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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: September 30, 2010
 
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)
 
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 10, 2010, 30,592,394 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 September 30, 2010 (Unaudited) and March 31, 2010
 
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months ended September 30, 2010 and 2009
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months ended September 30, 2010 and 2009
 
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 4T.
Controls and Procedures
PART II --
OTHER INFORMATION
 
Item 1.
Legal Proceedings
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 5.
Other Information
Item 6.
Exhibits
Signatures
 
Exhibit Index
 

PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)
CINEDIGM DIGITAL CINEMA CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
 
 
 
September 30,
2010
 
March 31,
2010
ASSETS
(Unaudited)
 
 
Current assets
 
 
 
Cash and cash equivalents
$
11,414
 
 
$
9,094
 
Restricted available-for-sale investments
9,120
 
 
5,927
 
Accounts receivable, net
14,450
 
 
13,265
 
Deferred costs, current portion
2,788
 
 
3,046
 
Unbilled revenue, current portion
6,165
 
 
4,335
 
Prepaid and other current assets
956
 
 
1,320
 
Note receivable, current portion
349
 
 
737
 
Assets held for sale
5,422
 
 
8,231
 
Total current assets
50,664
 
 
45,955
 
Restricted available-for-sale investments
—
 
 
2,004
 
Restricted cash
6,011
 
 
7,168
 
Security deposits
44
 
 
254
 
Property and equipment, net
204,920
 
 
215,601
 
Intangible assets, net
6,282
 
 
7,719
 
Capitalized software costs, net
3,713
 
 
3,831
 
Goodwill
5,874
 
 
5,874
 
Deferred costs, net of current portion
7,559
 
 
6,763
 
Unbilled revenue, net of current portion
920
 
 
964
 
Note receivable, net of current portion
1,653
 
 
816
 
Accounts receivable, net of current portion
198
 
 
198
 
Total assets
$
287,838
 
 
$
297,147
 
 
 
 
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)
 
 
 
September 30,
2010
 
March 31,
2010
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
(Unaudited)
 
 
Current liabilities
 
 
 
 
Accounts payable and accrued expenses
 
$
7,314
 
 
$
7,761
 
Current portion of notes payable, non-recourse
 
25,715
 
 
26,508
 
Current portion of notes payable
 
192
 
 
185
 
Current portion of capital leases
 
57
 
 
126
 
Current portion of deferred revenue
 
5,705
 
 
5,881
 
Current portion of customer security deposits
 
60
 
 
12
 
Liabilities as part of held for sale assets
 
5,835
 
 
6,315
 
Total current liabilities
 
44,878
 
 
46,788
 
Notes payable, non-recourse, net of current portion
 
151,378
 
 
146,793
 
Notes payable, net of current portion
 
73,847
 
 
69,669
 
Capital leases, net of current portion
 
36
 
 
38
 
Warrant liability
 
—
 
 
19,195
 
Interest rate swap
 
2,091
 
 
1,535
 
Deferred revenue, net of current portion
 
3,457
 
 
1,828
 
Customer security deposits, net of current portion
 
9
 
 
9
 
Total liabilities
 
275,696
 
 
285,855
 
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 September 30, 2010 and March 31, 2010, respectively. Liquidation
preference $4,050
 
3,637
 
 
3,583
 
Class A common stock, $0.001 par value per share; 75,000,000
shares authorized; 30,643,834 and 28,084,315 shares issued
and 30,592,394 and 28,032,875 shares outstanding at September 30, 2010 and March 31, 2010, respectively
 
30
 
 
28
 
Class B common stock, $0.001 par value per share; 15,000,000
shares authorized; 733,811 shares issued and outstanding, at
September 30, 2010 and March 31, 2010, respectively
 
1
 
 
1
 
Additional paid-in capital
 
194,848
 
 
175,937
 
Treasury stock, at cost; 51,440 Class A shares
 
(172
)
 
(172
)
Accumulated deficit
 
(186,117
)
 
(168,018
)
Accumulated other comprehensive loss
 
(85
)
 
(67
)
Total stockholders’ equity
 
12,142
 
 
11,292
 
Total liabilities and stockholders’ equity
 
$
287,838
 
 
$
297,147
 
 
 
 
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,
 
 
2010
 
2009
 
2010
 
2009
Revenues
 
$
18,899
 
 
$
17,538
 
 
$
38,249
 
 
$
33,746
 
Costs and Expenses:
 
 
 
 
 
 
 
 
Direct operating (exclusive of depreciation and
amortization shown below)
 
4,303
 
 
4,241
 
 
9,242
 
 
7,793
 
Selling, general and administrative
 
5,001
 
 
4,262
 
 
10,477
 
 
8,220
 
Provision for doubtful accounts
 
228
 
 
136
 
 
332
 
 
264
 
Research and development
 
97
 
 
73
 
 
162
 
 
123
 
Depreciation and amortization of property and equipment
 
8,293
 
 
8,126
 
 
16,454
 
 
16,064
 
Amortization of intangible assets
 
722
 
 
749
 
 
1,443
 
 
1,513
 
Total operating expenses
 
18,644
 
 
17,587
 
 
38,110
 
 
33,977
 
Income (loss) from operations
 
255
 
 
(49
)
 
139
 
 
(231
)
    Interest income
 
39
 
 
95
 
 
106
 
 
135
 
Interest expense
 
(6,647
)
 
(8,531
)
 
(13,478
)
 
(15,820
)
Gain (loss) on extinguishment of note payable
 
—
 
 
10,744
 
 
(4,448
)
 
10,744
 
Other expense, net
 
(165
)
 
(158
)
 
(316
)
 
(301
)
Change in fair value of interest rate swap
 
(987
)
 
540
 
 
(1,445
)
 
1,223
 
Change in fair value of warrant liability
 
(1,891
)
 
(3,576
)
 
3,142
 
 
(3,576
)
Net loss from continuing operations
 
(9,396
)
 
(935
)
 
(16,300
)
 
(7,826
)
 
 
 
 
 
 
 
 
 
Loss from discontinued operations
 
(1,439
)
 
(183
)
 
(1,594
)
 
(338
)
Net loss
 
(10,835
)
 
(1,118
)
 
(17,894
)
 
(8,164
)
Preferred stock dividends
 
(105
)
 
(100
)
 
(205
)
 
(200
)
Net loss attributable to common stockholders
 
$
(10,940
)
 
$
(1,218
)
 
$
(18,099
)
 
$
(8,364
)
Net loss per Class A and Class B common share - basic and diluted
 
 
 
 
 
 
 
 
 
 
 
 
Loss from continuing operations
 
$
(0.31
)
 
$
(0.03
)
 
$
(0.55
)
 
$
(0.27
)
Loss from discontinued operations
 
(0.05
)
 
(0.01
)
 
(0.05
)
 
(0.02
)
 
 
$
(0.36
)
 
$
(0.04
)
 
$
(0.60
)
 
$
(0.29
)
Weighted average number of Class A and Class B common shares outstanding: Basic and diluted
 
30,294,306
 
 
28,663,959
 
 
29,860,122
 
 
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,
 
2010
 
2009
Cash flows from operating activities
 
 
 
Net loss
$
(17,894
)
 
$
(8,164
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
          Loss on disposal of assets
—
 
 
4
 
          Gain from sale of the information technology services operation
(622
)
 
—
 
          Depreciation and amortization of property and equipment and amortization of intangible assets
17,897
 
 
17,991
 
          Amortization of capitalized software costs
372
 
 
323
 
          Amortization of debt issuance costs included in interest expense
1,020
 
 
938
 
          Provision for doubtful accounts
136
 
 
264
 
          Stock-based compensation
1,361
 
 
766
 
          Non-cash interest expense
—
 
 
1,861
 
          Change in fair value of interest rate swap
1,445
 
 
(1,223
)
          Change in fair value of warrant liability
(3,142
)
 
3,576
 
          Realized loss on restricted available-for-sale investments
44
 
 
2
 
          Interest expense added to note payable
3,187
 
 
817
 
          Extinguishment of note payable
4,448
 
 
(10,744
)
          Accretion of note payable discount included in interest expense
1,193
 
 
300
 
Changes in operating assets and liabilities:
 
 
 
          Accounts receivable
(1,321
)
 
2,093
 
          Unbilled revenue
269
 
 
(250
)
          Prepaids and other current assets
(1,786
)
 
(1,308
)
          Other assets
2,730
 
 
533
 
          Accounts payable and accrued expenses
4
 
 
(2,194
)
          Deferred revenue
1,461
 
 
1,236
 
          Other liabilities
49
 
 
—
 
Net cash provided by operating activities
10,851
 
 
6,821
 
Cash flows from investing activities
 
 
 
 
 
          Purchases of property and equipment
(5,746
)
 
(12,573
)
          Purchases of intangible assets
(6
)
 
—
 
          Additions to capitalized software costs
(254
)
 
(408
)
          Sales/maturities of restricted available-for-sale investments
3,110
 
 
671
 
          Purchase of restricted available-for-sale investments
(4,276
)
 
(11,265
)
          Restricted cash
1,156
 
 
(6,906
)
Net cash used in investing activities
(6,016
)
 
(30,481
)
Cash flows from financing activities
 
 
 
 
 
          Repayment of notes payable
(19,287
)
 
(42,862
)
          Proceeds from notes payable
170,775
 
 
76,513
 
          Repayment of credit facilities
(154,932
)
 
(18,950
)
          Proceeds from credit facilities
5,025
 
 
8,884
 
          Payments of debt issuance costs
(4,894
)
 
(6,064
)
          Principal payments on capital leases
(99
)
 
(432
)
          Costs associated with issuance of preferred stock
—
 
 
(8
)
          Net proceeds from issuance of Class A common stock
941
 
 
—
 
          Costs associated with issuance of Class A common stock
(44
)
 
(18
)
Net cash (used in) provided by financing activities
(2,515
)
 
17,063
 
Net increase (decrease) in cash and cash equivalents
2,320
 
 
(6,597
)
Cash and cash equivalents at beginning of period
9,094
 
 
26,329
 
Cash and cash equivalents at end of period
$
11,414
 
 
$
19,732
 
 
See accompanying notes to Unaudited Condensed Consolidated Financial Statements

4
 

 CINEDIGM DIGITAL CINEMA CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
($ 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”).
 
The Company is a digital cinema services and a content marketing and distribution company driving the conversion of the exhibition industry from film to digital technology.  The Company provides a digital cinema platform that combines technology solutions, provides financial advice and guidance, software services and electronic delivery services to content owners and distributors and to movie exhibitors.  Cinedigm leverages this digital cinema platform with a series of business applications that utilize the platform to capitalize on the new business opportunities created by the transformation of movie theaters into networked entertainment centers.  The three main applications currently provided by Cinedigm include (i) its digital entertainment origination, marketing and distribution business focused on alternative content and independent film; (ii) its operational and analytical software applications; and (iii) its pre-show advertising and theatrical marketing business.  Historically, the conversion of an industry from analog to digital has created new revenue and growth opportunities as well as an opening for new players to emerge for capitalizing on this technological shift at the expense of incumbents.
 
During the quarter ended June 30, 2010, the Company modified how its decision makers review and allocate resources to operating segments, which resulted in revised reportable segments, but did not impact our consolidated financial position, results of operations or cash flows.  We realigned our focus to four primary businesses as follows: the first digital cinema deployment (“Phase I Deployment”), the second digital cinema deployment (“Phase II Deployment”), digital cinema services (“Services”) and media content and entertainment (“Content & Entertainment”).  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 marketing and distribution services to alternative and theatrical content owners and to theatrical exhibitors and in-theatre advertising.
 
Since June 2010, the Company has classified certain businesses as discontinued operations, including the motion picture exhibition to the general public (“Pavilion Theatre”) , information technology consulting services and managed network monitoring services (“Managed Services”), and hosting services and network access for other web hosting services (“Access Digital Server Assets”), which are all separate reporting units previously included in our former "Other" segment.  The Company is pursuing a sale of the Pavilion Theatre. In August 2010, the Company sold both Managed Services and the Access Digital Server Assets. Additional information on the discontinued operations can be found in Note 3.  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 reportable 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 $186,117 as of September 30, 2010. The Company also has significant contractual obligations related to its recourse and non-recourse debt for the remaining part of fiscal year 2011 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, 2010, and expected cash flows from operations, management believes that the Company has the ability to meet its obligations through September 30, 2011. 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, and 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,

5
 

raise additional capital or manage discretionary spending could have a material adverse effect on the Company’s ability to continue as a going concern.  The accompanying unaudited condensed consolidated financial statements do not reflect any adjustments which may result from the Company’s inability to continue as a going concern.
 
The condensed consolidated balance sheet as of March 31, 2010, which has been derived from audited financial statements, and the unaudited interim 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 made in financial statements contained in the Form 10-K. In management’s opinion, all adjustments necessary for a fair presentation of financial position, the results of operations and cash flows in accordance with U.S. generally accepted accounting principles (“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, 2010 filed with the SEC on June 14, 2010 (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 Cinedigm Software (“Software”), Core Technology Services, Inc. (“Managed Services”), FiberSat Global Services, Inc. d/b/a Cinedigm 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 Cinedigm 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”), Access Digital Cinema Phase 2 B/AIX Corp. (“Phase 2 B/AIX”) and Cinedigm Digital Funding I, LLC (“CDF I”). 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 condensed 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.  Actual results may differ from those estimates.
 
RECLASSIFICATION
 
The assets and liabilities of the Pavilion Theatre, Managed Services and the Access Digital Server Assets have been reported as assets held for sale and discontinued operations for all periods presented.  The March 31, 2010 consolidated balance sheet and the unaudited interim condensed consolidated statement of operations for the three and six months ended September 30, 2009 were reclassified 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, CDF I and to Phase 2 DC, when movies distributed by the studio are displayed on screens utilizing the Company’s Systems installed in movie theatres.  VPFs are earned and payable to Phase 1 DC and CDF I 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 dependent on the number of movie titles released and displayed using 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 a digitally-equipped movie theatre, as Phase 1 DC’s, CDF I’s and Phase 2 DC’s performance obligations have been substantially met at that time.
 
Phase 2 DC’s agreements with distributors require the payment of VPFs, according to a defined fee schedule, for ten years from the date each system is installed; however, Phase 2 DC may no longer collect VPFs once “cost recoupment,” as defined in the agreements, is achieved.  Cost recoupment will occur once the cumulative VPFs and other cash receipts collected by Phase 2 DC have equaled the total of all cash outflows, including the purchase price of all Systems, all financing costs, all “overhead and ongoing costs”, as defined, and including the Company’s service fees, subject to maximum agreed upon amounts during the three-year rollout period and thereafter, plus a compounded return on any billed but unpaid overhead and ongoing costs, of 15% per year.  Further, if cost recoupment occurs before the end of the eighth contract year, a one-time “cost recoupment bonus” is payable by the studios to the Company.  Any other cash flows, net of expenses, received by Phase 2 DC following the achievement of cost recoupment are required to be returned to the distributors on a pro-rata basis. At this time, the Company cannot estimate the timing or probability of the achievement of cost recoupment.
 

6
 

Alternative content fees (“ACFs”) are earned pursuant to contracts with movie exhibitors, whereby amounts are payable to Phase 1 DC, CDF I 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 first 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.
 
Exhibitors who will purchase and own Systems using their own financing will pay an upfront activation fee of $2 thousand per screen to the Company (the “Exhibitor-Buyer Structure”).  These upfront activation fees are recognized in the period in which these exhibitor owned Systems are ready for content, as the Company has no further obligations to the customer.  The Company will then manage the billing and collection of VPFs and will remit all VPFs collected to the exhibitors, less an administrative fee that will approximate 10% of the VPFs collected.  This administrative fee is recognized in the period in which the billing of VPFs occurs, as performance obligations have been substantially met at that time.  The Company does not recognize VPF revenue within Services.
 
Content & Entertainment
 
USM has contracts with exhibitors to display pre-show advertisements on their screens, in exchange for certain fees paid to the exhibitors. USM then contracts with businesses of various types to place their advertisements in select theatre locations, designs the advertisement, and places it on-screen for specific periods of time, generally ranging from three to twelve months.  Cinema advertising service revenue, and the associated direct selling, production and support cost, is recognized on a straight-line basis over the period the related in-theatre advertising is displayed, pursuant to the specific terms of each advertising contract. USM has the right to receive or bill the entire amount of the advertising contract upon execution, and therefore such amount is recorded as a receivable at the time of execution, and all related advertising revenue and all direct costs actually incurred are deferred until such time as the in-theatre advertising is displayed.
 
The right to sell and display such advertising, or other in-theatre programs, products and services, is based upon advertising contracts with exhibitors which stipulate payment terms to such exhibitors for this right. Payment terms generally consist of fixed annual payments or annual minimum guarantee payments, plus a revenue share of the excess of a percentage of advertising revenue over the minimum guarantee, if any.  The Company recognizes the cost of fixed and minimum guarantee payments on a straight-line basis over each advertising contract year, and the revenue share cost, if any, in accordance with the terms of the advertising contract.
  
Barter advertising revenue is recognized for the fair value of the advertising time surrendered in exchange for alternative content.  The Company includes the value of such exchanges in both Content & Entertainment’s net revenues and direct operating costs.  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 cost by CEG when the alternative content is screened, and the underlying advertising is being deferred and recognized as revenue ratably over the period such advertising is screened by USM.  For the three months ended September 30, 2010 and 2009, the Company recorded net revenues and direct operating costs related to barter advertising of $0 and $541, respectively. For the six months ended September 30, 2010 and 2009, the Company recorded net revenues and direct operating costs related

7
 

to barter advertising of $356 and $541, respectively.
 
CEG has contracts for the theatrical distribution of third party feature films and alternative content.  CEG’s distribution fee revenue is recognized at the time a feature film and alternative content is viewed, based on CEG’s participation in box office receipts.  CEG has the right to receive or bill a portion of the theatrical distribution fee in advance of the exhibition date, and therefore such amount is recorded as a receivable at the time of execution, and all related distribution revenue is deferred until the third party feature films’ or alternative content’s theatrical release date.
 
RESTRICTED AVAILABLE-FOR-SALE INVESTMENTS
 
In connection with the $75,000 Senior Secured Note issued in August 2009 (see Note 5), the Company was required to segregate a portion of the proceeds into marketable securities which will be used to pay interest over the next two years.  The Company classifies the marketable securities as restricted available-for-sale investments and accordingly, these investments are recorded at fair value.
 
In connection with the $172,500 term loans issued in May 2010 (see Note 5), the Company segregated $3,873 of the proceeds into an account which will be used to fund the purchase of satellite equipment for DMS.
 
During the three months ended September 30, 2010 and 2009, the Company made scheduled quarterly interest payments of $715 and $1,408, respectively, and $2,788 and $715, for the six months ended September 30, 2010 and 2009, respectively.  Investment securities with a maturity of twelve months or less are classified as short-term and investment securities with a maturity greater than twelve months are classified as long-term. As of September 30, 2010, there were no long-term restricted available-for-sale investments.
 
The changes in the value of these investments are recorded in other comprehensive loss in the condensed consolidated financial statements.  Realized gains and losses are recorded in earnings when securities mature or are redeemed.  During the six months ended September 30, 2010 and 2009, there were realized losses of $44 and $2, respectively.
 
The carrying value and fair value of restricted available-for-sale investments at September 30, 2010 were as follows:
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. Treasury securities
 
$
1,395
 
 
$
—
 
 
$
(26
)
 
$
1,369
 
Obligations of U.S.
government agencies and
FDIC guaranteed bank
debt
 
3,499
 
 
—
 
 
(55
)
 
3,444
 
Corporate debt securities
 
—
 
 
—
 
 
—
 
 
—
 
Other interest bearing
securities
 
4,311
 
 
—
 
 
(4
)
 
4,307
 
 
 
$
9,205
 
 
$
—
 
 
$
(85
)
 
$
9,120
 
 
The carrying value and fair value of restricted available-for-sale investments at March 31, 2010 were as follows:
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. Treasury securities
 
$
2,709
 
 
$
1
 
 
$
(29
)
 
$
2,681
 
Obligations of U.S.
government agencies and
FDIC guaranteed bank debt
 
4,395
 
 
—
 
 
(36
)
 
4,359
 
Corporate debt securities
 
506
 
 
—
 
 
(1
)
 
505
 
Other interest bearing
securities
 
388
 
 
—
 
 
(2
)
 
386
 
 
 
$
7,998
 
 
$
1
 
 
$
(68
)
 
$
7,931
 
 

8
 

RESTRICTED CASH
 
Restricted cash was comprised of the following:
 
 
 
September 30,
2010
 
March 31,
2010
Interest reserve account related to the GE Credit Facility (see Note 5)
 
$
—
 
 
$
6,913
 
Interest reserve account related to the 2010 Term Loans (see Note 5)
 
5,756
 
 
—
 
Bank certificate of deposit underlying an outstanding bank standby letter of credit for an office space lease
 
255
 
 
255
 
 
 
$
6,011
 
 
$
7,168
 
 
DEFERRED COSTS
 
Deferred costs primarily consist of the unamortized debt issuance costs which are amortized on a straight-line basis over the term of the respective debt.  The straight-line basis is not materially different from the effective interest method.  Other deferred costs are advertising production, post production and technical support costs related to developing and displaying advertising.
 
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, 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, 2010 and 2009, the Company recorded stock-based compensation expense of $674 and $438, respectively, and $1,364 and $760, for the six months ended September 30, 2010 and 2009, respectively.  During the three months ended June 30, 2010, certain stock-based awards were accelerated upon the retirement of the CEO, which resulted in recognition of $266 of additional stock-based compensation expense.
 
The weighted-average grant-date fair value of options granted during the three months ended September 30, 2010 and 2009 was $0.00 and $0.57, respectively, and $0.91 and $0.57, for the six months ended September 30, 2010 and 2009, respectively.  There were no stock options exercised during the three and six months ended September 30, 2010 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,
Assumptions for Option Grants
 
2010
 
2009
 
2010
 
2009
Range of risk-free interest rates
 
—
 
 
2.7
%
 
2.0-2.2%
 
 
2.7
%
Dividend yield
 
—
 
 
—
 
 
—
 
 
—
 
Expected life (years)
 
—
 
 
5
 
 
5
 
 
5
 
Range of expected volatilities
 
—
 
 
77.4
%
 
78.5-78.8%
 
 
77.4
%
 
 The risk-free interest rate used in the Black-Scholes option pricing 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 pricing 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

9
 

stock option plans based on a measure of historical volatility in the trading market for the Company’s common stock.
 
Employee stock-based compensation expense related to the Company’s stock-based awards was as follows for the periods presented:
 
 
 
For the Three Months Ended
September 30,
 
For the Six Months Ended
September 30,
 
 
2010
 
2009
 
2010
 
2009
Direct operating
 
17
 
 
15
 
 
34
 
 
33
 
Selling, general and administrative
 
642
 
 
414
 
 
1,303
 
 
708
 
Research and development
 
15
 
 
9
 
 
27
 
 
19
 
 
 
$
674
 
 
$
438
 
 
$
1,364
 
 
$
760
 
 
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. Goodwill and intangible assets with indefinite lives are not amortized; rather, they are tested for impairment on at least an annual basis. Intangible assets with finite lives, primarily customer relationships, non-compete agreements, patents and software technology, are amortized over their useful lives.
 
In order to test goodwill and intangible assets with indefinite lives, a determination of the fair value of our reporting units and intangible assets with indefinite lives is required and is based, among other things, on estimates of future operating performance of the reporting unit and/or the component of the entity being valued. The Company is required to complete an impairment test for goodwill and intangible assets with indefinite lives and record any resulting impairment losses at least on an annual basis or more often if warranted by events or changes in circumstances indicating that the carrying value may exceed fair value (“impairment indicators”). This impairment test includes the projection and discounting of cash flows, analysis of our market factors impacting the businesses the Company operates and estimating the fair values of tangible and intangible assets and liabilities. Estimating future cash flows and determining their present values are based upon, among other things, certain assumptions about expected future operating performance and appropriate discount rates determined by management.
 
As of September 30, 2010, 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.  During the three and six months ended September 30, 2010 the Company acquired intangible assets of $6 thousand. No impairment charge for intangible assets was recorded during the three and six months ended September 30, 2010.
 
Information related to the goodwill allocated to the Company’s continuing operations is detailed below:
 
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
As of September 30, 2010
 
$
—
 
 
$
—
 
 
$
4,306
 
 
1,568
 
 
$
—
 
 
$
5,874
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of March 31, 2010
 
$
—
 
 
$
—
 
 
$
4,306
 
 
1,568
 
 
—
 
 
$
5,874
 
 
See Note 3 for information related to the goodwill allocated to the Company’s discontinued operations.
 
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.
 

10
 

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 the difference between the fair value and the carrying value of the asset exceeds its fair value.  Fair value is determined by computing the expected future discounted cash flows.  During the three and six months ended September 30, 2010 and 2009, no impairment charge for long-lived assets was recorded.
 
NET LOSS PER SHARE
 
Basic and diluted net loss per common share has been calculated as follows:
 
Basic and diluted net loss per common share =
Net loss – preferred dividends
 
Weighted average number of common stock
 outstanding during the period
 
Shares issued and any shares that are reacquired during the period are weighted for the portion of the period that they are outstanding.
 
The Company incurred net losses for each of the three and six months ended September 30, 2010 and 2009 and, therefore, the impact of dilutive potential common shares from outstanding stock options, warrants, restricted stock, and restricted stock units, totaling 20,949,329 shares and 23,451,352 shares as of September 30, 2010 and 2009, respectively, were excluded from the computation as it would be anti-dilutive.
 
ACCOUNTING FOR DERIVATIVE ACTIVITIES
 
Derivative financial instruments are recorded as either assets or liabilities at fair value.  In May 2010, the Company settled the interest rate swap in place with the GE Credit Facility.  In June 2010, the Company executed three separate interest rate swap agreements (the “Interest Rate Swaps”) to limit the Company’s exposure to changes in interest rates related to the 2010 Term Loans.  Changes in fair value of derivative financial instruments are either recognized in accumulated other comprehensive loss (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 not sought hedge accounting and therefore, changes in the value of its Interest Rate Swaps were recorded in the condensed consolidated statements of operations (see Note 5).
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The fair value measurement disclosures are grouped into three levels based on valuation factors:
 
•    
Level 1 – quoted prices in active markets for identical investments
•    
Level 2 – other significant observable inputs (including quoted prices for similar investments, market corroborated inputs, etc.)
•    
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments)
 
Assets and liabilities measured at fair value on a recurring basis use the market approach, where prices and other relevant information are generated by market transactions involving identical or comparable assets or liabilities.
 
 The following tables summarize the levels of fair value measurements of the Company’s financial assets:

11
 

 
 
As of September 30, 2010
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
 
$
11,414
 
 
$
—
 
 
$
—
 
 
$
11,414
 
Restricted available-for-sale investments
 
299
 
 
8,821
 
 
—
 
 
9,120
 
Restricted cash
 
6,011
 
 
—
 
 
—
 
 
6,011
 
Interest rate swap
 
—
 
 
(2,091
)
 
—
 
 
(2,091
)
 
 
$
17,724
 
 
$
6,730
 
 
$
—
 
 
$
24,454
 
 
 
 
As of March 31, 2010
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents
 
$
9,094
 
 
$
—
 
 
$
—
 
 
$
9,094
 
Restricted available-for-sale investments
 
153
 
 
7,778
 
 
—
 
 
7,931
 
Restricted cash
 
7,168
 
 
—
 
 
—
 
 
7,168
 
Interest rate swap
 
—
 
 
(1,535
)
 
—
 
 
(1,535
)
 
 
$
16,415
 
 
$
6,243
 
 
$
—
 
 
$
22,658
 
 
3.    
ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
 
The Pavilion Theatre generates movie theatre admission and concession revenues. 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. The Pavilion Theatre, while once a digital cinema test site and showcase for digital cinema technology, is no longer needed in that capacity due to widespread adoption of the technology. Management decided to pursue its sale during the fourth quarter of the year ended March 31, 2010. The Company had preliminary offers from interested buyers and expects a sale to be concluded within a year. Accordingly, the Company classified the Pavilion Theatre as assets held for sale in the quarter ended March 31, 2010 and reported the results of Pavilion Theatre as discontinued operation for the year ended March 31, 2010 and all prior periods.
 
During the quarter ended September 30, 2010, the Company experienced a reduction in its estimated sales price of the Pavilion Theater as well as decline in its operating performance. Accordingly, the Company recorded an impairment charge of $1,763 and the estimate used to measure the impairment loss is a Level 3 fair value estimate. As of September 30, 2010, there is no goodwill associated with the Pavilion Theatre.
 
The Company's other segment consists of Managed Services and Access Digital Server Assets. In August 2010, the Company sold the stock of Managed Services and the Access Digital Server Assets in exchange for $268 in cash and $1,150 in service credits under a 46-month service agreement (the "Managed Services Agreement"). The service credits will serve to pay the balance of the purchase price pursuant to the Managed Services Agreement under which the buyer will continue to perform certain information technology related services for the Company. The Access Digital Server Assets currently host the Company's websites, and provide networking and other information technology services to the Company. If there is an event of default by the buyer or if the Managed Services Agreement is terminated pursuant to its terms, the buyer would be required to pay all of the then outstanding (unused) service credits in cash, with immediate acceleration. The operations and cash flows of the other segment has been eliminated from the ongoing operation as a result of the sale, and the Company will have no significant continuing involvement in the operations of these businesses after they are sold. The results of the other segment has been reported in discontinued operation for the quarter ended September 30, 2010, and all prior period presentation has been reclassified accordingly.
 
The assets and liabilities of held for sale assets were comprised of the following:
 

12
 

 
 
September 30,
2010
 
March 31,
2010
Accounts receivable, net
 
$
130
 
 
$
348
 
Prepaid expenses and other current assets
 
226
 
 
323
 
Security deposits
 
39
 
 
65
 
Property and equipment, net
 
5,027
 
 
5,334
 
Intangible assets, net
 
—
 
 
11
 
Goodwill
 
—
 
 
2,150
 
Assets held for sale
 
$
5,422
 
 
$
8,231
 
Accounts payable and accrued expenses
 
$
185
 
 
$
456
 
Customer security deposits
 
—
 
 
49
 
Capital leases
 
5,647
 
 
5,792
 
Deferred revenue
 
3
 
 
18
 
Liabilities as part of held for sale assets
 
$
5,835
 
 
$
6,315
 
 
At September 30, 2010, the assets and liabilities of held for sale assets are comprised entirely of the assets and liabilities of the Pavilion Theatre.
 
The results of the Pavilion Theatre, Managed Services and the Access Digital Server Assets have been reported as discontinued operations for all periods presented. The loss from discontinued operations was as follows:
 
 
 
For the Three Months Ended
September 30,
 
For the Six Months Ended
September 30,
 
 
2010
 
2009
 
2010
 
2009
Revenues
 
$
1,486
 
 
$
2,343
 
 
$
3,567
 
 
$
4,801
 
Costs and Expenses:
 
 
 
 
 
 
 
 
 
Direct operating (exclusive of depreciation and amortization shown below)
 
1,267
 
 
1,840
 
 
2,971
 
 
3,768
 
Selling, general and administrative
 
99
 
 
224
 
 
331
 
 
430
 
Provision for doubtful accounts
 
46
 
 
—
 
 
46
 
 
 
Stock-based compensation
 
—
 
 
3
 
 
(3
)
 
6
 
Loss on disposal of asset
 
120
 
 
—
 
 
120
 
 
 
Impairment of goodwill
 
1,763
 
 
—
 
 
1,763
 
 
—
 
Gain from sale of the information technology services operation
 
(622
)
 
—
 
 
(622
)
 
—
 
Depreciation of property and equipment
 
—
 
 
198
 
 
48
 
 
412
 
Amortization of intangible assets
 
—
 
 
1
 
 
1
 
 
2
 
Total operating expenses
 
2,673
 
 
2,266
 
 
4,655
 
 
4,618
 
Income from operations
 
(1,187
)
 
77
 
 
(1,088
)
 
183
 
Interest expense
 
(252
)
 
(260
)
 
(506
)
 
(521
)
Loss from discontinued operations
 
$
(1,439
)
 
$
(183
)
 
(1,594
)
 
$
(338
)
 
 

13
 

4.    
RECENT ACCOUNTING PRONOUNCEMENTS
 
In June 2009, the Financial Accounting Standards Board (“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. On April 1, 2010, the Company adopted ASC 810-10 and its adoption did not have a material impact on the Company’s condensed consolidated financial statements.
 
 In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”), which requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. This consensus eliminates the use of the residual method of allocation and requires allocation using the relative-selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. The Company will adopt ASU 2009-13 on April 1, 2011 and apply it prospectively. The Company does not expect the adoption of ASU 2009-13 to have a material impact on the Company’s consolidated financial statements.
 
In October 2009, the FASB issued ASU No. 2009-14, “Software (Topic 985): Certain Revenue Arrangements That Include Software Elements (a consensus of the FASB Emerging Issues Task Force)” (“ASU 2009-14”).  ASU 2009-14 amends ASC 985-605, “Software: Revenue Recognition,” such that tangible products, containing both software and non-software components that function together to deliver the tangible product’s essential functionality, are no longer within the scope of ASC 985-605. It also amends the determination of how arrangement consideration should be allocated to deliverables in a multiple-deliverable revenue arrangement. ASU 2009-14 will become effective for the Company for revenue arrangements entered into or materially modified on or after April 1, 2011. Earlier application is permitted with required transition disclosures based on the period of adoption. The Company does not expect the adoption of ASU 2009-14 will have a material impact on the Company’s consolidated financial statements.
 
In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 requires some new disclosures and clarifies some existing disclosure requirements about fair value measurements codified within ASC 820, “Fair Value Measurements and Disclosures.” ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009. The Company has adopted the requirements for disclosures about inputs and valuation techniques used to measure fair value.  Additionally, these amended standards require presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3) and is effective for fiscal years beginning after December 15, 2010, which will be effective for the Company as of April 1, 2011.  The Company does not expect the additional disclosure requirements will have a material impact on the Company’s consolidated financial statements.
 
In March 2010, the FASB issued ASU No. 2010-11, Derivatives and Hedging (Topic 815) - Scope Exception Related to Embedded Credit Derivatives (“ASU 2010-11”). ASU 2010-11 clarifies the scope exception for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another. The amendments address how to determine which embedded credit derivative features, including those in collateralized debt obligations and synthetic collateralized debt obligations, are considered to be embedded derivatives that should not be analyzed for potential bifurcation and separate accounting.  The amendments in this pronouncement are effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010.  This is effective for the Company as of April 1, 2011. The Company does not expect the adoption of ASU 2010-11 will have a material impact on the Company’s consolidated financial statements.
 
In April 2010, the FASB issued ASU No. 2010-12, Income Taxes (Topic 740) – Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts (“ASU 2010-12”). ASU 2010-12 establishes criteria for measuring the impact on deferred tax assets and liabilities based on provisions of enacted law, the impact of both Acts, the Health Care and Education Reconciliation Act of 2010 and the Patient Protection and Affordable Care Act, should be considered. ASU 2010-12 requires that income tax deductions for the cost of providing prescription drug coverage will be reduced by the amount of any subsidy received. The Company has evaluated ASU 2010-12 and its adoption did not have a significant impact on the Company’s condensed consolidated financial statements.
 
In April 2010, the FASB issued ASU No. 2010-17, Revenue Recognition — Milestone Method (“ASU 2010-17”). ASU 2010-17

14
 

establishes criteria for a milestone to be considered substantive and allows revenue recognition when the milestone is achieved in research or development arrangements. In addition, it requires disclosure of certain information with respect to arrangements that contain milestones. ASU 2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010.  ASU 2010-17 is effective for the Company prospectively beginning April 1, 2011.  The Company has evaluated ASU 2010-17 and does not expect its adoption to have a material impact on the Company’s consolidated financial statements.
 
 In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU 2010-20”).  ASU 2010-20 enhances disclosures about the credit quality of financing receivables and the allowance for credit losses. The Company is currently evaluating the impact of ASU 2010-20 on its consolidated financial statements.
 
5.    
NOTES PAYABLE
 
Notes payable consisted of the following:
 
 
 
As of September 30, 2010
 
As of March 31, 2010
Notes Payable
 
Current Portion
 
Long Term Portion
 
Current Portion
 
Long Term Portion
Vendor Note
 
$
—
 
 
$
—
 
 
$
—
 
 
$
9,600
 
GE Credit Facility
 
—
 
 
—
 
 
25,129
 
 
128,600
 
2010 Term Loans
 
24,151
 
 
138,694
 
 
—
 
 
—
 
KBC Facilities
 
1,431
 
 
11,526
 
 
1,269
 
 
7,298
 
P2 Vendor Note
 
79
 
 
675
 
 
66
 
 
724
 
P2 Exhibitor Notes
 
54
 
 
483
 
 
44
 
 
571
 
Total non-recourse notes payable
 
$
25,715
 
 
$
151,378
 
 
$
26,508
 
 
$
146,793
 
 
 
 
 
 
 
 
 
 
NEC Facility
 
$
192
 
 
$
66
 
 
$
185
 
 
$
148
 
2010 Note, net of debt discount
 
—
 
 
73,781
 
 
—
 
 
69,521
 
Total recourse notes payable
 
$
192
 
 
$
73,847
 
 
$
185
 
 
$
69,669
 
Total notes payable
 
$
25,907
 
 
$
225,225
 
 
$
26,693
 
 
$
216,462
 
 
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, which is collateral for 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 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.  The 2010 Term Loans are not guaranteed by the Company or its other subsidiaries, other than Phase 1 DC and CDF I.
 
In August 2009, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with an affiliate of Sageview Capital LP (“Sageview” or 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 2009 Note was later amended and restated on May 6, 2010 (as so amended and restated, the “2010 Note”).  The balance of the 2010 Note, net of the discount associated with the issuance of the Sageview Warrants and the interest of 8% per annum on the 2010 Note to be accrued as an increase in the aggregate principal amount of the 2010 Note (“PIK Interest”), was as follows:
  
 
 
As of September 30, 2010
 
As of March 31, 2010
2010 Note, at issuance
 
$
75,000
 
 
$
75,000
 
Discount on 2010 Note
 
(8,285
)
 
(9,359
)
PIK Interest
 
7,066
 
 
3,880
 
2010 Note, net
 
$
73,781
 
 
$
69,521
 
Less current portion
 
—
 
 
—
 
Total long term portion
 
$
73,781
 
 
$
69,521
 
 

15
 

In August 2007, Phase 1 DC obtained $9,600 of vendor financing (the “Vendor Note”) for equipment used in Phase 1 DC’s Phase I Deployment. The Vendor Note bears interest at 11% and may be prepaid without penalty.  Interest is due semi-annually commencing February 2008 and is paid by Cinedigm.  The balance of the Vendor Note, together with all unpaid interest is due on the maturity date of August 1, 2016.  In May 2010, the Vendor Note was repaid in full from the proceeds of the 2010 Term Loans, as discussed below.
 
In May 2010, CDF I, an indirectly wholly-owned, special purpose, non-recourse subsidiary of the Company, formed in April 2010, entered into a definitive credit agreement (the “2010 Credit Agreement”) with Société Générale, New York Branch (“SocGen”), as co-administrative agent and paying agent for the lenders party thereto and certain other secured parties, and General Electric Capital Corporation (“GECC”), as co-administrative agent and collateral agent (the “Collateral Agent”).  Pursuant to the 2010 Credit Agreement, CDF I borrowed term loans (the “2010 Term Loans”) in the principal amount of $172,500.  These 2010 Term Loans are non-recourse to the Company.  The proceeds of the 2010 Term Loans were used by CDF I to pay all costs, fees and expenses relating to the transaction and to pay $157,456 to Phase 1 DC, as part of the consideration for the acquisition by CDF I of all of the assets and liabilities of Phase 1 DC pursuant to a Sale and Contribution Agreement between CDF I and Phase 1 DC.  Phase 1 DC acquired all of the outstanding membership interests in CDF I pursuant to this Sale and Contribution Agreement.  Phase 1 DC, in turn, extinguished all of its outstanding obligations with respect to the GE Credit Facility and the Vendor Note, and its intercompany obligations owed to the Company.   Under the 2010 Credit Agreement, each of the 2010 Term Loans will bear interest, at the option of CDF I and subject to certain conditions, based on the base rate (generally, the bank prime rate) plus a margin of 2.50% or the Eurodollar rate (subject to a floor of 1.75%), plus a margin of 3.50%.  All collections and revenues of CDF I are deposited into a special blocked account, classified as cash and cash equivalents, from which amounts are paid out on a monthly basis to pay certain operating expenses, principal, interest, fees, costs and expenses relating to the 2010 Credit Agreement according to certain designated priorities.  On a quarterly basis, if funds remain after the payment of all such amounts, they will be applied to prepay the 2010 Term Loans.  After certain conditions are met, CDF I may use up to 50% of the remaining funds to pay dividends or distributions to Phase 1 DC.  The Company also set up a debt service fund under the 2010 Credit Agreement for future principal and interest payments, classified as restricted cash of $5,756 as of September 30, 2010.
 
The 2010 Term Loans mature and must be paid in full by April 29, 2016.  In addition, CDF I may prepay the 2010 Term Loans, without premium or penalty, in whole or in part, subject to paying certain breakage costs, if applicable.  The 2010 Credit Agreement also requires each of CDF I’s existing and future direct and indirect domestic subsidiaries (the "Guarantors") to guarantee, under a Guaranty and Security  Agreement dated as of May 6, 2010 by and among CDF I, the Guarantors and the Collateral Agent (the “Guaranty and Security Agreement”), the obligations under the 2010 Credit Agreement, and all such obligations to be secured by a first priority perfected security interest in all of the collective assets of CDF I and the Guarantors, including real estate owned or leased, and all capital stock or other equity interests in Phase 1 DC, CDF I and CDF I’s subsidiaries.  In connection with the 2010 Credit Agreement, AccessDM, the direct parent of Phase 1 DC, entered into a pledge agreement dated as of May 6, 2010 in favor of the Collateral Agent (the “ADM Pledge Agreement”) pursuant to which AccessDM pledged to the Collateral Agent all of the outstanding shares of common stock of Phase 1 DC, and Phase 1 DC entered into a pledge agreement dated as of May 6, 2010 in favor of the Collateral Agent (the “Phase 1 DC Pledge Agreement”) pursuant to which Phase 1 DC pledged to the Collateral Agent all of the outstanding membership interests of CDF I.  The 2010 Credit Agreement contains customary representations, warranties, affirmative covenants, negative covenants and events of default, as well as conditions to borrowings.  The balance of the 2010 Term Loans, net of the original issue discount, was as follows:
 
 
As of September 30, 2010
2010 Term Loans, at issuance
$
172,500
 
Payments to date
(8,050
)
Discount on 2010 Term Loans
(1,605
)
2010 Term Loans, net
162,845
 
Less current portion
(24,151
)
Total long term portion
$
138,694
 
 
In June 2010, CDF I executed the three separate Interest Rate Swaps with counterparties for a total notional amount of approximately 66.67% of the amounts to be outstanding at June 15, 2011 under the 2010 Term Loans or an initial amount of $100,000. Under the Interest Rate Swaps, CDF I will effectively pay a fixed rate of 2.16%, to guard against CDF I’s exposure to increases in the variable interest rate under the 2010 Term Loans. SocGen arranged the transaction, which took effect commencing June 15, 2011  as required by the 2010 Term Loans and will remain in effect until at least June 15, 2013.  As principal repayments of the 2010 Term Loans occur, the notional amount will decrease by a pro rata amount, such that

16
 

approximately $80,000 of the remaining principal amount will be covered by the Interest Rate Swaps at any time. The Company has not sought hedge accounting and therefore, changes in the value of its Interest Rate Swaps will be recorded in the condensed consolidated statements of operations (see Note 2).
 
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 Phase I Deployment and to pay transaction fees and expenses related to the GE Credit Facility, and for certain other specified purposes. The GE Credit Facility was not guaranteed by the Company or its other subsidiaries, other than Phase 1 DC. In May 2010, the GE Credit Facility was extinguished. The write-off of unamortized debt issuance costs of $3,320 and a prepayment penalty of $1,128 resulted in a $4,448 loss on extinguishment of note payable included in the condensed consolidated statements of operations.
 
In April 2008, Phase 1 DC executed the Interest Rate Swap, otherwise known as an “arranged hedge transaction” or "synthetic fixed rate financing" 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.   In May 2010, the Interest Rate Swap was settled in cash with the counter party for $888 from the proceeds of the 2010 Term Loans discussed above.
 
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 of up to a maximum of $8,900 with KBC Bank NV (the “KBC Facility #1”) 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 Facility #1 required interest-only payments at 7.3% per annum through December 31, 2009.  The principal is to be repaid in twenty-eight equal quarterly installments commencing in March 2010 and ending December 31, 2016 (the “Repayment Period”) at an interest rate of 8.5% per annum during the Repayment Period.  The KBC Facility #1 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, 2010, $8,885 has been drawn down on the KBC Facility #1.
 
In February 2010, Phase 2 B/AIX entered into an additional credit facility with KBC Bank NV (the “KBC Facility #2”) to fund the purchase of Systems from Barco, to be installed in movie theatres as part of the Company’s Phase II Deployment.  The KBC Facility #2 provides for borrowings of up to a maximum of $2,890 through December 31, 2010 (the “Draw Down Period”) and requires interest-only payments based on the three month London Interbank Offered Rate ("LIBOR") plus 3.75% 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 2011 and ending December 2017 (the “Repayment Period”) at an interest rate based on the three month LIBOR plus 3.75% per annum during the Repayment Period.  The KBC Facility #2 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, 2010, $1,512 has been drawn down on the KBC Facility #2.
 
In May 2010, Phase 2 B/AIX entered into an additional credit facility with KBC Bank NV (the “KBC Facility #3”) to fund the purchase of Systems from Barco, to be installed in movie theatres as part of the Company’s Phase II Deployment.  The KBC Facility #3 provides for borrowings of up to a maximum of $13,312 through December 31, 2010 (the “Draw Down Period”) and requires interest-only payments based on the three month LIBOR plus 3.75% 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 December 2011 and ending September 2018 (the “Repayment Period”) at an interest rate based on the three month LIBOR plus 3.75% per annum during the Repayment Period.  The KBC Facility #3 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, 2010, $2,443 has been drawn down on the KBC Facility #3.
 
 In May 2010, Phase 2 B/AIX entered into an additional credit facility with KBC Bank NV (the “KBC Facility #4”) to fund the purchase of Systems from Barco, to be installed in movie theatres as part of the Company’s Phase II Deployment.  The KBC Facility #4 provides for borrowings of up to a maximum of $22,336 through December 31, 2010 (the “Draw Down Period”) and requires interest-only payments based on the three month LIBOR plus 3.75% per annum during the Draw Down

17
 

Period.  For any funds drawn, the principal is to be repaid in twenty-eight equal quarterly installments commencing in December 2011 and ending September 2018 (the “Repayment Period”) at an interest rate based on the three month LIBOR plus 3.75% per annum during the Repayment Period.  The KBC Facility #4 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, 2010, $1,070 has been drawn down on the KBC Facility #4.
 
At September 30, 2010, the Company was in compliance with all of its debt covenants that were in effect at September 30, 2010.
 
6.    
STOCKHOLDERS’ EQUITY
 
CAPITAL STOCK
 
In April 2010, Imperial Capital, LLC exercised all their warrants under the cashless exercise feature and the Company issued 348,633 shares of Class A Common Stock.
 
In June 2010, a holder of Preferred Warrants exercised their warrants for $441 and the Company issued 700,000 shares of Class A Common Stock.
 
In the six months ended September 30, 2010, the Company issued 399,899 shares of Class A Common Stock for restricted stock awards that vested, of which 114,260 were restricted stock awards whose vesting was accelerated upon the retirement of the Company’s CEO, which resulted in approximately $80 of additional stock-based compensation expense included in the unaudited interim condensed consolidated statement of operations.
 
In September 2010, the Company issued 347,223 shares of Class A Common Stock in connection with a stock purchase agreement with Grassmere Partners, LLC (“Grassmere”) for an aggregate purchase price of  $500, priced at the trailing 20 day average share price of $1.44 per share.
 
In September 2010, the Company issued 267,068 shares of Class A Common Stock to certain members of the Board of Directors as payment for their services as non-employee directors for the fiscal year ended March 31, 2010, the value of such shares are included in stock-based compensation in the unaudited interim condensed consolidated statement of operations.
 
In September 2010, the Company issued 476,776 shares of Class A Common Stock as payment for the cumulative dividends in arrears, up through September 30, 2010, on the Series A 10% Non-Voting Cumulative Preferred Stock (“Preferred Stock”).
 
PREFERRED STOCK
 
There were no cumulative dividends in arrears on the Preferred Stock at September 30, 2010.
 
CINEDIGM’S EQUITY INCENTIVE 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 7,000,000 shares of Class A Common Stock at the Company’s 2010 Annual Meeting of Stockholders held on September 14, 2010.
 
Stock Options
 
During the six months ended September 30, 2010, under the Plan, the Company granted stock options to purchase 213,964 shares of its Class A Common Stock to its employees at a weighted average exercise price of $1.42 per share.  As of September 30, 2010, the weighted average exercise price for outstanding stock options is $4.04 and the weighted average remaining contractual life is 6.6 years.
 
The following table summarizes the activity of the Plan related to stock option awards:
 

18
 

 
 
Shares Under Option
 
Weighted Average Exercise Price Per
Share
Balance at March 31, 2010
 
3,910,372
 
 
$
4.11
 
Granted
 
213,964
 
 
1.42
 
Exercised
 
—
 
 
—
 
Cancelled
 
(1,099,949
)
 
1.66
 
Balance at September 30, 2010
 
3,024,387
 
 
$
4.08
 
 
 
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, 2010, the Company granted 153,843 restricted stock unit awards which will vest equally over a three year period.  The Company may pay such restricted stock unit awards upon vesting in cash or shares of Class A Common Stock or a combination thereof at the Company’s discretion.
 
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, 2010
 
1,065,674
 
 
 
 
$
1.44
 
Granted
 
153,843
 
 
(1)
 
1.4
 
Vested
 
(399,899
)
 
 
 
0.96
 
Forfeitures
 
(61,951
)
 
 
 
1.43
 
Balance at September 30, 2010
 
757,667
 
 
 
 
$
1.40
 
 
(1) Represents restricted stock units awarded in June 2010 which were subject to stockholder approval. Stockholder approval was obtained at the Company’s 2010 Annual Meeting of Stockholders, held on September 14, 2010.
 
WARRANTS
 
Warrants outstanding consisted of the following:
 
 
 
As of September 30, 2010
 
As of March 31, 2010
July 2005 Private Placement Warrants
 
467,275
 
 
467,275
 
August 2005 Warrants
 
—
 
 
760,196
 
Preferred Warrants
 
700,000
 
 
1,400,000
 
Sageview Warrants
 
16,000,000
 
 
16,000,000
 
Imperial Warrants
 
—
 
 
750,000
 
 
 
17,167,275
 
 
19,377,471
 
 
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 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 and the average daily volume exceeds 50,000 shares.  In June 2010, a holder of Preferred Warrants exercised their warrants for $441 and the Company issued 700,000 shares of Class A Common Stock.
 
The Sageview Warrants are exercisable beginning on September 30, 2009 and contain customary cashless exercise provision

19
 

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 Sageview pursuant to which the Company agreed to register the resale of the Sageview Warrants and the underlying shares of the Sageview Warrants from time to time in accordance with the terms of such Registration Rights Agreement. Based on the terms of the warrant and the Registration Rights Agreement, the Company determined that the fair value of the Sageview Warrant represents a liability until such time when the underlying common shares are registered. The shares underlying the Sageview Warrant were registered with the SEC for resale in September 2010 and the Company reclassified the warrant liability of $16,054 to equity.
 
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 April 2010, Imperial exercised all their warrants under the cashless exercise feature and the Company issued 348,633 shares of Class A Common Stock.
 
7.    
COMMITMENTS AND CONTINGENCIES
 
As of September 30, 2010, in connection with the Phase II Deployment, Phase 2 DC has entered into digital cinema deployment agreements with eight motion picture studios for the distribution of digital movie releases to motion picture exhibitors equipped with Systems, and providing for payment of VPFs to Phase 2 DC.  As of September 30, 2010, Phase 2 DC also entered into master license agreements with 35 exhibitors covering a total of 2,223 screens, whereby the exhibitors agreed to the placement of Systems as part of the Phase II Deployment.  Included in the 2,223 contracted screens are contracts covering 1,437 screens with 28 exhibitors  under the Exhibitor-Buyer Structure. As of September 30, 2010, the Company has 1,050 Phase 2 Systems installed, including 521 screens under the Exhibitor-Buyer Structure.  For Phase 2 Systems that the Company will own and finance, installation of additional Systems in the Phase II Deployment is contingent upon the completion of financing for the purchase of Systems.
 
In November 2008, in connection with the Phase II Deployment, Phase 2 DC entered into a supply agreement with Christie, for the purchase of up to 10,000 Systems at agreed upon pricing, as part of the Phase II Deployment.  As of September 30, 2010, the Company has purchased Systems under this agreement for $898 and has no purchase obligations for additional Systems.
 
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, 2010, the Company has purchased Systems under this agreement for an accumulated total of $13,910 and has additional purchase obligations for approximately $34,800.
 
In March 2009, in connection with the Phase II Deployment, Phase 2 DC entered into a supply agreement with NEC Corporation of America (“NEC”), for the purchase of up to 5,000 Systems at agreed upon pricing, as part of the Phase II Deployment.  As of September 30, 2010, the Company has not purchased any Systems under this agreement.
 
In June 2010, in connection with the retirement of the Company’s  CEO, the Company agreed to pay and accrued a $450 bonus and $450 of severance, to be paid over the subsequent 9 months. As of September 30, 2010, the Company has $300 bonus and $300 of severance remaining to be paid.
 

20
 

8.    
SUPPLEMENTAL CASH FLOW DISCLOSURE
 
 
 
For the Six Months Ended
September 30,
 
 
2010
 
2009
Interest paid
 
$
12,513
 
 
$
14,907
 
Assets acquired under capital leases
 
$
27
 
 
$
901
 
Accretion of preferred stock discount
 
$
54
 
 
$
54
 
Accrued dividends on preferred stock
 
$
205
 
 
$
200
 
Issuance of Class A Common Stock to Board of Directors for services
 
$
655
 
 
$
—
 
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
 
$
—
 
 
$
427
 
 

21
 

9.    
SEGMENT INFORMATION
 
The Company is now comprised of four reportable segments: Phase I Deployment, Phase II Deployment, Services and Content & Entertainment. Our former Other segment has been reclassified as discontinued operations (see Notes 1 and 3).  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 the segment’s income (loss) from continuing operations before interest, taxes, depreciation and amortization.  As a result of the change in the Company’s reportable segments during the three months ended June 30, 2010, the Company has restated the segment information for the prior periods.  All segment information has been restated to reflect the changes described above for all periods presented.
 
The Phase I Deployment and Phase II Deployment segments consist of the following:
 
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 Systems and the residual cash flows related to the Systems after the repayment of all non-recourse debt and the Company retains 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 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:
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 cinema 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.
 
 
Information related to the segments of the Company and its subsidiaries is detailed below:
 

22
 

 
 
As of September 30, 2010
 
 
(Unaudited)
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Total intangible assets, net
 
$
458
 
 
$
—
 
 
$
47
 
 
$
5,777
 
 
$
—
 
 
$
6,282
 
Total goodwill
 
$
—
 
 
$
—
 
 
$
4,306
 
 
$
1,568
 
 
$
—
 
 
$
5,874
 
Assets from continuing operations
 
$
208,275
 
 
$
19,702
 
 
$
20,424
 
 
$
16,276
 
 
$
17,739
 
 
$
282,416
 
Assets held for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5,422
 
Total assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
287,838
 
Notes payable, non-recourse
 
$
162,845
 
 
$
14,248
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
177,093
 
Notes payable
 
—
 
 
—
 
 
258
 
 
—
 
 
73,781
 
 
74,039
 
Capital leases
 
—
 
 
20
 
 
22
 
 
51
 
 
—
 
 
93
 
Total debt
 
$
162,845
 
 
$
14,268
 
 
$
280
 
 
$
51
 
 
$
73,781
 
 
$
251,225
 
 
 
 
 
As of March 31, 2010
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Total intangible assets, net
 
$
481
 
 
$
—
 
 
$
49
 
 
$
7,189
 
 
$
—
 
 
$
7,719
 
Total goodwill
 
$
—
 
 
$
—
 
 
$
4,306
 
 
$
1,568
 
 
$
—
 
 
$
5,874
 
Assets from continuing operations
 
$
217,974
 
 
$
12,146
 
 
$
20,961
 
 
$
18,133
 
 
$
19,702
 
 
$
288,916
 
Assets held for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8,231
 
Total assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
297,147
 
Notes payable, non-recourse
 
$
163,329
 
 
$
9,972
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
173,301
 
Notes payable
 
—
 
 
—
 
 
333
 
 
—
 
 
69,521
 
 
69,854
 
Capital leases
 
—
 
 
25
 
 
99
 
 
40
 
 
—
 
 
164
 
Total debt
 
$
163,329
 
 
$
9,997
 
 
$
432
 
 
$
40
 
 
$
69,521
 
 
$
243,319
 
 
 
 
 
Capital Expenditures
 
 
For the Six Months Ended
September 30,
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
2010
 
$
—
 
 
$
5,292
 
 
$
391
 
 
$
63
 
 
$
—
 
 
$
5,746
 
2009
 
$
66
 
 
$
11,768
 
 
$
635
 
 
$
13
 
 
$
47
 
 
$
12,529
 
 
 
 

23
 

 
 
Statements of Operations
 
 
For the Three Months Ended September 30, 2010
 
 
(Unaudited)
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Revenues from external customers
 
$
10,988
 
 
$
1,111
 
 
$
2,868
 
 
$
3,932
 
 
$
—
 
 
$
18,899
 
Intersegment revenues (1)
 
1
 
 
—
 
 
1,355
 
 
1
 
 
—
 
 
1,357
 
Total segment revenues
 
10,989
 
 
1,111
 
 
4,223
 
 
3,933
 
 
—
 
 
20,256
 
Less: Intersegment revenues
 
(1
)
 
—
 
 
(1,355
)
 
(1
)
 
—
 
 
(1,357
)
Total consolidated revenues
 
$
10,988
 
 
$
1,111
 
 
$
2,868
 
 
$
3,932
 
 
$
—
 
 
$
18,899
 
Direct operating (exclusive of depreciation and amortization shown below) (2)
 
122
 
 
31
 
 
1,875
 
 
2,275
 
 
—
 
 
4,303
 
Selling, general and administrative (3)
 
5
 
 
15
 
 
938
 
 
1,648
 
 
2,395
 
 
5,001
 
Plus: Allocation of Corporate overhead
 
—
 
 
—
 
 
1,767
 
 
237
 
 
(2,004
)
 
—
 
Provision for doubtful accounts
 
97
 
 
11
 
 
5
 
 
115
 
 
—
 
 
228
 
Research and development
 
—
 
 
—
 
 
97
 
 
—
 
 
—
 
 
97
 
Depreciation and amortization of property and equipment
 
7,139
 
 
457
 
 
507
 
 
179
 
 
11
 
 
8,293
 
Amortization of intangible assets
 
11
 
 
—
 
 
5
 
 
706
 
 
—
 
 
722
 
Total operating expenses
 
7,374
 
 
514
 
 
5,194
 
 
5,160
 
 
402
 
 
18,644
 
Income (loss) from operations
 
$
3,614
 
 
$
597
 
 
$
(2,326
)
 
$
(1,228
)
 
$
(402
)
 
$
255
 
 
(1) Included in intersegment revenues of the Services segment is $1,270 for service fees earned from the Phase I and Phase II Deployments.
(2) Included in direct operating of the Services segment is $197 for the amortization of capitalized software development costs.
(3) Included in selling, general and administrative of the Corporate segment is $229 of one-time transition costs related to the retirement of our CEO.
 
The following employee stock-based compensation expense related to the Company’s stock-based awards is included in the above amounts as follows:
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Direct operating
 
$
—
 
 
$
—
 
 
$
13
 
 
$
4
 
 
$
—
 
 
$
17
 
Selling, general and administrative
 
—
 
 
—
 
 
72
 
 
11
 
 
559
 
 
642
 
Research and development
 
—
 
 
—
 
 
15
 
 
—
 
 
—
 
 
15
 
Total stock-based compensation
 
$
—
 
 
$
—
 
 
$
100
 
 
$
15
 
 
$
559
 
 
$
674
 
 

24
 

 
 
Statements of Operations
 
 
For the Three Months Ended September 30, 2009
 
 
(Unaudited)
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Revenues from external customers
 
$
11,405
 
 
$
451
 
 
$
1,735
 
 
$
3,947
 
 
$
—
 
 
$
17,538
 
Intersegment revenues
 
—
 
 
—
 
 
69
 
 
6
 
 
—
 
 
75
 
Total segment revenues
 
11,405
 
 
451
 
 
1,804
 
 
3,953
 
 
—
 
 
17,613
 
Less: Intersegment revenues
 
—
 
 
—
 
 
(69
)
 
(6
)
 
—
 
 
(75
)
Total consolidated revenues
 
$
11,405
 
 
$
451
 
 
$
1,735
 
 
$
3,947
 
 
$
—
 
 
$
17,538
 
Direct operating (exclusive of depreciation and amortization shown below) (1)
 
265
 
 
62
 
 
1,358
 
 
2,556
 
 
—
 
 
4,241
 
Selling, general and administrative
 
153
 
 
245
 
 
488
 
 
1,253
 
 
2,123
 
 
4,262
 
Plus: Allocation of Corporate overhead
 
—
 
 
—
 
 
1,267
 
 
122
 
 
(1,389
)
 
—
 
Provision for doubtful accounts
 
—
 
 
—
 
 
(1
)
 
137
 
 
—
 
 
136
 
Research and development
 
—
 
 
—
 
 
73
 
 
—
 
 
—
 
 
73
 
Depreciation and amortization of property and equipment
 
7,139
 
 
290
 
 
470
 
 
218
 
 
9
 
 
8,126
 
Amortization of intangible assets
 
11
 
 
—
 
 
32
 
 
706
 
 
—
 
 
749
 
Total operating expenses
 
7,568
 
 
597
 
 
3,687
 
 
4,992
 
 
743
 
 
17,587
 
Income (loss) from operations
 
$
3,837
 
 
$
(146
)
 
$
(1,952
)
 
$
(1,045
)
 
$
(743
)
 
$
(49
)
 
(1) Included in direct operating of the Services segment is $162 for the amortization of capitalized software development costs.
 
The following employee stock-based compensation expense related to the Company’s stock-based awards is included in the above amounts as follows:
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Direct operating
 
$
4
 
 
$
—
 
 
$
9
 
 
$
2
 
 
$
—
 
 
$
15
 
Selling, general and administrative
 
37
 
 
—
 
 
25
 
 
25
 
 
327
 
 
414
 
Research and development
 
—
 
 
—
 
 
9
 
 
—
 
 
—
 
 
9
 
Total stock-based compensation
 
$
41
 
 
$
—
 
 
$
43
 
 
$
27
 
 
$
327
 
 
$
438
 
 
 

25
 

 
 
Statements of Operations
 
 
 
For the Six Months Ended September 30, 2010
 
 
(Unaudited)
 
 
Phase I
 
Phase II
 
Services
 
Content & Entertainment
 
Corporate
 
Consolidated
Revenues from external customers
 
$
22,501
 
 
$
1,712