<PAGE> 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 SEPTEMBER 30, 1998
Commission File Number 00-21315
ON COMMAND CORPORATION
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(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
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(Address of principal executive offices) (Zip Code)
(408) 360-4500
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(Registrant's telephone number, including area code)
(not applicable)
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(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, 1998 was 30,160,782 shares.
<PAGE> 2
ON COMMAND CORPORATION
FORM 10-Q
INDEX
<TABLE>
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Page No.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets as of September 30,1998 and December 31,1997. 3
Condensed Consolidated Statements of Operations for the Three Months and Nine Months
Ended September 30, 1998 and 1997. 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30,1998 and 1997. 5
Notes to Condensed Consolidated Financial Statements. 6-7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. 8-14
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,
1998 1997 *
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,267 $ 6,287
Accounts receivable, net 34,662 26,827
Other current assets 2,324 1,959
--------- ---------
Total current assets 43,253 35,073
Video systems, net 272,226 270,531
Property and equipment, net 9,881 7,850
Goodwill, net 78,767 82,049
Other assets, net 4,112 5,885
--------- ---------
$ 408,239 $ 401,388
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,110 $ 20,155
Accrued compensation 5,483 5,805
Other accrued liabilities 10,911 9,763
Taxes payable 8,122 11,115
--------- ---------
Total current liabilities 48,626 46,838
Revolving credit facility 160,000 133,000
Other long-term liabilities 2,189 4,383
--------- ---------
Total liabilities 210,815 184,221
--------- ---------
Stockholders' equity:
Common stock, $.01 par value; shares authorized - 50,000 in 1998 and 1997
shares issued and outstanding, 30,161 in 1998 and 29,801 in 1997;
shares subscribed - 2 in 1998 and 315 in 1997 302 301
Additional paid-in capital 249,774 249,431
Common stock warrants 31,450 31,450
Cumulative translation adjustments (2,161) (964)
Accumulated deficit (81,941) (63,051)
--------- ---------
Total stockholders' equity 197,424 217,167
--------- ---------
408,239 401,388
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
* Derived from audited financial statements.
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<PAGE> 4
ON COMMAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Room revenues $ 57,918 $ 53,544 $ 170,816 $ 158,087
Video system sales / other 5,057 3,441 8,922 7,349
--------- --------- --------- ---------
Total revenues 62,975 56,985 179,738 165,436
--------- --------- --------- ---------
Direct costs:
Room revenues 25,564 23,150 74,167 72,961
Video system sales / other 1,132 2,584 3,311 4,607
--------- --------- --------- ---------
Total direct costs 26,696 25,734 77,478 77,568
--------- --------- --------- ---------
Direct income 36,279 31,251 102,260 87,868
Operating expenses:
Operations 7,879 7,812 24,869 25,539
Research and development 1,708 1,936 5,418 5,039
Selling, general and administrative 5,722 5,437 18,015 16,327
Depreciation and amortization 22,246 19,636 65,488 58,159
--------- --------- --------- ---------
Total operating expenses 37,555 34,821 113,790 105,064
--------- --------- --------- ---------
Operating loss (1,276) (3,570) (11,530) (17,196)
Interest/other expense, net 2,708 2,158 7,472 5,853
--------- --------- --------- ---------
Loss before income taxes (3,984) (5,728) (19,002) (23,049)
Income tax (benefit) expense (10) 340 (112) 792
--------- --------- --------- ---------
Net loss (3,974) (6,068) (18,890) (23,841)
========= ========= ========= =========
Basic and diluted net loss per share $ (0.13) $ (0.20) $ (0.63) $ (0.79)
========= ========= ========= =========
Shares used in basic and diluted per share computations 30,164 30,102 30,143 30,070
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE> 5
ON COMMAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(18,890) $(23,841)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 65,567 58,159
Loss on disposal of fixed assets 72 --
Changes in assets and liabilities:
Accounts receivable, net (7,864) (4,335)
Other assets 359 1,235
Accounts payable 3,996 225
Accrued compensation (564) (415)
Taxes payable (3,794) 830
Other accrued liabilities (1,314) 900
-------- --------
Net cash provided by operating activities 37,568 32,758
Cash flows from investing activities:
Capital expenditures (64,805) (65,800)
-------- --------
Net cash used in investing activities (64,805) (65,800)
-------- --------
Cash flows from financing activities:
Proceeds from revolving credit facility 27,000 29,000
Proceeds from issuance of common stock 344 207
-------- --------
Net cash provided by financing activities 27,344 29,207
-------- --------
Effect of exchange rate changes in cash (127) (49)
-------- --------
Net decrease in cash and cash equivalents (20) (3,884)
Cash and cash equivalents, beginning of period 6,287 5,733
-------- --------
Cash and cash equivalents, end of period $ 6,267 $ 1,849
======== ========
Non-cash activity:
Reversal of accrual made in purchase
price allocation $ -- $ 3,000
======== ========
Supplemental information:
Cash paid for income taxes $ -- $ 262
======== ========
Cash paid for interest $ 6,992 $ 4,900
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE> 6
ON COMMAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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 of
SpectraDyne, Inc., a wholly owned subsidiary of SpectraVision, Inc.
Following the Acquisition in 1996, SpectraDyne, Inc. changed its name
to SpectraVision, Inc. ("SpectraVision"). Ascent was a majority-owned
subsidiary of COMSAT Corporation ("COMSAT") until June 27, 1997, when
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 condensed consolidated 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, 1998 and December 31, 1997, and the results of
operations for the three months and nine months ended September 30,
1998 and 1997 and cash flows for the nine months ended September 30,
1998 and 1997. The results for interim periods are not necessarily
indicative of the results to be expected for the entire year.
2. NET LOSS PER SHARE
Basic and diluted net loss per share are computed by
dividing net loss (numerator) by the weighted-average number of
common shares outstanding (denominator) for the period. At September
30, 1998 and 1997 approximately 10.1 million and 9.9 million
equivalent dilutive securities (primarily common stock options and
warrants), respectively, have been excluded in weighted-average
number of common shares outstanding for the diluted net loss per
share computation as common stock equivalents because their effect is
antidilutive.
3. COMPREHENSIVE LOSS
Total comprehensive loss of $4.6 million and $20.1 million
for the three months and nine months ended September 30, 1998 is
comprised of $4.0 million and $18.9 million net loss plus $0.6
million and $1.2 million net change in the cumulative translation
account, respectively. For the three months and nine months ended
September 30, 1997, total comprehensive loss of $6.3 million and
$23.9 million is comprised of $6.1 million and $23.8 million net loss
plus $1.2 million and $0.1 million net change in the cumulative
translation account, respectively.
4. DEBT
On November 24, 1997, the Company refinanced its former
credit facility and entered into an amended and restated agreement
with its lenders (the "Credit Facility"). Under the amended Credit
Facility, the amount available to the Company was increased from $150
million to $200 million, and certain other terms were amended; most
notably, the inclusion of restrictions on the Company's ability to
pay dividends or make other distributions until the later of January
1, 1999 or until certain operating ratios are attained. The Credit
Facility matures in November 2002 and , subject to certain
conditions, can be renewed for two additional years. At September 30,
1998, there was $40 million of available borrowings under the Credit
Facility, subject to certain covenant restrictions.
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<PAGE> 7
5. LITIGATION
On September 11, 1998, OCC reached an agreement with
LodgeNet Entertainment Corporation (LodgeNet) to settle all pending
litigation between the companies. As a result, the two providers of
in-room entertainment and information services to the lodging
industry have dismissed all pending litigation between the parties in
United States Federal District Courts in California and South Dakota,
with no admission of liability by either party. The terms of the
confidential settlement include a cross-license of each company's
patented technologies at issue to the other party and a covenant not
to engage in patent litigation against the other party for a period
of five years. Each company is responsible for its own legal costs
and expenses, and in connection with the multiple cross-licenses, OCC
expects to receive royalty payments, net of legal fees and expenses,
in an aggregate amount of approximately $10.8 million. OCC received
the first payment of approximately $2.9 million (net of expenses) in
September 1998 and expects to receive an additional two payments of
approximately $3.95 million (net of expenses) in each of July 1999
and July 2000. OCC will be recognizing the additional royalty revenue
as the cash payments are received.
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.
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards 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. The Company has not yet identified its reporting segments.
Adoption of this statement will not impact the Company's consolidated
financial position, results of operations or cash flow. The Company
is required to and will adopt SFAS 131 for the fiscal year 1998.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities", (SFAS
133) which defines derivatives, requires that all derivatives be
carried at fair value, and provides for hedge accounting when certain
conditions are met. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. On a
forward-looking basis, although the Company has not fully assessed
the implications of this new statement, the Company does not believe
adoption of this statement will have a material impact on the
Company's financial position or results of operations.
-7-
<PAGE> 8
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 Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's 1997 Annual Report on Form 10-K, 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 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 movies on
the television sets located in their rooms. OCC also provides in-room viewing of
free-to-guest programming of select cable channels and other interactive
services. OCC (OCV prior to October 8, 1996) has experienced rapid growth in the
past six years, increasing its base of installed rooms from approximately 37,000
rooms at the end of 1992 to approximately 921,000 rooms at September 30, 1998.
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, 1998, approximately 87% of OCC's 921,000 installed rooms
were located in the United States, with the balance located in Canada, Asia,
Europe and Mexico. Of these installed systems, approximately 89% 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 generally 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 revenues generated from the Company's pay-per-view service are
influenced by occupancy rates at the hotel 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.
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<PAGE> 9
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 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
Hospitality Networks, a provider of pay-per-view services to the certain hotels
primarily 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 its 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 affected. 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 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 to another provider or had
service discontinued.
ROOM AND INVESTMENT ACTIVITY
At September 30, 1998, the Company's installed room base was
approximately 921,000, as compared to approximately 872,000 at the end of the
third quarter of 1997. In the third quarter of 1998, the Company installed its
on-demand system in approximately 30,000 rooms, of which approximately 12,000
were new hotel installations, and approximately 18,000 were conversions of
SpectraVision properties. Capital expenditures totaled $64.8 million during the
first nine months of 1998 primarily in support of the new hotel installations,
SpectraVision conversions, increased inventory, and internal fixed asset
purchases. Following is selected financial information for the three and nine
months ended September 30, 1998 compared to the same period for 1997.
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<PAGE> 10
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
1998 REVENUE 1997 REVENUE 1998 REVENUE 1997 REVENUE
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room Revenues $ 57,918 92.0% $ 53,544 94.0% $ 170,816 95.0% $ 158,087 95.6%
Video Systems/Other 5,057(1) 8.0% 3,441 6.0% 8,922(1) 5.0% 7,349 4.4%
--------- --------- --------- --------- --------- --------- --------- ---------
Total Revenues 62,975 100.0% 56,985 100.0% 179,738 100.0% 165,436 100.0%
Direct Costs:
Room Revenues 25,564 40.6% 23,150 40.6% 74,167 41.3% 72,961 44.1%
Video Systems/Other 1,132 1.8% 2,584 4.5% 3,311 1.8% 4,607 2.8%
--------- --------- --------- --------- --------- --------- --------- ---------
Total Direct Costs 26,696 42.4% 25,734 45.2% 77,478 43.1% 77,568 46.9%
--------- --------- --------- --------- --------- --------- --------- ---------
Direct Profit 36,279 57.6% 31,251 54.8% 102,260 56.9% 87,868 53.1%
Operations 7,879 12.5% 7,812 13.7% 24,869 13.8% 25,539 15.4%
Research & Development 1,708 2.7% 1,936 3.4% 5,418 3.0% 5,039 3.0%
Selling, General & Administrative 5,722 9.1% 5,437 9.5% 18,015 10.0% 16,327 9.9%
--------- --------- --------- --------- --------- --------- --------- ---------
15,309 24.3% 15,185 26.6% 48,302 26.9% 46,905 28.4%
--------- --------- --------- --------- --------- --------- --------- ---------
EBITDA (2) 20,970 33.3% 16,066 28.2% 53,958 30.0% 40,963 24.8%
Depreciation & Amortization 22,246 35.3% 19,636 34.5% 65,488 36.4% 58,159 35.2%
Interest/other exp, net 2,708 4.3% 2,158 3.8% 7,472 4.2% 5,853 3.5%
Taxes (10) (0.0%) 340 0.6% (112) (0.1%) 792 0.5%
--------- --------- --------- --------- --------- --------- --------- ---------
24,944 39.6% 22,134 38.8% 72,848 41.2% 64,804 39.2%
--------- --------- --------- --------- --------- --------- --------- ---------
Net Loss $ (3,974) (6.3%) $ (6,068) (10.6%) $ (18,890) (10.5%) $ (23,841) (14.4%)
========= ========= ========= ========= ========= ========= ========= =========
CAPITAL EXPENDITURES $ 19,560 $ 21,885 $ 64,805 $ 65,800
</TABLE>
<TABLE>
<CAPTION>
AS OF % OF AS OF % OF
SEPT. 30, TOTAL SEPT. 30, TOTAL
1998 ROOMS 1997 ROOMS
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
TOTAL HOTELS 3,181 2,931
TOTAL ROOMS 921,000 872,000
ROOM COMPOSITION:
Geographic
Domestic 799,000 86.8% 763,000 87.5%
International 122,000 13.2% 109,000 12.5%
System Type
Scheduled Only 106,000 11.5% 123,000 14.1%
On-Demand 815,000 88.5% 749,000 85.9%
</TABLE>
- ---------------------
(1) Includes the $2.9 million LodgeNet royalty payment.
(2) 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 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, which are
presented in the financial statements in Item 1 and discussed in Item 2
under Liquidity and Capital Resources.
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<PAGE> 11
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Total revenues for the third quarter of 1998 increased $6.0 million or
10.5% to $63.0 million, as compared to $57.0 million for the comparable period
of 1997. Room revenues increased $4.4 million or 8.2% in the third quarter of
1998 to $57.9 million, as compared to $53.5 million in the third quarter of
1997. The increase was primarily due to stronger buy rates for movies during the
third quarter of 1998, higher total rooms during the period, and a higher
percentage of total rooms being served by higher revenue producing on-demand
equipment in the third quarter of 1998 as compared to the same period of 1997.
Video system sales and other revenues increased $1.6 million or 47.0% to $5.1
million in the third quarter of 1998, as compared to $3.4 million in the third
quarter of 1997. The increase was primarily due to receipt of a royalty payment
from LodgeNet of $2.9 million (net of legal fees) (see Note 5 of Notes to
Condensed Consolidated Financial Statements), partially offset by a decrease in
video system sales.
Total direct costs of revenues for the third quarter of 1998 increased
$1.0 million or 3.7% to $26.7 million, as compared to $25.7 million for the
third quarter of 1997. Direct costs associated with room revenue in the third
quarter of 1998 increased $2.4 million or 10.4% to $25.6 million, as compared to
$23.2 million for the same period of 1997, and as a percentage of room revenue
increased to 44.1% for the quarter ended September 30, 1998 from 43.2% for the
quarter ended September 30, 1997. The increase is primarily due to an increase
in hotel commissions and free-to-guest expenses in relation to the increase in
room revenue. Direct costs from video system sales and other revenues decreased
$1.5 million or 56.2% to $1.1 million in the third quarter of 1998, as compared
to $2.6 million in the same period of 1997, due to the decrease in video system
sales. Direct costs as a percentage of video system sales and other revenues
decreased to 22.4% for the third quarter of 1998 from 75.1% for the same period
of 1997, primarily attributable to the LodgeNet royalty payment for which there
were no direct costs. With the LodgeNet payment excluded, direct costs as a
percentage of video system sales and other revenues would have been 53.3% for
the third quarter of 1998. This improvement over the third quarter of 1997 is
primarily due to higher margins on system sales and pre-wire projects.
Operations expenses, which consists primarily of technical field support
for the hotels, for the third quarter of 1998 increased $0.1 million or 1.0% to
$7.9 million, as compared to $7.8 million in the third quarter of 1997, and as a
percentage of room revenue decreased to 13.6% from 14.6% for the same period of
1997. Operations expense includes a positive adjustment of approximately $0.4
million due to the capitalization of certain costs involved in the installation
process. When this adjustment is omitted, Operations expenses total $8.3 million
or 14.3% of room revenue compared to $7.8 million and 14.6% in the same quarter
of 1997. The absolute dollar increase is primarily due to the additional rooms
during the period, higher television maintenance costs, and higher cost of
training.
Research and development expenses for the third quarter of 1998
decreased $0.2 million or 11.8% to $1.7 million from $1.9 million for the third
quarter of 1997. The decrease is primarily due to lower recruiting costs and the
capitalization of certain digital systems that were converted from test to
production during the period.
Selling, general and administrative expenses for the third quarter of
1998 increased $0.3 million or 5.2% to $5.7 million, as compared to $5.4 million
in the third quarter of 1997. The increase is principally due to higher expenses
in the areas of product management and marketing in order to support new
products and initiatives and lower legal expenses due to the settlement of the
LodgeNet litigation.
Depreciation and amortization expenses for the third quarter of 1998
increased $2.6 million or 13.3% to $22.2 million, as compared to $19.6 million
for the third quarter of 1997, and as a percentage of total revenue increased to
35.3% for the quarter ended September 30, 1998 from 34.5% for the quarter ended
September 30, 1997. These expenses consist primarily of depreciable video
systems that generate movie revenue. The dollar increase is mainly due to
capital investments associated with the growing room base. The percentage
increase is mainly attributable to conversion of SpectraVision equipment to OCV
equipment which has a higher cost basis.
-11-
<PAGE> 12
Interest / other expense, net for the third quarter of 1998 increased
$0.6 million or 25.5% to $2.7 million, as compared to $2.2 million in the third
quarter of 1997. The increase is due to the Company's reliance on debt financing
to continue the expansion of its installed customer base and replacement of
SpectraVision systems with OCV systems.
Provision for income taxes for the third quarter of 1998 represents tax
benefits on losses in certain foreign jurisdictions.
EBITDA for the third quarter of 1998 increased $4.9 million or 30.5% to
$21.0 million as compared to $16.1 million in the third quarter of 1997. EBITDA
as a percentage of total revenue increased to 33.3% in the third quarter of 1998
from 28.2% in the same period of 1997. The improved EBITDA amount is primarily
attributable to the increase in revenue for the third quarter of 1998 as
compared to the same period of 1997. With the LodgeNet royalty payment excluded,
EBITDA as a percentage of total revenue increased slightly to 28.7% in the third
quarter of 1998 from 28.2% in the same period of 1997.
Net loss decreased to $4.0 million for the third quarter of 1998 from
$6.1 million for the third quarter of 1997 due to the factors described above.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Total revenues for the nine months ended September 30, 1998 increased
$14.3 million or 8.6% to $179.7 million, as compared to $165.4 million for the
comparable period of 1997. Room revenues increased $12.7 million or 8.1% in the
first nine months of 1998 to $170.8 million, as compared to $158.1 million in
the first nine months of 1997. The increase was primarily due to the satellite
outage in the first quarter of 1997, stronger buy rates for movies during the
first nine months of 1998, and a higher percentage of total rooms being served
by on-demand equipment in 1998 as compared to the same period of 1997. Video
system sales and other revenues increased $1.6 million or 21.4% in the first
nine months of 1998 to $8.9 million, as compared to $7.3 million in the first
nine months of 1997. The increase was primarily due to receipt of the royalty
payment from LodgeNet of $2.9 million (net of legal fees) (see Note 5 of Notes
to Condensed Consolidated Financial Statements), partially offset by a decrease
in the sale of video systems.
Total direct costs of revenues for the nine months ended September 30,
1998 decreased $0.1 million or 0.1% to $77.5 million, as compared to $77.6
million for the nine months ended September 30, 1997. Direct costs associated
with room revenue in the first nine months of 1998 increased $1.2 million or
1.7% to $74.2 million, as compared to $73.0 million for the same period of 1997,
and as a percentage of room revenue decreased to 43.4% for the nine months ended
September 30, 1998 from 46.2% for the nine months ended September 30, 1997. The
increase in direct cost dollars is attributable to an increase in free-to-guest
costs from third party vendors, royalties, and hotel commissions due primarily
to higher revenues and higher room base. The percentage reduction in direct
costs is due to the termination of expensive satellite transmission of movies
and lower per room free-to-guest cost due to negotiated improvements in certain
vendor contracts. Direct costs from video system sales and other revenues
decreased $1.3 million or 28.1% to $3.3 million in the first nine months of
1998, as compared to $4.6 million in the same period of 1997, primarily as a
result of decreased sales of video systems. Direct costs as a percentage of
video system sales and other revenues decreased to 37.1% for the first nine
months of 1998 from 62.7% for the same period of 1997, due primarily to the
inclusion of the net LodgeNet royalty payment in other revenues and improved
margins for system sales and pre-wire projects.
Operations expenses, which consists primarily of technical field
support for the hotels, for the nine months ended September 30, 1998 decreased
$0.7 million or 2.6% to $24.9 million, as compared to $25.5 million for the nine
months ended September 30, 1997, and as a percentage of room revenue decreased
to 14.6% from 16.2% for the same period of 1997. The decrease is primarily due
to $0.5 million of non-recurring satellite re-deployment expenses incurred in
the first quarter of 1997 and a higher percentage of rooms using OCV technology
which is less expensive to support.
Research and development expenses for the nine months ended September
30, 1998 increased $0.4 million or 7.5% to $5.4 million from $5.0 million for
the nine months ended September 30, 1997. The higher expenses are due to
increasing efforts in the development of the Company's new digital platforms and
programming support.
-12-
<PAGE> 13
Selling, general and administrative expenses for the nine months ended
September 30, 1998 increased $1.7 million or 10.3% to $18.0 million, as compared
to $16.3 million for the nine months ended September 30, 1997, and as a
percentage of total revenue increased to 10.0% from 9.9%. The increase is
principally due to higher expenses in product management and marketing in order
to support new products and initiatives, and expenses incurred for legal costs
associated with the LodgeNet litigation.
Depreciation and amortization expenses for the nine months ended
September 30, 1998 increased $7.3 million or 12.6% to $65.5 million, as compared
to $58.2 million for the nine months ended September 30, 1997, and as a
percentage of total revenue increased to 36.4% for the first nine months of 1998
from 35.2% for the same period of 1997. These expenses consist primarily of
depreciable video systems that generate movie revenue. The dollar increase is
mainly due to capital investments associated with the growing OCV room base. The
percentage increase is attributable to conversion of SpectraVision equipment to
OCV equipment which has a higher cost basis.
Interest / other expense, net for the nine months ended September 30,
1998 increased $1.6 million or 27.7% to $7.5 million, as compared to $5.9
million for the nine months ended 1997. The increase is due to the Company's
reliance on debt financing to continue the expansion of its installed customer
base and replacement of SpectraVision systems with OCV systems.
Provision for income taxes for the nine months ended September 30, 1998
represents tax benefits on losses in certain foreign jurisdictions. The income
tax expense for the nine months ended September 30, 1997 represents tax on
income in foreign jurisdictions.
EBITDA for the nine months ended September 30, 1998 increased $13.0
million or 31.7% to $54.0 million as compared to $41.0 million for the nine
months ended September 30, 1997. EBITDA as a percentage of total revenue
increased to 30.0% in the first nine months of 1998 from 24.8% in the same
period of 1997. The improved EBITDA amount is primarily attributable to the
increase in revenue for the nine months ended September 30, 1998 as compared to
the same period of 1997. With the LodgeNet royalty payment excluded, EBITDA as a
percentage of total revenue increased to 28.9% for the first nine months of 1998
from 24.8% for the same period of 1997.
Net loss decreased to $18.9 million for the nine months ended
September 30, 1998 from $23.8 million for the same period of 1997 due to the
factors described above.
SEASONALITY
The Company's business is expected to be seasonal where revenues are
influenced principally by hotel occupancy rates and the "buy rate" or percentage
of occupied rooms at hotels that buy movies or other services at the property.
Higher revenues are generally realized during the summer months and lower
revenues realized during the winter months due to business and vacation travel
patterns which impact the lodging industry's occupancy rates. Buy rates
generally reflect the hotel's guest demographic mix, the popularity of the
motion picture or services available at the hotel and the guests' other
entertainment alternatives.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash during the nine months ended
September 30, 1998 were cash from operations of $37.6 million, and borrowings of
$27.0 million from the Company's Credit Facility (see note 4 of Notes to
Condensed Consolidated Financial Statements). Cash was expended primarily for
capital expenditures which totaled $64.8 million for the first nine months of
the year, primarily for the conversion of SpectraVision systems, the
installation of new hotels with OCV's on-demand system, increased inventory, and
internal fixed asset purchases.
The amount of the Company's Credit Facility is $200 million. At
September 30, 1998, the Company had $160.0 million outstanding under its Credit
Facility and has access to an additional $40.0 million of long-term financing.
The Company expects that the available cash, cash flows from operations and
funds available under the Credit Facility will be sufficient to finance its
expected investment in in-room video systems through the remainder of 1998 and
1999. The Company anticipates capital expenditures in connection with the
continued installation and conversion of hotel rooms will be approximately $20.0
to $30.0 million during the remainder of 1998 and $70.0 to $90.0 million in
1999.
-13-
<PAGE> 14
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 $164.5 million through December 31, 1998.
YEAR 2000
The year 2000 issue is the result of certain computer programs being
written using two digits rather than four digits to define the application year,
such that computer programs that are date sensitive may recognize a date using
"00" as the Year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in normal
business activities for both the Company and its customers who rely on its
products.
The Company is actively engaged, but has not yet completed, reviewing,
correcting and testing all of the Year 2000 compliance issues. Based on the
current review and remediation, the Company has determined that it will be
required to modify or replace some of its internally developed IT software
products. The Company utilizes embedded technology in all of its hotel system
design. The Company's engineering department has completed the majority of its
evaluation process and is currently developing solutions to the Year 2000 issues
affecting the hotel systems. In addition, the Company has also determined that
it will be required to modify and/or replace certain third-party software so
that it will function properly with respect to dates in the Year 2000 and
thereafter. The Company presently believes that with the proper modifications,
the Year 2000 issue will not pose significant operational problems for the
Company or its customers.
The Company is currently on schedule to complete all Year 2000 issues by
June 1999. However, if such modifications and replacements are not made, or not
completed timely, the Year 2000 issue could have a material impact on the
Company and its customers.
The cost to the Company for addressing its Year 2000 issues is estimated
to be less than $1 million with less than $100,000 expended within the first 9
months of 1998. The costs of Year 2000 compliance and the date on which the
Company plans to complete the Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions including
third parties' Year 2000 readiness and other factors.
The Company has and will continue to have communications with its
significant suppliers and customers, to determine the extent to which the
Company may be vulnerable in the event that those parties fail to properly
address their own Year 2000 issues. The Company has taken steps to monitor the
progress made by those parties, and intends to test critical system interfaces,
as the Year 2000 approaches. There is some unknown level of risk based upon the
compliance issue affecting a given hotel, and generally this should be limited
to a specific hotel. Conditions that make a hotel unable to take in guests would
affect the Company's revenue. A large number of the Company's systems are
interfaced with the hotel's property management system. If this interface fails
all movie charges will require manual processing. Processes to perform this are
in place in all hotels and are occasionally utilized at times when the property
management system interface is not functioning. This typically causes a slightly
higher number of lost charges, which could have a material effect if applied to
a large number of customers.
While the Company has not completed a formal contingency plan for the
Year 2000 problem, it has evaluated several anticipated scenarios for failures
affecting both its critical business systems and hotel systems. It is
management's opinion that any of the potential scenarios can be managed by
manual means, although less efficient, while the necessary corrective action is
taken. However, there can be no guarantee that the systems of third parties on
which the Company relies will be corrected in a timely manner, that manual
processing of the Company's movie charges would be accomplished, or that the
failure to properly convert by another company would not have a material adverse
effect on the Company.
-14-
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
From time to time the Company has been, or may become, involved in legal
proceedings incidental to the conduct of its business. While the outcome of such
proceedings cannot be predicted with certainty, the Company does not believe any
such proceedings presently pending will have a material adverse effect 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.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
- ---------
-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 16, 1998.
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)
By: /s/ PAUL J. MILLEY
----------------------------------
Paul J. Milley
Senior Vice President, Finance
(Principal Accounting Officer)
-16-
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001020871
<NAME> ON COMMAND CORPORATION
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,267
<SECURITIES> 0
<RECEIVABLES> 35,662
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,253
<PP&E> 282,107
<DEPRECIATION> 0
<TOTAL-ASSETS> 408,239
<CURRENT-LIABILITIES> 48,626
<BONDS> 0
0
0
<COMMON> 302
<OTHER-SE> 197,122
<TOTAL-LIABILITY-AND-EQUITY> 408,239
<SALES> 62,975
<TOTAL-REVENUES> 62,975
<CGS> 26,696
<TOTAL-COSTS> 26,696
<OTHER-EXPENSES> 37,555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,708
<INCOME-PRETAX> (3,984)
<INCOME-TAX> (10)
<INCOME-CONTINUING> (3,974)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,974)
<EPS-PRIMARY> (0.13)<F1>
<EPS-DILUTED> (0.13)
<FN>
<F1>For Purposes of This Exhibit, Primary means Basic.
</FN>
</TABLE>
