
Phase II
   
Services
   
Content & Entertainment
   
Other
   
Corporate
   
Consolidated
 
For the six months ended September 30, 2008
  $ 14,353     $     $ 1,320     $ 191     $ 123     $ 21     $ 16,008  
For the six months ended September 30, 2009
  $ 66     $ 11,768     $ 635     $ 13     $ 44     $ 47     $ 12,573  

24


   
For the Three Months Ended September 30, 2008
 
   
Phase I
   
Phase II
   
Services
   
Content & Entertainment
   
Other
   
Corporate
   
Consolidated
 
Revenues from external customers
  $ 12,713     $     $ 2,269     $ 4,368     $ 2,499     $     $ 21,849  
Intersegment revenues
    1             128       6       96             231  
Total segment revenues
    12,714             2,397       4,374       2,595             22,080  
Less :Intersegment revenues
    (1 )           (128 )     (6 )     (96 )           (231 )
Total consolidated revenues
  $ 12,713     $     $ 2,269     $ 4,368     $ 2,499     $     $ 21,849  
Direct operating (exclusive of depreciation and amortization shown below)
    241             1,512       2,874       2,105             6,732  
Selling, general and administrative
    313             376       1,641       201       1,656       4,187  
Plus: Allocation of Corporate overhead
                745       207       99       (1,051 )      
Provision for doubtful accounts
                      115       30             145  
Research and development
                93                         93  
Stock-based compensation
                40       23       2       135       200  
Depreciation and amortization of property and equipment
    7,137             447       267       265       17       8,133  
Amortization of intangible assets
                150       728       22       1       901  
Total operating expenses
    7,691             3,363       5,855       2,724       758       20,391  
Income (loss) from operations
  $ 5,022     $     $ (1,094 )   $ (1,487 )   $ (225 )   $ (758 )   $ 1,458  

25


   
For the Three Months Ended September 30, 2009
 
   
Phase I
   
Phase II
   
Services
   
Content & Entertainment
   
Other
   
Corporate
   
Consolidated
 
Revenues from external customers
  $ 11,406     $ 450     $ 1,735     $ 3,947     $ 2,343     $     $ 19,881  
Intersegment revenues
                69       6       117             192  
Total segment revenues
    11,406       450       1,804       3,953       2,460             20,073  
Less :Intersegment revenues
                (69 )     (6 )     (117 )           (192 )
Total consolidated revenues
  $ 11,406     $ 450     $ 1,735     $ 3,947     $ 2,343     $     $ 19,881  
Direct operating (exclusive of depreciation and amortization shown below)
    262       61       1,349       2,553       1,841             6,066  
Selling, general and administrative
    117       244       463       1,228       223       1,798       4,073  
Plus: Allocation of Corporate overhead
                1,267       122       58       (1,447 )      
Provision for doubtful accounts
                      136                   136  
Research and development
                64                         64  
Stock-based compensation
                84       28       3       326       441  
Depreciation and amortization of property and equipment
    7,139       290       470       217       198       9       8,323  
Amortization of intangible assets
    11             32       706       1             750  
Total operating expenses
    7,529       595       3,729       4,990       2,324       686       19,853  
Income (loss) from operations
  $ 3,877     $ (145 )   $ (1,994 )   $ (1,043 )   $ 19     $ (686 )   $ 28  
 
26

 
   
For the Six Months Ended September 30, 2008
 
   
Phase I
   
Phase II
   
Services
   
Content & Entertainment
   
Other
   
Corporate
   
Consolidated
 
Revenues from external customers
  $ 24,614     $     $ 4,215     $ 8,463     $ 5,127     $     $ 42,419  
Intersegment revenues
    1             289       21       172             483  
Total segment revenues
    24,615             4,504       8,484       5,299             42,902  
Less :Intersegment revenues
    (1 )           (289 )     (21 )     (172 )           (483 )
Total consolidated revenues
  $ 24,614     $     $ 4,215     $ 8,463     $ 5,127     $     $ 42,419  
Direct operating (exclusive of depreciation and amortization shown below)
    421             2,563       5,401       4,144             12,529  
Selling, general and administrative
    710             1,020       3,536       425       3,329       9,020  
Plus: Allocation of Corporate overhead
                1,498       416       200       (2,114 )      
Provision for doubtful accounts
    (150 )           40       223       60             173  
Research and development
                100                         100  
Stock-based compensation
                99       43       (30 )     246       358  
Depreciation and amortization of property and equipment
    14,255             889       559       532       33       16,268  
Amortization of intangible assets
                301       1,503       43       1       1,848  
Total operating expenses
    15,236