UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission File Number: 00-21315
ON COMMAND CORPORATION
--------------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 77-04535194
---------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7900 East Union Avenue
Denver, Colorado 80237
---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (720) 873-3200
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [X] Yes [ ] No
The number of shares outstanding of the Registrant's Common Stock as of
August 1, 2001 was 30,853,641 shares.
ON COMMAND CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
June 30, December 31,
2001 2000
--------- ------------
(amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 1,442 3,569
Accounts receivable, (net of allowance for doubtful accounts of
$1,379 in 2001 and $1,366 in 2000) 36,241 35,514
Note receivable Hotel Digital Network ("DMN") (Note 5) - 1,445
Other current assets 2,639 1,993
--------- ---------
Total current assets 40,322 42,521
Video systems, net 294,222 296,221
Property and equipment, net 24,525 21,182
Goodwill, net 67,511 68,921
Cost investments (Notes 4 and 10) 25,148 1,563
Note receivable STSN, Inc. ("STSN") (Note 4) -- 5,015
Other assets, net 4,007 3,871
--------- ---------
$ 455,735 439,294
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 44,111 41,627
Accrued compensation 6,494 7,077
Other accrued liabilities 5,384 10,906
Current portion of capital lease obligations (Note 6) 704 705
Taxes payable 4,680 5,457
--------- ---------
Total current liabilities 61,373 65,772
Debt (Note 6) 259,958 248,465
--------- ---------
Total liabilities 321,331 314,237
--------- ---------
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, $.01 par value; shares authorized - 98,500 ; Shares
issued and outstanding - 58,500 in 2001 and 13,500 in 2000; (Note 7) 1 -
Common stock, $.01 par value; shares authorized - 50,000,000;
Shares issued and outstanding - 30,849,561 in 2001 and 30,491,070 in 2000; 309 306
Additional paid-in capital - Preferred 68,416 21,688
Additional paid-in capital - Common 257,013 253,801
Common stock warrants 31,450 31,450
Other comprehensive income - cumulative translation loss (3,786) (3,060)
Accumulated deficit (196,578) (157,454)
Note receivable from stockholder (22,421) (21,674)
--------- ---------
Total stockholders' equity 134,404 125,057
--------- ---------
$ 455,735 439,294
========= =========
See accompanying notes to condensed consolidated financial statements.
Page 1
ON COMMAND CORPORATION
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---------------------------------------------------------
(amounts in thousands, except per share amounts)
Revenue:
Room $ 59,155 63,088 120,017 125,474
Video system sales and other 4,183 2,681 5,536 5,259
-------- -------- -------- --------
63,338 65,769 125,553 130,733
-------- -------- -------- --------
Direct costs:
Room 29,027 28,054 58,104 57,061
Video system sales and other 3,175 2,007 4,135 3,751
-------- -------- -------- --------
32,202 30,061 62,239 60,812
-------- -------- -------- --------
Direct income 31,136 35,708 63,314 69,921
Operating expenses:
Operations 8,501 8,255 17,698 15,926
Research and development 1,573 1,971 3,040 4,078
Selling, general and administrative 6,453 6,665 13,373 12,518
Depreciation and amortization 19,994 22,258 41,259 42,007
Relocation and restructuring (Note 8) 8,098 - 11,445 -
-------- -------- -------- --------
44,619 39,149 86,815 74,529
-------- -------- -------- --------
Operating loss (13,483) (3,441) (23,501) (4,608)
Other expense:
Interest expense (5,412) (3,262) (10,804) (6,556)
Legal settlement and other expenses (Note 10) (1,039) - (4,764) -
-------- -------- -------- --------
(6,451) (3,262) (15,568) (6,556)
-------- -------- -------- --------
Loss before income taxes (19,934) (6,703) (39,069) (11,164)
Income tax expense (26) (257) (55) (363)
-------- -------- -------- --------
Net loss (19,960) (6,960) (39,124) (11,527)
Preferred stock dividend (907) - (1,036) -
-------- -------- -------- --------
Net loss applicable to common stockholders $(20,867) (6,960) (40,160) (11,527)
======== ======== ======== ========
Basic and diluted net loss per common share (Note 3) $ (0.68) (0.23) (1.31) (0.38)
======== ======== ======== ========
Shares used in basic and diluted per common share computations 30,844 30,477 30,728 30,424
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
Page 2
ON COMMAND CORPORATION
Condensed Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 2001
(unaudited)
Additional Additional Accumulated
paid-in paid-in Common Other
Preferred Common Capital Capital Stock Comprehensive
Stock Stock Preferred Common Warrants Income
----- ----- --------- ------ -------- ------
(amounts in thousands)
BALANCE AT DECEMBER 31, 2000 $ - 306 21,688 253,801 31,450 (3,060)
Net loss - - - - - -
Comprehensive loss -
Translation adjustment - - - - - (726)
----------------------------------------------------------------------------
TOTAL COMPREHENSIVE LOSS - - - - - (726)
Exercise of stock options - - - 18 - -
Issuance of common stock
Under ESP plan - 1 - 108 - -
Interest on stockholder note - - 747 - - -
Issuance of preferred stock 1 - 44,945 - - -
Preferred Stock Dividend 1,036 (1,036) - -
Issuance of common stock in
legal settlement with Maginet - 2 - 4,122 - -
----------------------------------------------------------------------------
BALANCE AT JUNE 30, 2001 $ 1 309 68,416 257,013 31,450 (3,786)
============================================================================
Notes Total
Accumulated Receivable Stockholders'
Deficit Stockholder Equity
------- ----------- ------
(amounts in thousands)
BALANCE AT DECEMBER 31, 2000 (157,454) (21,674) 125,057
Net loss (39,124) - (39,124)
Comprehensive loss -
Translation adjustment - - (726)
-------------------------------------------
TOTAL COMPREHENSIVE LOSS (39,124) - (39,850)
Exercise of stock options - - 18
Issuance of common stock
Under ESP plan - - 109
Interest on stockholder note - (747) -
Issuance of preferred stock - - 44,946
Preferred Stock Dividend - - -
Issuance of common stock in
legal settlement with Maginet - - 4,124
-------------------------------------------
BALANCE AT JUNE 30, 2001 (196,578) (22,421) 134,404
===========================================
See accompanying notes to condensed consolidated financial statements.
Page 3
ON COMMAND CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended
June 30,
-------------------------
2001 2000
-------------------------
(amounts in thousands)
Cash flows from operating activities:
Net loss $(39,124) (11,527)
Adjustments to reconcile net loss to net cash provided by
Operating activities:
Depreciation and amortization 41,259 42,007
Loss on litigation settlement 3,700 -
Other non-cash items 1,425 -
Changes in current assets and liabilities:
Accounts receivable, net (1,413) (3,826)
Other current assets 647 (797)
Accounts payable 2,702 1,371
Accrued compensation (1,395) (930)
Taxes payable (708) 909
Other accrued liabilities 2,281 764
-------- --------
Net cash provided by operating activities 9,374 27,971
Cash flows from investing activities:
Capital expenditures (51,225) (53,212)
Cost investments and note receivable (15,985) (2,000)
-------- --------
Net cash used in investing activities (67,210) (55,212)
-------- --------
Cash flows from financing activities:
Borrowings of debt 26,000 25,000
Repayment of debt (15,000) -
Proceeds from issuance of common and preferred stock 45,072 1,618
Payment of capital lease obligations (617) (1,565)
-------- --------
Net cash provided by financing activities 55,455 25,053
-------- --------
Effect of exchange rate changes in cash 254 (450)
-------- --------
Net decrease in cash and cash equivalents (2,127) (2,638)
Cash and cash equivalents, beginning of period 3,569 8,972
-------- --------
Cash and cash equivalents, end of period $ 1,442 6,334
======== ========
Non-cash activity:
Capital lease obligations $ 1,104 -
======== ========
Issuance of common stock for investment $ 4,125 -
======== ========
Stock based compensation $ - 602
======== ========
Supplemental information:
Cash paid for income taxes $ - 187
======== ========
Cash paid for interest $ 10,482 6,486
======== ========
See accompanying notes to condensed consolidated financial statements.
Page 4
ON COMMAND CORPORATION
Notes To Condensed Consolidated Financial Statements
June 30, 2001
(unaudited)
1. BASIS OF PRESENTATION
On Command Corporation (the "Company" or "OCC") is a Delaware
corporation formed in July 1996 by Ascent Entertainment Group, Inc.
("Ascent"), the Company's controlling stockholder. On March 28, 2000,
Liberty Media Corporation ("Liberty") closed a cash tender offer for the
common stock of Ascent and thereby obtained control of the Company. On June
8, 2000, Liberty completed a merger with Ascent pursuant to which Ascent
became an indirect, wholly owned subsidiary of Liberty.
The Company designs, develops, manufactures and installs proprietary
video systems. The Company's primary distribution system allows hotel
guests to select, on an on-demand basis, motion pictures on
computer-controlled television sets located in their hotel rooms. The
Company also provides in-room viewing of select cable channels and other
interactive services under long-term contracts to hotels and businesses.
These interactive services include video games, Internet offerings, CD
quality music and various hotel and guest services. At June 30, 2001, the
Company had operating subsidiaries or branches in the United States,
Canada, Mexico, Spain and the United Kingdom. All significant intercompany
accounts and transactions have been eliminated.
The accompanying interim condensed consolidated financial statements
are unaudited. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) have been made which are necessary to
present fairly the financial position of the Company as of June 30, 2001,
as well as the results of its operations for the three months and six
months ended June 30, 2001 and 2000. The results of operations for any
interim period are not necessarily indicative of the results for the entire
year. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
thereto included in the Company's December 31, 2000 Annual Report on Form
10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities, as well as the reported amounts of
revenues and expenses. Significant estimates include the allowance for
doubtful accounts receivable, and the estimated useful lives of video
systems, property and equipment and intangible assets, including goodwill
and the amounts of certain accrued liabilities. Actual results may differ
from these estimates.
Certain amounts have been reclassified for comparability with the 2001
presentation.
2. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business
Combinations" which requires the use of the purchase method and eliminates
the option of using the pooling-of-interests method of accounting for all
business combinations. The provisions in this statement apply to all
business combinations initiated after June 30, 2001, and all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001, or later. The Company does not believe the
adoption of this statement will have a material impact on the Company's
financial position, results of operations or cash flows.
Page 5
ON COMMAND CORPORATION
Notes To Condensed Consolidated Financial Statements
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" which requires
that all intangible assets acquired, other than those acquired in a
business combination, be initially recognized and measured based on the
asset's fair value. In addition, the intangible asset should be amortized
based upon its useful life. If the intangible asset is determined to have
an indefinite useful life, it shall not be amortized until its useful life
can be determined. Management has not determined the potential impact that
this statement will have on the Company's financial position, results of
operations or cash flows.
3. LOSS PER COMMON SHARE
Basic loss per common share is computed by dividing net loss applicable
to common stockholders (numerator) by the weighted-average number of common
shares outstanding (denominator) during the period. Diluted loss per common
share is computed by dividing net loss applicable to common stockholders
(numerator) by the weighted-average number of common equivalent shares
outstanding (denominator) for the period. Common stock equivalent shares
include common stock options, convertible preferred stock, and common stock
warrants. As of June 30, 2001 and 2000, approximately 15.3 million and 10.9
million common stock equivalent shares have been excluded from the
calculations because of their anti-dilutive effect on net loss per common
share.
4. COST INVESTMENTS
On March 30, 2001, the Company completed a $20 million investment in
convertible preferred stock of STSN, a high-speed broadband Internet access
provider for hotels. In connection with this investment, the Company
advanced $15 million in cash and converted a $5 million Convertible
Promissory Note in consideration for a 9.7% equity interest in STSN. The
Company previously recorded the Convertible Promissory Note as a note
receivable in the December 31, 2000 consolidated financial statements. The
Company uses the cost method to account for this investment. Other
strategic investors in STSN include Marriott International,
Inc.("Marriott"), a hotel company and major customer of OCC, and Siemens
Corporation, a German corporation which, among many other things,
manufactures electronic equipment and supplies. STSN has an exclusive
contract with Marriott to provide its in-room Internet access services to
Marriott hotels.
5. ACQUISITION
On February 28, 2001, pursuant to a stock purchase agreement between
the Company and DMN, for aggregate consideration of approximately $1.7
million (which consisted primarily of the conversion of a $1.4 million
promissory note and accrued interest thereon), DMN issued to the Company
common stock equal to 80% of the equity interests in DMN, on a fully
diluted basis, and approximately 85% of the voting securities of DMN. The
Company previously recorded the promissory note as a note receivable in the
December 31, 2000 consolidated financial statement. The acquisition has
been accounted for using the purchase method of accounting. Accordingly,
the excess purchase price over the fair market value of net tangible assets
acquired was allocated to goodwill and is being amortized over five years.
In addition, the Company has agreed to fund additional contributions up to
$2.7 million towards future operations. The operating results of DMN are
included in the Company's consolidated financial statements of operations
from the date of acquisition.
Page 6
ON COMMAND CORPORATION
Notes To Condensed Consolidated Financial Statements
6. DEBT
The components of debt are as follows:
June 30, December 31,
2001 2000
---------------- ----------------
(amounts in thousands)
Revolving Credit Facility (a) $ 258,133 $247,133
Capital Lease Obligations 2,529 2,037
---------------- ----------------
$ 260,662 $ 249,170
Less: Current portion of
Capital Lease Obligations (704) (705)
---------------- ----------------
$ 259,958 $ 248,465
================ ================
(a) On March 27, 2001, the Company entered into an amendment to the
Revolving Credit Facility. As amended, the Revolving Credit Facility
provides for maximum commitments of up to $320 million, subject to the
Company's compliance with certain financial covenants and other customary
conditions. The Revolving Credit Facility matures in July 2005 and, subject
to certain conditions, can be renewed for two additional years.
Borrowings under the Revolving Credit Facility bear interest at the
London Interbank Offering Rate plus a spread ranging from 1.10% to 2.25%
depending on certain financial ratios of the Company. In addition, the
Company must pay a facility fee ranging from 0.15% to 0.50% per annum on
the daily amount of the outstanding commitments under the Revolving Credit
Facility, payable in arrears and at maturity. The Revolving Credit Facility
contains customary covenants, most notably the inclusion of restrictions on
the Company's ability to pay dividends or make other distributions, as well
as maintaining minimum leverage and interest coverage ratios. In addition
to the limitations on borrowing contained in the Revolving Credit Facility,
certain covenants in the public indebtedness of Ascent effectively prevent
the Company's indebtedness under its Revolving Credit Facility from
exceeding an aggregate of $275 million so long as such public indebtedness
of Ascent is outstanding. The Company was in compliance with its bank
covenants as of June 30, 2001.
7. SALE OF PREFERRED STOCK
Series B And C Preferred Stock
Pursuant to Preferred Stock Agreements dated March 5, 2001 and April
23, 2001 between the Company and Ascent, the Company sold 15,000 newly
issued shares of its Series B Cumulative Redeemable Preferred Stock, par
value $.01 per share (the "Series B Preferred Stock"), and 10,000 shares of
its Series C Cumulative Redeemable Preferred Stock, par value $.01 per
share (the "Series C Preferred Stock"), (collectively, the "Redeemable
Preferred Stock"), for cash consideration of $15 million and $10 million,
respectively.
Page 7
ON COMMAND CORPORATION
Notes To Condensed Consolidated Financial Statements
The liquidation preference (the "Liquidation Preference") of each share
of the Redeemable Preferred Stock as of any date of determination is equal
to the sum of (a) the stated value per share of $1,000, plus (b) an amount
equal to all dividends accrued on such shares that have been added to and
remain a part of the Liquidation Preference as of such date, plus (c) for
purposes of the liquidation and redemption provisions of the Redeemable
Preferred Stock, an amount equal to all unpaid dividends accrued on the sum
of the amounts specified in clauses (a) and (b) above during the period
from and including the immediately preceding dividend payment date to but
excluding the date in question.
The holders of Redeemable Preferred Stock are entitled to receive
cumulative dividends, when and as declared by the Company, in preference to
dividends on junior securities, including the common stock and the Series A
Preferred Stock, and ratably on dividends to parity securities. Dividends
accrue on the Series B Preferred Stock on a daily basis at the rate of 8.5%
per annum of the Liquidation Preference from and including March 5, 2001 to
but excluding April 15, 2001 and accrue at the rate of 12% per annum of the
Liquidation Preference thereafter. Dividends accrue on the Series C
Preferred Stock on a daily-basis at the rate of 12% per annum of the
Liquidation Preference. Accrued dividends on the Series B Preferred Stock
are payable monthly, in cash. Accrued dividends on the Series C Preferred
Stock are payable quarterly, in cash. Dividends not paid on any dividend
payment date are added to the Liquidation Preference on such date and
remain a part of the Liquidation Preference until such dividends are paid.
Upon any liquidation, dissolution or winding up of the Company, the
holders of shares of Redeemable Preferred Stock are entitled to receive,
from the assets of the Company available for distribution to stockholders,
an amount in cash per share equal to the Liquidation Preference of a share
of Redeemable Preferred Stock, after payment is made on any senior
securities and before any distribution or payment is made on any junior
securities, which payment will be made ratably among the holders of the
Redeemable Preferred Stock and the holders of any parity securities.
Shares of Redeemable Preferred Stock are redeemable at the option of
the Company at any time after the issuance date at a redemption price per
share payable in cash equal to the Liquidation Preference of such share on
the redemption date. Any redemptions by the Company are required to be made
pro rata if less than all shares of Redeemable Preferred Stock are to be
redeemed.
Series D Preferred Stock
On June 29, 2001, pursuant to a Preferred Stock Agreement between the
Company and Ascent (the "Series D Purchase Agreement"), the Company
authorized for issuance 60,000 shares of its Cumulative Convertible
Redeemable Preferred Stock, Series D, par value $.01 per share (the "Series
D Preferred Stock") to Ascent in consideration of $60 million in cash. The
Series D Purchase Agreement states that the shares are issuable in three
sub-series, Series D-1, Series D-2, and Series D-3, each with an aggregate
authorized amount of $20 million in stated value. The Series D-1 shares
were issued on June 29, 2001, the Series D-2 shares will be issued after
June 30, 2001 and on or before September 30, 2001, and the Series D-3
shares will be issued after September 30, 2001 and on or before December
31, 2001. Shares of Series D Preferred Stock are convertible on or after
December 31, 2002 at the option of the holder, into the Company's common
stock at a conversion price of $7.55 per share of common stock. On July
30, 2001, the Company gave notice to Ascent, in accordance with the
Series D Purchase Agreement, of its intention to sell, on August 2, 2001,
20,000 shares of Series D-2 Preferred Stock to Ascent for cash
consideration of $20 million.
Page 8
ON COMMAND CORPORATION
Notes To Condensed Consolidated Financial Statements
The liquidation preference (the "Series D Liquidation Preference") of
each share of Series D Preferred Stock as of any date of determination is
equal to the sum of (a) the stated value per share of $1,000, plus (b) an
amount equal to all dividends accrued on such shares that have been added
to and remain a part of the Series C Liquidation Preference as of such
date, plus (c) for purposes of the liquidation and redemption provisions of
the Series D Preferred Stock, an amount equal to all unpaid dividends
accrued on the sum of the amounts specified in clauses (a) and (b) above
during the period from and including the immediately preceding dividend
payment date to but excluding the date in question.
The holders of the Series D Preferred Stock are entitled to receive
cumulative dividends, when and as declared by the Company, in preference to
dividends on junior securities, including the common stock and the Series A
Preferred Stock and ratably to dividends to parity securities. Dividends
accrue on each sub-series of the Series D Preferred Stock on a daily basis
at the rate of 8% per annum of the Series D Liquidation Preference from and
including the applicable issue date of such shares (the "Issue Date").
Accrued dividends are payable in cash quarterly on the last day of March,
June, September and December, commencing, with respect to each outstanding
share of a sub-series of Series D Preferred Stock, on the first date
following the Issue Date of such share. Dividends not paid on any dividend
payment date are added to the Series D Liquidation Preference until such
dividends are paid.
Upon any liquidation, dissolution or winding up of the Company, the
holders of shares of Series D Preferred Stock are entitled to receive, from
the assets of the Company available for distribution to stockholders, an
amount in cash per share equal to the Series D Liquidation Preference of a
share of Series D Preferred Stock, after payment is made on any senior
securities and before any distribution or payment is made on any junior
securities, which payment will be made ratably among the holders of Series
D Preferred Stock and the holders of any parity securities.
Shares of the Series D Preferred Stock are redeemable, at the option of
the Company, between June 29, 2001 and December 31, 2002 at a redemption
price per share payable in cash equal to the Series D Liquidation
Preference. The Series D Preferred Stock is not redeemable during the
period from December 31, 2002 to June 30, 2005. Thereafter, the shares are
redeemable at the Series D Liquidation Preference plus the percentage set
forth opposite the applicable redemption date.
Redemption Date Percentage
------------------------------------- -------------------
June 30, 2005 - June 29, 2006 4%
June 30, 2006 - June 29, 2007 3%
June 30, 2007 - June 29, 2008 2%
June 30, 2008 - June 29, 2009 1%
June 30, 2009 - thereafter 0%
Page 9
ON COMMAND CORPORATION
Notes To Condensed Consolidated Financial Statements
8. RELOCATION AND RESTRUCTURING COSTS
The Company is in the process of relocating its headquarter operations
from San Jose, California, to Denver, Colorado. It is estimated that most
sales, marketing, field support, accounting, finance, and executive
management will be transitioned to Denver by December, 2001. During the
three months and six months ended June 30, 2001, $6.4 million and $9.7
million of relocation expenses have been recognized and recorded. The
relocation expenses include severance, stay bonuses, search fees,
contractors, travel and redundant operations expenses.
On May 21, 2001, the compensation committee of the Company's board of
directors approved a restructuring plan (the "Plan"), which effected
approximately 50 employees. Severance costs associated with the Plan
aggregated $1.7 million and were recognized during the three months ended
June 30, 2001. Annual savings of salary and employee related costs from
the restructuring are estimated to be approximately $5.4 million.
9. SIGNIFICANT CUSTOMER
On March 21, 2001, the Company and Marriott entered into a definitive
agreement pursuant to which the Company will distribute its interactive
television platform in approximately 165,000 U.S. and Canadian hotel rooms
managed by Marriott and an additional approximately 135,000 U.S. and
Canadian hotel rooms franchised by Marriott.
10. LITIGATION
In September 1998, On Command Video Corporation ("OCV"), a wholly-owned
subsidiary of the Company, filed suit against Maginet Corporation
("Maginet"), in the Superior State Court of California, County of Santa
Clara Case No. CV776723, for past due royalties and for judicial
declaration that the license agreement between OCV and Maginet was
terminated by Maginet's material breach. Maginet counter-claimed against
OCV, alleging that OCV breached the license agreement, and alleging various
torts by OCV in its relationship with Maginet. On January 4, 2001, the
Company signed a settlement agreement with Maginet. In exchange for the (i)
contribution of 100% of the Company's equity interest in various
Asia-Pacific subsidiaries, (ii) payment of $1.0 million in cash, and (iii)
issuance of 275,000 shares of the Company's common stock, the Company
received a 7.5% minority interest in Maginet. The Company also agreed that
Maginet will have the option during the period of 15 days beginning on the
second anniversary of the execution of the settlement agreement to cause
the Company to repurchase all, but not less than all, of the shares of the
Company's common stock issued to Maginet at a price per share of $15.00.
This obligation will terminate if the Company's common stock closes at or
above $15.00 per share on any ten consecutive trading days prior to the
second anniversary of the execution of the settlement agreement and the
shares of the Company's common stock held by Maginet are freely tradable by
Maginet during such time, either because a registration statement covering
those shares is effective or the shares are saleable pursuant to an
exemption under the Securities Act. Due to the existence of the foregoing
purchase price contingency, the Company has recorded the shares issued to
Maginet at the specified amount of $15.00 per share. The Company estimated
the fair value of its 7.5% minority interest at approximately $5.3 million,
which resulted in a charge of approximately $4.8 million recorded in the
fourth quarter of 2000, and an additional charge of $3.7 million recorded
in the first quarter of 2001. This additional charge was the result of a
change in the estimate of the amount of inter-company debt to be forgiven
in connection with the settlement.
Page 10
ON COMMAND CORPORATION
Notes To Condensed Consolidated Financial Statements
The settlement agreement was finalized on March 1, 2001. Therefore, the
results of operations of the Asia-Pacific subsidiaries have been excluded
from the Company's consolidated operating results since February 28, 2001.
The Company is a defendant, and may be a potential defendant, in
lawsuits and claims arising in the ordinary course of its business. While
the outcomes of such claims, lawsuits, or other proceedings cannot be
predicted with certainty, management expects that such liability, to the
extent not provided for by insurance or otherwise, will not have a material
adverse effect on the financial condition of the Company.
Page 11
ON COMMAND CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which reflect the Company's current
expectations and assumptions on those issues. Because such statements apply to
future events, they are subject to risks and uncertainties that could cause the
actual results to differ materially. The following should be read in conjunction
with the Condensed Consolidated Financial Statements (unaudited) included
elsewhere herein, and with the Consolidated Financial Statements, notes thereto,
and the Management's Discussion and Analysis of Financial Condition and Results
of Operations contained in the Company's 2000 Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission.
OVERVIEW
On Command Corporation is the leading provider (by number of hotel rooms
served) of in-room, on-demand video entertainment and information services to
the lodging industry. With the exception of the six months ended June 30, 2001,
in which the Company lost approximately 38,000 rooms primarily as a result of
the Maginet settlement, the Company has experienced growth in the past eight
years. The Company has increased its base of installed rooms from approximately
37,000 rooms at the end of 1992 to approximately 939,000 rooms at June 30, 2001,
of which approximately 902,000 rooms are served by on-demand systems.
The Company provides in-room video entertainment and information services
on three technology platforms: the OCX video system, the OCV video system, and
the SpectraVision video system. The OCX video system provides enhanced
multimedia applications, including an improved graphical interface for movies
and games, CD quality music, television-based Internet with a wireless keyboard,
and other guest services. As of June 30, 2001, the Company had installed the OCX
video system in approximately 188,000 hotel rooms, 145,000 with Internet
capability. The OCV video system is a patented video selection and distribution
technology platform that allows hotel guests to select, on an on-demand basis,
movies and games through the television sets in their rooms. As of June 30,
2001, the Company had installed OCV video systems in approximately 670,000 hotel
rooms. The SpectraVision video system, which provides in-room movie
entertainment on a rolling schedule basis, and in some upgraded variations on an
on-demand basis, was, as of June 30, 2001, installed in approximately 81,000
hotel rooms. The SpectraVision video system generally offers fewer movie choices
than the OCV or OCX video systems.
In addition to movies, the Company's platforms provide for in-room viewing
of select cable channels (such as HBO, ESPN, CNN and Disney Channel) and other
interactive and information services. The Company primarily provides its
services under long-term contracts to hotel chains, hotel management companies,
and individually owned and franchised hotel properties. The Company's services
are offered predominately in the large deluxe, luxury, and upscale hotel
categories serving business travelers, such as Marriott, Hyatt, Wyndham,
Starwood, Doubletree, Fairmont, Embassy Suites, Four Seasons and other select
hotels.
As of June 30, 2001, approximately 89% of the Company's 939,000 installed
rooms were located in the United States, with the balance located primarily in
Canada, Mexico, Spain and the United Kingdom. In addition to installing systems
in hotels served by the Company, the Company sells its systems to certain other
providers of in-room entertainment, including Hospitality Networks, Inc., which
is licensed to use the Company's systems to provide on-demand, in-room
entertainment and information services to certain gaming-based hotel properties,
ALLIN Interactive, who is licensed to install the Company's systems on cruise
ships and Maginet who is licensed to install the Company's systems in Asia.
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ON COMMAND CORPORATION
ANALYSIS OF OPERATIONS
Following is selected financial information for the three months and six
months ended June 30, 2001 compared to the corresponding periods for 2000.
SELECTED FINANCIAL INFORMATION
(in thousands, except hotel and room amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------------- ---------------------------------------------
% OF % OF % OF % OF
JUNE 30, TOTAL JUNE 30, TOTAL JUNE 30, TOTAL JUNE 30, TOTAL
2001 REVENUE 2000 REVENUE 2001 REVENUE 2000 REVENUE
---------------------------------------------- ---------------------------------------------
Revenue:
Room $ 59,155 93.4% $ 63,088 95.9% $ 120,017 95.6% $ 125,474 96.0%
Video systems/other 4,183 6.6% 2,681 4.1% 5,536 4.4% 5,259 4.0%
--------- ------ --------- ------ --------- ------ --------- -----
63,338 100.0% 65,769 100.0% 125,553 100.0% 130,733 100.0%
--------- ------ --------- ------ --------- ------ --------- -----
Direct costs:
Room 29,027 45.8% 28,054 42.7% 58,104 46.3% 57,061 43.6%
Video systems/other 3,175 5.0% 2,007 3.1% 4,135 3.3% 3,751 2.9%
--------- ------ --------- ------ --------- ------ --------- -----
32,202 50.8% 30,061 45.7% 62,239 49.6% 60,812 46.5%
--------- ------ --------- ------ --------- ------ --------- -----
Direct profit 31,136 49.2% 35,708 54.3% 63,314 50.4% 69,921 53.5%
Operating expenses:
Operations 8,501 13.4% 8,255 12.6% 17,698 14.1% 15,926 12.2%
Research & development 1,573 2.5% 1,971 3.0% 3,040 2.4% 4,078 3.1%
Selling, general &
administrative 6,453 10.2% 6,665 10.1% 13,373 10.7% 12,518 9.6%
--------- ------ --------- ------ --------- ------ --------- -----
16,527 26.1% 16,891 25.7% 34,111 27.2% 32,522 24.9%
--------- ------ --------- ------ --------- ------ --------- -----
Operating cash flow (1) 14,609 23.1% 18,817 28.6% 29,203 23.3% 37,399 28.6%
Depreciation and amortization 19,994 31.6% 22,258 33.8% 41,259 32.9% 42,007 32.1%
Relocation and restructuring 8,098 12.8% 0 0.0% 11,445 9.1% 0 0.0%
Interest expense 5,412 8.5% 3,262 5.0% 10,804 8.6% 6,556 5.0%
Legal settlement and other
expenses 1,039 1.6% 0 0.0% 4,764 3.8% 0 0.0%
Income taxes 26 0.0% 257 0.4% 55 0.0% 363 0.3%
--------- ------ --------- ------ --------- ------ --------- -----
34,569 54.6% 25,777 39.2% 68,327 54.4% 48,926 37.4%
--------- ------ --------- ------ --------- ------ --------- -----
Net loss $ (19,960) -31.5% $ (6,960) -10.6% $ (39,124) -31.2% $ (11,527) -8.8%
========= ====== ========= ====== ========= ====== ========= =====
(1) Operating cash flow represents earnings before interest, income taxes,
depreciation, amortization, relocation and restructuring expense, and legal
settlement and other expenses. The most significant difference between
operating cash flow and cash provided from operations is changes in working
capital, relocation and restructuring expenses and interest expense.
Operating cash flow is presented because it is a widely accepted financial
indicator used by certain investors and analysts to analyze and compare
companies. In addition, management believes operating cash flow provides an
important additional perspective on the Company's operating results and the
Company's ability to service its long-term debt and fund the Company's
continuing growth. Operating cash flow is not intended to represent cash
flows for the period, or to depict funds available for dividends,
reinvestment or other discretionary uses.
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ON COMMAND CORPORATION
Operating cash flow has not been presented as an alternative to operating income
or as an indicator of operating performance and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles.
JUNE 30 % OF TOTAL JUNE 30 % OF TOTAL
2001 ROOMS 2000 ROOMS
Other data:
Net cash provided (used in):
Operating activities 9,374 27,971
Investing activities (67,210) (55,212)
Financing activities 55,455 25,053
Total hotels 3,450 3,449
Total rooms 939,000 969,000
Room composition:
Geographic
Domestic 834,000 89.0% 835,000 86.2%
International 105,000 11.0% 134,000 13.8%
Platform type:
OCX 188,000 20.0% 83,000 8.6%
OCV 670,000 71.4% 732,000 75.5%
SpectraVision 81,000 8.6% 154,000 15.9%
System type
On-demand 902,000 96.1% 906,000 93.5%
Scheduled Only 37,000 3.9% 63,000 6.5%
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Revenue consists primarily of fees from hotels for guest programming,
pay-per-view movies, video games, CD quality music, internet services and
other services provided through the Company's in-room video systems
(collectively room revenue) and sales of the Company's in room video system
to other entertainment providers (video system revenue). Room revenue
decreased $3.9 million and $5.5 million during the three and six months ended
June 30, 2001 compared to the corresponding periods in 2000. The decreases
are the result of a reduction in total rooms served by the Company and an
overall decrease in occupancy rates in the hotel industry, offset by an
increase in room revenue generated primarily from the Company's @Hotel TV
internet and short video products. Total rooms served decreased from
approximately 969,000 rooms as of June 30, 2000 to approximately 939,000
rooms as of June 30, 2001. The decrease is the result of the loss of
approximately 35,000 rooms, related to the Company's Asia-Pacific operations,
as part of the settlement agreement with Maginet (see Note 10 in the
accompanying Notes to Condensed Consolidated Financial Statements). The
settlement agreement was finalized on March 1, 2001, therefore the results of
operation of the Asia-Pacific assets have been included in the accompanying
condensed consolidated financial statements for two months in 2001 compared
to six months in 2000. Incremental room revenue attributable to the
Asia-Pacific assets was approximately $2.0 million and $2.8 million for the
three and six months ended June 30, 2000, respectively. The Asia-Pacific
revenue represents approximately 50% of the decrease in room revenue in 2001.
In addition to the decrease in total rooms served, the hotel industry has
experienced a decrease in overall occupancy rates. Through May 31, 2001,
compared to the corresponding period in 2000, occupancy rates have decreased
approximately 2.3%. Luxury and upscale hotels experienced a greater decrease
in occupancy rates of approximately 3.3%. Most of the decrease is
attributable to cutbacks in business travel. The change in occupancy rates
has resulted in a decrease of approximately $2.9 million and $5.6 million in
net movie revenue during the three and six months ended June 30, 2001,
respectively. These decreases have been offset by an increase in other
interactive room services principally @Hotel TV Internet and the short video
products. The increase in @Hotel TV and short video revenue is attributable
principally to an increase in the number of rooms providing such services. As
of June 30, 2001, the room base for @Hotel TV was
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ON COMMAND CORPORATION
approximately 145,000 rooms, a 131% increase over the corresponding date in
2000 and the room base for short videos was approximately 623,000 rooms, a
138% increase over the corresponding date in 2000. Video systems and other
revenue were comparable during the six months ended June 30, 2001 and 2000.
However, for the three months ended June 30, 2001 such revenue increased $1.5
million over the corresponding period in 2000. This increase is attributable
to higher volume of sales to certain distributors of the Company's video
systems.
Direct costs consist primarily of hotel commissions, fees paid to movie and
other content providers, connectivity costs associated with the Company's
internet product and costs associated with the manufacturing of video systems
sold to other providers. Direct cost from room revenue was 45.8% and 46.3% of
total revenue during the three and six months ended June 30, 2001 compared to
42.7% and 43.6% for the corresponding periods in 2000. The increase is due
principally to higher costs associated with providing additional channels of
free-to-guest programming to hotels upgraded to the OCX video system.
Additionally, during the three and six months ended June 30, 2001 broadband
connectivity costs to hotels that distribute @Hotel TV Internet increased
approximately $1.0 million and $2.0 million, respectively. The increase in such
costs is due to a corresponding increase in the number of hotels distributing
such product. As of June 30, 2001, 530 hotels were Internet capable, a 130%
increase over the same period in 2000. Direct costs from video systems and other
revenue as a percentage of total revenue increased during the three and six
months ended June 30, 2001 as a result of the sale of lower margin equipment to
certain distributors.
Operating expenses consists primarily of labor and material required to
maintain the existing equipment in hotels. Operating expenses as a percentage of
total revenue was 13.4% and 14.1% during the three and six months ended June 30,
2001 compared to 12.6% and 12.2% in 2000. The increase is principally due to
additional maintenance activities and other indirect costs, which are not
subject to capitalization.
Research and development expenses were comparable during the three and six
months ended June 30, 2001 as compared to the same periods in 2000.
Selling, general and administrative expenses represented 10.2% and 10.7% of
total revenue for the three and six months ended June 30, 2001 compared to 10.1%
and 9.6% for the corresponding periods in 2000. The increase is the result of
approximately $0.5 million in legal expenses associated with the Maginet
settlement and additional expenditures relating to information technology,
offset by reductions in other administrative departments.
Depreciation and amortization expenses decreased $2.2 million and $0.8
million during the three and six months ended June 30, 2001 as compared to the
three and six months ended June 30, 2000. The decreases are due to a reduction
in the depreciable base of video systems and property and equipment, resulting
from the disposition of the Company's Asia-Pacific assets to Maginet, as well as
an increase in the number of fully depreciated OCV and SpectraVision video
systems.
Relocation and restructuring expenses for the three and six months ended
June 30, 2001 include $6.4 million and $9.7 million, respectively, of costs
related to severance, stay bonuses, moving and travel costs, contractors, and
redundant salaries associated with relocating the Company's headquarters to
Denver, Colorado. The Company expects to complete its relocation by December
2001. In addition, in May 2001 the compensation committee of the Company's board
of directors approved a restructuring plan, which effected approximately 50
employees. Severance costs associated with the restructuring aggregated $1.7
million and were recognized during the three months ended June 30, 2001. Annual
savings from the restructuring are estimated to be approximately $5.4 million.
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ON COMMAND CORPORATION
Interest expense for the three and six months ended June 30, 2001 increased
$2.1 million and $4.2 million as compared to the corresponding periods in 2000.
These increases are due to additional borrowings under the Company's revolving
credit facility.
Legal settlement and other expenses represents primarily costs associated
with the settlement of the Maginet litigation (see Note 10 in the accompanying
Condensed Consolidated Financial Statement).
Provision for income taxes represents tax on income in certain
international and domestic jurisdictions.
Net loss applicable to common stockholders increased to $40.2 million for
the six months ended June 30, 2001 from $11.5 million for the six months ended
June 30, 2000. Such increase in net loss applicable to common shareholders is
due primarily to expenses associated with the relocation and restructuring of
the Company's corporate office, the settlement of the Maginet litigation and an
increase in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash during the six months ended June
30, 2001 and June 30, 2000, respectively, were cash from operations of $9.4
million and $28.0 million and cash provided by financing activities of $55.5
million and $25.0 million. For the six months ended June 30, 2001 and June
30, 2000, respectively, cash was expended primarily for capital expenditures
aggregating $51.2 and $53.2 million, related primarily to the conversion of
hotels equipped with the SpectraVision and OCV video systems to the Company's
new OCX video systems, the installation of new hotels and internal fixed
asset purchases and investments in and advances to certain strategic partners
aggregating $16.0 million and $2.0 million, respectively.
At June 30, 2001, the Company had $258.1 million outstanding under its
revolving credit facility. The Company's ability to draw additional funds
under the revolving credit facility is limited by certain financial
covenants. On March 27, 2001, the Company entered into an amendment to the
revolving credit facility that (a) reduced the total commitments from $350
million to $320 million and (b) amended the financial covenant to allow for
total indebtedness of the Company up to 4.25 times the Company's operating
cash flow plus certain non-recurring expenses for the trailing four quarters.
Subject to the restriction described in the following paragraph, as of June
30, 2001 the Company has $61.9 million of remaining commitments and $24.9
million of availability (based on certain financial covenants) under its
revolving credit facility.
In addition to the limitations on borrowing contained in the revolving
credit agreement, certain covenants in the public indebtedness of Ascent
effectively prevent the Company's indebtedness under its revolving credit
facility from exceeding an aggregate of $275 million so long as such public
indebtedness of Ascent is outstanding. At June 30, 2001, based upon this
limitation and $258.1 million outstanding under the revolving credit
facility, availability under the revolving credit facility is limited to
$16.9 million.
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ON COMMAND CORPORATION
On June 29, 2001, the Company authorized for issuance 60,000 shares of its
Cumulative Convertible Redeemable preferred Stock, Series D to Ascent for cash
consideration of $60 million. Pursuant to the Series D Purchase Agreement, the
Series D shares are issuable in three sub-series, Series D-1, Series D-2 and
Series D-3, each with an aggregate authorized amount of $20 million in stated
value. The Series D-1 shares were issued on June 29, 2001, the Series D-2 shares
will be issued after June 30, 2001 and on or before September 30, 2001 and the
Series D-3 shares will be issued after September 30, 2001 and on or before
December 31, 2001. On July 30, 2001, the Company gave notice to Ascent in
accordance with the Series D Purchase Agreement of its intention to sell 20,000
shares of Series D-2 Preferred Stock to Ascent for cash consideration of $20
million on August 2, 2001.
As of June 30, 2001, the Company has approximately $16.9 million of
availability under its revolving credit facility and commitments to purchase $40
million of its Series D Preferred Stock. Based upon the Company's current
projections of its sources and uses of cash, the Company anticipates it will use
all of the remaining availability under the revolving credit facility and the
proceeds from the issuance of its Series D Preferred Stock by February 2002.
Accordingly, it will be necessary for the Company to raise incremental capital
through additional debt or equity financing in order to satisfy its operations
and capital expenditures. However, there can be no assurance that the Company
will be able to secure such additional financing on terms acceptable to the
Company, or if available, that the proceeds from such financing would be
sufficient to enable the Company to fund all of its requirements. In addition,
while Ascent's public indebtedness is outstanding, the Company will not be able
to raise additional debt financing.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates, which
could impact its results of operations and financial condition. Revolving loans
extended under the Company's credit facility generally bear interest at variable
rates based on the London Interbank Offering Rate ("LIBOR") and on certain
financial ratios of the Company. At June 30, 2001, the Company had $258.1
million outstanding on its credit facility and the weighted average interest
rate on such credit facility was 7.46%. Assuming no increase or decrease in the
amount outstanding, a hypothetical immediate 100 basis point increase (or
decrease) in interest rates at June 30, 2001 would increase (or decrease), the
Company's annual interest expense and cash outflow by approximately $2.6
million.
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ON COMMAND CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant, and may be a potential defendant, in lawsuits
and claims arising in the ordinary course of its business. While the outcomes of
such claims, lawsuits, or other proceedings cannot be predicted with certainty,
management expects that such liability, to the extent not provided for by
insurance or otherwise, will not have a material adverse effect on the financial
condition of the Company.
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable.
(b) Not applicable.
(c) On April 23, 2001, the Company sold 10,000 newly issued shares of its
Cumulative Redeemable Preferred Stock, Series C, par value $.01 per share (the
"Series C Preferred Stock") to Ascent in consideration of $10 million in cash in
a private transaction exempt from the registration requirements of the
Securities Act of 1934, as amended, pursuant to section 4(2) thereof. Shares of
the Series C Preferred Stock are not convertible into or exchangeable for any
other securities of the Company.
On June 29, 2001, the Company authorized for issuance 60,000 shares of its
Cumulative Convertible Redeemable Preferred Stock, Series D, par value $.01 per
share (the "Series D Preferred Stock") to Ascent in consideration of $60 million
in cash in a private transaction exempt from the registration requirements of
the Securities act of 1933, as amended, pursuant to section 4(2) thereof. Shares
of the Series D Preferred Stock are convertible, on or after December 31, 2002,
at the option of the holder, into the Company's common stock at a conversion
price of $7.55 per share of common stock.
(d) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ON COMMAND CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
10.1 - Service Agreement, dated March 21, 2001, between On Command
Corporation and Marriott International, Inc. (composite version) (confidential
treatment requested).
(b) Reports on Form 8-K
The registrant filed with the Commission on June 27, 2001 a form 8-K
describing the Company's board of directors election of Carl E. Vogel as the new
chairman of the board, and the appointment of William D. Myers as executive vice
president and chief financial officer and Pamela J. Strauss as vice president
and general counsel. The filing also describes the Company's revised revenue and
operating cash flow guidance for 2001.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Denver,
State of Colorado on August 2, 2001.
ON COMMAND CORPORATION
Date: August 2, 2001 By: /s/ William D. Myers
---------------------------------------------
William D. Myers
Executive Vice President and Chief Financial
Officer (Principal Accounting and Financial
Officer)
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