<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 JUNE 30, 1999
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 (I.R.S. Employer
incorporation 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
June 30, 1999 was 30,211,776 shares.
<PAGE> 2
ON COMMAND CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1- Financial Statements:
Condensed Consolidated Balance Sheets as of June 30,1999 and December 31,1998. 3
Condensed Consolidated Statements of Operations for the Three Months and Six Months
Ended June 30, 1999 and 1998. 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30,1999 and 1998. 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>
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ON COMMAND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,571 $ 7,235
Accounts receivable, net 35,675 32,167
Other current assets 1,202 2,633
--------- ---------
Total current assets 43,448 42,035
Video systems, net 265,536 267,880
Property and equipment, net 12,860 11,829
Goodwill, net 75,485 77,674
Other assets, net 2,772 3,550
--------- ---------
$ 400,101 $ 402,968
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,940 $ 23,443
Accrued compensation 5,203 5,916
Other accrued liabilities 10,255 11,977
Taxes payable 7,475 7,632
--------- ---------
Total current liabilities 49,873 48,968
Other accrued liabilities 415 995
Revolving credit facility 173,000 163,000
--------- ---------
Total liabilities 223,288 212,963
--------- ---------
Stockholders' equity:
Common stock, $.01 par value; shares authorized - 50,000 in 1999 and 1998
shares issued and outstanding, 30,212 in 1999 and 30,160 in 1998;
shares subscribed - 0 in 1999 and 2 in 1998 302 302
Additional paid-in capital 250,773 249,809
Common stock warrants 31,450 31,450
Cumulative translation adjustments (1,373) (2,539)
Accumulated deficit (104,339) (89,017)
--------- ---------
Total stockholders' equity 176,813 190,005
--------- ---------
$ 400,101 $ 402,968
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-3-
<PAGE> 4
ON COMMAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Room $ 59,252 $ 58,652 $ 117,774 $ 112,898
Video system sales / other 3,312 2,243 6,023 3,865
--------- --------- --------- ---------
Total revenues 62,564 60,895 123,797 116,763
--------- --------- --------- ---------
Direct costs:
Room 26,304 25,492 51,705 48,614
Video system sales / other 2,179 1,370 4,238 2,168
--------- --------- --------- ---------
Total direct costs 28,483 26,862 55,943 50,782
--------- --------- --------- ---------
Direct income 34,081 34,033 67,854 65,981
Operating expenses:
Operations 7,041 8,569 14,459 16,990
Research and development 2,046 2,022 4,108 3,710
Selling, general and administrative 6,688 6,328 12,763 12,293
Depreciation, amortization, and stock based compensation 24,314 21,786 47,089 43,242
--------- --------- --------- ---------
Total operating expenses 40,089 38,705 78,419 76,235
--------- --------- --------- ---------
Operating loss (6,008) (4,672) (10,565) (10,254)
Interest/other expense, net 2,404 2,482 4,686 4,764
--------- --------- --------- ---------
Loss before income taxes (8,412) (7,154) (15,251) (15,018)
Income tax (benefit) expense 48 (76) 71 (102)
--------- --------- --------- ---------
Net loss $ (8,460) $ (7,078) $ (15,322) $ (14,916)
========= ========= ========= =========
Basic and diluted net loss per share $ (0.28) $ (0.23) $ (0.51) $ (0.50)
========= ========= ========= =========
Shares used in basic and diluted per share computations 30,187 30,147 30,180 30,133
========= ========= ========= =========
</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>
Six Months Ended
June 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(15,322) $(14,916)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, amortization, and stock based compensation 47,089 43,242
Loss on disposal of fixed assets 2 74
Changes in assets and liabilities:
Accounts receivable, net (3,376) (12,207)
Other assets 658 (225)
Accounts payable 3,474 8,363
Accrued compensation (600) (773)
Taxes payable (1,497) (1,148)
Other accrued liabilities (732) 255
-------- --------
Net cash provided by operating activities 29,696 22,665
Cash flows from investing activities:
Capital expenditures (40,651) (45,245)
-------- --------
Net cash used in investing activities (40,651) (45,245)
-------- --------
Cash flows from financing activities:
Proceeds from revolving credit facility 10,000 21,000
Proceeds from issuance of common stock 195 225
-------- --------
Net cash provided by financing activities 10,195 21,225
-------- --------
Effect of exchange rate changes in cash 96 (93)
-------- --------
Net decrease in cash and cash equivalents (664) (1,448)
Cash and cash equivalents, beginning of period 7,235 6,287
-------- --------
Cash and cash equivalents, end of period $ 6,571 $ 4,839
======== ========
Non-cash activity:
Stock based compensation $ 769 $ --
======== ========
Supplemental information:
Cash paid for income taxes $ 156 $ --
======== ========
Cash paid for interest $ 4,875 $ 4,575
======== ========
</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
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
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 June 30, 1999 and
December 31, 1998, and the results of operations and cash flows for the
six months ended June 30, 1999 and 1998. 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. Common equivalent shares
include common stock options and warrants and at June 30, 1999 and 1998
approximately 9.5 million and 10.1 million equivalent dilutive
securities, 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 $14.2 million for the six months
ended June 30, 1999 is comprised of $15.3 million net loss less $1.1
million net change in the cumulative translation account. At June 30,
1998, total net comprehensive loss of $15.5 million is comprised of
$14.9 million net loss less $0.6 million net change in the cumulative
translation account.
4. DEBT
On November 24, 1997, the Company refinanced its former credit
facility and entered into an amended and restated agreement with its
lender (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. The Credit Facility
matures in November 2002, and subject to certain conditions, can be
renewed for two additional years. At June 30, 1999, there was $27
million of available borrowing under the Credit Facility, subject to
certain covenant restrictions.
5. LITIGATION
In September 1998, OCV filed suit against Maginet, alleging
breach by Maginet of a license agreement between OCV and Maginet, and
terminating the license agreement. OCV has also demanded the payment of
license fees from Maginet, which OCC believes were due and payable under
the License Agreement and have not been paid by Maginet. Maginet has
counter-claimed against OCV, alleging that OCV breached the license
agreement, and alleging various torts by OCV in its relationship with
Maginet.
-6-
<PAGE> 7
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 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, as amended by SFAS137, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. 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 1998 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 942,000 rooms at June 30, 1999. 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 June 30, 1999, approximately 87% of OCC's 942,000 installed rooms were
located in the United States, with the balance located in Canada, Asia, Europe
and Mexico. Of these installed systems, approximately 91% had on-demand
capability.
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, and if televisions are provided by the Company to the
hotel property, the installed cost of a new on-demand system with interactive
and video game services capabilities, including the head-end equipment, averages
from approximately $375 to $750 per room. If the Company does not provide
televisions to the hotel property, the average costs are $375 to $450 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.
-8-
<PAGE> 9
OCC also markets a free-to-guest (FTG) 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.
Beginning in 1997, OCC developed and selectively deployed for market
testing several new services to complement its existing offerings and strengthen
its growth strategy by creating new potential revenue sources. New technology
and services being tested by OCC include a digital server technology and
high-speed, TV-based and laptop connectivity Internet offerings. OCC is also
testing shorter and more targeted non-movie programming on a lower cost
pay-per-view basis, including business, lifestyle, kids, and sports.
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, and Allin Interactive, a provider of
pay-per-view services to the cruise ship industry.
In conjunction with the acquisition of Spectra Vision's assets and certain
liabilities in October 1996, OCC acquired among other assets, video systems and
equipment. These specific assets, which were recorded at their estimated fair
market of approximately $41,800,000 in October 1996, are being depreciated over
36 months. Accordingly, OCC's 1999 fourth quarter operating results will be
impacted from a reduction in depreciation and amortization expense charges
relating to these specific assets.
ANALYSIS OF OPERATIONS
ROOM AND INVESTMENT ACTIVITY
Following is selected financial information for the three and six months ended
June 30, 1999 compared to the same period for 1998.
-9-
<PAGE> 10
SELECTED FINANCIAL INFORMATION
(In thousands, except hotel and room amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------------------- --------------------------------------------
% OF % OF % OF % OF
JUNE 30, TOTAL JUNE 30, TOTAL JUNE 30, TOTAL JUNE 30, TOTAL
1999 REVENUE 1998 REVENUE 1999 REVENUE 1998 REVENUE
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room Revenues $ 59,252 94.7% $ 58,652 96.3% $ 117,774 95.1% $ 112,898 96.7%
Video Systems/Other 3,312 5.3% 2,243 3.7% 6,023 4.9% 3,865 3.3%
-------------------- -------------------- -------------------- --------------------
Total Revenues 62,564 100.0% 60,895 100.0% 123,797 100.0% 116,763 100.0%
Direct Costs:
Room Revenues 26,304 42.0% 25,492 41.9% 51,705 41.8% 48,614 41.6%
Video Systems/Other 2,179 3.5% 1,370 2.2% 4,238 3.4% 2,168 1.9%
-------------------- -------------------- -------------------- --------------------
Total Direct Costs 28,483 45.5% 26,862 44.1% 55,943 45.2% 50,782 43.5%
-------------------- -------------------- -------------------- --------------------
Direct Profit 34,081 54.5% 34,033 55.9% 67,854 54.8% 65,981 56.5%
Operations 7,041 11.3% 8,569 14.1% 14,459 11.7% 16,990 14.6%
Research & Development 2,046 3.3% 2,022 3.3% 4,108 3.3% 3,710 3.2%
Selling, General & Administrative 6,688 10.7% 6,328 10.4% 12,763 10.3% 12,293 10.5%
-------------------- -------------------- -------------------- --------------------
15,775 25.2% 16,919 27.8% 31,330 25.3% 32,993 28.3%
-------------------- -------------------- -------------------- --------------------
EBITDA (1) 18,306 29.3% 17,114 28.1% 36,524 29.5% 32,988 28.3%
Depreciation, Amortization, and
Stock Based Compensation 24,314 38.9% 21,786 35.8% 47,089 38.0% 43,242 37.0%
Interest/other exp, net 2,404 3.8% 2,482 4.1% 4,686 3.8% 4,764 4.1%
Taxes 48 0.1% (76) (0.1%) 71 0.1% (102) (0.1%)
-------------------- -------------------- -------------------- --------------------
26,766 42.8% 24,192 39.7% 51,846 41.9% 47,904 41.0%
-------------------- -------------------- -------------------- --------------------
Net Loss $ (8,460) (13.5%) $ (7,078) (11.6%) $ (15,322) (12.4%) $ (14,916) (12.8%)
==================== ==================== ==================== ====================
CAPITAL EXPENDITURES $ 20,442 $ 22,043 $ 40,651 $ 45,245
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AS OF % OF AS OF % OF
JUNE 30, TOTAL JUNE 30, TOTAL
1999 ROOMS 1998 ROOMS
-------------------- --------------------
<S> <C> <C> <C> <C>
TOTAL HOTELS 3,308 3,146
TOTAL ROOMS 942,000 916,000
ROOM COMPOSITION:
Geographic
Domestic 820,000 87.0% 793,000 86.6%
International 122,000 13.0% 123,000 13.4%
System Type
Scheduled Only 84,000 8.9% 115,000 12.6%
On-Demand 858,000 91.1% 801,000 87.4%
</TABLE>
- ----------
(1) EBITDA represents earnings before interest, income taxes, depreciation,
amortization, and stock based compensation. 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.
-10-
<PAGE> 11
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30,1998
Total revenues for the second quarter of 1999 increased $1.7 million or
2.7% to $62.6 million, as compared to $60.9 million for the comparable period of
1998. Room revenues increased $0.6 million or 1.0% in the second quarter of 1999
to $59.3 million, as compared to $58.7 million in the second quarter of 1998.
The increase was primarily due to, on average, more FTG channels in each room
during 1999 than in 1998, and to a lesser extent, increases in internet TV and
game revenues. Movie buy rates in the second quarter of 1999 were lower
compared with the second quarter of 1998 due primarily to a very strong movie
lineup in the second quarter of 1998. Video system sales and other revenues
increased $1.1 million or 47.7% to $3.3 million in the second quarter of 1999,
as compared to $2.2 million in the second quarter of 1998. The increase was
primarily due to increased ordering of video systems by our major licensee and
sales of our new digital system (OCX) to a provider of entertainment systems to
the cruise ship industry.
Total direct costs of revenues for the second quarter of 1999 increased
$1.6 million or 6.0% to $28.5 million, as compared to $26.9 million for the
second quarter of 1998. Direct costs associated with room revenue in the second
quarter of 1999 increased $0.8 million or 3.2% to $26.3 million, as compared to
$25.5 million for the same period of 1998, and as a percentage of room revenue
increased to 44.4% for the quarter ended June 30, 1999 from 43.5% for the
quarter ended June 30, 1998. The increase is primarily due to an increase in
hotel commissions and movie royalties. Direct costs from video system sales and
other revenues increased $0.8 million or 59.1% to $2.2 million in the second
quarter of 1999, as compared to $1.4 million in the same period of 1998,
primarily due to the increase in video system sales. Direct costs associated
with video systems sales and other revenue as a percentage of video system sales
and other revenues increased to 65.8% for the second quarter of 1999 from 61.1%
for the same period of 1998. The increase is primarily due to lower margins on
projects where the Company will contract with the hotel to provide wiring
services prior to the movie system installation.
Operations expenses, which consists primarily of technical field support for
the hotels, for the second quarter of 1999 decreased $1.5 million or 17.8% to
$7.1 million, as compared to $8.6 million in the second quarter of 1998, and as
a percentage of room revenue decreased to 11.9% from 14.6% for the same period
of 1998. The decrease is primarily due to lower costs for repair material,
lower freight, and lower TV repair costs.
Research and development expenses for the second quarter of 1999
remained relatively flat compared to the second quarter of 1998.
Selling, general and administrative expenses for the second quarter of 1999
increased $0.4 million or 5.7% to $6.7 million, as compared to $6.3 million in
the second quarter of 1998. The increase is principally due to higher
Information Systems, Account Management, and Product Management expenses as the
Company builds its infrastructure in support of new interactive services (i.e.
internet) offered with OCX, the Company's new digital platform. These increases
were partially offset by reductions in legal expenses.
Depreciation, amortization, and stock based compensation expenses for
the second quarter of 1999 increased $2.5 million or 11.6% to $24.3 million, as
compared to $21.8 million for the second quarter of 1998, and as a percentage of
total revenue increased to 38.9% for the quarter ended June 30, 1999 from 35.8%
for the quarter ended June 30, 1998. The increase is mainly due to depreciation
on capital investments associated with the growing room base and an $0.8 million
non-cash expense associated with accounting for cashless stock options in an
executive compensation agreement, reflecting the increased share price.
Interest / other expense, net for the second quarter of 1999 remained
relatively flat as compared to the second quarter of 1998.
Provision for income taxes for the second quarter of 1999 represents tax
on income in certain international and domestic jurisdictions.
-11-
<PAGE> 12
EBITDA for the second quarter of 1999 increased $1.2 million or 7.0% to
$18.3 million as compared to $17.1 million in the second quarter of 1998. EBITDA
as a percentage of total revenue increased to 29.3% in the second quarter of
1999 from 28.1% in the same period of 1998. The improved EBITDA percentage is
primarily attributable to the decrease in operation expenses in the second
quarter of 1999 as compared to the same period of 1998.
Net loss increased to $8.5 million for the second quarter of 1999 from $7.1
million for the second quarter of 1998 due to the factors described above.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30,1998
Total revenues for the six months ended June 30, 1999 increased $7.0
million or 6.0% to $123.8 million, as compared to $116.8 million for the
comparable period of 1998. Room revenues increased $4.9 million or 4.3% in the
first six months of 1999 to $117.8 million, as compared to $112.9 million in the
first six months of 1998. The increase was primarily attributable to new hotel
installations, continued conversions of SpectraVision equipped properties, lower
movie denial rates, and on average more FTG channels in each room during 1999
than in 1998. Video system sales and other revenues increased $2.2 million or
55.8% to $6.0 million in the six months ended June 30, 1999, as compared to $3.9
million in the six months ended June 30, 1998. The increase was primarily due to
increased ordering of video systems by our major licensee and sales of our new
digital system (OCX) to a provider of entertainment systems to the cruise ship
industry.
Total direct costs of revenues for the six months ended June 30, 1999
increased $5.2 million or 10.2% to $55.9 million, as compared to $50.8 million
for the six months ended June 30, 1998. Direct costs associated with room
revenue in the first six months of 1999 increased $3.1 million or 6.4% to $51.7
million, as compared to $48.6 million for the same period of 1998, and as a
percentage of room revenue increased to 43.9% for the six months ended June 30,
1999 from 43.1% for the six months ended June 30, 1998. The increase is
primarily due to an increase in hotel commissions, movie royalties, and
free-to-guest expenses in relation to the increase in revenue. Direct costs from
video system sales and other revenues increased $2.0 million or 95.5% to $4.2
million in the first six months of 1999, as compared to $2.2 million in the same
period of 1998, primarily due to the increase in video system sales. Direct
costs associated with video systems sales and other revenue as a percentage of
video system sales and other revenues increased to 70.4% for the six months
ended June 30, 1999 from 56.1% for the same period of 1998. The increase is
primarily due to lower margins on projects where the Company will contract with
the hotel to provide wiring services prior to the movie system installation and
lower margins on system sales.
Operations expenses, which consists primarily of technical field support for
the hotels, for the six months ended June 30, 1999 decreased $2.5 million or
14.9% to $14.5 million, as compared to $17.0 million for the six months ended
June 30, 1998, and as a percentage of room revenue decreased to 12.3% from 15.0%
for the same period of 1998. The decrease is primarily due to the shut-down of
the Company's Richardson facility in the first quarter of 1998, lower costs for
repair material, lower freight, and lower TV repair costs during the first six
months of 1999.
Research and development expenses for the six months ended June 30, 1999
increased $0.4 million or 10.7% to $4.1 million, as compared to $3.7 million for
the six months ended June 30, 1998. The increase is primarily due to the
continued development of the Company's digital server technology and other new
product offerings such as high-speed laptop connectivity.
Selling, general and administrative expenses for the six months ended June
30, 1999 increased $0.5 million or 3.8% to $12.8 million, as compared to $12.3
million six months ended June 30, 1998. The increase is principally due to
increased expenses in the areas of Account Management and Product Management
expenses as the Company builds its infrastructure in support of new interactive
services (i.e. internet) offered with OCX, the Company's new digital platform.
These increases were partially offset by reductions in legal expenses.
Depreciation, amortization, and stock based compensation expenses for
the six months ended June 30, 1999 increased $3.8 million or 8.9% to $47.1
million, as compared to $43.2 million for the six months ended June 30, 1998,
and as a percentage of total revenue increased to 38.0% for the first six months
of 1999 from 37.0% for the first six months of 1998. The increase is mainly due
to depreciation on capital investments associated with the growing room base and
an $0.8 million non-cash expense associated with accounting for cashless stock
options in an executive compensation agreement, reflecting the increased share
price.
-12-
<PAGE> 13
Interest / other expense, net for the six months ended June 30, 1999
remained relatively flat as compared to the same period for 1998.
Provision for income taxes for the six months ended June 30, 1999
represents tax on income in certain international and domestic jurisdictions.
EBITDA for the six months ended June 30, 1999 increased $3.5 million or
10.7% to $36.5 million as compared to $33.0 million for the six months ended
June 30, 1998. EBITDA as a percentage of total revenue increased to 29.5% in the
first six months of 1999 from 28.3% in the same period of 1998. The improved
EBITDA percentage is primarily attributable to the decrease in operation
expenses in 1999 as compared to the same period of 1998.
Net loss increased to $15.3 million for the six months ended June 30, 1999
from $14.9 million for the six months ended June 30, 1998 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 six months ended June
30, 1999 were cash from operations of $29.6 million, and borrowings of $10.0
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 $40.7 million for the first six 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. At June 30, 1999, the Company's installed room base was
approximately 942,000, as compared to approximately 929,000 at the end of 1998.
In the first six months of 1999, the Company installed its on-demand system in
approximately 43,000 rooms, of which approximately 26,700 were new hotel
installations, and approximately 16,300 were conversions of SpectraVision
properties.
The amount of the Company's Credit Facility is $200 million. At June
30, 1999, the Company had $173.0 million outstanding under its Credit Facility
and had access to an additional $27.0 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 at least the remainder of 1999. The
Company anticipates capital expenditures in connection with the continued
installation and conversion of hotel rooms will be approximately $40 to $50
million during the remainder of 1999.
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 $182 million through December 31, 1999.
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.
-13-
<PAGE> 14
The Company is actively engaged in but has not yet completed, evaluating,
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
November 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 incurred through December 31,
1998 and less than $200,000 incurred in the first six months of 1999. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates, which
could impact its results of operations and financial condition, particularly,
the Company's interest expense and cash flow. Revolving loans extended under the
Credit Facility generally bear an interest rate that is variable and based on
the London Interbank Offering Rate ("LIBOR") and on certain operating ratios of
the Company. At June 30, 1999, the Company had $173.0 million outstanding on the
Credit Facility and the weighted average interest rate on the Credit Facility
was 5.9%. Assuming no increase or decrease in the amount outstanding, a
hypothetical immediate 100 basis point increase (or decrease) in interest rates
at June 30, 1999 would increase (or decrease), the Company's annual interest
expense and cash outflow by approximately $0.9 million for the remaining six
months of the year.
-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 results of operations. (See note 5).
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 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON 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 August 13, 1999.
On Command Corporation
/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 June 30, 1999 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-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,571
<SECURITIES> 0
<RECEIVABLES> 35,675
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,448
<PP&E> 278,396
<DEPRECIATION> 0
<TOTAL-ASSETS> 400,101
<CURRENT-LIABILITIES> 49,873
<BONDS> 0
0
0
<COMMON> 305
<OTHER-SE> 176,508
<TOTAL-LIABILITY-AND-EQUITY> 400,101
<SALES> 62,564
<TOTAL-REVENUES> 62,564
<CGS> 28,483
<TOTAL-COSTS> 28,483
<OTHER-EXPENSES> 40,089
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,404
<INCOME-PRETAX> (8,412)
<INCOME-TAX> 48
<INCOME-CONTINUING> (8,460)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,460)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
