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 September 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
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(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
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(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
November 1, 2001 was 30,866,327 shares.
ON COMMAND CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
September 30, December 31,
2001 2000
------------- ------------
(amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 1,997 3,569
Accounts receivable, (net of allowance
for doubtful accounts of $1,510 on
9/30/01 and $1,366 on 12/31/00) 36,126 35,514
Note receivable Hotel Digital Network
("DMN") (Note 5) -- 1,445
Other current assets 3,018 1,993
--------- ---------
Total current assets 41,141 42,521
Video systems, net 301,013 296,221
Property and equipment, net 23,468 21,182
Goodwill, net 66,811 68,921
Cost investments (Notes 4 and 10) 25,142 1,563
Note receivable STSN, Inc. ("STSN") (Note 4) -- 5,015
Other assets, net 3,847 3,871
--------- ---------
$ 461,422 439,294
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 27,428 41,627
Accrued compensation 6,480 7,077
Other accrued liabilities 5,091 10,906
Current portion of capital lease
obligations (Note 6) 704 705
Taxes payable 4,774 5,457
--------- ---------
Total current liabilities 44,477 65,772
Debt (Note 6) 276,268 248,465
--------- ---------
Total liabilities 320,745 314,237
--------- ---------
Commitments and contingencies (Notes 6 and 10)
Stockholders' equity:
Preferred stock, $.01 par value; shares
authorized - 10,000,000; Shares issued and
outstanding - 78,500 on 9/30/01 and 13,500
on 12/31/00; (Note 7) 1 --
Common stock, $.01 par value; shares
authorized - 150,000,000; Shares issued and
outstanding - 30,853,501 on 9/30/01 and
30,491,070 on 12/31/00; 309 306
Additional paid-in capital - Preferred 89,987 21,688
Additional paid-in capital - Common 255,812 253,801
Common stock warrants 31,450 31,450
Other comprehensive income - cumulative
translation loss (5,018) (3,060)
Accumulated deficit (209,048) (157,454)
Note receivable from stockholder (22,816) (21,674)
--------- ---------
Total stockholders' equity 140,677 125,057
--------- ---------
$ 461,422 439,294
========= =========
See accompanying notes to condensed consolidated financial statements.
Page 1
ON COMMAND CORPORATION
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
(amounts in thousands, except per share amounts)
Revenue:
Room $ 55,342 62,822 175,359 188,296
Video system sales and other 2,980 6,010 8,516 11,269
-------- -------- -------- --------
58,322 68,832 183,875 199,565
-------- -------- -------- --------
Direct costs:
Room 28,187 29,336 86,291 86,397
Video system sales and other 1,914 1,380 6,049 5,131
-------- -------- -------- --------
30,101 30,716 92,340 91,528
-------- -------- -------- --------
Direct income 28,221 38,116 91,535 108,037
Operating expenses:
Operations 7,512 7,746 25,210 23,672
Research and development 1,309 2,464 4,667 6,542
Selling, general and administrative 4,597 7,384 17,652 19,902
Depreciation and amortization 20,697 21,317 61,956 63,324
Relocation and restructuring (Note 8) 1,824 2,997 13,269 2,997
-------- -------- -------- --------
35,939 41,908 122,754 116,437
-------- -------- -------- --------
Operating loss (7,718) (3,792) (31,219) (8,400)
Other income (expense):
Interest expense (4,506) (4,871) (15,310) (11,739)
Legal settlement and other income
(expense) (Note 10) (62) 178 (4,826) 490
-------- -------- -------- --------
(4,568) (4,693) (20,136) (11,249)
-------- -------- -------- --------
Loss before income taxes (12,286) (8,485) (51,355) (19,649)
Income tax benefit (expense) (184) 8 (239) (355)
-------- -------- -------- --------
Net loss (12,470) (8,477) (51,594) (20,004)
Preferred stock dividend (1,251) -- (2,287) --
-------- -------- -------- --------
Net loss applicable to common stockholders $(13,721) (8,477) (53,881) (20,004)
======== ======== ======== ========
Basic and diluted net loss per common
share (Note 3) $ (0.44) (0.27) (1.75) (0.65)
======== ======== ======== ========
Shares used in basic and diluted per common
share computations 30,855 30,531 30,770 30,460
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
Page 2
ON COMMAND CORPORATION
Condensed Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 2001
(unaudited)
Additional Additional Accumulated
paid-in paid-in Common Other Notes Total
Preferred Common Capital Capital Stock Comprehensive Accumulated Receivable Stockholders'
Stock Stock Preferred Common Warrants Income Deficit Stockholder Equity
--------- -------- ---------- ---------- -------- ------------- ----------- ----------- -------------
(amounts in thousands)
BALANCE AT
DECEMBER 31, 2000 $ -- 306 21,688 253,801 31,450 (3,060) (157,454) (21,674) 125,057
Net loss -- -- -- -- -- -- (51,594) -- (51,594)
Comprehensive loss -
Translation
adjustment -- -- -- -- -- (1,958) -- -- (1,958)
-------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL COMPREHENSIVE
LOSS -- -- -- -- -- (1,958) (51,594) -- (53,552)
Exercise of stock
options -- -- -- 18 -- -- -- -- 18
Issuance of common
stock Under
ESP plan -- 1 -- 158 -- -- -- -- 159
Interest on
stockholder note -- -- 1,142 -- -- -- -- (1,142) --
Issuance of
preferred stock 1 -- 64,870 -- -- -- -- -- 64,871
Preferred Stock
Dividend -- -- 2,287 (2,287) -- -- -- -- --
Issuance of common
stock in legal
settlement with
Maginet -- 2 -- 4,122 -- -- -- -- 4,124
BALANCE AT
SEPTEMBER 30, 2001 $ 1 309 89,987 255,812 31,450 (5,018) (209,048) (22,816) 140,677
======== ======== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
Page 3
ON COMMAND CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
-----------------------
2001 2000
-------- --------
(amounts in thousands)
Cash flows from operating activities:
Net loss $(51,594) (20,004)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 62,755 63,324
Loss on litigation settlement 3,700 --
Write-down of cost investment 1,100 --
Other non-cash items 302 14
Changes in current assets and liabilities:
Accounts receivable, net (1,431) (4,350)
Other current assets (104) (3,172)
Accounts payable (13,370) 5,811
Accrued compensation (2,087) 1,135
Taxes payable (610) (675)
Other accrued liabilities (1,698) (2,072)
-------- --------
Net cash provided (used) by operating activities (3,037) 40,011
Cash flows from investing activities:
Capital expenditures (74,422) (83,592)
Cost investments and note receivable (15,985) (3,000)
-------- --------
Net cash provided (used) in investing activities (90,407) (86,592)
-------- --------
Cash flows from financing activities:
Borrowings of debt 42,500 45,133
Repayment of debt (15,000) --
Proceeds from issuance of common and preferred stock 65,048 2,016
Payment of capital lease obligations (807) (2,049)
-------- --------
Net cash provided (used) by financing activities 91,741 45,100
-------- --------
Effect of exchange rate changes in cash 131 (594)
-------- --------
Net decrease in cash and cash equivalents (1,572) (2,076)
-------- --------
Cash and cash equivalents, beginning of period 3,569 8,972
-------- --------
Cash and cash equivalents, end of period $ 1,997 6,896
======== ========
Non-cash activity:
Stock based compensation $ -- 659
======== ========
Supplemental information:
Cash paid for income taxes $ 683 168
======== ========
Cash paid for interest $ 15,196 7,706
======== ========
See accompanying notes to condensed consolidated financial statements.
Page 4
ON COMMAND CORPORATION
Notes To Condensed Consolidated Financial Statements
September 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 September 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 September 30,
2001, as well as the results of its operations for the three and nine
months ended September 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 consolidated 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, inventory reserve, 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, measured and 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 is
determined. This statement is effective for financial statements issued for
periods beginning after December 15, 2001. The Company expects that the
adoption of this statement will result in a reduction of the amortization
of Goodwill beginning January 1, 2002. In addition, the Company will
periodically review the impairment of these assets.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" which
requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The statement also requires
that the associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. This statement is effective for
financial statements issued for periods beginning after June 15, 2002. 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.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. This statement supercedes prior statements that address the
disposal of a segment of a business, and eliminates the exception to
consolidation for subsidiaries for which control is likely to be temporary.
This statement retains the prior statements fundamental provisions for the
recognition and measurement of impairment of long-lived assets to be held
and used, as well as the measurement of long-lived assets to be disposed of
by sale. The statement is effective for fiscal years beginning after
December 15, 2001. 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 September 30, 2001 and 2000,
approximately 17.7 million and 12.3 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
Page 6
ON COMMAND CORPORATION
Notes To Condensed Consolidated Financial Statements
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 statements. 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 of up
to $2.7 million towards future operations. The operating results of DMN are
included in the Company's consolidated statements of operations from the
date of acquisition.
6. DEBT
The components of debt are as follows:
September 30, December 31,
2001 2000
------------- ------------
(amounts in thousands)
Revolving Credit Facility (a) $ 274,633 $ 247,133
Capital Lease Obligations 2,339 2,037
--------- ---------
$ 276,972 $ 249,170
Less: Current portion of
Capital Lease Obligations (704) (705)
--------- ---------
$ 276,268 $ 248,465
========= =========
(a) Effective September 30, 2001, the Company entered into a second
amendment to the revolving credit facility. Under the terms of the
amendment the maximum commitments under the revolving credit facility were
reduced from $320 million to $275 million and the maturity date was reset
from July 2005 to July 2004. Subject to certain conditions, the revolving
credit facility can be renewed for two additional years. The Company's
ability to draw additional funds under the facility is limited by certain
financial covenants. Subject to such restrictions, the Company has $0.4
million of remaining commitments under the revolving credit facility.
Borrowings under the revolving credit facility bear interest at the
London Interbank Offering Rate plus a spread ranging from 1.10% to 2.75%
depending on certain financial ratios of the Company. The Company must
also 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
Page 7
ON COMMAND CORPORATION
Notes To Condensed Consolidated Financial Statements
restrictions on the Company's ability to pay dividends or make other
distributions, limitation on capital expenditures, as well as maintaining
minimum leverage and interest coverage ratios. In addition to the
limitations on borrowings 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.
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.
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
Page 8
ON COMMAND CORPORATION
Notes To Condensed Consolidated Financial Statements
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 were issued on August
2, 2001, and the Series D-3 shares were issued on October 18, 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.
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.
Page 9
ON COMMAND CORPORATION
Notes To Condensed Consolidated Financial Statements
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%
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 and nine months ended September 30, 2001, $1.8 million and $11.6
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 affected
approximately 50 employees. Severance costs associated with the Plan
aggregated $1.7 million and were recognized during the nine months ended
September 30, 2001.
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
Page 10
ON COMMAND CORPORATION
Notes To Condensed Consolidated Financial Statements
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 intercompany debt
to be forgiven in connection with the settlement.
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.
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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 nine months ended September
30, 2001, in which the Company lost approximately 48,000 rooms, of which
approximately 35,000 were the 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 929,000 rooms at September 30, 2001, of which approximately
894,000 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 is a digital platform that
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 September 30, 2001, the
Company had installed the OCX video system in approximately 199,000 hotel rooms,
155,000 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 September 30, 2001, the Company had installed OCV video
systems in approximately 655,000 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 September 30, 2001,
installed in approximately 75,000 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 September 30, 2001, approximately 89% of the Company's 929,000
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 which are licensed
to use the Company's systems to provide on-demand,
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ON COMMAND CORPORATION
in-room entertainment and information services on cruise ships and to hotel
properties in Asia.
ANALYSIS OF OPERATIONS
Following is selected financial information for the three and nine months
ended September 30, 2001 compared to the corresponding periods for 2000.
SELECTED FINANCIAL INFORMATION
(in thousands, except hotel and room amounts)
Three Months Ended Nine Months Ended
---------------------------------------------- ----------------------------------------------
% Of % Of % Of % Of
Sept 30, Total Sept 30, Total Sept 30, Total Sept 30, Total
2001 Revenue 2000 Revenue 2001 Revenue 2000 Revenue
--------- ------- --------- ------- --------- ------- --------- -------
Revenue:
Room $ 55,342 94.9% $ 62,822 91.3% $ 175,359 95.4% $ 188,296 94.4%
Video systems/other 2,980 5.1% 6,010 8.7% 8,516 4.6% 11,269 5.6%
--------- ------- --------- ------- --------- ------- --------- -------
58,322 100.0% 68,832 100.0% 183,875 100.0% 199,565 100.0%
--------- ------- --------- ------- --------- ------- --------- -------
Direct costs:
Room 28,187 48.3% 29,336 42.6% 86,291 46.9% 86,397 43.3%
Video systems/other 1,914 3.3% 1,380 2.0% 6,049 3.3% 5,131 2.6%
--------- ------- --------- ------- --------- ------- --------- -------
30,101 51.6% 30,716 44.6% 92,340 50.2% 91,528 45.9%
--------- ------- --------- ------- --------- ------- --------- -------
Direct profit 28,221 48.4% 38,116 55.4% 91,535 49.8% 108,037 54.1%
Operating expenses:
Operations 7,512 12.9% 7,746 11.3% 25,210 13.7% 23,672 11.9%
Research & development 1,309 2.2% 2,464 3.6% 4,667 2.5% 6,542 3.3%
Selling, general &
administrative 4,597 7.9% 7,384 10.7% 17,652 9.6% 19,902 9.9%
--------- ------- --------- ------- --------- ------- --------- -------
13,418 23.0% 17,594 25.6% 47,529 25.8% 50,116 25.1%
--------- ------- --------- ------- --------- ------- --------- -------
Operating cash flow(1) 14,803 25.4% 20,522 29.8% 44,006 23.9% 57,921 29.0%
Depreciation and amortization 20,697 35.5% 21,317 31.0% 61,956 33.7% 63,324 31.7%
Relocation and restructuring 1,824 3.1% 2,997 4.3% 13,269 7.2% 2,997 1.4%
Interest expense 4,506 7.7% 4,871 7.1% 15,310 8.3% 11,739 5.9%
Legal settlement and other
income (expense) 62 0.1% (178) (0.3)% 4,826 2.6% (490) (0.2)%
Income taxes 184 0.3% (8) 0.0% 239 0.1% 355 0.2%
--------- ------- --------- ------- --------- ------- --------- -------
27,273 46.8% 28,999 42.1% 95,600 51.9% 77,925 39.0%
--------- ------- --------- ------- --------- ------- --------- -------
Net loss $ (12,470) (21.4)% $ (8,477) (12.3)% $ (51,594) (28.1)% $ (20,004) (10.0)%
========= ======= ========= ======= ========= ======= ========= =======
(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
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ON COMMAND CORPORATION
funds available for dividends, reinvestment or other discretionary uses.
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 in the United States of America.
Sept 30 % of Total Sept 30 % of Total
2001 Rooms 2000 Rooms
-------- ---------- -------- ----------
(in thousands, except hotel and room amounts)
Other data:
Net cash provided (used in):
Operating activities (3,037) 40,011
Investing activities (90,407) (86,592)
Financing activities 91,741 45,100
Total hotels 3,442 3,494
Total rooms 929,000 975,000
Room composition:
Geographic
Domestic 823,000 89% 841,000 86%
International 106,000 11% 134,000 14%
Platform type:
OCX 199,000 21% 118,000 12%
OCV 655,000 71% 719,000 74%
SpectraVision 75,000 8% 138,000 14%
System type
On-demand 894,000 96% 922,000 95%
Scheduled Only 35,000 4% 53,000 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 $7.5 million and $12.9 million during the three and nine months
ended September 30, 2001 compared to the corresponding periods in 2000. The
decreases are the result of an overall decrease in occupancy rates in the
hotel industry and a reduction in total rooms served by the Company, offset
by an increase in room revenue generated primarily from the Company's @Hotel
TV internet and short video products. Through August 31, 2001, compared to
the corresponding period in 2000, occupancy rates have decreased
approximately 3.0%. During this same period, luxury hotels experienced a
greater decrease in occupancy rates at approximately 5.2%. In addition, the
events that took place on September 11, 2001 resulted in an additional 18% to
20% decrease in occupancy in the month of September.
In addition to the decrease in overall occupancy rates, the Company has
also experienced a decrease in total rooms served. Total rooms served decreased
from approximately 975,000 rooms as of September 30, 2000 to approximately
929,000 rooms as of September 30, 2001. The decrease is due in part to the loss
of approximately 35,000 rooms, related to the Company's Asia-Pacific operations,
as part of the settlement
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ON COMMAND CORPORATION
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 nine months in 2000. Incremental
room revenue attributable to the Asia-Pacific assets was approximately $1.8
million and $5.6 million for the three and nine months ended September 30, 2000,
respectively. The remaining decrease in total rooms is due primarily to the
Company's decision to discontinue service in non-profitable hotels.
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 to an increase in
the number of rooms providing such services. As of September 30, 2001, the room
base for @Hotel TV was approximately 155,000 rooms, a 87% increase over the
corresponding date in 2000 and the room base for short videos was approximately
558,000 rooms, a 95% increase over the corresponding date in 2000.
Video systems and other revenue for the three and nine months ended
September 30, 2001 decreased $3.0 million and $2.8 million respectively, as
compared to the corresponding periods in 2000. This decrease is attributable to
royalty income of $3.9 million, which was earned during 2000 in an agreement in
which LodgeNet Entertainment Corporation purchased licensing rights to the
Company's patented technologies. This decrease was offset by a higher volume of
sales to external 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 48.3% and 46.9% of
total revenue during the three and nine months ended September 30, 2001 compared
to 42.6% and 43.3% 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 nine months ended September 30, 2001
broadband connectivity costs to hotels that distribute @Hotel TV Internet
increased approximately $0.5 million and $2.1 million, respectively. The
increase in such costs is due to a corresponding increase in the number of
hotels distributing such product. As of September 30, 2001, 164 hotels were
Internet capable, a 55% 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 nine months ended September 30, 2001 as a result of the
sale of lower margin equipment to certain distributors.
Operation expenses consist primarily of labor and material required to
maintain the existing equipment in hotels. Operation expenses as a percentage of
total revenue was 12.9% and 13.7% during the three and nine months ended
September 30, 2001 compared to 11.3% and 11.9% 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 represented 2.2% and 2.5% of total
revenue for the three and nine months ended September 30, 2001 compared to 3.6%
and 3.3% for the corresponding periods in 2000. The decrease is primarily due to
savings associated with a reduction in personnel and contract labor expense.
Selling, general and administrative expenses represented 7.9% and 9.6% of
total revenue for the three and nine months ended September 30, 2001 compared to
10.7% and 9.9% for the corresponding periods in 2000. The decrease is the result
of savings associated with the restructuring plan approved by the Company's
board of directors in May 2001, as well as additional savings in various
administrative functions.
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ON COMMAND CORPORATION
Depreciation and amortization expenses decreased $0.6 million and $1.4
million during the three and nine months ended September 30, 2001 as compared to
the three and nine months ended September 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 nine months
ended September 30, 2001 include $1.8 million and $11.6 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 an additional
restructuring plan (the "Plan"), which affected approximately 50 employees.
Severance costs associated with the Plan aggregated $1.7 million and were
recognized during the nine months ended September 30, 2001. Annual personnel
savings from the Plan are estimated to be approximately $5.4 million.
Interest expense was comparable during the three months ended September 30,
2001 and 2000. Interest expense for the nine months ended September 30, 2001
increased $3.6 million as compared to the corresponding period in 2000. The
increase during the nine month period is due to additional borrowings under the
Company's revolving credit facility.
Legal settlement and other expenses represent primarily costs associated
with the settlement of the Maginet litigation (see Note 10 in the accompanying
Condensed Consolidated Financial Statement).
Provision for income taxes during the three and nine months ended September
30, 2001 represents tax on income in certain international and domestic
jurisdictions.
Net loss increased to $12.5 and $51.6 for the three and nine months ended
September 30, 2001 as compared to $8.5 and $20.0 for the corresponding periods
in 2000. Such increases in net loss are due primarily to a decrease in revenue
resulting from lower occupancy rates, as well as 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 source of cash during the nine months ended
September 30, 2001 and September 30, 2000, respectively, was cash provided by
financing activities of $91.7 million and $45.1 million. In addition, during
the nine months ended September 30, 2001, the Company used cash from
operating activities of $3.0 million, and during the nine months ended
September 30, 2000, had sources of cash from operating activities of $40.0
million. For the nine months ended September 30, 2001 and September 30, 2000,
respectively, cash was expended primarily for capital expenditures
aggregating $74.4 and $83.6 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 $3.0 million, respectively.
On June 29, 2001, the Company authorized for issuance 60,000 shares of
its Cumulative Convertible Redeemable Preferred Stock, Series D to Ascent for
aggregate 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 were issued on August 2, 2001 and the
Series D-3 shares were issued on October 18, 2001.
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ON COMMAND CORPORATION
Effective September 30, 2001, the Company entered into an amendment to its
revolving credit facility whereby, among other things, the maximum commitments
under the facility were reduced from $320.0 million to $275.0 million. As of
September 30, 2001, outstanding borrowings under the revolving credit facility
aggregated $274.6 million. The Company's ability to draw additional funds under
the facility is limited by certain financial covenants. Subject to such
restrictions the Company has $0.4 million of remaining commitments under the
revolving credit facility.
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 senior indebtedness from exceeding an
aggregate of $275.0 million so long as such public indebtedness of Ascent is
outstanding. However, subject to certain restrictions under the Ascent
indenture, the Company may incur additional indebtedness provided such
indebtedness is subordinate to the Company's senior indebtedness.
As of September 30, 2001, the Company has approximately $2.0 million in
cash, $0.4 million of availability under its revolving credit facility and a
commitment to purchase $20.0 million of Series D-3 Preferred Stock, which
shares were subsequently issued on October 18, 2001. 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.
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 revolving 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
September 30, 2001, the Company had $274.6 million outstanding on its
revolving credit facility and the weighted average interest rate on such
revolving credit facility was 6.56%. Assuming no increase or decrease in the
amount outstanding, a hypothetical immediate 100 basis point increase (or
decrease) in interest rates at September 30, 2001 would increase (or
decrease), the Company's annual interest expense and cash outflow by
approximately $2.7 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 March 5, 2001, the Company sold 15,000 newly issued shares of its
Cumulative Redeemable Preferred Stock, Series B, par value $0.1 per share
(the "Series B Preferred Stock") to Ascent in consideration of $15 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 B Preferred Stock are not convertible into or
exchangeable for any other securities of the Company.
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
Page 18
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 November 14, 2001.
ON COMMAND CORPORATION
Date: November 14, 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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