<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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.)
6331 SAN IGNACIO AVE, SAN JOSE, CALIFORNIA 95119
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(408) 360-4500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
(not applicable)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
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
September 30, 1997 was 29,784,729 shares.
<PAGE> 2
ON COMMAND CORPORATION
FORM 10Q
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets as of September 30,1997 and December 31,1996. 3
Condensed Consolidated Statements of Operations for the Three Months and Nine Months
Ended September 30,1997 and 1996. 4
Condensed Consolidated Statements of Cash Flows for the Nine months Ended
September 30,1997 and 1996. 5
Notes to Condensed Consolidated Financial Statements. 6-8
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. 9-14
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ON COMMAND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,849 $ 5,733
Accounts receivable, net 29,663 25,328
Other current assets 2,523 3,718
Deferred income taxes 1,593 1,593
--------- ---------
Total current assets 35,628 36,372
Video systems, net 263,898 250,600
Property and equipment, net 11,243 11,037
Goodwill, net 83,143 89,503
Other assets, net 6,831 9,374
--------- ---------
Total assets $ 400,743 $ 396,886
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,866 $ 16,823
Accounts payable - stockholder 203 21
Accrued compensation 4,516 4,931
Other accrued liabilities 6,712 6,627
Taxes payable 13,607 15,777
Deferred revenue 1,756 232
Current portion of revolving credit facility 77,000 48,000
--------- ---------
Total current liabilities 120,660 92,411
Other accrued liabilities 991 1,700
Long-term portion of revolving credit facility 50,000 50,000
Deferred income taxes 1,858 1,858
--------- ---------
Total liabilities 173,509 145,969
--------- ---------
Stockholders' equity:
Common stock, $.01 par value: shares authorized - 50,000 in 1997 and 1996;
shares issued and outstanding - 29,785 in 1997 and 29,087 in 1996;
shares subscribed-323 in 1997 and 960 in 1996 301 300
Additional paid-in capital 249,370 249,164
Common stock warrants 31,450 31,450
Cumulative translation adjustments (309) (260)
Accumulated deficit (53,578) (29,737)
--------- ---------
Total stockholders' equity 227,234 250,917
--------- ---------
Total liabilities and stockholders' equity $ 400,743 $ 396,886
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE> 4
ON COMMAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Movie revenues $ 53,544 $ 28,041 $ 158,087 $ 83,624
Video system sales/other 3,441 4,652 7,349 11,559
--------- --------- --------- ---------
Total revenues 56,985 32,693 165,436 95,183
--------- --------- --------- ---------
Direct costs:
Movie revenues 23,150 11,693 72,961 34,624
Video system sales/other 2,584 3,680 4,607 8,689
--------- --------- --------- ---------
Total direct costs 25,734 15,373 77,568 43,313
--------- --------- --------- ---------
Direct income 31,251 17,320 87,868 51,870
Operating expenses:
Operations 7,812 3,007 25,539 8,247
Research and development 1,936 1,060 5,039 2,989
Selling, general and administrative 5,437 1,432 16,327 3,644
Depreciation and amortization 19,636 11,935 58,159 33,228
--------- --------- --------- ---------
Total operating expenses 34,821 17,434 105,064 48,108
--------- --------- --------- ---------
Operating income (loss) (3,570) (114) (17,196) 3,762
Interest expense, net (2,158) (738) (5,853) (1,727)
--------- --------- --------- ---------
Income (loss) before income taxes (5,728) (852) (23,049) 2,035
Income tax (expense) benefit (340) 1,263 (792) --
--------- --------- --------- ---------
Net income (loss) (6,068) 411 (23,841) 2,035
Redeemable common stock accretion -- 160 -- 483
--------- --------- --------- ---------
Net income (loss) applicable to nonredeemable common stock $ (6,068) $ 251 $ (23,841) $ 1,552
========= ========= ========= =========
Net income (loss) per common and equivalent share $ (0.20) $ 0.01 $ (0.79) $ 0.07
========= ========= ========= =========
Weighted-average number of common shares outstanding 30,102 21,848 30,070 22,246
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-4-
<PAGE> 5
ON COMMAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(23,841) $ 2,035
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 58,159 33,228
Deferred income taxes, net -- 3,970
Changes in assets and liabilities:
Accounts receivable, net (4,335) (2,876)
Other assets 1,235 (1,133)
Accounts payable 43 3,462
Accounts payable to stockholder 182 (4,635)
Accrued compensation (415) 84
Other accrued liabilities (624) 624
Taxes payable 830 1,306
Deferred revenue 1,524 (593)
-------- --------
Net cash provided by operating activities 32,758 35,472
-------- --------
Cash flows from investing activities:
Capital expenditures (65,800) (56,169)
Other assets -- (2,155)
-------- --------
Net cash used in investing activities (65,800) (58,324)
-------- --------
Cash flows from financing activities:
Proceeds from revolving credit facility 29,000 --
Proceeds from sale of stock 207 --
Proceeds from stockholders' notes payable -- 22,967
Pricipal payments on stockholders' notes payable -- (649)
Proceeds from issuance of stock -- 578
-------- --------
Net cash provided by financing activities 29,207 22,896
-------- --------
Effect of exchange rate changes in cash (49) --
Net increase (decrease) in cash and cash equivalents (3,884) 44
Cash and cash equivalents, beginning of period 5,733 956
-------- --------
Cash and cash equivalents, end of period $ 1,849 $ 1,000
-------- --------
Non-cash investing activities:
Net assets acquired from
contribution agreement with Ascent $ -- $ 1,385
======== ========
Reversal of accrual made in purchase price allocation $ 3,000 $ --
======== ========
Supplemental information:
Cash paid for income taxes $ 262 $ 414
======== ========
Cash paid for interest $ 4,900 $ 1,482
======== ========
Accretion of redeemable common stock $ -- $ 483
======== ========
Dividends declared $ -- $ 10,654
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-5-
<PAGE> 6
ON COMMAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1. BASIS OF PRESENTATION
On Command Corporation (the "Company" or "OCC") is a
Delaware corporation formed by Ascent Entertainment Group, Inc.
("Ascent") for the purpose of effecting (i) the merger (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. ("Oldco"). 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").
Effective October 8, 1996, the Merger and Acquisition
were consummated. The Merger has been accounted for using the
historical book value of the assets, liabilities and stockholders'
equity acquired from OCV in a manner similar to a pooling of
interests and the Acquisition was accounted for as a purchase using
the fair value of the assets acquired and liabilities assumed from
Oldco. Accordingly, the condensed financial statements of the
Company include the historical statements of financial position at
September 30, 1997 and December 31, 1996, and the results of
operations and cash flows for the nine months ended September 30,
1997 and 1996 of OCV, as well as the acquired operations of
SpectraVision subsequent to the date the Acquisition. Per share
amounts and number of shares have been restated to reflect the 2.84
shares of OCC common stock received for every share of OCV common
stock previously held. Prior to the Merger and Acquisition, OCC had
no significant operations. (See Note 3 for additional discussion of
the business combination.)
The condensed financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). While the quarterly financial
information contained in this filing is unaudited, the financial
statements presented reflect all adjustments (consisting only of
normal recurring adjustments) which the Company considers necessary
for a fair presentation of the financial position at September 30,
1997 and December 31, 1996, and the results of operations and cash
flows for the nine months ended September 30, 1997 and 1996. The
results for interim periods are not necessarily indicative of the
results to be expected for the entire year.
Certain fiscal 1996 amounts have been reclassified to
conform with the fiscal 1997 presentation. Such reclassifications
had no effect on net income or stockholders' equity.
2. NET INCOME (LOSS) PER SHARE
Net income per share is based on the weighted-average
number of common and dilutive common equivalent shares outstanding
during the periods. Common equivalent shares include redeemable
common stock and common stock options and warrants. Net loss per
share is calculated by dividing the net loss applicable to
nonredeemable common stock by the weighted-average number of common
shares outstanding as including common stock equivalents would be
antidilutive.
3. BUSINESS COMBINATION
As discussed in Note 1 to the Company's 1996 Financial
Statements, effective October 8, 1996 (the "Closing Date"), the
Company acquired all of the outstanding capital stock of
SpectraVision, the primary operating subsidiary of Oldco, together
with certain other assets of Oldco and its affiliates.
-6-
<PAGE> 7
As of the Closing Date, the stockholders of OCV received
21,750,000 shares of OCC common stock (72.5% of the initial OCC
common stock). In consideration for the acquisition of the net
assets and properties of SpectraVision by OCC, OCC paid $4,000,000
in cash and issued 8,041,618 shares of OCC common stock to the Oldco
bankruptcy estate for distribution to Oldco's creditors.
Additionally, 208,382 shares were held in reserve pursuant to the
Acquisition for potential adjustments. Of these, 196,382 shares of
reserved stock were subsequently distributed to the Oldco bankruptcy
estate for the benefit of Oldco's creditors with the remaining
12,000 shares distributed to the OCV stockholders. Ascent owned
approximately 57.1% of the outstanding common stock of OCC at
September 30, 1997.
In connection with the Acquisition and Merger, OCC also
issued warrants representing the right to purchase a total of
7,500,000 shares of OCC common stock (20% of the outstanding common
stock of OCC after exercise of the warrants). The warrants have a
term of seven years and an exercise price of $15.27 per share of OCC
common stock. Series A warrants to purchase on a cashless basis an
aggregate of 1,425,000 shares of OCC common stock were issued to the
former OCV stockholders, of which Ascent received warrants to
purchase 1,124,325 shares; Series B warrants to purchase for cash an
aggregate of 2,625,000 shares of OCC common stock were issued to the
Oldco bankruptcy estate for distribution to creditors; and
$4,000,000 in cash was paid and Series C warrants were issued to
OCC's investment advisor to purchase for cash an aggregate of
3,450,000 shares of OCC common stock in consideration for certain
banking and advisory services provided in connection with the
transactions. The Acquisition has been accounted for under the
purchase method and, accordingly the results of operations of
SpectraVision are included in the Consolidated Financial Statements
from the Closing Date.
4. DEBT
In conjunction with the SpectraVision Acquisition, the
Company obtained a $125 million credit facility with a bank (the
"Credit Facility"), dated as of October 8, 1996. The Credit Facility
consists of (i) a 364-day revolving credit and competitive advance
facility which, subject to certain conditions, will be renewable for
four 364-day periods, and (ii) a five-year revolving credit and
competitive advance facility; provided, however, that any amounts
borrowed under the five-year facility will reduce the amount
available under the 364-day facility. Revolving loans extended under
the Credit Facility generally will bear interest at the London
Interbank Offering Rate ("LIBOR") plus a spread that may range from
0.375% to 0.645% depending on certain operating ratios of Company.
The Credit Facility limits the Company's ability to incur
indebtedness or pay dividends, but does not preclude the Company
from paying cash dividends on its common stock. The Credit Facility
contains customary covenants, including, among other things,
compliance by the Company with certain financial covenants. The
Company was in compliance with such covenants at December 31, 1996
and with such covenants, as amended, at September 30, 1997.
On March 23, 1997, OCC entered into an amendment to the
Credit Facility (the "OCC Amendment"). Under the OCC Amendment the
amount available under the OCC Credit Facility was increased from
$125 million to $150 million, and certain other terms were amended
to clarify such terms.
5. LITIGATION
The Company is a defendant, and may be 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.
-7-
<PAGE> 8
6. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128). The Company is required to adopt
SFAS 128 in the fourth quarter of fiscal 1997 and will restate at
that time earnings per share (EPS) data for prior periods to conform
with SFAS 128. Earlier application is not permitted. SFAS 128
replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution
and is computed by dividing net income available to nonredeemable
common stock by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. If SFAS
128 had been in effect during the nine months ended September 30,
1997, basic and diluted EPS would not have been different than fully
diluted EPS currently reported for the period. If SFAS 128 had been
in effect during the nine months ended September 30, 1996, basic and
diluted EPS would not have been different from the amount previously
reported.
In June 1997, the Financial Accounting Standards Board
adopted Statements of Financial Accounting Standards No. 130
"Reporting Comprehensive Income", (SFAS 130) which requires that an
enterprise report, by major components and as a single total, the
change in its net assets during the period from nonowner sources;
and No. 131 "Disclosures about Segments of an Enterprise and Related
Information", (SFAS 131) which establishes annual and interim
reporting standards for an enterprise's business segments and
related disclosures about its products, services, geographic areas,
and major customers. Adoption of these statements will not impact
the Company's consolidated financial position, results of operations
or cash flows. The Company is required to and will adopt both SFAS
130 and 131 in fiscal 1998.
7. SUBSEQUENT EVENT
On October 31, 1997, the Company sold the building which
housed the SpectraVision spare part depot in Richardson, Texas for
$4.5 million in cash.
-8-
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q may contain 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
judgment 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 Condensed Consolidated Financial Statements, notes
thereto, and Management Discussion and Analysis of Financial Condition and
Results of Operations contained in the Company's 1996 annual report on Form 10-K
and 10-Q's, as filed with the Securities and Exchange Commission.
OVERVIEW
OCC is the leading provider (by number of hotel rooms served) of
on-demand in-room video entertainment for the United States lodging industry.
The on-demand OCC system is a patented video selection and distribution system
that allows guests to select at any time, on a pay-per-view basis, from up to 50
motion pictures on computer controlled television sets located in their rooms.
OCC (OCV prior to October 8, 1996) has experienced rapid growth in the past four
years, increasing its base of installed rooms from approximately 37,000 rooms at
the end of 1992 to approximately 872,000 rooms at September 30, 1997. OCC also
provides in-room viewing of free-to-guest programming of select cable channels
and other interactive services. OCC provides its services under long-term
contracts primarily to business and luxury hotel chains such as Marriott,
Hilton, Hyatt, Wyndham, Doubletree, Fairmont, Four Seasons, Loews, Stouffer,
Embassy Suites, Holiday Inn and Harvey Hotels, and to other hotel management
companies; and individually owned and franchised hotel properties.
At September 30, 1997, approximately 87% of OCC's 872,000 installed
rooms were located in the United States, with the balance located in Canada,
Asia, Europe and Mexico. Of these installed systems, approximately 86% had
on-demand capability.
GUEST PAY SERVICES
OCC provides scheduled and on-demand in-room television viewing of major
motion pictures (including new releases) and independent non-rated motion
pictures for mature audiences for which a hotel guest pays on a per-view basis.
Depending on the type of system installed and the size of the hotel, guests can
choose among twenty (20) to fifty (50) different movies with an on demand system
or among eight (8) to twelve (12) movies with a scheduled system.
OCC obtains the non-exclusive rights to show recently released motion
pictures from major motion picture studios generally pursuant to a master
agreement with each studio. The license period and fee for each motion picture
are negotiated individually with each studio, which typically receives a
percentage of that picture's gross revenues generated by the pay-per-view
system. Typically, OCC obtains rights to exhibit major motion pictures during
the time frame after initial theatrical release and before release for home
video distribution or cable television exhibition. OCC also obtains independent
motion pictures, most of which are non-rated and are intended for mature
audiences, for a one-time flat fee that is nominal in relation to the licensing
fees paid for major motion pictures.
Under OCC's standard arrangements with hotels, OCC installs its system
into the hotel and retains ownership of all its equipment used in providing the
service. Depending on the size of the hotel property and the configuration of
the system installed, the installed cost of a new on-demand system with
interactive and video game services capabilities, including the head-end
equipment, averages from approximately $300 to $700 per room. The hotels collect
movie viewing charges from their guests and retain a commission equal to a
percentage of the total pay-per-view revenue that can vary depending on the
system, the hotel, and amount of revenue generated.
The revenue generated from the Company's pay-per-view service is
dependent upon the occupancy rate at the property, the "buy rate" or percentage
of occupied rooms that buy movies or other services at the property, and the
price of the movie or service. Occupancy rates vary by property based on the
property's location, competitive position within its marketplace, seasonal
factors and general economic conditions. Buy rates generally reflect the hotel's
guest mix profile, the popularity of the motion pictures or services available
at the hotel, and the guests' other entertainment alternatives. Buy rates also
vary over time with general economic conditions.
-9-
<PAGE> 10
FREE-TO-GUEST SERVICES
OCC also markets a free-to-guest service pursuant to which a hotel may
elect to receive one or more satellite programming channels, such as HBO,
Showtime, CNN, ESPN, WTBS, and other cable networks. OCC provides hotels
free-to-guest services through a variety of arrangements including having the
hotel pay the Company a fixed monthly fee per room for each programming channel
selected or having the price of such programming included in the Company's other
offerings.
INTERACTIVE AND OTHER SERVICES
In addition to entertainment services, OCC provides interactive services
to the lodging industry. These services generate revenues and cash flows which
are independent of viewing levels. These services use two-way interactive
communications capability of the Company's equipment and room availability
monitoring.
In addition to installing systems in hotels served by OCC, OCC sells
systems to certain other providers of in-room entertainment including MagiNet
Corporation (formerly Pacific Pay Video Limited), which is licensed to use OCC's
system to provide on-demand in-room entertainment in the Asia Pacific region,
and Hospitality Networks, a provider of pay-per-view services to the certain
hotels in the Las Vegas, Nevada region.
ANALYSIS OF OPERATIONS
EFFECTS OF SATELLITE DISRUPTION
On January 11, 1997, OCC experienced an interruption in service for
certain of it's SpectraVision hotels caused by the loss of communication with a
satellite used to deliver pay-per-view programming. Approximately 950 of OCC's
approximately 3,100 hotels were effected. Of the hotels affected, approximately
410 hotels continued to provide limited pay-per-view services through alternate
disk or tape-based systems. By February 9, 1997, OCC was able to obtain
alternate satellite service and had restored full service to all the hotels
affected. The Company believes the loss of satellite service in the first
quarter of 1997 resulted in approximately $3 million to $4 million of decreased
EBITDA through reduced revenues and increased expenses in that period. On July
23, 1997, the alternate satellite service was terminated. As of that date, many
of the rooms previously receiving only satellite broadcast were installed with
tape based replacement systems. The remaining satellite only rooms, which
totaled approximately 37,000 rooms, were either assigned or had service
discontinued (see below).
ROOM AND INVESTMENT ACTIVITY
Room counts during the third quarter decreased to approximately
872,000 worldwide rooms. The decrease is largely due to the assignment of
approximately 45,000 SpectraVision rooms (satellite and tape based rooms) to
Skylink Cinema Corporation in July 1997. Rooms with OCV systems increased during
the third quarter from approximately 515,000 at June 30, 1997, to approximately
545,000 on September 30, 1997. Capital expenditures totaled $21.9 million during
the quarter in support of OCV's room growth, additional expenditures on prior
installations, and internal fixed asset purchases. Following is selected
financial information for the three and nine months ended September 30, 1997
compared to the same periods for 1996.
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<PAGE> 11
SELECTED FINANCIAL INFORMATION
(In thousands, except hotel and room amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------------- --------------------------------------------
% OF % OF % OF % OF
SEPT.30, TOTAL SEPT. 30, TOTAL SEPT. 30, TOTAL SEPT. 30, TOTAL
1997 REVENUE 1996 REVENUE 1997 REVENUE 1996 REVENUE
-------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Movie Revenues $ 53,544 94.0% $ 28,041 85.8% $ 158,087 95.6% $ 83,624 8.1%
Video Systems/Other 3,441 6.0% 4,652 14.2% 7,349 4.4% 11,559 11.9%
--------- --------- --------- --------- --------- --------- --------- ---------
Total Revenues 56,985 100.0% 32,693 100.0% 165,436 100.0% 95,183 100.0%
Direct Costs
Movie Revenues 23,150 40.6% 11,693 35.8% 72,961 44.1% 34,624 36.4%
Video Systems/Other 2,584 4.5% 3,680 11.3% 4,607 2.8% 8,689 9.1%
--------- --------- --------- --------- --------- --------- --------- ---------
Total Direct Costs 25,734 45.2% 15,373 47.0% 77,568 46.9% 43,313 45.5%
--------- --------- --------- --------- --------- --------- --------- ---------
Direct Profit 31,251 54.8% 17,320 53.0% 87,868 53.1% 51,870 54.5%
Operations 7,812 13.7% 3,007 9.2% 25,539 15.4% 8,247 8.7%
Research & Development 1,936 3.4% 1,060 3.2% 5,039 3.0% 2,989 3.1%
Selling, General & Administrative 5,437 9.5% 1,432 4.4% 16,327 9.9% 3,644 3.8%
--------- --------- --------- --------- --------- --------- --------- ---------
15,185 26.6% 5,499 16.8% 46,905 28.4% 14,880 15.6%
--------- --------- --------- --------- --------- --------- --------- ---------
EBITDA (1) 16,066 28.2% 11,821 36.2% 40,963 24.8% 36,990 38.9%
Depreciation & Amortization 19,636 34.5% 11,935 36.5% 58,159 35.2% 33,228 34.9%
Interest 2,158 3.8% 738 2.3% 5,853 3.5% 1,727 1.8%
Taxes 340 0.6% (1,263) -3.9% 792 0.5% -- 0.0%
--------- --------- --------- --------- --------- --------- --------- ---------
22,134 38.8% 11,410 34.9% 64,804 39.2% 34,955 36.7%
--------- --------- --------- --------- --------- --------- --------- ---------
Net Income/(Loss) $ (6,068) -10.6% $ 411 1.3% $ (23,841) -14.4% $ 2,035 2.1%
========= ========= ========= ========= ========= ========= ========= =========
CAPITAL EXPENDITURES $ 21,885 $ 18,733 $ 65,800 $ 56,169
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
% OF % OF
SEPT. 30, TOTAL SEPT. 30, TOTAL
1997 ROOMS 1996 ROOMS
-------------------- --------------------
TOTAL HOTELS 2,931 1,588
TOTAL ROOMS 872,000 441,000
ROOM COMPOSITION:
Geographic
Domestic 763,000 87.5% 424,000 96.1%
International 109,000 12.5% 17,000 3.9%
System Type
Scheduled Only 123,000 14.1% -- 0.0%
On-Demand 749,000 85.9% 441,000 100.0%
- ---------------------------------
(1) EBITDA represents earnings before interest, income taxes, depreciation
and amortization. The most significant difference between EBITDA and
cash provided from operations is changes in working capital. 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, which are presented in the financial
statements in Item 1 and discussed in Item 2 under Liquidity and Capital
Resources.
-11-
<PAGE> 12
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30,1996
Total revenues for the third quarter of 1997 increased $24.3 million or
74.3% to $57.0 million, as compared to $32.7 million for the comparable period
of 1996. Movie revenues increased $25.5 million or 90.9% in the third quarter of
1997 to $53.5 million, as compared to $28.0 million in the third quarter of
1996. The increase was primarily due to the acquisition of SpectraVision and to
a lesser degree, increases in the OCV room base. The Company's room base
increased from approximately 441,000 rooms at September 30, 1996 to
approximately 872,000 rooms at September 30, 1997. Approximately 470,000 rooms
were acquired in the SpectraVision Acquisition, approximately 45,000 of which
had been assigned to Skylink Cinema Corporation in July 1997. Video system sales
and other revenues decreased $1.2 million or 26.0% to $3.4 million as compared
to $4.7 million in 1996, principally due to a slowdown in ordering of video
systems from two of the Company's primary licensees.
Total direct costs of revenues for the third quarter of 1997 increased
$10.4 million or 67.4% to $25.7 million, as compared to $15.4 million for the
third quarter of 1996. Direct costs associated with movie revenue in the third
quarter of 1997 increased 98.0% to $23.2 million, as compared to $11.7 million
for the same period in 1996, and as a percentage of movie revenue increased to
43.2% at September 30, 1997 from 41.7% at September 30, 1996. The increase is
principally attributed to lower revenues from free-to-guest programming from the
hotels, higher royalties on feature movies and higher hotel commissions expense
on the SpectraVision room revenues. Direct costs from video system sales and
other revenues decreased 29.8% to $2.6 million in 1997, as compared to $3.7
million in 1996, primarily as a result of a decline in sales volume of video
systems. Direct costs as a percentage of video system sales and other revenues
decreased to 75.1% from 79.1% in 1996, primarily attributable to the increase in
other revenues which have significantly higher margins than video system sales.
Operations costs, which consists primarily of technical field support
for the hotels, for the third quarter of 1997 increased $4.8 million or 159.8%
to $7.8 million, as compared to $3.0 million in the third quarter of 1996, and
as a percentage of total revenue increased to 13.7% from 9.2% in 1996. The
increase is primarily due to the higher field service costs to support the
acquired SpectraVision equipment and the SpectraVision spare part depot used to
refurbish SpectraVision equipment.
Research and development expenses for the third quarter of 1997
increased $0.9 million or 82.6% to $1.9 million from $1.1 million in the third
quarter of 1996, and increased as a percentage of total revenue to 3.4% from
3.2% in 1996. The reason for the increase is due to the sustaining engineering
support requirements of the SpectraVision platforms, and additionally the
development of the company's new digital technologies.
Selling, general and administrative expenses for the third quarter of
1997 increased $4.0 million or 279.7% to $5.4 million, as compared to $1.4
million in the third quarter of 1996, and as a percentage of total revenue
increased to 9.5% from 4.4% in the third quarter of 1996. The increase is
principally due to costs to support the SpectraVision room base, activities to
integrate SpectraVision's and OCV's accounting and operational systems, and
higher administrative costs associated with being a public company with an
expanded international presence .
Depreciation and amortization expenses for the third quarter of 1997
increased $7.7 million or 64.5% to $19.6 million, as compared to $11.9 million
for the third quarter of 1996, and decreased as a percentage of total revenue to
34.5% at September 30, 1997 from 36.5% at September 30, 1996, and as a
percentage of movie revenue decreased to 36.7% at September 30, 1997 from 42.6%
at September 30, 1996. These expenses are primarily attributable to depreciable
assets associated with video systems that generate movie revenue. The dollar
increase is primarily due to capital investments associated with the growing OCV
room base and with incremental depreciation and amortization resulting from the
acquisition of SpectraVision's in-room assets. The percentage decrease is
primarily attributable to the lower cost basis of the acquired SpectraVision
assets.
Interest expense for the third quarter of 1997 increased $1.4 million
or 192.4% to $2.2 million, as compared to $0.7 million in the third quarter of
1996. The increase is due to the Company's greater reliance on debt financing to
continue the expansion of its installed customer base and debt used to complete
the acquisition of SpectraVision.
Provision for income taxes for the third quarter of 1997 increased $1.6
million or 126.9% to $0.3 million as compared to an income tax benefit of $1.3
million in the third quarter of 1996. The income tax expense in 1997 represents
tax on income in foreign jurisdictions.
-12-
<PAGE> 13
Redeemable common stock accretion was eliminated in 1997 as this
security was converted to common stock in 1996. The accretion in the third
quarter of 1996 was $0.2 million.
EBITDA for the third quarter of 1997 increased $4.2 million or 35.9% to
$16.1 million as compared to $11.8 million in the third quarter of 1996. EBITDA
as a percentage of total revenue decreased to 28.2% in 1997 from 36.2% in 1996.
The reduced percentage is primarily due to the higher direct costs and operating
expenses associated with operating the SpectraVision business as discussed
above.
Net income (loss) decreased to a net loss of $6.1 million for the third
quarter of 1997 from net income of $0.4 million for the third quarter of 1996
due to the factors described above.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30,1996
Total revenues for the nine months ended September 30, 1997 increased
$70.3 million or 73.8% to $165.4 million, as compared to $95.2 million for the
comparable period of 1996. Movie revenues increased $74.3 million or 88.6% in
the nine months of 1997 to $158.1 million, as compared to $83.8 million in the
nine months of 1996. The increase was primarily due to the acquisition of
SpectraVision and to a lesser degree, increases in OCV room base. Management
believes revenues in the first nine months of 1997 would have been higher by
approximately $3 million to $4 million had the satellite disruption, as
previously discussed, not occurred. Video system sales and other revenues
decreased $4.0 million or 35.4% to $7.3 million as compared to $11.4 million in
1996, principally due to a slowdown in ordering of video systems from two of the
Company's primary licensees.
Total direct costs of revenues for the nine months ended September 30,
1997 increased $34.3 million or 79.1% to $77.6 million, as compared to $43.3
million for the same period of 1996. Direct costs associated with movie revenue
in the first nine months of 1997 increased 110.7% to $73.0 million, as compared
to $34.6 million for the same period in 1996, and as a percentage of movie
revenue increased to 46.2% for the nine months ended September 30, 1997 from
41.3% for the nine months ended September 30, 1996. The increase is principally
attributed to lower revenues from free-to-guest programming from the hotels,
higher royalties on feature movies and higher hotel commissions expense on the
SpectraVision room revenues. Direct costs from video system sales and other
revenues decreased 47.0% to $4.6 million in 1997, as compared to $8.7 million in
1996, primarily as a result of a decline in sales volume of video systems.
Direct costs as a percentage of video system sales and other revenues decreased
to 62.7% from 76.4% in 1996, primarily attributable to the increase in other
revenues which have significantly higher margins than video system sales.
Operations costs, which consists primarily of technical field support
for the hotels, for the nine months ended September 30, 1997 increased $17.3
million or 209.7% to $25.5 million, as compared to $8.2 million in nine months
ended September 30, 1996, and as a percentage of total revenue increased to
15.4% in 1997 from 8.7% in 1996. The increase is primarily due to the higher
field service costs to support the acquired SpectraVision equipment, the
SpectraVision spare part depot used to refurbish SpectraVision equipment, and
expenses associated with the satellite outage, as previously discussed. Expenses
in the first nine months associated with the deployment of alternative satellite
capacity in the affected SpectraVision hotels was approximately $1 million.
Research and development expenses for the nine months ended September
30, 1997 increased $2.1 million or 68.6% to $5.0 million from $3.0 million in
the nine months of 1996, but decreased slightly as a percentage of total revenue
to 3.0% for 1997 from 3.1% for 1996. The reason for the increase is due to the
sustaining engineering support requirements of the SpectraVision platforms, and
additionally the development of the company's new digital technologies.
Selling, general and administrative expenses for the nine months ended
September 30, 1997 increased $12.7 million or 348.1% to $16.3 million, as
compared to $3.6 million for the same period of 1996, and as a percentage of
total revenue increased to 9.9% in 1997 from 3.8% in 1996. The increase is
principally due to costs to support the SpectraVision room base, activities to
integrate SpectraVision's and OCV's accounting and operational systems, and
higher administrative costs associated with being a public company with an
expanded international presence.
Depreciation and amortization expenses for the nine months ended
September 30, 1997 increased $25.0 million or 75.0% to $58.2 million, as
compared to $33.2 million for the same period in 1996, and increased as a
-13-
<PAGE> 14
percentage of total revenue to 35.2% for the first nine months of 1997 from
34.9% for 1996, however, as a percentage of movie revenue, decreased to 36.8%
for 1997 from 39.6% for 1996. These expenses are primarily attributable to
depreciable assets associated with video systems that generate movie revenue.
The dollar increase is primarily due to capital investments associated with the
growing OCV room base and with incremental depreciation and amortization
resulting from the acquisition of SpectraVision's in-room assets. The percentage
decrease is primarily attributable to the lower cost basis of the acquired
SpectraVision assets.
Interest expense for the nine months ended September 30, 1997 increased
$4.1 million or 238.9% to $5.9 million, as compared to $1.7 million for the same
period of 1996. The increase is due to the Company's greater reliance on debt
financing to continue the expansion of its installed customer base and debt used
to complete the acquisition of SpectraVision.
Provision for income taxes for the nine months ended September 30, 1997
increased $0.8 million as compared to zero income tax expense in the same period
of 1996. The income tax expense in 1997 represents tax on income in foreign
jurisdictions.
Redeemable common stock accretion was eliminated in 1997 as this
security was converted to common stock in 1996. The accretion in the first six
months of 1996 was $0.3 million.
EBITDA for the nine months ended September 30, 1997 increased $4.0
million or 10.7% to $41.0 million, as compared to $37.0 million for the same
period of 1996. The increase is due to larger revenue for the nine months ended
September 30, 1997, as compared to the same period of 1996. EBITDA as a
percentage of total revenue decreased to 24.8% in 1997 from 38.9% in 1996. The
reduced percentage is primarily due to direct costs and operating expenses
associated with operating the SpectraVision business, and additionally lost
revenue and increased costs associated with the satellite outage.
Net income (loss) decreased to a net loss of $23.8 million for the nine
months ended September 30, 1997 from net income of $2.0 million for the same
period of 1996 due to the factors described above.
SEASONALITY
The Company's business is expected to be seasonal, with higher revenues
generally realized during the summer months and lower revenues realized during
the winter months due to business and vacation travel patterns.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash during the nine months ended September 30,
1997 were cash from operations of $32.8 million, and borrowing of $29.0 million
from the revolving line of credit with NationsBank of Texas, N.A. (NationsBank).
Cash was expended primarily for capital expenditures which totaled $65.8 million
for the first nine months of the year, primarily for the installation of
on-demand systems in hotels.
As previously noted, the Company's line of credit with NationsBank was
increased from $125 million to $150 million during the first quarter. At
September 30, 1997, the Company had $127 million outstanding under the line of
credit. The Company is in the process of finalizing negotiations with
NationsBank to increase the Company's line of credit and amend certain other
terms and conditions of its credit agreement (the "New Facility"). The Company
expects that cash from operations and the Credit Facility will be sufficient to
finance its expected investment in in-room video systems for the remainder of
1997.
RESTRICTIONS ON DEBT FINANCINGS
Pursuant to the Corporate Agreement entered into between Ascent and
OCC, the Company has agreed, among other things, not to incur any indebtedness
without Ascent's prior written consent, other than indebtedness under the OCC
Credit Facility and indebtedness incurred in the ordinary course of operations,
as limited by Ascent. Ascent's limitation on such OCC indebtedness currently
stands at $130 million through December 31, 1997, although Ascent has agreed to
increase such limitations to $140 million contingent upon OCC's entering into
the New Facility. Restrictions on OCC's ability to incur additional debt could
adversely affect the Company's plans for growth, its ability to develop new
products and technologies and its ability to meet its liquidity needs.
-14-
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
From time to time the Company has been, or may become, involved in
litigation proceedings incidental to the conduct of its business. The Company
does not believe any such proceedings presently pending will have a material
adverse affect on the Company's financial position or its result of operations.
ITEM 2. CHANGES IN SECURITIES:
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K:
None
EXHIBIT NO. DESCRIPTION
27.0 Financial Data Schedule
- ------------
-15-
<PAGE> 16
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 San
Jose, State of California on November 13, 1997.
On Command Corporation
By: /s/ BRIAN A.C.STEEL
----------------------------
Brian A.C. Steel
Executive Vice President,
Chief Financial Officer,
Chief Operating Officer, and
Director
(Principal Financial Officer)
/s/ PAUL J. MILLEY
--------------------------------
Paul J. Milley
Senior Vice President, Finance
(Principal Accounting Officer)
-16-
<PAGE> 17
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
27.0 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,849
<SECURITIES> 0
<RECEIVABLES> 29,683
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,628
<PP&E> 275,141
<DEPRECIATION> 0
<TOTAL-ASSETS> 400,743
<CURRENT-LIABILITIES> 120,880
<BONDS> 0
0
0
<COMMON> 301
<OTHER-SE> 228,833
<TOTAL-LIABILITY-AND-EQUITY> 400,743
<SALES> 56,985
<TOTAL-REVENUES> 56,985
<CGS> 25,734
<TOTAL-COSTS> 25,734
<OTHER-EXPENSES> 34,821
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,158
<INCOME-PRETAX> (5,728)
<INCOME-TAX> 340
<INCOME-CONTINUING> (6,068)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,068)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
