<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, 2000
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, 2000 was 30,547,835 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 September 30, 2000 and
December 31, 1999 (Unaudited) 3
Condensed Consolidated Statements of Operations for the Three Months and Nine
Months Ended September 30, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statement of Stockholder's Deficit for the Nine
Months Ended September 30, 2000 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999 (Unaudited) 6
Notes to Unaudited Condensed Consolidated Financial Statements 7-10
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ON COMMAND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,896 $ 8,972
Accounts receivable, net 36,341 32,037
Other current assets 1,814 1,211
--------- ---------
Total current assets 45,051 42,220
Video systems, net 286,981 266,947
Property and equipment, net 20,956 17,644
Goodwill, net 70,015 73,297
Other assets, net (Note 6) 7,534 2,809
--------- ---------
Total Assets $ 430,537 $ 402,917
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 37,117 $ 31,435
Accounts payable to stockholder 621 1,054
Accrued compensation 7,936 6,431
Other accrued liabilities 7,209 8,750
Current portion of capital lease obligations 705 2,533
Taxes payable 6,066 6,809
--------- ---------
Total current liabilities 59,654 57,012
Capital lease obligations 1,525 1,758
Revolving credit facility (Note 3) 225,133 180,000
--------- ---------
Total liabilities 286,312 238,770
--------- ---------
Commitments and contingencies (Note 4)
Stockholders' equity (Note 7):
Common stock, $.01 par value; shares authorized - 50,000 in 2000 and 1999;
shares issued and outstanding - 30,548 in 2000 and 30,313 in 1999 $ 305 $ 303
Common stock warrants 31,429 31,450
Preferred stock $.01 par value; shares authorized, issued and outstanding -
13,500 in 2000, none in 1999 - -
Additional paid-in capital 275,078 251,677
Accumulated other comprehensive income - cumulative translation loss (2,874) (872)
Accumulated deficit (138,415) (118,411)
Less: note receivable from stockholder (21,298) -
--------- ---------
Total stockholders' equity 144,225 164,147
--------- ---------
Total liabilities and stockholders' equity $ 430,537 $ 402,917
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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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,
--------------------------- ---------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues (Note 8):
Room $ 62,822 $ 61,800 $ 188,296 $ 179,574
Video system sales / other 6,010 5,952 11,269 11,975
--------- --------- --------- ---------
Total revenues 68,832 67,752 199,565 191,549
--------- --------- --------- ---------
Direct costs:
Room 29,336 28,037 86,397 79,742
Video system sales / other 1,380 1,115 5,131 5,353
--------- --------- --------- ---------
Total direct costs 30,716 29,152 91,528 85,095
--------- --------- --------- ---------
Direct income 38,116 38,600 108,037 106,454
Operating expenses:
Operations 7,746 7,573 23,672 22,032
Research and development 2,464 2,182 6,542 6,290
Selling, general and administrative 7,384 6,418 19,902 19,181
Depreciation, amortization, and stock based compensation 21,317 24,768 63,324 71,857
Relocation expense (Note 9) 2,997 - 2,997 -
--------- --------- --------- ---------
Total operating expenses 41,908 40,941 116,437 119,360
--------- --------- --------- ---------
Operating loss (3,792) (2,341) (8,400) (12,906)
Interest expense 4,871 2,699 11,739 7,700
Interest/other income, net (178) (123) (490) (438)
--------- --------- --------- ---------
Loss before income taxes (8,485) (4,917) (19,649) (20,168)
Income tax expense (benefit) (8) 65 355 136
--------- --------- --------- ---------
Net loss $ (8,477) $ (4,982) $ (20,004) $ (20,304)
========= ========= ========= =========
Other comprehensive income - net of taxes:
Foreign currency translation (296) 306 (2,002) 1,472
--------- --------- --------- ---------
Comprehensive income (loss) (8,773) (4,676) (22,006) (18,832)
========= ========= ========= =========
Basic and diluted net loss per share $ (0.28) $ (0.16) $ (0.66) $ (0.67)
========= ========= ========= =========
Shares used in basic and diluted per share computations 30,531 30,232 30,460 30,198
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ON COMMAND CORPORATION
Condensed Consolidated Statement of Stockholders' Deficit
Nine Months Ended September 30, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Common Additional
Common Stock Stock Warrants Preferred Stock paid-in
Shares Amount Shares Amount Shares Amount capital
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 30,313 303 7,500 31,450 251,677
Shares issued in connection with
exercise of cashless stock
options 32 0 68
Shares issued for cash in
connection with the
exercise of stock options 186 2 1,763
Shares issued for cash in
connection with the Employee stock
purchase plan 12 0 161
Shares issued in connection
with the exercise of warrants 5 0 (5) (21) 98
Shares issued in connection
with issuance of Preferred Stock 14 0 13
Note Receivable from Stockholder 21,298
Net loss
------ --- ----- ------ --- --- -------
Balance at September 30, 2000 30,548 305 7,495 31,429 14 0 275,078
====== === ===== ====== === === =======
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Notes Total
Income, Accumulated Receivable Stockholders'
Net of taxes Deficit Stockholder Deficit
------------ ------- ----------- -------
<S> <C> <C> <C> <C>
Balance at January 1, 2000 (872) (118,411) 164,147
Shares issued in connection with
exercise of cashless stock
options 68
Shares issued for cash in
connection with the
exercise of stock options 1,765
Shares issued for cash in
connection with the Employee stock
purchase plan 161
Shares issued in connection
with the exercise of warrants 77
Shares issued in connection
with issuance of Preferred Stock 13
Note Receivable from Stockholder (21,298) -
Net loss (2,002) (20,004) (22,006)
------ -------- ------- -------
Balance at September 30, 2000 (2,874) (138,415) (21,298) 144,225
====== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ON COMMAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (20,004) $ (20,304)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, amortization, and stock based compensation 63,324 71,857
Loss on disposal of fixed assets 14 2
Changes in assets and liabilities
Accounts receivable, net (4,350) (5,107)
Other assets (3,172) 214
Accounts payable 5,811 4,907
Accounts payable to stockholder (433) 701
Accrued compensation 1,135 40
Taxes payable (675) (2,228)
Other accrued liabilities (1,640) 2,665
--------- ---------
Net cash provided by operating activities 40,011 52,747
Cash flows from investing activities:
Capital expenditures (83,592) (64,209)
Investments (3,000)
--------- ---------
Net cash used in investing activities (86,592) (64,209)
--------- ---------
Cash flows from financing activities:
Proceeds from new credit facility (Note 3) 210,000
Repayment of former credit facilities (210,000)
Proceeds from borrowings under new credit facility 15,133
Proceeds from borrowings under former credit facilities 30,000 14,000
Payments on capital lease obligations (2,049)
Proceeds from issuance of common and preferred stock 2,016 536
--------- ---------
Net cash provided by financing activities 45,100 14,536
--------- ---------
Effect of exchange rate changes in cash (594) 125
--------- ---------
Net (decrease) increase in cash and cash equivalents (2,076) 3,199
Cash and cash equivalents, beginning of period 8,972 7,235
--------- ---------
Cash and cash equivalents, end of period $ 6,896 $ 10,434
========= =========
Non-cash activity:
Stock based compensation $ 659 $ 1,295
========= =========
Supplemental information:
Cash paid for income taxes $ 168 $ 233
========= =========
Cash paid for interest $ 7,706 $ 7,378
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ON COMMAND CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
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.
On March 28, 2000, Liberty Media Corporation ("Liberty") obtained
control of Ascent pursuant to the closing of a tender offer (the "Offer")
in which Liberty offered Ascent stockholders $15.25 in cash for each share
of Ascent common stock. Liberty commenced the offer on February 29, 2000
and under its terms and conditions, the Offer expired on March 27, 2000.
Under the terms of the Agreement and Plan of Merger (the "Merger
Agreement") among Ascent, Liberty and Liberty AEG Acquisition, Inc.
("Merger Sub") an indirect wholly-owned subsidiary of Liberty, Merger Sub
will be merged with and into Ascent (the "Merger") and all shares not
purchased in the Offer (other than Shares held by Liberty, Merger Sub or
Ascent, or shares held by dissenting stockholders) will be converted into
the right to receive $15.25 per share in cash. The Merger occurred on June
8, 2000 and at the time of the Merger, Ascent became an indirect,
wholly-owned subsidiary of Liberty.
The accompanying unaudited 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, 2000 and December
31, 1999, and the results of operations for the three months and nine
months ended September 30, 2000 and 1999 and cash flows for the nine months
ended September 30, 2000 and 1999. 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 equivalent shares
outstanding (denominator) for the period. Common equivalent shares include
common stock options and warrants, except that at September 30, 2000 and
1999, approximately 12.3 million and 9.4 million equivalent dilutive
securities, respectively, have been excluded in weighted-average number of
common equivalent shares outstanding for the diluted net loss per share
computation as common stock equivalents, because their effect is
antidilutive.
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3. DEBT
On July 18, 2000, OCC entered into a new credit agreement with a group
of banks (the "OCC Credit Facility"), replacing the pre-existing $200.0
million Revolving Credit Facility and a $10.0 million interim line of
credit. The new agreement provides OCC with unsecured borrowings of up to
$350.0 million for the next five years (the new OCC Credit Facility matures
July, 2005). Several options are available to borrow at floating interest
rates based on LIBOR (London Interbank Offered Rate) or the bank's
alternate base rate (prime rate). The OCC Credit Facility contains
covenants that place certain limits on OCC's ability to pay dividends or
make distributions on its equity, repurchase equity, merge or acquire
another entity, and incur debt or create liens on assets, among other
things. In addition, the OCC Credit Facility requires OCC to meet certain
leverage and interest coverage tests and places annual limits on OCC's
capital expenditures.
4. COMMITMENTS AND CONTINGENCIES
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 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 was responsible for
its own legal costs and expenses, and in connection with the multiple
cross-licenses, OCC has received royalty payments, net of legal fees and
expenses, in an aggregate amount of approximately $10,700,000. OCC received
the first payment of approximately $2,900,000 (net of expenses) in
September 1998, the second payment of approximately $3,900,000 (net of
expenses) in July 1999, and the final payment of approximately $3,900,000
(net of expenses) in July 2000. OCC recognized the royalty revenue as
payments were received.
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 and OCC, alleging that OCV breached the license agreement, and
alleging various torts by OCV and OCC in their respective relationships
with Maginet. The Company believes that its positions in the litigation
with Maginet are meritorious, however, the outcome of the Maginet suit and
counter-suit cannot be predicted with certainty. Given the current level of
uncertainty associated with this litigation, management is unable to
predict the outcome at this time, but a decision adverse to the Company
could have a material impact on the financial condition of the Company.
Apart from the Maginet litigation, 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 any resulting liability, to the extent not provided for by insurance
or otherwise, will not have a material adverse effect on the financial
condition, results of operations, or liquidity of the Company.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities", which defines
derivatives, requires that all derivatives be carried at fair value, and
provides for hedge accounting when certain conditions are met. SFAS No.
133, as amended by SFAS 137, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company does not believe that the
adoption of this statement will have a material impact on the Company's
financial position, results of operations or cash flows.
In December 1999, the SEC released Staff Accounting Bulletin No.
101 ("SAB 101") "Revenue Recognition in Financial Statements", which
provides guidance on the recognition, presentation and disclosure of
revenue in financial statements filed with the SEC. Subsequently, the SEC
released SAB 101B, which delayed the implementation date of SAB 101 until
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the quarter ended December 31, 2000, for registrants with fiscal years
beginning between December 16, 1999 and March 15, 2000. The Company does
not believe that the implementation of this SAB will have a material impact
on the Company's financial position, results of operations or cash flows.
6. INVESTMENTS
On June 29, 2000, the Company made an investment of $2.0 million in an
unrelated company, STS Hotel Net, LLC ("STS") for a 5% equity interest with
an option (subject to certain conditions and satisfactory due diligence) to
invest an additional $18 million for an additional 40% equity share. The
Company has declined to exercise this option and is currently in
negotiations with STS to purchase certain assets under a new agreement.
The Company has also invested $1.0 million in other strategic
investments during the nine months ended September 30, 2000.
7. PREFERRED STOCK ISSUANCE
Following negotiations between the Company and Jerome H. Kern
("Kern"), its Chairman and CEO regarding the terms of Kern's equity
purchase from the Company, on August 8, 2000, the Company sold to Kern
13,500 shares of the Company's Series A $.01 Par Value Convertible
Participating Preferred Stock, which shares are initially convertible into
1,350,000 shares of the Company's common stock. The price of the preferred
shares was $1,562.50 per share. The preferred shares participate in any
dividends paid to the holders of the common stock but otherwise are not
entitled to receive any dividends. The preferred shares have a liquidation
preference of $.01 per share; thereafter, the preferred shares are entitled
to participate with the common stock in distributions upon liquidation on
an as-converted basis. The holders of the preferred shares vote with the
holders of the common stock as a single class and are entitled to one vote
per share. Kern made a cash payment of $13,500 and the Company lent him
$21,080,250 to finance the balance of the funds needed to acquire the
preferred shares. This loan is secured by the preferred shares or their
proceeds and Kern's personal obligations under such loan are limited. The
note may not be prepaid and interest on the note accrues at a rate of 7%
per annum, compounded quarterly. The September 30, 2000 contra equity note
receivable balance of $21,298,561 includes $218,311 of accrued interest in
addition to the $21,080,250 principal balance due from Kern. The promissory
note matures on July 31, 2005, at which time all principal and interest
becomes due. Kern's right to transfer the preferred shares is restricted.
8. SIGNIFICANT CUSTOMER
The Hilton Master Contract expired on April 27, 2000. The Master
Contract provided the Company exclusive rights to install its in-room
entertainment system in all corporate-owned Hilton properties and as a
preferred vendor for all Managed and Franchised properties. Per the terms
of the Master agreement, individual hotel installations predominantly have
a term of seven years from installation date. Since the expiration of the
Master agreement earlier this year, the Company has operated under a
month-to-month extension. On October 10, 2000, Hilton Corporation announced
that it would not be renewing its contract with the Company. The Company
currently services approximately 26,000 Hilton-owned ("Owned") rooms and
approximately 60,300 Hilton Managed and Franchised ("Managed") rooms. The
rooms expire in accordance with the individual hotel contracts over the
next eight years. It is the Company's intention to pursue the renewal of
all Managed and Franchised Hilton hotel contracts.
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In addition, the Company has a Master Contract in place with Promus
Hotel Corporation. This Master Contract expires on May 25, 2002. Promus
owns, manages and franchises the DoubleTree, Embassy Suites, Hampton Inn
and Homewood hotel chains. Promus Hotel Corporation was acquired by the
Hilton Corporation in late 1999. The Company currently services
approximately 6,200 Promus owned rooms and 63,200 Promus Managed and
Franchised rooms. The rooms expire in accordance with the individual hotel
contracts over the next eight years.
9. RELOCATION COSTS
The Company is in the process of relocating its headquarter operations
from San Jose, California, to Denver, Colorado. It is estimated that most
sales, marketing, field support, accounting, finance, and executive
management will be transitioned to Denver by the end of 2000. The estimated
cost of moving those departments is approximately $5 million, of which
approximately $3.0 million has been recognized and recorded during the
three months ended September 30, 2000. The relocation expenses include
severance, stay bonuses, search fees, contractors, travel and redundant
operations expenses. The retention bonuses have been ratably accrued over
the retention period (employees not relocating to Denver were offered
bonuses to stay through the estimated transition date of December 31, 2000,
although, for a few key employees the transition date extends into early
2001). The remaining expenses are recognized as they are incurred.
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. These forward looking statements
include disclosures, expressed or implied, that are based on the beliefs of
management as well as assumptions made based on information currently available
to management. These forward looking statements and information involve risks
and uncertainties including, but not limited to, the ability of the Company to
raise capital, future demand for the Company's services, general economic
conditions, government regulations, competition and customer strategies, capital
deployment, the impact of pricing and other risks and uncertainties. Should one
or more of these risks materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from anticipated results. The
following should be read in conjunction with the Unaudited Condensed
Consolidated Financial Statements and notes thereto 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 1999 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 in-room,
on-demand video entertainment and information services to the domestic lodging
industry. OCC has experienced rapid growth in the past seven years, increasing
its base of installed rooms from approximately 37,000 rooms at the end of 1992
to approximately 975,000 rooms at September 30, 2000, of which approximately
922,000 rooms are served by on-demand systems.
OCC provides in-room video entertainment and information services on three
technology platforms: the recently developed OCX video system, the On Command
Video (OCV) System and the SpectraVision systems. The OCX video system provides
enhanced multimedia applications, including an improved graphical interface for
movies and games, TV-based Internet with a wireless keyboard, and other guest
services. At September 30, 2000, OCC had installed the OCX video system in
approximately 118,000 hotel rooms, of which there are approximately 91,000 rooms
with TV-based Internet capability. The OCV video system is a patented video
selection and distribution technology platform that allows hotel guests to
select at any time, movies and games through the television sets in their hotel
rooms. At September 30, 2000, OCC has approximately 719,000 rooms installed with
the OCV platform. There are variations of the SpectraVision video systems still
installed in hotels, including tape based scheduled and on demand systems. The
SpectraVision video system generally offers fewer movie choices than the OCV or
OCX systems. At September 30, 2000, OCC had approximately 138,000 rooms
installed with SpectraVision equipment.
In addition to movies, OCC's platforms provide for in-room viewing of
programming of select cable channels (such as HBO, Showtime, ESPN, CNN and
Disney Channel) and other interactive and information services, which includes
high speed Internet access through the OCX platform. OCC primarily provides its
services under long-term contracts to hotel chains, hotel management companies,
and individually owned and franchised hotel properties, predominantly in the
deluxe, luxury, and upscale hotel category serving business travelers, such as
Marriott, Hilton, Hyatt, Wyndham, Starwood, Doubletree, Fairmont, Embassy
Suites, Four Seasons, and other select hotels.
At September 30, 2000, approximately 86% of OCC's 975,000 installed rooms
were located in the United States, with the balance located primarily in Canada,
the Caribbean, Australia, Europe, Latin America, and the Asia-Pacific region. In
addition to installing systems in hotels served by OCC, OCC sells its systems to
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certain other providers of in-room entertainment, including Hospitality Network,
Inc., which is licensed to use OCC's systems to provide on-demand, in-room
entertainment and information services to certain gaming-based, hotel properties
and Allin Communications, Inc., which is licensed to install OCC's systems in
cruise ships and hospitals.
ANALYSIS OF OPERATIONS
Following is selected financial information for the three months and nine
months ended September 30, 2000 compared to the same periods for 1999.
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SELECTED FINANCIAL INFORMATION
(Unaudited)
(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
2000 REVENUE 1999 REVENUE 2000 REVENUE 1999 REVENUE
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Room Revenues $ 62,822 91.3% $ 61,800 91.2% $ 188,296 94.4% $ 179,574 93.7%
Video Systems/Other 6,010 8.7% 5,952 8.8% 11,269 5.6% 11,975 6.3%
--------- -------- --------- -------- --------- -------- --------- --------
Total Revenues 68,832 100.0% 67,752 100.0% 199,565 100.0% 191,549 100.0%
Direct Costs:
Room Revenues 29,336 42.6% 28,037 41.4% 86,397 43.3% 79,742 41.6%
Video Systems/Other 1,380 2.0% 1,115 1.6% 5,131 2.6% 5,353 2.8%
--------- -------- --------- -------- --------- -------- --------- --------
Total Direct Costs 30,716 44.6% 29,152 43.0% 91,528 45.9% 85,095 44.4%
Direct Profit 38,116 55.4% 38,600 57.0% 108,037 54.1% 106,454 55.6%
Operations 7,746 11.3% 7,573 11.2% 23,672 11.9% 22,032 11.5%
Research & Development 2,464 3.6% 2,182 3.2% 6,542 3.3% 6,290 3.3%
Selling, General & Administrative 7,384 10.7% 6,418 9.5% 19,902 9.9% 19,181 10.0%
--------- -------- --------- -------- --------- -------- --------- --------
17,594 25.6% 16,173 23.9% 50,116 25.1% 47,503 24.8%
EBITDA (1) 20,522 29.8% 22,427 33.1% 57,921 29.0% 58,951 30.8%
Depreciation, Amortization, and
Stock Based Compensation 21,317 31.0% 24,768 36.6% 63,324 31.7% 71,857 37.5%
Relocation expense 2,997 4.3% -- 0.0% 2,997 1.4% -- 0.0%
Interest expense 4,871 7.1% 2,699 4.0% 11,739 5.9% 7,700 4.0%
Interest/other income, net (178) (0.3)% (123) (0.2)% (490) (0.2)% (438) (0.2)%
Taxes (8) 0.0% 65 0.1% 355 0.2% 136 0.1%
--------- -------- --------- -------- --------- -------- --------- --------
28,999 42.1% 27,409 40.5% 77,925 39.0% 79,255 41.4%
--------- -------- --------- -------- --------- -------- --------- --------
Net Loss $ (8,477) (12.3%) $ (4,982) (7.4%) $ (20,004) (10.0%) $ (20,304) (10.6%)
========= ======== ========= ======== ========= ======== ========= ========
Other Data:
Net cash provided
by operating activities 12,040 23,051 40,011 52,747
Net cash (used)
in investing activities (31,380) (23,558) (86,592) (64,209)
Net cash provided
by financing activities 20,047 4,341 45,100 14,536
Capital Expenditures 30,380 23,558 83,592 64,209
</TABLE>
<TABLE>
<CAPTION>
AS OF % OF AS OF % OF
SEPT 30, TOTAL SEPT 30, TOTAL
2000 ROOMS 1999 ROOMS
--------- -------- --------- --------
<S> <C> <C> <C> <C>
TOTAL HOTELS 3,494 3,355
TOTAL ROOMS 975,000 950,000
ROOM COMPOSITION:
Geographic
Domestic 841,000 86.3% 826,000 86.9%
International 134,000 13.7% 124,000 13.1%
System Type
Scheduled Only 53,000 5.4% 77,000 8.1%
On-Demand 922,000 94.6% 873,000 91.9%
</TABLE>
----------------
(1) EBITDA represents earnings before interest, income taxes, depreciation,
amortization, relocation expense 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.
Page 12
<PAGE> 13
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Total revenues for the third quarter of 2000 increased $1.0 million or 1.6%
to $68.8 million, as compared to $67.8 million for the comparable period of
1999. Room revenues increased $1.0 million or 1.7% in the third quarter of 2000
to $62.8 million, as compared to $61.8 million in the third quarter of 1999. The
increase was primarily due to higher total rooms being served, lower denial
rates on movie purchases, and higher percentages of on-demand movie rooms, game
rooms, and Internet rooms. Total rooms increased from approximately 950,000 at
September 30, 1999 to 975,000 at September 30, 2000. Game rooms increased 49% to
256,000 rooms and revenue increased by 38%. The @Hotel TV (internet) room base
increased to 91,000 rooms and revenue increased by 336%. Video system sales and
other revenues totaled $6.0 million for both the third quarter of 2000 and 1999,
respectively.
Total direct costs of revenues for the third quarter of 2000 increased $1.5
million or 5.4% to $30.7 million, as compared to $29.2 million for the third
quarter of 1999. Direct costs associated with room revenues in the third quarter
of 2000 increased $1.3 million or 4.6% to $29.3 million, versus $28.0 million
for the same period of 1999, and, as a percentage of room revenue, increased to
46.7% for the third quarter of 2000 compared to 45.4% for the third quarter of
1999. The increase in direct costs was due to the increase in revenue. The
increase in the direct costs as a percent of room revenue was due to increases
in the costs associated with providing "free-to-guest" programming to the hotels
and the higher costs (and lower margins) of providing Internet services to the
hotels. Direct costs from video system sales and other revenues increased $0.3
million or 23.8% to $1.4 million in the third quarter of 2000, as compared to
$1.1 million in the same period of 1999. The increase is due to lower margins on
certain hardware sales completed in the third quarter of 2000.
Operations expenses, which consist primarily of technical field support
costs for the hotels, for the third quarter of 2000 increased $0.1 million or
2.3% to $7.7 million, as compared to $7.6 million in the third quarter of 1999,
and as a percentage of room revenue remained consistent at 12.3% as compared to
the same period of 1999.
Research and development expenses for the third quarter of 2000 increased
$0.3 million or 12.9% to $2.5 million, as compared to $2.2 million expended in
the same period of 1999, and increased as a percentage of total revenue from
3.2% in the 1999 period to 3.6% in the 2000 period. The increase was due to
higher average salaries due to the competitive nature of the Bay Area job market
and to higher levels of development resources.
Selling, general and administrative expenses for the third quarter of 2000
increased $1.0 million or 15.1% to $7.4 million as compared to $6.4 million in
the third quarter of 1999 and as a percentage of total revenue, these expenses
increased from 9.5% in the 1999 period to 10.7% in the 2000 period. The increase
is due to legal expenses associated with the Maginet litigation (see Note 4 to
Condensed Consolidated Financial Statements), office space leased in Denver, and
higher executive and travel costs.
EBITDA (excludes stock based compensation and Denver relocation
expenses)for the third quarter of 2000 decreased $1.9 million or 8.5% to $20.5
million as compared to $22.4 million for the third quarter of 1999. EBITDA as a
percentage of total revenue decreased to 29.8% in the third quarter of 2000 from
33.1% in the same period of 1999. The decreased EBITDA is primarily attributable
to the increase in "free-to-guest" programming costs and higher selling, general
and administrative expenses.
Depreciation, amortization and stock based compensation expenses for the
third quarter of 2000 decreased $3.5 million or 13.9% to $21.3 million, as
compared to $24.8 million for the third quarter of 1999, and as a percentage of
total revenue decreased to 31.0% for the third quarter 2000 from 36.6% for the
third quarter of 1999. This decrease occurred primarily due to the absence of
depreciation on certain video systems assets acquired during the 1996
acquisition of SpectraVision by OCC, which became fully depreciated in October
1999, and lower stock based compensation.
Relocation expenses of $3.0 million for the 2000 quarter include all
severance, stay bonuses, hiring costs, moving costs, travel, contractors, and
redundant salaries associated with relocating the Company's headquarters to
Denver. It is estimated that most sales, marketing, field support, accounting,
finance, and executive management will be transitioned to Denver by the end of
2000. The total estimated costs of moving those departments is $5 million.
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<PAGE> 14
Interest expense for the third quarter of 2000 increased $2.2 million or
80.5% to $4.9 million as compared to $2.7 million for the third quarter of 1999.
This increase is due to additional borrowings under the Company's revolving
Credit Facility, and an increase in the interest rates paid on the borrowings.
Interest/other income, net increased slightly by $.1 million to $.2 million in
the third quarter of 2000 from $.1 million in the third quarter of 1999. This
increase is due to increased earnings on overnight investments and an increase
in purchase discounts taken.
Provision for income taxes for the quarters ended September 30, 2000 and
1999 represents tax on income in certain international and domestic
jurisdictions. Income taxes decreased to a nominal tax benefit in 2000 from a
$.07 million tax expense for the same period in 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Total revenues for the nine months ended September 30, 2000 increased $8.0
million or 4.2% to $199.6 million, as compared to $191.6 million for the
comparable period of 1999. Room revenues increased $8.7 million or 4.9% in the
first nine months of 2000 to $188.3 million, as compared to $179.6 million in
the first nine months of 1999. The increase was primarily due to higher total
rooms being served during the period, a higher percentage of total rooms being
served by higher revenue-producing on-demand equipment, increased guest
programming revenues, and higher net revenue per equipped room. The higher net
revenue per equipped room was primarily due to higher feature movie buy rates in
the first half of 2000, and a higher penetration of rooms with games and
Internet services. Video system sales and other revenues decreased $0.7 million
or 5.9% to $11.3 million in the nine months ended September 30, 2000, as
compared to $12.0 million in the nine months ended September 30, 1999 due to
lower sales of equipment to our licensees.
Total direct costs of revenues for the nine months ended September 30, 2000
increased $6.4 million or 7.6% to $91.5 million, as compared to $85.1 million
for the nine months ended September 30, 1999. Direct costs associated with room
revenue in the first nine months of 2000 increased $6.7 million or 8.3% to $86.4
million, as compared to $79.7 million for the same period of 1999, and as a
percentage of room revenue increased to 45.9% for the nine months ended
September 30, 2000 from 44.4% for the nine months ended September 30, 1999.
Increases in direct costs were primarily due to the increase in revenues. The
increase of direct cost as a percent of revenue is primarily attributable to
increases in costs associated with providing "free-to-guest" programming to
hotels, the higher costs of providing Internet services to hotels, and a higher
percent of lower margin feature movies in the product mix. Direct costs from
video system sales and other revenues decreased $0.2 million or 4.1% to $5.2
million in the first nine months of 2000, as compared to $5.4 million in the
same period of 1999, primarily due to the decrease 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 45.5% for the nine months
ended September 30, 2000 from 44.7% for the same period of 1999. The increase is
primarily due to lower margins on certain hardware sales completed during 2000.
Operations expenses, which consists primarily of technical field support
for the hotels, increased $1.7 million or 7.4% to $23.7 million for the nine
months ended September 30, 2000, as compared to $22.0 million for the nine
months ended September 30, 1999, and as a percentage of room revenue increased
slightly to 12.6% from 12.3% for the same period of 1999. The increase is
primarily due to higher material spare parts and freight costs in 2000.
Research and development expenses increased $0.2 million or 4.0% to $6.5
million for the nine months ended September 30, 2000 as compared to $6.3 million
expended for the same period of 1999. The increase is primarily due to higher
average salaries due to the competitive nature of the Bay Area job market.
Selling, general and administrative expenses for the nine months ended
September 30, 2000 increased 3.8% to $19.9 million, as compared to $19.2 million
for the nine months ended September 30, 1999. The increase is primarily due to
higher legal costs, costs of leasing office space in Denver, and higher travel
and executive costs.
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<PAGE> 15
EBITDA for the nine months ended September 30, 2000 decreased $1.0 million
or 1.7% to $57.9 million as compared to $58.9 million for the nine months ended
September 30, 1999. EBITDA as a percentage of total revenue decreased to 29.0%
in the first nine months of 2000 from 30.8% in the same period of 1999. The
decreased EBITDA percentage is primarily attributable to the increase in direct
costs as a percent of revenues and an increase in Selling, General and
Administrative expenses in 2000 as compared to the same period in 1999.
Depreciation, amortization, and stock based compensation expenses for the
nine months ended September 30, 2000 decreased $8.6 million or 11.9% to $63.3
million, as compared to $71.9 million for the nine months ended September 30,
1999, and as a percentage of total revenue decreased to 31.7% for the first nine
months of 2000 from 37.5% for the first nine months of 1999. The decrease
occurred primarily due to the absence of depreciation on certain video system
assets acquired during the 1996 acquisition of SpectraVision by the Company,
which became fully depreciated in October of 1999.
Interest expense for the nine months ended September 30, 2000 increased
$4.0 million or 52.5% to $11.7 million as compared to $7.7 million for the nine
months ended September 30, 1999. This increase is due to additional borrowings
under the Company's revolving Credit Facility, an increase in interest rates and
additional interest due under certain capital lease obligations, which were
entered into during the third and fourth quarters of 1999.
Interest/other income, net increased slightly by $0.1 million to $0.5
million from $0.4 million, respectively, for the nine months ended September 30,
2000 and September 30, 1999. This increase is due to increases in investment
related income and purchase discounts taken.
Provision for income taxes for the nine months ended September 30, 2000 and
1999 represent tax on income in certain international and domestic
jurisdictions. Income taxes increased to $0.4 million in 2000 from $0.1 million
for the same period in 1999.
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 hotels' 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, 2000 and September 30, 1999 respectively, were cash from
operations of $40.0 million and $52.7 million, and net borrowings of $45.1
million and $14.0 million from the Company's credit lines. For the nine months
ended September 30, 2000 and September 30, 1999, respectively, cash was expended
primarily for capital expenditures which totaled $83.6 million for the first
nine months of 2000 and $64.2 million for the first nine months of 1999, related
primarily to the conversion of hotels equipped with SpectraVision and OCV
systems to OCC's new OCX systems, the installation of new hotels with OCC's
systems, increased inventory, and internal fixed asset purchases. In addition,
for the first nine months of 2000 the Company invested $3 million in two
companies that are expected to provide content to the Company.
On July 18, 2000, OCC entered into a new credit agreement with a group of
banks (the "OCC Credit Facility"), replacing the pre-existing $200.0 million
Revolving Credit Facility and a $10.0 million interim line of credit. The new
agreement provides OCC with unsecured borrowings of up to $350.0 million for the
next five years (the OCC Credit Facility matures July, 2005). Several options
are available to borrow at floating interest rates based on LIBOR (London
Interbank Offered Rate) or the bank's alternate base rate (prime rate). The OCC
Credit Facility contains covenants that place certain limits on OCC's ability to
pay dividends or make distributions on its equity, repurchase equity, merge or
acquire another entity, and incur debt or create liens on assets, among other
things. In addition, the OCC Credit Facility requires OCC to meet certain
leverage and interest coverage tests and places annual limits on OCC's capital
expenditures.
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<PAGE> 16
The Company expects that internally generated funds and the OCC Credit
Facility will support its financing requirements for the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The Company is exposed to market risk from changes in interest rates, which
could impact its results of operations and financial condition. Revolving loans
extended under the OCC Credit Facility generally bear an interest rate that is
variable and based on the London Interbank Offering Rate ("LIBOR") and on
certain operating ratios of the Company. At September 30, 2000, the Company had
$225.1 million outstanding on its Credit Facility and the weighted average
interest rate on such Credit Facility was 8.54%. Assuming no increase or
decrease in the amount outstanding, a hypothetical immediate 100 basis point
increase (or decrease) in interest rates at September 30, 2000 would increase
(or decrease), the Company's annual interest expense and cash outflow by
approximately $2.25 million.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
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 has received royalty payments, net of legal fees and
expenses, in an aggregate amount of approximately $10,700,000. OCC received the
first payment of approximately $2,900,000 (net of expenses) in September 1998,
the second payment of approximately $3,900,000 (net of expenses) in July 1999,
and the final payment of approximately $3,900,000 (net of expenses) in July
2000. OCC recognized the royalty revenue as payments were received.
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 and OCC,
alleging that OCV breached the license agreement, and alleging various torts by
OCV and OCC in their respective relationships with Maginet. The Company believes
that its positions in the litigation with Maginet are meritorious, however, the
outcome of the Maginet suit and counter-suit cannot be predicted with certainty.
Given the current level of uncertainty associated with this litigation,
management is unable to predict the outcome at this time, but a decision
adverse to the Company could have a material impact on the financial condition
of the Company.
Apart from the Maginet litigation, the Company is a defendant, and may be
a potential defendant, in lawsuits and claims arising in the ordinary course of
its business. While the outcomes of such claims, lawsuits, or other proceedings
cannot be predicted with certainty, management expects that such liability, to
the extent not provided for by insurance or otherwise, will not have a material
adverse effect on the financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES:
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:
EXHIBIT NO. DESCRIPTION
(A) 27.0 Financial Data Schedule
Page 16
<PAGE> 17
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 14, 2000.
On Command Corporation
/s/ PAUL J. MILLEY
----------------------------------
Paul J. Milley
Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)
Page 17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
(A) 27.0 Financial Data Schedule
