1
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
Commission File Number 00-21315
ON COMMAND CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 77-04535194
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(State or other jurisdiction (I.R.S. Employer
of Incorporation or organization Identification No.)
6331 SAN IGNACIO AVE., SAN JOSE, CALIFORNIA 95119
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(Address of principal executive offices) (Zip Code)
(408 360-4500)
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(Registrant's telephone number, including area code)
(not applicable)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
The number of shares outstanding of the Registrant's Common Stock as of
March 31, 1997 was 29,196,800 shares.
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ON COMMAND CORPORATION
FORM 10Q
INDEX
Page No.
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Part I. Financial Information
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Item 1 -- Financial Statements:
Condensed Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996.................. 3
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1997 and 1996.... 4
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 1997 and 1996........ 5
Notes to Condensed Consolidated Financial Statements.. 6-8
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 9-13
Part II. Other Information
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Item 6 -- Exhibits and Reports on Form 8-K..................... 14
Signatures.............................................................. 16
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ON COMMAND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
March 31, December 31,
1997 1996
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 3,900 $ 5,733
Accounts receivable, net..................................................... 25,225 25,328
Other current assets......................................................... 3,011 3,718
Deferred income taxes........................................................ 1,593 1,593
-------- --------
Total current assets................................................... 33,729 36,372
Video systems, net............................................................. 252,914 250,600
Property and equipment, net.................................................... 11,110 11,037
Goodwill, net.................................................................. 88,370 89,503
Other assets, net.............................................................. 8,366 9,374
-------- --------
Total assets........................................................... $394,489 $396,886
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable,............................................................ $ 21,678 $ 16,844
Accrued compensation......................................................... 5,205 4,931
Other accrued liabilities.................................................... 5,615 6,627
Taxes payable................................................................ 16,103 15,777
Deferred revenue............................................................. 148 232
Current portion of revolving credit facility................................. 53,000 48,000
-------- --------
Total current liabilities.............................................. 101,749 92,411
Other accrued liabilities...................................................... 1,700 1,700
Long-term portion of revolving credit facility................................. 50,000 50,000
Deferred income taxes.......................................................... 1,858 1,858
-------- --------
Total liabilities...................................................... 155,307 145,969
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Stockholders' equity:
Common stock $.01 par value; shares authorized -- 50,000 in 1997 and
1996; shares issued and outstanding -- 29,197 in 1997 and 29,087 in 1996;
shares subscribed -- 850 in 1997 and 960 in 1996........................... 300 300
Additional paid-in capital................................................... 249,164 249,164
Common stock warrants........................................................ 31,450 31,450
Cumulative translation adjustments........................................... (39) (260)
Accumulated deficit.......................................................... (41,693) (29,737)
-------- --------
Total stockholders' equity............................................. 239,182 250,917
-------- --------
Total liabilities and stockholders' equity..................................... $394,489 $396,886
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ON COMMAND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
March 31,
------------------------------------
1997 1996
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Revenues:
Movie revenues............................................................... $ 49,963 $ 27,317
Video system sales/other..................................................... 2,101 3,224
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Total revenues......................................................... 52,064 30,541
-------- --------
Direct costs:
Movie revenues............................................................... 24,430 11,244
Video system sales/other..................................................... 1,066 2,534
-------- --------
Total direct costs.................................................... 25,496 13,778
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Direct income.................................................................. 26,568 16,763
Operating expenses:
Depreciation and amortization................................................ 19,009 10,047
Operations................................................................... 9,854 2,542
Research and development..................................................... 1,614 932
Selling, general and administrative.......................................... 6,190 1,232
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Total operating expenses............................................... 36,667 14,753
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Operating income (loss)........................................................ (10,099) 2,010
Interest expense, net.......................................................... (1,857) (419)
-------- --------
Income (loss) before income taxes.............................................. (11,956) 1,591
Income tax expense............................................................. - (673)
-------- --------
Net income (loss).............................................................. (11,956) 918
Redeemable common stock accretion.............................................. - 160
-------- --------
Net income (loss) applicable to nonredeemable common stock..................... $(11,956) $ 758
======== ========
Net income (loss) per common and equivalent share.............................. $ (0.40) $ 0.03
======== ========
Weighted-average number of common shares outstanding........................... 30,047 22,050
======== ========
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)
Three Months Ended
March 31,
---------------------
1997 1996
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Cash flows from operating activities:
Net income (loss) $(11,956) $ 918
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 19,009 10,047
Deferred income taxes, net -- (2,603)
Loss on disposal of fixed assets 92 --
Changes in assets and liabilities:
Accounts receivable, net (62) (3,336)
Other assets 799 477
Accounts payable 5,386 (1,494)
Accounts payable to stockholder -- (206)
Accrued compensation 274 (1,726)
Taxes payable 326 231
Other accrued liabilities (1,098) 9,453
Deferred revenue (84) (147)
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Net cash provided by operating activities 12,686 11,614
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Cash flows from investing activities:
Capital expenditures (19,453) (19,741)
Other assets (20) --
-------- --------
Net cash used in investing activities (19,473) (19,741)
-------- --------
Cash flows from financing activities:
Proceeds from revolving credit facility 5,000 --
Proceeds from stockholders' notes payable -- 8,000
Principal payments on stockholders' notes payable -- (120)
Proceeds from issuance of stock -- 15
-------- --------
Net cash provided by financing activities 5,000 7,895
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Effect of exchange rate changes in cash (46) --
Decrease in cash and cash equivalents (1,833) (232)
Cash and cash equivalents, beginning of period 5,733 956
-------- --------
Cash and cash equivalents, end of period $ 3,900 $ 724
-------- --------
Supplemental information:
Cash paid for income taxes $ 82 $ 71
======== ========
Cash paid for interest $ 1,603 $ 126
======== ========
Accretion of redeemable common stock $ -- $ 160
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ON COMMAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
1. BASIS OF PRESENTATION
On Command Corporation (the "Company" or "OCC") is a Delaware
corporation formed by Ascent Entertainment Group, Inc. ("Ascent") for
the purpose of effecting (i) the merger (the "Merger") of On Command
Video Corporation ("OCV"), a majority-owned subsidiary of Ascent, with
a wholly-owned subsidiary of OCC, after which OCV became a wholly owned
subsidiary of OCC, and (ii) the acquisition (the "Acquisition") of
SpectraDyne, Inc., a wholly owned subsidiary of SpectraVision, Inc.
("Oldco"). Following the Acquisition, SpectraDyne, Inc. changed its
name to SpectraVision, Inc. ("SpectraVision"). Ascent is a
majority-owned subsidiary of COMSAT Corporation ("COMSAT").
Effective October 8, 1996, the Merger and Acquisition were
consummated. The Merger has been accounted for using the historical
book value of the assets, liabilities and stockholders' equity acquired
from OCV in a manner similar to a pooling of interests and the
Acquisition was accounted for as a purchase using the fair value of the
assets acquired and liabilities assumed from Oldco. Accordingly, the
condensed consolidated financial statements of the Company include the
historical statements of financial position at March 31, 1997 and
December 31, 1996, and the results of operations and cash flows for the
three months ended March 31, 1997 and 1996 of OCV, as well as the
acquired operations of SpectraVision subsequent to the date the
Acquisition. Per share amounts and number of shares have been restated
to reflect the 2.84 shares of OCC common stock received for every share
of OCV common stock previously held. Prior to the Merger and
Acquisition, OCC had no significant operations. (See Note 3 for
additional discussion of the business combination.)
The condensed 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 March 31, 1997 and
December 31, 1996, and the results of operations and cash flows for the
three months ended March 31, 1997 and 1996. The results for interim
periods are not necessarily indicative of the results to be expected
for the entire year.
Certain fiscal 1996 amounts have been reclassified to conform
with the fiscal 1997 presentation. Such reclassifications had no effect
on net income or stockholders' equity.
2. NET INCOME (LOSS) PER SHARE
Net income per share is based on the weighted-average number
of common and dilutive common equivalent shares outstanding during the
periods. Common equivalent shares include redeemable common stock and
common stock options and warrants. Net loss per share is calculated by
dividing the net loss applicable to nonredeemable common stock by the
weighted-average number of common shares outstanding as including
common stock equivalents would be antidilutive.
3. BUSINESS COMBINATION
As discussed in Note 1 above and in Note 3 to the Company's
1996 Consolidated Financial Statements, effective October 8, 1996 (the
"Closing Date"), the Company acquired all of the outstanding capital
stock of SpectraVision, the primary operating subsidiary of Oldco,
together with certain other assets of Oldco and its affiliates.
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As of the Closing Date, the stockholders of OCV received
21,750,000 shares of OCC common stock (72.5% of the initial OCC common
stock). In consideration for the acquisition of the net assets and
properties of SpectraVision by OCC, OCC paid $4 million in cash and
issued 8,041,618 shares of OCC common stock to the Oldco bankruptcy
estate for distribution to Oldco's creditors. Additionally, 208,382
shares were held in reserve pursuant to the Acquisition for potential
adjustments. Of these, 196,382 shares of reserved stock were
subsequently distributed to the Oldco bankruptcy estate for the benefit
of Oldco's creditors with the remaining 12,000 shares distributed to
the OCV stockholders. Ascent owned approximately 57.2% of the
outstanding common stock of OCC at March 31, 1997.
In connection with the Acquisition and Merger, OCC also issued
warrants representing the right to purchase a total of 7,500,000 shares
of OCC common stock (20% of the outstanding common stock of OCC after
exercise of the warrants). The warrants have a term of seven years and
an exercise price of $15.27 per share of OCC common stock. Series A
warrants to purchase on a cashless basis an aggregate of 1,425,000
shares of OCC common stock were issued to the former OCV stockholders,
of which Ascent received warrants to purchase 1,124,325 shares; Series
B warrants to purchase for cash an aggregate of 2,625,000 shares of OCC
common stock were issued to the Oldco bankruptcy estate for
distribution to creditors; and $4,000,000 in cash was paid and Series C
warrants were issued to OCC's investment advisor to purchase for cash
an aggregate of 3,450,000 shares of OCC common stock in consideration
for certain banking and advisory services provided in connection with
the transactions. The Acquisition has been accounted for under the
purchase method and, accordingly the results of operations of
SpectraVision are included in the Consolidated Financial Statements
from the Closing Date.
4. DEBT
In conjunction with the SpectraVision Acquisition, the Company
obtained a $125 million credit facility with a bank (the "Credit
Facility"), dated as of October 8, 1996. The Credit Facility consists
of (i) a 364-day revolving credit and competitive advance facility
which, subject to certain conditions, will be renewable for four
364-day periods, and (ii) a five-year revolving credit and competitive
advance facility; provided, however, that any amounts borrowed under
the five-year facility will reduce the amount available under the
364-day facility. Revolving loans extended under the Credit Facility
generally will bear interest at the London Interbank Offering Rate
("LIBOR") plus a spread that may range from 0.375% to 0.625% depending
on certain operating ratios of Company. The Credit Facility limits the
Company's ability to incur indebtedness or pay dividends, but does not
preclude the Company from paying cash dividends on its common stock.
The Credit Facility contains customary covenants, including, among
other things, compliance by the Company with certain financial
covenants. The Company was in compliance with such covenants at
December 31, 1996 and with such covenants, as amended, at March 31,
1997.
On March 23, 1997, OCC entered into an amendment to the Credit
Facility (the "OCC Amendment"). Under the OCC Amendment the amount
available under the OCC Credit Facility was increased from $125 million
to $150 million, and certain other terms were amended to clarify such
terms.
5. LITIGATION
The Company is a defendant, and may be potential defendant, in
lawsuits and claims arising in the ordinary course of its business.
While the outcomes of such claims, lawsuits, or other proceedings
cannot be predicted with certainty, management expects that such
liability, to the extent not provided for by insurance or otherwise,
will not have a material adverse effect on the financial condition of
the Company.
6. OTHER MATTERS
In August 1996, OCV, Ascent and Hilton Hotels Corporation
("Hilton") entered into a letter of agreement (the "Letter Agreement")
providing for the cancellation of approximately 1,336,000 shares of OCV
common stock issued to Ascent pursuant to the Contribution Agreement
entered into between OCV and Ascent in September 1995 ("Contribution
Agreement"). The Letter Agreement also provided for an extension of the
effective date of the increase in the exercise price of the Hilton
Warrants from June 1, 1996 to 90 days after the closing of the
Acquisition of SpectraVision. On October 7, 1996, Hilton exercised its
warrants and the Company received proceeds of $1.8 million in cash and
$8.9 million in the form of a promissory note.
The Letter Agreement also provided Hilton the right to put to
Ascent all, but not less than all, of the shares acquired from exercise
of the Hilton Warrants and still held by Hilton on the date 90 days
after the closing of the SpectraVision Acquisition at the same exercise
price at which Hilton exercised its warrants. On January 5, 1997, this
put right expired unexercised.
7. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS 128). The Company is required to adopt SFAS 128 in the
fourth quarter of fiscal 1997 and will restate at that time earnings
per share (EPS) data for prior periods to conform with SFAS 128.
Earlier applications is not permitted.
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SFAS 128 replaces current EPS reporting requirements and
requires a dual presentation of basic and diluted EPS. Basic EPS
excludes dilution and is computed by dividing net income available to
nonredeemable common stock by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
If SFAS 128 had been in effect during the quarter ended March
31, 1997, basic and diluted EPS would not have been different than
fully diluted EPS currently reported for the period. If SFAS 128 had
been in effect during the quarter ended March 31, 1996, basic and
diluted EPS both would have been $(0.40).
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q may contain forward looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which reflect OCC's current
judgment on those issues. Because such statements apply to future events, they
are subject to risks and uncertainties that could cause the actual results to
differ materially. The following should be read in conjunction with the
Consolidated Financial Statements (unaudited) included elsewhere (herein), and
with the Consolidated Financial Statements, notes thereto, and Management
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's annual report on Form 10-K and 10-Q's, as filed with
the Securities and Exchange Commission.
OVERVIEW
OCC is the leading provider (by number of hotel rooms served) of on-demand
in-room video entertainment for the United States lodging industry. The
on-demand OCC system is a patented video selection and distribution system that
allows guests to select at any time, on a pay-per-view basis, from up to 50
motion pictures on computer controlled television sets located in their rooms.
OCC (OCV prior to October 8, 1996) has experienced rapid growth in the past four
years, increasing its base of installed on-demand rooms from approximately
37,000 rooms at the end of 1992 to approximately 917,000 rooms at March 31,
1997. OCC also provides in-room viewing of free-to-guest programming of select
cable channels and other interactive services. OCC provides its services under
long-term contracts primarily to business and luxury hotel chains such as
Marriott, Hilton, Hyatt, Wyndham, Doubletree, Fairmont, Four Seasons, Loews,
Stouffer, Embassy Suites, Holiday Inn and Harvey Hotels, and to other hotel
management companies; and individually owned and franchised hotel properties.
At March 31, 1997, approximately 87% of OCC's 917,000 installed rooms were
located in the United States, with the balance located in Canada, Asia, Europe
and Mexico. Of these installed systems, 78% had on-demand capability.
GUEST PAY SERVICES
OCC provides scheduled and on-demand in-room television viewing of major
motion pictures (including new releases) and independent non-rated motion
pictures for mature audiences for which a hotel guest pays on a per-view basis.
Depending on the type of system installed and the size of the hotel, guests can
choose among twenty (20) to fifty (50) different movies with an on demand system
or among eight (8) to twelve (12) movies with a scheduled system.
OCC obtains the non-exclusive rights to show recently released motion
pictures from major motion picture studios generally pursuant to a master
agreement with each studio. The license period and fee for each motion picture
are negotiated individually with each studio, which typically receives a
percentage of that picture's gross revenues generated by the pay-per-view
system. Typically, OCC obtains rights to exhibit major motion pictures during
the time frame after initial theatrical release and before release for home
video distribution or cable television exhibition. OCC also obtains independent
motion pictures, most of which are non-rated and are intended for mature
audiences, for a one-time flat fee that is nominal in relation to the licensing
fees paid for major motion pictures.
OCC provides service under contracts with hotels that generally run for a
term of five to seven years. Under these contracts, OCC installs its system into
the hotel at OCC's cost, and OCC retains ownership of all its equipment used in
providing the service. Traditionally, the hotel provides and owns the
televisions; however, based on certain economic evaluations, OCC may provide
televisions to certain hotels. Depending on the size of the hotel property and
the configuration of the system installed, the installed cost of a new on-demand
system with interactive and video game services capabilities, including the
head-end equipment, averages from approximately $300 to $700 per room. OCC's
contracts with hotels provide that OCC will be the exclusive provider of
in-room, pay-per-view television entertainment services to the hotel and
generally permit OCC to set the movie prices, subject to approval by some major
customers. 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.
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The revenue generated from the Company's pay-per-view service is dependent
upon the occupancy rate at the property, the "buy rate" or percentage of
occupied rooms that buy movies or other services at the property, and the price
of the movie or service. Occupancy rates vary by property based on the
property's location, competitive position within its marketplace, seasonal
factors and general economic conditions. Buy rates generally reflect the hotel's
guest mix profile, the popularity of the motion pictures or services available
at the hotel, and the guests' other entertainment alternatives. Buy rates also
vary over time with general economic conditions.
FREE-TO-GUEST SERVICES
OCC also markets a free-to-guest service pursuant to which a hotel may
elect to receive one or more satellite programming channels, such as HBO,
Showtime, CNN, ESPN, WTBS, and other cable networks. OCC provides hotels
free-to-guest services through a variety of arrangements including having the
hotel pay the Company a fixed monthly fee per room for each programming channel
selected or having the price of such programming included in the Company's other
offerings.
INTERACTIVE AND OTHER SERVICES
In addition to entertainment services, OCC provides interactive services
to the lodging industry. These services generate revenues and cash flows which
are independent of viewing levels. These services use two-way interactive
communications capability of the Company's equipment and room availability
monitoring. The hotel typically pays a fixed monthly fee for each service
selected. Interactive services are also currently available in Spanish, French,
and certain other foreign languages. In most cases, the interactive services are
made a part of the contract for pay-per-view services which typically runs for a
term of five to seven years.
In addition to installing systems in hotels served by OCC, OCC sells
systems to certain other providers of in-room entertainment including MagiNet
Corporation (formerly Pacific Pay Video Limited), which is licensed to use OCC's
system to provide on-demand in-room entertainment in the Asia Pacific region,
and Hospitality Networks.
ANALYSIS OF OPERATIONS
REDEPLOYMENT OF SATELLITE
On January 11, 1997, SpectraVision experienced an interruption in
service caused by the loss of communication with a satellite used to deliver
pay-per-view programming to approximately 950 of OCC's approximately 3,100
hotels. Of the hotels affected, approximately 410 hotels continued to provide
limited pay-per-view services through alternate disk or tape-based systems. By
February 9, 1997, OCC was able to obtain alternate satellite service through
July 1997 and had restored full service to all the hotels affected. After July
1997, the Company anticipates providing programming service to such hotels via
terrestrial-based systems or alternate satellite service. The Company believes
the loss of satellite service in the first quarter of 1997 resulted in
approximately $3 million to $4 million of decreased operating cash flow through
reduced revenues and incremental expenses in that period.
ROOM AND INVESTMENT ACTIVITY
Room counts during the quarter were basically flat at 917,000
worldwide rooms as most of the investment activity was focused on converting
SpectraVision rooms to OCV's pay-per-view systems. Rooms with OCV systems
increased during the quarter from approximately 466,000 at December 31, 1996, to
approximately 484,000 on March 31, 1997. Capital expenditures totaled $19.5
million during the quarter in support of OCV's room growth, additional
expenditures on prior installations, and internal fixed asset purchases.
Following is selected financial information for the quarter compared to the
first quarter of 1996.
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SELECTED FINANCIAL INFORMATION
(In thousands, except hotel and room amounts)
THREE MONTHS ENDED
--------------- -------------------------------------
% OF % OF
MARCH 31, TOTAL MARCH 31, TOTAL
1997 REVENUE 1996 REVENUE
--------- ------- --------- --------
Revenues:
Movie Revenues $ 49,963 96.0% $ 27,317 89.4%
Video Systems/Other 2,101 4.0% 3,224 10.6%
-------- ----- -------- -----
Total Revenues 52,064 100.0% 30,541 100.0%
Direct Costs:
Movie Revenues 24,430 46.9% 11,244 36.8%
Video Systems/Other 1,066 2.0% 2,534 8.3%
-------- ----- -------- -----
Total Direct Costs 25,496 49.0% 13,778 45.1%
-------- ----- -------- -----
Direct Profit 26,568 51.0% 18,763 54.9%
Operations 9,854 18.9% 2,542 8.3%
Research and Development 1,614 3.1% 932 3.1%
Selling, General & Administrative 6,190 11.9% 1,232 4.0%
-------- ----- -------- -----
17,658 33.9% 4,706 15.4%
-------- ----- -------- -----
EBITDA(1) 8,910 17.1% 12,057 39.5%
Depreciation and Amortization 19,009 36.5% 10,047 32.9%
Interest 1,857 3.6% 419 1.4%
Taxes -- 0.0% 673 2.2%
-------- ----- -------- -----
20,866 40.1% 11,139 36.5%
-------- ----- -------- -----
Net Income/(Loss) $(11,956) -23.0% $ 918 3.0%
======== ===== ======== =====
% OF % OF
MARCH 31, TOTAL MARCH 31, TOTAL
1997 ROOMS 1996 ROOMS
--------- ------- --------- -------
TOTAL HOTELS 3,138 1,353
TOTAL ROOMS 917,000 386,000
ROOM COMPOSITION:
Geographic
Domestic 799,000 87.1% 373,000 96.6%
International 118,000 12.9% 13,000 3.4%
System Type
Scheduled Only 205,000 22.4% -- 0.0%
On-Demand 712,000 77.6% 386,000 100.0%
CAPITAL EXPENDITURES $ 19,453 $ 19,741
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(1) EBITDA represents earnings before interest, income taxes, depreciation
and amortization. The most significant difference between EBITDA and cash
provided from operations is changes in working capital. EBITDA is presented
because it is a widely accepted financial indicator used by certain
investors and analysts to analyze and compare companies on the basis of
operating performance. In addition, management believes EBITDA provides an
important additional perspective on the Company's operating results and the
Company's ability to service its long-term debt and fund the Company's
continuing growth. EBITDA is not intended to represent cash flows for the
period, or to depict funds available for dividends, reinvestment or other
discretionary uses. EBITDA has not been presented as an alternative to
operating income or as an indicator of operating performance and should not
be considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles, which
are presented in the financial statements in item 1 and discussed in item 2
under Liquidity and Capital Resources.
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THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Total revenues for the first quarter of 1997 increased $21.5 million or
70.5% to $52.1 million, as compared to $30.5 million for the comparable period
of 1996. Movie revenues increased $22.6 million or 82.9% in the first quarter of
1997 to $50.0 million, as compared to $27.3 million in the first quarter of
1996. The increase was primarily due to the acquisition of SpectraVision ($19.4
million) and the increase in OCV room base prior to the acquisition. The
Company's room base increased from 386,000 rooms at March 31, 1996 to 917,000 at
March 31, 1997, of which 433,000 rooms were acquired in the SpectraVision
Acquisition. Management believes revenues in the first quarter of 1997 would
have been higher by approximately $3 million to $4 million had the satellite
outage not occurred. Video system sales and other revenues decreased $1.1
million or 34.8% to $2.1 million as compared to $3.2 million in 1996,
principally due to a slowdown in ordering of video systems from two of the
Company's primary licensees.
Total direct costs of revenues for the first quarter of 1997 increased
$11.7 million or 85.0% to $25.5 million, as compared to $13.8 million for the
first quarter of 1996. Direct costs associated with movie revenue in the first
quarter of 1997 increased 117.3% to $24.4 million, as compared to $11.2 million
for the same period in 1996, and as a percentage of movie revenue increased to
48.9% at March 31, 1997 from 41.2% at March 31, 1996. The increase is
principally attributed to lower revenues from "free-to-guest" programming from
the hotel, and higher royalties to the studios and hotel commissions expense on
the SpectraVision room revenues. Direct costs from "video system sales and
other" revenues decreased 57.9% to $1.1 million in 1997, as compared to $2.5
million in 1996, primarily as a result of a decline in sales volume of video
systems. Direct costs as a percentage of "video system sales and other" revenues
decreased to 50.7% from 78.6% in 1996, primarily attributable to the increase in
"other" revenues which have significantly higher margins than video system
sales.
Depreciation and amortization expenses for the first quarter of 1997
increased $9.0 million or 89.2% to $19.0 million, as compared to $10.0 million
for the first quarter of 1996, and increased as a percentage of total revenue to
36.6% at March 31, 1997 from 32.9% at March 31, 1996, and as a percentage of
movie revenue increased to 38.0% at March 31, 1997 from 36.8% at March 31, 1996.
These expenses are primarily attributable to depreciable assets associated with
video systems that generate movie revenue. The increase is primarily due to
capital investments associated with the growing OCV room base prior to the
acquisition, coupled with incremental depreciation and amortization resulting
from the acquisition of SpectraVision's in-room assets.
Operations costs for the first quarter of 1997 increased $7.3 million or
287.6% to $9.9 million, as compared to $2.5 million in the first quarter of
1996, and as a percentage of total revenue increased to 18.9% from 8.3% in 1996.
The increase is primarily due to the higher field service costs to support the
acquired SpectraVision equipment, the SpectraVision spare part depot used to
refurbish SpectraVision equipment, and expenses associated with the satellite
outage, as previously discussed. Expenses in the quarter associated with the
deployment of alternative satellite capacity in the affected SpectraVision
hotels was approximately $1 million.
Research and development expenses for the first quarter of 1997
increased $0.7 million or 73.2% to $1.6 million from $0.9 million in the first
quarter of 1996, but remained constant as a percentage of total revenue at 3.1%.
Research and development activities were focused on integrating SpectraVision
equipment and to the development of new products and services.
Selling, general and administrative expenses for the first quarter of
1997 increased $5.0 million or 402.4% to $6.2 million, as compared to $1.2
million in the first quarter of 1996, and as a percentage of total revenue
increased to 12.0% from 4.0% in 1996. The increase is principally due to
SpectraVision's higher cost structure, activities to integrate SpectraVision's
and OCV's accounting and operational systems, and higher administrative costs
associated with being a public company.
Interest expense for the first quarter of 1997 increased $1.4 million
or 343.2% to $1.8 million, as compared to $0.4 million in the first quarter of
1996. The increase is due to the Company's greater reliance on debt financing to
continue the expansion of its installed customer base and debt used to complete
the acquisition of SpectraVision.
Provision for income taxes for the first quarter of 1997 decreased $0.7
million or 100.0% to zero as compared to an income tax expense of
approximately $0.7 million in the first quarter of 1996. The decrease is due to
the net loss incurred in 1997 in contrast to a 1996 tax provision at an
effective rate of 42%. The Company has not recorded a tax benefit in the first
quarter of 1997 from the net operating losses generated in that quarter because
it has established a valuation allowance against its otherwise recognizable net
deferred tax assets at March 31, 1997, due to the uncertainty surrounding the
realizability of these benefits in future tax returns.
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Redeemable common stock accretion was eliminated in 1997 as this security
was converted to common stock in 1996. The accretion in the first quarter of
1996 was $0.2 million.
EBITDA for the first quarter of 1997 decreased $3.1 million or 26.1% to
$8.9 million as compared to $12.0 million in the first quarter of 1996. EBITDA
as a percentage of total revenue decreased to 17.1% in 1997 from 39.5% in 1996.
The reduced percentage is primarily due to the higher operating costs currently
associated with the SpectraVision business, higher administrative expenses
necessary to operate as a public company, and lost revenue and increased costs
associated with the satellite outage.
Net income (loss) decreased to a net loss of $12.0 million for the first
quarter of 1997 from net income of $0.9 million for the first quarter of 1996
due to the factors described above.
SEASONALITY
The Company's business is expected to be seasonal, with higher revenues
realized during the summer months and lower revenues realized during the winter
months due to business and vacation travel patterns.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash during the three months ended March 31,
1997 were cash from operations of $12.3 million, and borrowing of $5.0 million
from the revolving line of credit with NationsBank of Texas, N.A. (NationsBank)
Cash was expended primarily for capital expenditures of $19.5 million for the
installation of on-demand systems.
As previously noted, the Company's line of credit with NationsBank was
increased from $125 million to $150 million during the first quarter. At March
31, 1997, the Company had $103 million outstanding under the line of credit. The
Company expects that cash from operations, the Company's current line of credit
with NationsBank, and anticipated operating lease financing will be sufficient
to finance its expected investment in in-room video systems for the remainder of
1997.
RESTRICTIONS ON DEBT FINANCINGS
Pursuant to the Corporate Agreement entered into between Ascent and On
Command Corporation, On Command Corporation has agreed, among other things, not
to incur any indebtedness without Ascent's prior written consent, other than
indebtedness under the OCC Credit Facility entered into by On Command
Corporation in connection with the Transactions and indebtedness incurred in the
ordinary course of operations, which together shall not exceed $100 million in
the aggregate. Restrictions on On Command Corporation's ability to incur
additional debt could adversely affect On Command Corporation's plans for
growth, its ability to develop new products and technologies and its ability to
meet its liquidity needs. In addition, pursuant to the COMSAT Agreement between
Ascent and COMSAT, Ascent has agreed not to incur any indebtedness, other than
under Ascent's existing credit facility (and refinancings thereof) and
indebtedness incurred in the ordinary course of business, which together shall
not exceed $175 million in the aggregate, without COMSAT's consent. In March
1997, COMSAT consented to increase the limitation on Ascent's consolidated
indebtedness to $270 million through December 31, 1997; provided that (i) no
more than $50 million of such indebtedness may constitute long term debt; and
(ii) indebtedness subordinated to indebtedness under Ascent's existing credit
facility could only be incurred on terms which did not adversely affect COMSAT's
proposed tax-free distribution of its interest in Ascent to COMSAT stockholders.
In connection with COMSAT's consent under the COMSAT Agreement, Ascent consented
under the Corporate Agreement to increase OCC's limitation on indebtedness to
$116 million through June 30, 1997, and to $130 million through December 31,
1997; provided, however, that (i) no more than $50 million of such indebtedness
may constitute long term debt, and (ii) indebtedness may only be incurred in
compliance with the financial covenants contained in OCC's existing $150 million
credit facility, with any amendments to such covenants subject to the written
consent of Ascent.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
From time to time the Company has been, or may become, involved in
litigation proceedings incidental to the conduct of its business. The Company
does not believe any such proceedings presently pending will have a material
adverse affect on the Company's financial position or its result of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K:
(A) EXHIBIT
EXHIBIT NO. DESCRIPTION
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2.1 Agreement and Plan of Merger, dated as of August 13, 1996,
which is incorporated by reference to Amendment to No. 3 to
Form S-4 ("Form S-4), by and among On Command Corporation, On
Command Merger Corporation, and On Command Video Corporation
2.2 Acquisition Agreement, dated as of August 13, 1996, which is
incorporated by reference to Form S-4, by and among On Command
Corporation, Ascent Entertainment Group, Inc., the Official
Creditors' Committee for SpectraVision, Inc. and certain of
its subsidiaries, SpectraVision, Inc., Spectradyne, Inc. and
the other Debtors named therein
3.1 Certificate of Amended and Restated Certificate of
Incorporation of On Command Corporation, which is incorporated
by reference to Form S-4
3.2 Form of Certificate of Merger of On Command Merger Corporation
with and into On Command Video Corporation, which is
incorporated by reference to Form S-4
3.3 Bylaws of On Command Corporation, which is incorporated by
reference to Form S-4
4.1 Registration Rights Agreement by and among On Command Corporation
and the other parties named therein, which is incorporated by
reference to Form S-4
4.2 Warrant Agreement by and among On Command Corporation and the
other parties named therein, which is incorporated by
reference to Form S-4
10.1 Master Services Agreement, dated as of August 3, 1993, by and
between Marriott International, Inc., Marriott Hotel Services,
Inc. and On Command Video Corporation (confidential treatment
granted), which is incorporated by reference to Form S-4,
(Incorporated by reference to Exhibit 10.6 of the Registration
statement on Form S-1 (File No. 33-98502) of Ascent
Entertainment Group, Inc.)
10.2 Amended and Restated Spectra Vision and Interactive Services
National Agreement, by and between Hyatt Corporation and
Spectradyne, Inc., dated August 31, 1993, which is
incorporated by reference to Form S-4, (confidential treatment
granted)
10.3 Amended and Restated SpectraMax National Agreement, dated
August 31, 1993, by and between Hyatt Corporation and
Spectradyne, Inc., which is incorporated by reference to Form
S-4, (confidential treatment granted)
10.4 Hilton Hotels Corporation-On Command Video Agreement, dated
April 27, 1993, by and between Hilton Hotels Corporation and
On Command Video Corporation ,which is incorporated by
reference to Form S-4 (confidential treatment granted)
10.5 EDS Agreement, dated August 5, 1996, among Electronic Data
Systems Corporation, EDS Technical Products Corporation,
Ascent Entertainment Group, Inc. and On Command Video
Corporation, which is incorporated by reference to Form S-4
10.6* Form of Employment Agreement between On Command Corporation
and Robert Kavner, which is incorporated by reference to Form
S-4
10.7 Credit Agreement dated as of October 8, 1996 among On Command
Corporation, the Lender named therein and NationsBank of
Texas, N.A. (Incorporated by reference to Exhibit 10.19 of the
Annual Report on Form 10-K for the year ended December 31,
1996 of Ascent Entertainment Group, Inc. (Commission File No.
0-27192)
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10.7(a) First Amendment to Credit Agreement and related documents,
dated March, 1997, between NationsBank of Texas, N.A. and On
Command Corporation. (Incorporated by reference to Exhibit
10.19(a) of the Annual Report on Form 10-K for the year ended
December 31, 1996 at Ascent Entertainment Group, Inc.
(Commission File No. 0-27192))
10.8* Form of Employment Agreement between On Command Corporation
and Brian Steel, which is incorporated by reference to Form
S-4
10.9* Employment and Consulting Agreement, dated November 20, 1991,
between Robert Snyder and On Command Video Corporation which
is incorporated by reference to Form S-4
10.10 Standard Lease, dated June, 1996, between Berg & Berg
Developers, and On Command Video Corporation, which is
incorporated by reference on the 1996 Annual Report on Form
10-K of On Command Corporation ("1996 Form 10-K")
10.11 Sublease Agreement, dated January, 1997, between On Command
Corporation and Hughes Network Systems, Inc., which is
incorporated by reference to the 1996 Form 10-K
10.12 Corporate Agreement dated as of October 8, 1996, between On
Command Corporation and Ascent Entertainment Group, Inc.
(Incorporated by reference to Exhibit 10.22 of the Annual
Report on Form 10-K for the year ended December 31, 1996 of
Ascent Entertainment Group, Inc. (Commission File No.
0-27192))
10.13* 1996 Key Employee Stock Plan, which is incorporated by
reference to the 1996 Form 10-K
27.0 Financial Data Schedule
* Indicates compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of Section 13 of 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 May 14, 1997.
On Command Corporation
By: /s/ BRIAN A.C. STEEL
---------------------------
Brian A.C. Steel
Executive Vice President,
Chief Financial Office,
Chief Operating Officer, and
Director
(Principal Financial Officer)
By: /s/ PAUL J. MILLEY
---------------------------
Paul J. Milley
Senior Vice President,
Finance
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit
No. Description
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27.0 Financial Data Schedule