1
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 MARCH 31, 2001
Commission File Number 00-21315
ON COMMAND CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-04535194
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
7900 E. UNION AVE., DENVER, COLORADO 80237
(Address of principal executive offices) (Zip Code)
(720) 873-3200
(Registrant's telephone number, including area code)
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
Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of
May 11, 2001 was 30,843,065 shares.
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ON COMMAND CORPORATION
FORM 10-Q
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000 3
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 2001 and 2000 4
Unaudited Condensed Consolidated Statement of Stockholders' Deficit for the Three
Months Ended March 31, 2001 5
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2001 and 2000 6
Notes to Unaudited Condensed Consolidated Financial Statements 7-11
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 12-16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities 18
Item 3 - Defaults Upon Senior Securities 18
Item 4 - Submission of Matters to a Vote of Security Holders 18
Item 5 - Other Information 18
Item 6 - Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ON COMMAND CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31, December 31,
2001 2000
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,848 $ 3,569
Accounts receivable, (net of allowance for doubtful accounts of
$1,382 on 3/31/01 and $1,366 on 12/31/00) 35,763 35,514
Note receivable -- 1,445
Other current assets 1,782 1,993
--------- ---------
Total current assets 39,393 42,521
Video systems, net 288,025 296,221
Property and equipment, net 23,338 21,182
Goodwill, net 68,477 68,921
Note receivable -- 5,015
Cost investments 26,398 1,563
Other assets, net 4,811 3,871
--------- ---------
Total assets $ 450,442 $ 439,294
========= =========
Current liabilities:
Accounts payable $ 33,712 $ 41,627
Accounts payable to stockholder 145 145
Accrued compensation 7,773 6,932
Other accrued liabilities 4,544 10,906
Current portion of capital lease obligations 443 705
Taxes payable 5,087 5,457
--------- ---------
Total current liabilities 51,704 65,772
Capital lease obligations 1,126 1,332
Revolving credit facility 273,133 247,133
--------- ---------
Total liabilities 325,963 314,237
--------- ---------
Commitments and contingencies (notes 3, 7, 10 and 11)
Stockholders' equity:
Preferred stock -- --
Common stock 308 306
Additional paid-in capital - common 253,819 253,801
Additional paid-in capital - preferred 37,064 21,688
Common stock warrants 31,450 31,450
Redeemable common stock 4,122 --
Other comprehensive income - cumulative translation loss (3,615) (3,060)
Accumulated deficit (176,619) (157,454)
Note receivable from stockholder (22,050) (21,674)
--------- ---------
Total stockholders' equity 124,479 125,057
--------- ---------
Total liabilities and stockholders' equity $ 450,442 $ 439,294
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
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ON COMMAND CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31,
---------------------------------
2001 2000
------------ ------------
Revenues:
Room $ 60,861 $ 62,386
Video system sales / other 1,353 2,578
------------ ------------
Total revenues 62,214 64,964
------------ ------------
Direct costs:
Room 29,077 29,007
Video system sales / other 960 1,744
------------ ------------
Total direct costs 30,037 30,751
------------ ------------
Operating expenses:
Operations 9,197 7,671
Research and development 1,467 2,107
Selling, general and administrative 6,921 5,853
Depreciation and amortization 21,265 19,749
Relocation expense 3,347 --
------------ ------------
Total operating expenses 42,197 35,380
------------ ------------
Loss from operations (10,020) (1,167)
Interest/ other expense, net 5,392 3,294
Loss on disposal of assets / legal settlement 3,723 --
------------ ------------
Loss before income taxes (19,135) (4,461)
Provision for income taxes 30 106
------------ ------------
Net loss (19,165) (4,567)
Preferred stock dividend 129 --
------------ ------------
Net loss applicable to common stockholders $ (19,294) $ (4,567)
============ ============
Basic and diluted loss per share $ (0.63) $ (0.15)
============ ============
Basic and diluted weighted average number
of common shares outstanding 30,609,848 30,371,406
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
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ON COMMAND CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2001 (UNAUDITED)
(IN THOUSANDS)
Additional Additional
Preferred Stock Common Stock paid-in paid-in
------------------- ------------------------ capital capital
Shares Amount Shares Amount Common Preferred
-------- ------ -------- -------- ---------- ----------
BALANCE AT JANUARY 1, 2001 14 - 30,554 306 253,801 21,688
Other comprehensive loss -
Translation adjustment -- - -- -- -- --
Net loss -- - -- -- -- --
-------- --- -------- -------- -------- --------
TOTAL COMPREHENSIVE LOSS -- - -- -- -- --
Exercise of stock options -- - 2 -- 18 --
Issuance of common stock
under ESP plan -- - 9 -- -- --
Interest on shareholder note -- - -- -- -- 376
Issuance of preferred stock 15 - -- -- -- 15,000
Issuance of common stock in
legal settlement with Maginet -- - 275 2 -- --
-------- --- -------- -------- -------- --------
BALANCE AT MARCH 31, 2001 29 - 30,840 308 253,819 37,064
======== === ======== ======== ======== ========
Accumulated
Common Redeemable Other Notes Total
Stock Warrants Common Comprehensive Accumulated Receivable Stockholders'
Amount Stock Income Deficit Stockholder Equity
-------------- ---------- ------------- ----------- ----------- -------------
BALANCE AT JANUARY 1, 2001 31,450 -- (3,060) (157,454) (21,674) 125,057
Other comprehensive loss -
Translation adjustment -- -- (555) -- -- (555)
Net loss -- -- -- (19,165) -- (19,165)
-------- -------- -------- -------- -------- --------
TOTAL COMPREHENSIVE LOSS -- -- (555) (19,165) -- (19,720)
Exercise of stock options -- -- -- -- -- 18
Issuance of common stock
under ESP plan -- -- -- -- -- --
Interest on shareholder note -- -- -- -- (376) --
Issuance of preferred stock -- -- -- -- -- 15,000
Issuance of common stock in
in legal settlement with Maginet -- 4,122 -- -- -- 4,124
-------- -------- -------- -------- -------- --------
BALANCE AT MARCH 31, 2001 31,450 4,122 (3,615) (176,619) (22,050) 124,479
======== ======== ======== ======== ======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
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ON COMMAND CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended
March 31
-------------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss $(19,165) $ (4,567)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 21,265 19,749
Loss (gain) on disposal of fixed assets 23 --
Loss (gain) on litigation settlement 3,700 --
Changes in assets and liabilities:
Accounts receivable, net (256) (7,642)
Other assets (1,471) 82
Accounts payable (7,797) 1,527
Accounts payable to stockholder -- 13
Accrued compensation 799 (624)
Taxes payable (389) (622)
Other accrued liabilities (6,347) 533
-------- --------
Net cash provided by (used in) operating activities (9,638) 8,449
Cash flows from investing activities:
Capital expenditures (14,516) (19,631)
Cost investments and notes receivables (18,375) --
-------- --------
Net cash used in investing activities (32,891) (19,631)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings under credit line 26,000 8,000
Payments on capital lease obligations (472) (891)
Proceeds from issuance of common and preferred stock 15,020 1,298
-------- --------
Net cash provided by financing activities 40,548 8,407
-------- --------
Effect of exchange rate changes on cash 260 (165)
-------- --------
Net decrease in cash and cash equivalents (1,721) (2,940)
Cash and cash equivalents, beginning of period 3,569 8,972
-------- --------
Cash and cash equivalents, end of period $ 1,848 $ 6,032
======== ========
Supplemental information:
Cash paid for interest $ 5,359 $ 1,934
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
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ON COMMAND CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
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") for the
purpose of effecting (i) the merger of On Command Video Corporation
("OCV"), a majority-owned subsidiary of Ascent, with a wholly-owned
subsidiary of OCC, after which OCV became a wholly-owned subsidiary of OCC,
and (ii) the acquisition (the "Acquisition") of Spectradyne, Inc., a
wholly-owned subsidiary of SpectraVision, Inc. Following the Acquisition,
Spectradyne, Inc. changed its name to SpectraVision, Inc.
("SpectraVision"). Ascent had been a majority-owned subsidiary of COMSAT
Corporation ("COMSAT") and on June 27, 1997, COMSAT consummated the
distribution of its 80.67% ownership interest in Ascent to the COMSAT
shareholders on a pro-rata basis in a transaction that was tax-free for
federal income tax purposes (the "Distribution").
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 (the
"Merger") 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 installed video system is OCV's
patented video selection and distribution system that allows hotel guests
to select motion pictures on computer-controlled television sets located in
their hotel rooms at any time. 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
games, internet offerings and various hotel and guest services. At March
31, 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 of
the company are unaudited. In the opinion of management, all adjustments
have been made that are necessary to present fairly the financial position
of the company as of March 31, 2001 and 2000, as well as the results of its
operations for the three months then ended. 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.
2. LOSS PER SHARE
Basic loss per share is computed by dividing net loss available to common
stockholders by the weighted-average number of common shares outstanding
during the period. Diluted loss per share is computed by dividing net loss
available to common stockholders after preferred stock dividends by the
weighted-average number of common equivalent shares outstanding for the
period. Common stock equivalent shares include common stock options,
preferred stock and warrants, except that at March 31, 2001 and 2000,
approximately 13.0 million and 9.7 million dilutive securities (primarily
common stock options, warrants, and convertible preferred stock),
respectively, have been excluded from the dilutive calculation because of
their antidilutive effect on net loss per share.
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The following is the reconciliation of the numerators and denominators of
the basic and diluted loss per share computations:
THREE MONTHS ENDED
--------------------------------------------
MARCH 31, MARCH 31,
2001 2000
----------------- -------------
(in 000's except loss per share amounts)
Net Loss Per Share:
Net loss applicable to common stockholders $ (19,294) $ (4,567)
Weighted average common shares outstanding 30,610 30,371
Net loss per common share, basic and diluted $ (0.63) $ (0.15)
3. DEBT
On March 27, 2001, the Company signed an amendment to its revolving
credit facility. This amendment to the revolving credit facility increases
the borrowing ratio from 3.5 times EBITDA over the preceding four quarters
to 4.25 times EBITDA over the preceding four quarters and decreases the
borrowings allowed under the revolving credit facility from $350 million to
$320 million. The Company is restricted to total borrowings of $275 million
while certain public indebtedness of Ascent remains outstanding (see
"Liquidity and Capital Resources").
4. LITIGATION
In September 1998, OCV filed suit against Maginet Corporation 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 Corporation. In exchange for contributing
100% of its Asia-Pacific subsidiary equity interests to Maginet, payment of
$1.0 million cash, and the issuance of 275,000 shares of OCC common stock,
the Company received a 7.5% minority interest in Maginet. OCC 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 OCC to repurchase all, but not less than all, of the shares of OCC
common stock issued to Maginet at a price per share of $15.00. This
obligation will terminate if the OCC 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
OCC common stock held by Maginet are freely tradable by Maginet during such
time, either because a registration settlement covering those shares is
effective or the shares are saleable pursuant to an exemption under the
Securities Act. The Company estimated the fair value of its 7.5% minority
interest in Maginet 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.
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
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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.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities", which defines
derivatives, requires that all derivatives be carried at fair value, and
provides for hedge accounting when certain conditions are met. SFAS No.
133, as amended by SFAS 137, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The adoption of this statement had no
material impact on the Company's financial position, results of operations
or cash flows, as the Company did not have any derivative instruments
during the period.
In September, 2000, the FASB issued SFAS 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement of FASB No. 125" which carries forward most of SFAS 125's
provisions without change and primarily revises only the standards for
accounting for securitizations and other transfers of financial assets and
collateral. SFAS 140 revises and clarifies the criteria for determining
whether a transferor has surrendered control over transferred assets. SFAS
140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The Company
does not believe that the adoption of this statement will have a material
impact on the Company's financial position, results of operations or cash
flows.
6. COST INVESTMENTS
On March 30, 2001, the Company completed a strategic $20 million
investment in convertible preferred stock of STSN, Inc., ("STSN") a
high-speed broad band 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
9.4% of the equity interests of STSN. The Company previously recorded the
$5 million Convertible Promissory Note in Notes Receivables 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., a hotel company and major customer of
OCC ("Marriott"), and Siemens Corporation, a German corporation which among
many other things, manufactures electronic equipment and supplies. STSN has
an exclusive contract to provide its service with Marriott International,
Inc.
7. ACQUISITIONS
At December 31, 2000, the Company had a $1.4 million Convertible
Promissory Note (the "Promissory Note") with Hotel Digital Network, Inc.
("DMN"). On February 28, 2001, pursuant to a stock purchase agreement
between OCC and DMN, for aggregate payments by OCC of approximately $1.7
million (including the conversion of the Promissory Note) and a commitment
to fund up to an additional $2.7 million, DMN issued to OCC 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. This transaction 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.
The operating results of DMN are included in the Company's consolidated
financial statements of operations from the date of acquisition.
8. SERIES B PREFERRED STOCK ISSUANCE
On March 5, 2001, OCC sold 15,000 newly issued shares of its Cumulative
Redeemable Preferred Stock, Series B, par value $.01 per share (the "Series
B Preferred Stock"), to Ascent in consideration of $15,000,000 in cash,
pursuant to a Preferred Stock Agreement, dated March 5, 2001 (the "Ascent
Purchase Agreement"), between OCC and Ascent.
The liquidation preference (the "Liquidation Preference") of each share
of the Series B 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
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provisions of the Series B 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 Series B Preferred Stock are entitled to receive
cumulative dividends, when and as declared by OCC, in preference to
dividends on junior securities, including the common stock and the Series A
Preferred Stock. 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 at the
rate of 12% per annum of the Liquidation Preference from and including
April 15, 2001 to but excluding the date on which the Liquidation
Preference is made available pursuant to a redemption of the Series B
Preferred Stock or a liquidation of OCC. Accrued dividends are payable
monthly, commencing on April 15, 2001, 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. Dividends added to the Liquidation Preference accrue dividends on a
daily basis at the rate of 12% per annum. Accrued dividends not paid as
provided above on any dividend payment date accumulate and such accumulated
unpaid dividends may be declared and paid at any time without reference to
any regular dividend payment date, to holders of record of Series B
Preferred Stock as of a special record date fixed by OCC. Subject to
certain specified exceptions, OCC is prohibited from paying dividends on
any parity securities or any junior securities (including common stock)
during any period in which OCC is in arrears with respect to payment of
dividends on Series B Preferred Stock.
Upon any liquidation, dissolution or winding up of OCC, the holders of
Series B Preferred stock are entitled to receive from the assets of OCC
available for distribution to stockholders an amount in cash per share
equal to the Liquidation Preference of a share of Series B 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 B Preferred Stock and the holders of
any parity securities. The holders of Series B Preferred Stock will be
entitled to no other or further distribution of or participation in the
remaining assets of OCC after receiving the Liquidation Preference per
share. Series B Preferred Stock is not convertible into any other security
of OCC.
Shares of Series B Preferred Stock are redeemable at the option of OCC at
any time after March 5, 2001 at a redemption price per share payable in
cash equal to the Liquidation Preference of such share on the redemption
date. Any redemptions by OCC are required to be made pro rata if less than
all shares of Series B Preferred Stock are to be redeemed.
Series B Preferred Stock will not rank junior to any other capital stock
of OCC in respect of rights of redemption or rights to receive dividends or
liquidating distributions. OCC may not issue any senior securities without
the consent of the holders of at least 66 2/3% of the number of shares of
Series B Preferred Stock then outstanding.
9. SIGNIFICANT CUSTOMER
On March 21, 2001, OCC and Marriott entered into a definitive agreement
pursuant to which OCC 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. RELOCATION 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 July, 2001. During the three
months ended March 31, 2001, $3.3 million of relocation expenses have been
recognized and recorded. The relocation expenses
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include severance, stay bonuses, search fees, contractors, travel and
redundant operations expenses.
11. SUBSEQUENT EVENTS
SALE OF SERIES C PREFERRED STOCK
On April 23, 2001, OCC 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 $10,000,000 in cash,
pursuant to a Preferred Stock Agreement, dated April 23, 2001 (the "Series
C Purchase Agreement"), between OCC and Ascent.
The liquidation preference (the "Series C Liquidation Preference") of
each share of Series C 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 C 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 C Preferred Stock are entitled to receive
cumulative dividends, when and as declared by OCC, in preference to
dividends on junior securities, including the common stock and the Series A
Preferred Stock, and ratably on dividends to parity securities, including
the Series B Preferred Stock. Dividends accrue on the Series C Preferred
Stock on a daily basis at the rate of 12% per annum of the Series C
Liquidation Preference from and including April 23, 2001 to but excluding
the date on which the Series C Liquidation Preference is made available
pursuant to a redemption of the Series C Preferred Stock or a liquidation
of OCC. Accrued dividends are payable monthly, commencing May 15, 2001, in
cash. Dividends not paid on any dividend payment date are added to the
Series C Liquidation Preference until such dividends are paid. Dividends
added to the Series C Liquidation Preference shall accrue interest on a
daily basis at the rate of 12% per annum. Accrued dividends not paid as
provided above on any dividend payment date accumulate and such accumulated
unpaid dividends may be declared and paid at any time without reference to
any regular dividend payment date, to holders of Series C Preferred Stock
as of a special record date fixed by OCC. Subject to certain specified
exceptions, OCC is prohibited from paying dividends on any parity
securities or any junior securities (including common stock) during any
period in which OCC is in arrears with respect to payment of dividends on
Series C Preferred Stock.
Upon any liquidation, dissolution or winding up of OCC, the holders of
Series C Preferred Stock are entitled to receive from the assets of OCC
available for distribution to stockholders an amount in cash per share
equal to the Series C Liquidation Preference of a share of Series C
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 C Preferred Stock and the
holders of any parity securities. The holders of Series C Preferred Stock
will be entitled to no other or further distribution of or participation in
the remaining assets of OCC after receiving the Series C Liquidation
Preference per share. Series C Preferred Stock is not convertible into any
other security of OCC.
Shares of Series C Preferred Stock are redeemable at the option of OCC at
any time after April 23, 2001 at a redemption price per share payable in
cash equal to the Series C Liquidation Preference of such share on the
redemption date. Any redemptions by OCC are required to be made pro rata if
less than all shares of Series C Preferred Stock are to be redeemed.
Series C Preferred Stock will not rank junior to any other capital stock
of OCC in respect of rights of redemption or rights to receive dividends or
liquidating distributions. Series C Preferred Stock and Series B Preferred
Stock (see Note 7) are to be considered parity securities. OCC may not
issue any senior securities without the consent of the holders of at least
66 2/3% of the number of shares of Series C Preferred Stock then
outstanding.
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ITEM 2. 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 OCC'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 domestic lodging industry. With the exception of the current quarter, in
which the Company decreased 35,000 rooms as a result of the Maginet settlement,
OCC has experienced growth in the past eight years. OCC has increased its base
of installed rooms from approximately 37,000 rooms at the end of 1992 to
approximately 946,000 rooms at March 31, 2001, of which approximately 857,000
rooms are served by on-demand systems. OCC is a holding company whose principal
assets are On Command Video Corporation, SpectraVision, Inc., and On Command
Development Corporation, each of which operates as a separate, wholly owned
subsidiary of OCC.
OCC 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,
television-based internet with a wireless keyboard, and other guest services. At
March 31, 2001, OCC had installed the OCX video system in approximately 161,000
hotel rooms, 123,000 with internet capability. The OCV video system is a
patented video selection and distribution technology platform that allows hotel
guests to select, at any time, movies and games through the television sets in
their rooms. At March 31, 2001, OCC had installed OCV video systems in
approximately 696,000 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 March 31, 2001, installed
in approximately 89,000 hotel rooms. The SpectraVision video system generally
offers fewer movie choices than the OCV or OCX video systems. As previously
disclosed, in Octber 2000, Hilton Corporation announced that it would not be
renewing its Master Agreement with the Company and would be signing an agreement
with LodgeNet Entertainment Corporation. The Company currently services
approximately 60,300 Hilton-owned rooms and approximately 60,300 Hilton managed
and franchised rooms. The effects of Hilton's decision not to renew the Master
Agreement will be spread out over eight years since the Hilton hotels under
contract with the Company have contracts that are not coterminous with the
Master Agreement.
In addition to movies, OCC's platforms provide for in-room viewing of
select cable channels (such as HBO, Starz Encore, ESPN, CNN and Disney Channel)
and other interactive and information services, which include the capability for
high-speed internet access through the OCX platform. OCC primarily provides its
services under long-term contracts to hotel chains, hotel management companies,
and individually owned and franchised hotel properties. OCC'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.
At March 31, 2001, approximately 89.4% of OCC's 946,000 installed rooms
were located in the United States, with the balance located primarily in Canada,
the Caribbean, Europe, and Latin America. In addition to installing systems in
hotels served by OCC, the company sells its systems to certain other providers
of in-room entertainment, including Hospitality Networks, Inc., which is
licensed to use OCC's systems to provide on-demand, in-room entertainment and
information services to certain gaming-based hotel properties, and ALLIN
Interactive, who is licensed to install OCC's systems on cruise ships.
The company is a Delaware corporation that was formed in July 1996. On
March 28, 2000, Liberty Media Corporation closed a cash tender offer for the
common stock of Ascent Entertainment Group, Inc., the Company's controlling
stockholder, and thereby obtained control of the Company. On June 8, 2000,
Liberty completed a merger with Ascent (the "Merger") pursuant to which Ascent
became an indirect, wholly owned subsidiary of Liberty.
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ANALYSIS OF OPERATIONS
Following is selected financial information for the three months ended
March 31, 2001 compared to the same period for 2000.
SELECTED FINANCIAL INFORMATION
(In thousands, except hotel and room amounts)
--------------------------------------------------------------
% OF % OF
MAR 31 TOTAL MAR 31 TOTAL
2001 REVENUE 2000 REVENUE
-------- -------- -------- --------
Revenues:
Room Revenues $ 60,861 97.8% $ 62,386 96.0%
Video Systems/Other 1,353 2.2% 2,578 4.0%
-------- -------- -------- --------
Total Revenues 62,214 100.0% 64,964 100.0%
Direct Costs:
Room Revenues 29,077 46.7% 29,007 44.7%
Video Systems/Other 960 1.6% 1,744 2.7%
-------- -------- -------- --------
Total Direct Costs 30,037 48.3% 30,751 47.3%
-------- -------- -------- --------
Direct Profit 32,177 51.7% 34,213 52.7%
Operations 9,197 14.8% 7,671 11.8%
Research & Development 1,467 2.3% 2,107 3.2%
Selling, General & Administrative 6,921 11.1% 5,853 9.0%
-------- -------- -------- --------
17,585 28.2% 15,631 24.1%
-------- -------- -------- --------
EBITDA (1) 14,592 23.5% 18,582 28.6%
Depreciation and Amortization 21,265 34.2% 19,749 30.4%
Relocation expense 3,347 5.4% -- 0.0%
Interest/other expense, net 5,392 8.6% 3,294 5.1%
Loss on disposal of assets/legal settlement 3,723 6.1% -- 0.0%
Taxes 30 0.0% 106 0.2%
-------- -------- -------- --------
33,757 54.3% 23,149 35.6%
-------- -------- -------- --------
Net Loss $(19,165) (30.8%) $ (4,567) (7.0%)
======== ======== ======== ========
Other Data:
Net cash provided
by (used in) operating activities (9,638) 8,449
Net cash used
in investing activities (32,891) (19,631)
Net cash provided
by financing activities 40,548 8,407
Capital Expenditures (14,516) (19,631)
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--------------------------------------------------------------
% OF % OF
MAR 31 TOTAL MAR 31 TOTAL
2001 REVENUE 2000 REVENUE
-------- -------- -------- --------
TOTAL HOTELS 3,456 3,416
TOTAL ROOMS 946,000 958,000
ROOM COMPOSITION:
Geographic
Domestic 846,000 89.4% 827,000 86.3%
International 100,000 10.6% 131,000 13.7%
System Type
Scheduled Only 41,000 4.3% 65,000 6.8%
On-Demand 905,000 95.7% 893,000 93.2%
(1) EBITDA represents earnings before interest, income taxes, depreciation,
amortization, relocation expense, and legal settlement and impairment charges.
The most significant difference between EBITDA and cash provided from operations
is changes in working capital and interest expense. EBITDA is presented because
it is a widely accepted financial indicator used by certain investors and
analysts to analyze and compare companies on the basis of operating performance.
In addition, management believes EBITDA 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. EBITDA is
not intended to represent cash flows for the period, or to depict funds
available for dividends, reinvestment or other discretionary uses. EBITDA 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.
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THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED
MARCH 31, 2000
Revenues consist primarily of fees from hotels for guest programming
and fees associated with pay-per-view movies, video games, internet services and
other services provided through OCC's in-room video systems. Total revenues for
the first quarter of 2001 decreased $2.8 million or 4.3% to $62.2 million, as
compared to $65.0 million for the comparable period of 2000. Room revenues
decreased $1.5 million or 2.4% in the first quarter of 2001 to $60.9 million, as
compared to $62.4 million in the first quarter of 2000. The decrease was
primarily due to lower movie buy rates and a decrease in the total number of
hotel rooms. The first quarter of 2000 included two movie releases which
generated some of the highest buy rates in the Company's history. Total rooms
decreased from approximately 958,000 at the end of Q1 2000 to 946,000 at March
31, 2001. This decrease in rooms was a result of the loss of approximately
35,000 rooms as part of the Maginet settlement, offset by increases in new rooms
realized during the normal course of business. As a result of the settlement,
OCC now has a 7.5% investment in Maginet (refer to Part II, Item 1 "Legal
Proceedings"). Game rooms increased 41.8% to 298,000 rooms and revenue increased
by 12.7%. Short Video rooms increased 143.6% to 609,000 rooms and revenues
increased 1054% to $0.6 million. The increase in short video revenue is
primarily the result of several new offerings, including HBO On Command, and
Golf Academy. The @Hotel TV (internet) room base increased to 123,000 rooms and
revenue increased by 196%. Video system sales and other revenues totaled $1.4
million for the period equal to the first quarter of 2001, as compared to $2.6
million for the same period in 2000. This decrease is primarily due to a
one-time return of $1.0 million of goods in the first quarter of 2001.
Direct costs consist primarily of costs of installing, maintaining and
repairing video systems in hotels, including labor costs and fees paid to movie
and other content providers. Total direct costs of revenues for the first
quarter of 2001 decreased $0.8 million or 2.6% to $30.0 million; as compared to
$30.8 million for the first quarter of 2000. Direct costs associated with room
revenue in the first quarter of 2001 remained relatively flat at $29.1 million,
versus $29.0 million for the same period of 2000, and, as a percentage of room
revenue, increased to 47.8% for the first quarter of 2001 compared to 46.5% for
the first quarter of 2000. The increase in the direct costs as a percent of room
revenue was due to increases in the costs associated with providing
"free-to-guest" programming to the hotels and the higher cost of providing
Internet services to the hotels. Direct costs from video system sales and other
revenues decreased $0.7 million or 41.2% to $1.0 million and 71% of sales in the
first quarter of 2001, as compared to $1.7 million and 65.4% of sales in the
same period of 2000.
Operating expenses, which consist primarily of labor and material
expense required to maintain the existing equipment in hotels, for the first
quarter of 2001 increased $1.5 million or 19.5% to $9.2 million, as compared to
$7.7 million in the first quarter of 2000. As a percentage of room revenue,
operations expenses increased to 15.1% as compared to 12.3% in the first quarter
of 2000. The increase is principally due to a larger percentage of total
incurred costs being expensed for maintenance activities.
Research and development expenses for the first quarter of 2001
decreased $0.6 million or 28.6% to $1.5 million, as compared to $2.1 million
expended in the same period of 2000, and decreased as a percentage of total
revenue from 3.2% in the 2000 period to 2.4% in the 2001 period.
Selling, general and administrative expenses for the first quarter of
2001 increased $1.0 million or 16.9% to $6.9 million as compared to $5.9 million
in the first quarter of 2000. As a percentage of total revenue, these expenses
increased from 9.0% in the 2000 period to 11.1% in the 2001 period. The increase
is principally due to approximately $0.5 million in legal expenses associated
with the Maginet litigation, and additional expenditures in information
technology, offset by reductions in other administrative departments.
Depreciation and amortization expenses for the first quarter of 2001
increased $1.5 million or 7.6% to $21.3 million, as compared to $19.8 million
for the first quarter of 2000, and as a percentage of total revenue increased to
34.2% for the first quarter 2001 from 30.4% for the first quarter of 2000. This
increase occurred primarily due to additions to the depreciable base of video
systems and property and equipment.
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Relocation expenses of $3.3 million for the quarter include all
applicable severance, stay bonuses, hiring costs, moving costs, travel,
contractors, and redundant salaries associated with relocating the Company's
headquarters to Denver. The company did not incur any relocation expenses in the
first quarter of 2000. The Company expects to incur additional relocation
expenses through the second quarter of 2001.
Interest/other expense for the first quarter of 2001 increased $2.0
million or 60.6% to $5.3 million as compared to $3.3 million for the first
quarter of 2000. This increase is due to additional borrowings under the
Company's revolving credit facility.
Provision for income taxes for the quarters ended March 31, 2001 and
2000 represents tax on income in certain international and domestic
jurisdictions.
Net loss applicable to common stockholders increased to $19.3 million
for the quarter ended March 31, 2001 from $4.6 million for the quarter ended
March 31, 2000 due to factors described above.
SEASONALITY
The business of OCC is seasonal, with higher revenues per room realized
during the summer months and lower revenues per room realized during the winter
months due to business and vacation travel patterns.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of cash during the three months ended
March 31, 2001 primarily consisted of cash from the issuance of preferred stock
of $15 million and borrowings of $26 million. The Company's primary source of
cash during the three months ended March 31, 2000 primarily consisted of cash
from operations of $8.4 million and borrowings of $8.0 million. For the three
months ended March 31, 2001 and March 31, 2000, respectively, cash was expended
primarily for capital expenditures which totaled $14.5 million for the first
three months of 2001 and $19.6 million for the first three months of 2000,
related primarily to the conversion of hotels equipped with SpectraVision and
OCV systems to OCC's new OCX systems, the installation of new hotels with OCC's
systems, increased inventory, and internal fixed asset purchases. In addition,
the Company invested $15 million in the first quarter of 2001 as part of a
strategic investment in convertible preferred stock of STSN, Inc., a high-speed
broad band internet access provider for hotels. The Company also used $9.6
million in operations during the first quarter of 2001.
At March 31, 2001, the Company had $273.1 million outstanding under its
revolving credit facility. The Company's ability to draw additional funds under
the revolving credit facility is limited by the total amount of borrowing
permitted by the revolving credit facility and certain financial covenants
contained in that facility. On March 27, 2001, the Company entered into an
amendment to the revolving credit facility that (a) reduces the total amount of
borrowing allowed from $350 million to $320 million and (b) amends the financial
covenant described in the previous sentence to allow for total indebtedness of
the Company up to 4.25 times the Company's EBITDA plus certain non-recurring
expenses for the trailing four quarters. Subject to the following paragraph, the
Company could obtain an additional $46.9 million in long-term financing under
the revolving credit facility, as amended.
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 total indebtedness from exceeding an aggregate
of $275 million so long as such public indebtedness of Ascent is outstanding. At
March 31, 2001, the total indebtedness of the Company was equal to $275 million
and therefore no funds are or will be available for borrowing under the
revolving credit facility, as amended, or under any other debt arrangements
while the public indebtedness of Ascent remains outstanding.
Without additional sources of capital, the Company will not be able to
satisfy its future working capital, capital expenditure and debt service
requirements from existing cash, cash generated from operations and funds
available under existing borrowing arrangements. It will be necessary for the
Company to raise additional capital through additional debt or equity financing
in order to satisfy these requirements. However, there can be no assurance that
such financing would be available on terms acceptable to the Company or, if
available, that the proceeds of such financing would be sufficient to enable the
Company to satisfy all of its requirements. In addition, while Ascent's public
indebtedness referred to in the previous paragraph is outstanding, the Company
will not be able to raise additional debt financing.
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ITEM 3. 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 OCC credit facility generally bear interest at variable
rates based on the London Interbank Offering Rate ("LIBOR") and on certain
operating ratios of the Company. At March 31, 2001, the Company had $273.1
million outstanding on its credit facility and the weighted average interest
rate on such credit facility was 7.66%. Assuming no increase or decrease in the
amount outstanding, a hypothetical immediate 100 basis point increase (or
decrease) in interest rates at March 31, 2001 would increase (or decrease), the
Company's annual interest expense and cash outflow by approximately $2.7
million.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
In September 1998, OCV filed suit against Maginet Corporation 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 Corporation. In
exchange for contributing its Asia-Pacific subsidiary assets to Maginet, payment
of $1.0 million cash, and the issuance of 275,000 shares of OCC common stock,
the Company received a 7.5% minority interest in Maginet. OCC 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 OCC to
repurchase all, but not less than all, of the shares of OCC common stock issued
to Maginet at a price per share of $15.00. This obligation will terminate if the
OCC 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 OCC common stock held by Maginet are freely tradable
by Maginet during such time, either because a registration settlement covering
those shares is effective or the shares are saleable pursuant to an exemption
under the Securities Act. The Company estimated the fair value of its 7.5%
minority interest in Maginet at approximately $5.3 million, which resulted in an
estimated loss of approximately $4.8 million recorded in the fourth quarter of
2000. Upon completion of the settlement on March 1, 2001, an additional charge
of $3.7 million was recorded. 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.
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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ITEM 2. CHANGES IN SECURITIES:
(a) Not applicable
(b) Not applicable
(c) On March 5, 2001, OCC sold 15,000 newly issued shares of its
Cumulative Redeemable Preferred Stock, Series B, par value $.01
per share (the "Series B Preferred Stock"), to Ascent in
consideration of $15,000,000 in cash in a private transaction
exempt from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"), pursuant to Section 4(2)
thereof. Shares of Series B Preferred Stock are not convertible
into or exchangeable for any other securities of OCC.
On March 16, 2001, OCC issued 275,000 shares of OCC common stock
to Maginet Corporation in connection with the settlement of
certain litigation. In exchange for the issuance of those shares
of OCC common stock, the contribution by OCC of OCC's Asia Pacific
subsidiary assets and the payment of $1.0 million in cash, OCC
received a 7.5% minority interest in Maginet. In addition, OCC
agreed to repurchase such shares of OCC common stock from Maginet
in certain circumstances. This repurchase right and other material
terms of the settlement of the Maginet litigation are described in
more detail in "Item 1 - Legal Proceedings" of this Part II. The
issuance of these shares of OCC common stock to Maginet was exempt
from the registration requirements of the Securities Act pursuant
to Section 4(2) thereof. Shares of OCC common stock are not
convertible into or exchangeable for any other equity securities
of OCC.
(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:
ORGANIZATIONAL CHANGES
On April 27, 2001, Jerome H. Kern resigned as CEO of the Company.
Mr. Kern retained his position as chairman of the On Command board
of directors. Carl E. Vogel, who is on the Company's board of
directors and serves on the executive committee, assumed the
position of vice chairman of the board of directors. He is a
senior vice president of Liberty Media Corporation, and is
president, CEO and director of Liberty Satellite & Technology,
Inc. (LSATA).
Chris Sophinos was appointed president of On Command on April 27,
2001. He has been with LSATA since 1996, and will remain as senior
vice president of LSATA. Gregory B. Armstrong was promoted to
executive vice president and chief operating officer. He joined On
Command in October 2000 as senior vice president of international
and regional operations, and worked at Tele-Communications
International, Inc. from 1994-2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
None
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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 May 21, 2001.
On Command Corporation
/s/ KATHRYN L. HALE
----------------------------------
Kathryn L. Hale
Senior Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
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