1
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 of incorporation (I.R.S. Employer
or organization) Identification No.)
6331 SAN IGNACIO AVE, SAN JOSE, CALIFORNIA 95119
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(Address of principal executive offices) (Zip Code)
(408) 360-4500
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(Registrant's telephone number, including area code)
(not applicable)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of
June 30, 1997 was 29,758,500 shares.
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ON COMMAND CORPORATION
FORM 10-Q
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets as of June 30,1997 and December 31,1996. 3
Condensed Consolidated Statements of Operations for the Three Months Ended and
Six Months Ended June 30,1997 and 1996. 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30,1997 and 1996. 5
Notes to Condensed Consolidated Financial Statements. 6-8
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. 9-14
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 15-16
SIGNATURES 17
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ON COMMAND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
1997 1996
--------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,151 $ 5,733
Accounts receivable, net 27,163 25,328
Other current assets 2,728 3,718
Deferred income taxes 1,593 1,593
--------- ---------
Total current assets 38,635 36,372
Video systems, net 259,909 250,600
Property and equipment, net 11,187 11,037
Goodwill, net 84,237 89,503
Other assets, net 7,549 9,374
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Total assets $ 401,517 $ 396,886
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 23,455 $ 16,823
Accounts payable - stockholder 257 21
Accrued compensation 4,533 4,931
Other accrued liabilities 7,390 6,627
Taxes payable 13,993 15,777
Deferred revenue 223 232
Current portion of revolving credit facility 65,000 48,000
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Total current liabilities 114,851 92,411
Other accrued liabilities 1,392 1,700
Long-term portion of revolving credit facility 50,000 50,000
Deferred income taxes 1,858 1,858
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Total liabilities 168,101 145,969
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Stockholders' equity:
Common stock, $.01 par value: shares
authorized - 50,000 in 1997 and 1996;
shares issued and outstanding - 29,759 in 1997
and 29,087 in 1996;
shares subscribed-335 in 1997 and 960 in 1996 300 300
Additional paid-in capital 249,290 249,164
Common stock warrants 31,450 31,450
Cumulative translation adjustments (114) (260)
Accumulated deficit (47,510) (29,737)
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Total stockholders' equity 233,416 250,917
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Total liabilities and stockholders' equity $ 401,517 $ 396,886
========= =========
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)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues:
Movie revenues $ 54,580 $ 28,455 $ 104,543 $ 55,583
Video system sales/other 1,807 3,494 3,908 6,907
--------- --------- --------- ---------
Total revenues 56,387 31,949 108,451 62,490
--------- --------- --------- ---------
Direct costs:
Movie revenues 25,381 11,689 49,811 22,933
Video system sales/other 957 2,475 2,023 5,009
--------- --------- --------- ---------
Total direct costs 26,338 14,164 51,834 27,942
--------- --------- --------- ---------
Direct income 30,049 17,785 56,617 34,548
Operating expenses:
Depreciation and amortization 19,514 10,970 38,523 21,017
Operations 7,873 2,698 17,727 5,240
Research and development 1,489 996 3,103 1,929
Selling, general and administrative 4,700 1,248 10,890 2,480
--------- --------- --------- ---------
Total operating expenses 33,576 15,912 70,243 30,666
--------- --------- --------- ---------
Operating income (loss) (3,527) 1,873 (13,626) 3,882
Interest expense, net (1,838) (576) (3,695) (995)
--------- --------- --------- ---------
Income ( loss) before income taxes (5,365) 1,297 (17,321) 2,887
Income tax expense (452) (590) (452) (1,263)
--------- --------- --------- ---------
Net income (loss) (5,817) 707 (17,773) 1,624
Redeemable common stock accretion -- 163 -- 323
--------- --------- --------- ---------
Net income (loss) applicable to nonredeemable common stock $ (5,817) $ 544 $ (17,773) $ 1,301
========= ========= ========= =========
Net income (loss) per common and equivalent share $ (0.19) $ 0.02 $ (0.59) $ 0.06
========= ========= ========= =========
Weighted-average number of common shares outstanding 30,060 22,447 30,053 22,445
========= ========= ========= =========
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)
Six Months Ended
June 30,
----------------------
1997 1996
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Cash flows from operating activities:
Net income (loss) $(17,773) $ 1,624
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 38,523 21,017
Deferred income taxes, net -- 673
Changes in assets and liabilities:
Accounts receivable, net (1,835) (3,966)
Other assets 990 (91)
Accounts payable 6,629 3,141
Accounts payable to stockholder 236 (590)
Accrued compensation (398) (105)
Taxes payable 1,216 1,484
Other accrued liabilities 455 497
Deferred revenue (9) (332)
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Net cash provided by operating activities 28,034 23,352
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Cash flows from investing activities:
Capital expenditures (43,915) (37,436)
Other assets 28 (70)
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Net cash used in investing activities (43,887) (37,506)
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Cash flows from financing activities:
Proceeds from revolving credit facility 17,000 --
Proceeds from sale of stock 126 15
Proceeds from stockholders' notes payable -- 13,500
Principal payments on stockholders' notes payable -- (172)
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Net cash provided by financing activities 17,126 13,343
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Effect of exchange rate changes in cash 145 --
Net increase (decrease) in cash and cash equivalents 1,418 (811)
Cash and cash equivalents, beginning of period 5,733 956
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Cash and cash equivalents, end of period $ 7,151 $ 145
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Non-cash and investing activity:
Common stock issued in connection
with contribution agreement with Ascent $ -- $ 2,094
======== ========
Reversal of accrual made in purchase
price allocation $ 3,000 $ --
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Supplemental information:
Cash paid for income taxes $ 265 $ 224
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Cash paid for interest $ 3,129 $ 250
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Accretion of redeemable common stock $ -- $ 323
======== ========
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
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
1. BASIS OF PRESENTATION
On Command Corporation (the "Company" or "OCC") is a Delaware
corporation formed by Ascent Entertainment Group, Inc. ("Ascent") for
the purpose of effecting (i) the merger (the "Merger") of On Command
Video Corporation ("OCV"), a majority-owned subsidiary of Ascent, with
a wholly-owned subsidiary of OCC, after which OCV became a wholly owned
subsidiary of OCC, and (ii) the acquisition (the "Acquisition") of
SpectraDyne, Inc., a wholly owned subsidiary of SpectraVision, Inc.
("Oldco"). Following the Acquisition, SpectraDyne, Inc. changed its
name to SpectraVision, Inc. ("SpectraVision"). Ascent had been a
majority-owned subsidiary of COMSAT Corporation ("COMSAT") and on June
27, 1997 COMSAT consummated the distribution of its 80.67% ownership
interest in Ascent to the COMSAT shareholders on a pro-rata basis in a
transaction that was tax-free for federal income tax purposes (the
"Distribution").
Effective October 8, 1996, the Merger and Acquisition were
consummated. The Merger has been accounted for using the historical
book value of the assets, liabilities and stockholders' equity acquired
from OCV in a manner similar to a pooling of interests and the
Acquisition was accounted for as a purchase using the fair value of the
assets acquired and liabilities assumed from Oldco. Accordingly, the
condensed financial statements of the Company include the historical
statements of financial position at June 30, 1997 and December 31,
1996, and the results of operations and cash flows for the six months
ended June 30, 1997 and 1996 of OCV, as well as the acquired operations
of SpectraVision subsequent to the date the Acquisition. Per share
amounts and number of shares have been restated to reflect the 2.84
shares of OCC common stock received for every share of OCV common stock
previously held. Prior to the Merger and Acquisition, OCC had no
significant operations. (See Note 3 for additional discussion of the
business combination.)
The condensed financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). While the quarterly financial information
contained in this filing is unaudited, the financial statements
presented reflect all adjustments (consisting only of normal recurring
adjustments) which the Company considers necessary for a fair
presentation of the financial position at June 30, 1997 and December
31, 1996, and the results of operations and cash flows for the six
months ended June 30, 1997 and 1996. The results for interim periods
are not necessarily indicative of the results to be expected for the
entire year.
Certain fiscal 1996 amounts have been reclassified to conform
with the fiscal 1997 presentation. Such reclassifications had no effect
on net income or stockholders' equity.
2. NET INCOME (LOSS) PER SHARE
Net income per share is based on the weighted-average number
of common and dilutive common equivalent shares outstanding during the
periods. Common equivalent shares include redeemable common stock and
common stock options and warrants. Net loss per share is calculated by
dividing the net loss applicable to nonredeemable common stock by the
weighted-average number of common shares outstanding as including
common stock equivalents would be antidilutive.
3. BUSINESS COMBINATION
As discussed in Note 1 above and in Note 3 to the Company's
1996 Financial Statements, effective October 8, 1996 (the "Closing
Date"), the Company acquired all of the outstanding capital stock of
SpectraVision, the primary operating subsidiary of Oldco, together with
certain other assets of Oldco and its affiliates.
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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 $4,000,000 in cash and
issued 8,041,618 shares of OCC common stock to the Oldco bankruptcy
estate for distribution to Oldco's creditors. Additionally, 208,382
shares were held in reserve pursuant to the Acquisition for potential
adjustments. Of these, 196,382 shares of reserved stock were
subsequently distributed to the Oldco bankruptcy estate for the benefit
of Oldco's creditors with the remaining 12,000 shares distributed to
the OCV stockholders. Ascent owned approximately 57.1% of the
outstanding common stock of OCC at June 30, 1997.
In connection with the Acquisition and Merger, OCC also issued
warrants representing the right to purchase a total of 7,500,000 shares
of OCC common stock (20% of the outstanding common stock of OCC after
exercise of the warrants). The warrants have a term of seven years and
an exercise price of $15.27 per share of OCC common stock. Series A
warrants to purchase on a cashless basis an aggregate of 1,425,000
shares of OCC common stock were issued to the former OCV stockholders,
of which Ascent received warrants to purchase 1,124,325 shares; Series
B warrants to purchase for cash an aggregate of 2,625,000 shares of OCC
common stock were issued to the Oldco bankruptcy estate for
distribution to creditors; and $4,000,000 in cash was paid and Series C
warrants were issued to OCC's investment advisor to purchase for cash
an aggregate of 3,450,000 shares of OCC common stock in consideration
for certain banking and advisory services provided in connection with
the transactions. The Acquisition has been accounted for under the
purchase method and, accordingly the results of operations of
SpectraVision are included in the Consolidated Financial Statements
from the Closing Date.
4. DEBT
In conjunction with the SpectraVision Acquisition, the Company
obtained a $125 million credit facility with a bank (the "Credit
Facility"), dated as of October 8, 1996. The Credit Facility consists
of (i) a 364-day revolving credit and competitive advance facility
which, subject to certain conditions, will be renewable for four
364-day periods, and (ii) a five-year revolving credit and competitive
advance facility; provided, however, that any amounts borrowed under
the five-year facility will reduce the amount available under the
364-day facility. Revolving loans extended under the Credit Facility
generally will bear interest at the London Interbank Offering Rate
("LIBOR") plus a spread that may range from 0.375% to 0.645% depending
on certain operating ratios of Company. The Credit Facility limits the
Company's ability to incur indebtedness or pay dividends, but does not
preclude the Company from paying cash dividends on its common stock.
The Credit Facility contains customary covenants, including, among
other things, compliance by the Company with certain financial
covenants. The Company was in compliance with such covenants at
December 31, 1996 and with such covenants, as amended, at June 30,
1997.
On March 23, 1997, OCC entered into an amendment to the Credit
Facility (the "OCC Amendment"). Under the OCC Amendment the amount
available under the OCC Credit Facility was increased from $125 million
to $150 million, and certain other terms were amended to clarify such
terms.
5. LITIGATION
The Company is a defendant, and may be potential defendant, in
lawsuits and claims arising in the ordinary course of its business.
While the outcomes of such claims, lawsuits, or other proceedings
cannot be predicted with certainty, management expects that such
liability, to the extent not provided for by insurance or otherwise,
will not have a material adverse effect on the financial condition of
the Company.
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6. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS 128). The Company is required to adopt SFAS 128 in the
fourth quarter of fiscal 1997 and will restate at that time earnings
per share (EPS) data for prior periods to conform with SFAS 128.
Earlier application is not permitted. SFAS 128 replaces current EPS
reporting requirements and requires a dual presentation of basic and
diluted EPS. Basic EPS excludes dilution and is computed by dividing
net income available to nonredeemable common stock by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. If SFAS 128 had been in effect during the six months ended June
30, 1997, basic and diluted EPS would not have been different than
fully diluted EPS currently reported for the period. If SFAS 128 had
been in effect during the six months ended June 30, 1996, basic and
diluted EPS would not have been different from the amount previously
reported.
In June 1997, the Financial Accounting Standards Board adopted
Statements of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income", (SFAS 130) which requires that an enterprise
report, by major components and as a single total, the change in its
net assets during the period from nonowner sources; and No. 131
"Disclosures about Segments of an Enterprise and Related Information",
(SFAS 131) which establishes annual and interim reporting standards for
an enterprise's business segments and related disclosures about its
products, services, geographic areas, and major customers. Adoption of
these statements will not impact the Company's consolidated financial
position, results of operations or cash flows. The Company is required
to and will adopt both SFAS 130 and 131 in the first quarter of fiscal
1998.
7. SUBSEQUENT EVENT
On July 24, 1997, the Company entered into an agreement with
Skylink Cinema Corporation for the assignment of operating rights and
the sale of assets associated with up to approximately 70,000 hotel
rooms in the U.S. and Canada.
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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
condensed Consolidated Financial Statements (unaudited) included elsewhere
(herein), and with the Condensed Consolidated Financial Statements, notes
thereto, and Management Discussion and Analysis of Financial Condition and
Results of Operations contained in the Company's 1996 annual report on Form 10-K
and 10-Q's, as filed with the Securities and Exchange Commission.
OVERVIEW
OCC is the leading provider (by number of hotel rooms served) of on-demand
in-room video entertainment for the United States lodging industry. The
on-demand OCC system is a patented video selection and distribution system that
allows guests to select at any time, on a pay-per-view basis, from up to 50
motion pictures on computer controlled television sets located in their rooms.
OCC (OCV prior to October 8, 1996) has experienced rapid growth in the past four
years, increasing its base of installed on-demand rooms from approximately
37,000 rooms at the end of 1992 to approximately 921,000 rooms at June 30, 1997.
OCC also provides in-room viewing of free-to-guest programming of select cable
channels and other interactive services. OCC provides its services under
long-term contracts primarily to business and luxury hotel chains such as
Marriott, Hilton, Hyatt, Wyndham, Doubletree, Fairmont, Four Seasons, Loews,
Stouffer, Embassy Suites, Holiday Inn and Harvey Hotels, and to other hotel
management companies; and individually owned and franchised hotel properties.
At June 30, 1997, approximately 87% of OCC's 921,000 installed rooms were
located in the United States, with the balance located in Canada, Asia, Europe
and Mexico. Of these installed systems, approximately 80% had on-demand
capability.
GUEST PAY SERVICES
OCC provides scheduled and on-demand in-room television viewing of major
motion pictures (including new releases) and independent non-rated motion
pictures for mature audiences for which a hotel guest pays on a per-view basis.
Depending on the type of system installed and the size of the hotel, guests can
choose among twenty (20) to fifty (50) different movies with an on demand system
or among eight (8) to twelve (12) movies with a scheduled system.
OCC obtains the non-exclusive rights to show recently released motion
pictures from major motion picture studios generally pursuant to a master
agreement with each studio. The license period and fee for each motion picture
are negotiated individually with each studio, which typically receives a
percentage of that picture's gross revenues generated by the pay-per-view
system. Typically, OCC obtains rights to exhibit major motion pictures during
the time frame after initial theatrical release and before release for home
video distribution or cable television exhibition. OCC also obtains independent
motion pictures, most of which are non-rated and are intended for mature
audiences, for a one-time flat fee that is nominal in relation to the licensing
fees paid for major motion pictures.
Under OCC's standard arrangements with hotels, OCC installs its system
into the hotel and retains ownership of all its equipment used in providing the
service. Depending on the size of the hotel property and the configuration of
the system installed, the installed cost of a new on-demand system with
interactive and video game services capabilities, including the head-end
equipment, averages from approximately $300 to $700 per room. The hotels collect
movie viewing charges from their guests and retain a commission equal to a
percentage of the total pay-per-view revenue that can vary depending on the
system, the hotel, and amount of revenue generated.
The revenue generated from the Company's pay-per-view service is dependent
upon the occupancy rate at the property, the "buy rate" or percentage of
occupied rooms that buy movies or other services at the property, and the price
of the movie or service. Occupancy rates vary by property based on the
property's location, competitive position within its marketplace, seasonal
factors and general economic conditions. Buy rates generally reflect the hotel's
guest mix profile, the popularity of the motion pictures or services available
at the hotel, and the guests' other entertainment alternatives. Buy rates also
vary over time with general economic conditions.
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FREE-TO-GUEST SERVICES
OCC also markets a free-to-guest service pursuant to which a hotel may
elect to receive one or more satellite programming channels, such as HBO,
Showtime, CNN, ESPN, WTBS, and other cable networks. OCC provides hotels
free-to-guest services through a variety of arrangements including having the
hotel pay the Company a fixed monthly fee per room for each programming channel
selected or having the price of such programming included in the Company's other
offerings.
INTERACTIVE AND OTHER SERVICES
In addition to entertainment services, OCC provides interactive services
to the lodging industry. These services generate revenues and cash flows which
are independent of viewing levels. These services use two-way interactive
communications capability of the Company's equipment and room availability
monitoring.
In addition to installing systems in hotels served by OCC, OCC sells
systems to certain other providers of in-room entertainment including MagiNet
Corporation (formerly Pacific Pay Video Limited), which is licensed to use OCC's
system to provide on-demand in-room entertainment in the Asia Pacific region,
and Hospitality Networks, a provider of pay-per-view services to the certain
hotels in the Las Vegas, Nevada region.
ANALYSIS OF OPERATIONS
EFFECTS OF SATELLITE LOSS
On January 11, 1997, OCC experienced an interruption in service for
certain of it's SpectraVison rooms caused by the loss of communication with a
satellite used to deliver pay-per-view programming. Approximately 950 of OCC's
approximately 3,100 hotels were effected. Of the hotels affected, approximately
410 hotels continued to provide limited pay-per-view services through alternate
disk or tape-based systems. By February 9, 1997, OCC was able to obtain
alternate satellite service through July 1997 and had restored full service to
all the hotels affected. After July 1997, the Company will provide programming
service to such hotels via terrestrial-based systems. The Company believes the
loss of satellite service in the first quarter of 1997 resulted in approximately
$3 million to $4 million of decreased EBITDA through reduced revenues and
increased expenses in that period.
ROOM AND INVESTMENT ACTIVITY
Room counts during the second quarter increased to approximately
921,000 worldwide rooms. Most of the investment activity continued to focus on
converting SpectraVision rooms to OCV's pay-per-view systems. Rooms with OCV
systems increased during the second quarter from approximately 484,000 at March
31, 1997, to approximately 515,000 on June 30, 1997. Capital expenditures
totaled $24.5 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 three and six
months ended June 30, 1997 compared to the same periods for 1996.
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SELECTED FINANCIAL INFORMATION
(In thousands, except hotel and room amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
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% OF % OF % OF % OF
JUNE 30, TOTAL JUNE 30, TOTAL JUNE 30, TOTAL JUNE 30, TOTAL
1997 REVENUE 1996 REVENUE 1997 REVENUE 1996 REVENUE
--------------------- --------------------- ------------------------- ---------------------
Revenues:
Movie Revenues $ 54,580 96.8% $ 28,455 89.1% $ 104,543 96.4% $ 55,583 88.9%
Video Systems/Other 1,807 3.2% 3,494 10.9% 3,908 3.6% 6,907 11.1%
--------- ---- --------- ---- --------- ---- --------- ----
Total Revenues 56,387 100.0% 31,949 100.0% 108,451 100.0% 62,490 100.0%
Direct Costs
Movie Revenues 25,381 45.0% 11,689 36.6% 49,811 45.9% 22,933 36.7%
Video Systems/Other 957 1.7% 2,475 7.7% 2,023 1.9% 5,009 8.0%
--------- ---- --------- ---- --------- ---- --------- ----
Total Direct Costs 26,338 46.7% 14,164 44.3% 51,834 47.8% 27,942 44.7%
--------- ---- --------- ---- --------- ---- --------- ----
Direct Income 30,049 53.3% 17,785 55.7% 56,617 52.2% 34,548 55.3%
Operations 7,873 14.0% 2,698 8.4% 17,727 16.3% 5,240 8.4%
Research & Development 1,489 2.6% 996 3.1% 3,103 2.9% 1,929 3.1%
Selling, General &
Administrative 4,700 8.3% 1,248 3.9% 10,890 10.0% 2,480 4.0%
--------- ---- --------- ---- --------- ---- --------- ----
14,062 24.9% 4,942 15.5% 31,720 29.2% 9,649 15.4%
--------- ---- --------- ---- --------- ---- --------- ----
EBITDA (1) 15,987 28.4% 12,843 40.2% 24,897 23.0% 24,899 39.8%
Depreciation & Amortization 19,514 34.6% 10,970 34.3% 38,523 35.5% 21,017 33.6%
Interest 1,838 3.3% 576 1.8% 3,695 3.4% 995 1.6%
Taxes 452 0.8% 590 1.8% 452 0.4% 1,263 2.0%
--------- ---- --------- ---- --------- ---- --------- ----
21,804 38.7% 12,136 38.0% 42,670 39.3% 23,275 37.2%
--------- ---- --------- ---- --------- ---- --------- ----
Net Income/(Loss) $ (5,817) -10.3% $ 707 2.2% $ (17,773) -16.4% $ 1,624 2.6%
========= ==== ========= === ========= ==== ========= ===
CAPITAL EXPENDITURES $ 24,462 $ 19,591 $ 43,915 $ 37,436
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AS OF % OF AS OF % OF
JUNE 30, TOTAL JUNE 30, TOTAL
1997 ROOMS 1996 ROOMS
--------------------- ---------------------
TOTAL HOTELS 3,187 1,500
TOTAL ROOMS 921,000 419,000
ROOM COMPOSITION:
Geographic
Domestic 803,000 87.2% 403,000 96.2%
International 118,000 12.8% 16,000 3.8%
System Type
Scheduled Only 188,000 20.4% -- 0.0%
On-Demand 733,000 79.6% 419,000 100.0%
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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 JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30,1996
Total revenues for the second quarter of 1997 increased $24.4 million
or 76.5% to $56.4 million, as compared to $32.0 million for the comparable
period of 1996. Movie revenues increased $26.1 million or 91.8% in the second
quarter of 1997 to approximately $54.6 million, as compared to $28.5 million in
the second quarter of 1996. The increase was primarily due to the acquisition of
SpectraVision and to a lesser degree, increases in the OCV room base. The
Company's room base increased from approximately 419,000 rooms at June 30, 1996
to approximately 921,000 rooms at June 30, 1997, of which approximately 433,000
rooms were acquired in the SpectraVision Acquisition. Video system sales and
other revenues decreased $1.7 million or 48.3% to $1.8 million as compared to
$3.5 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 second quarter of 1997 increased
$12.2 million or 86.0% to $26.3 million, as compared to $14.2 million for the
second quarter of 1996. Direct costs associated with movie revenue in the second
quarter of 1997 increased 117.1% to $25.4 million, as compared to $11.7 million
for the same period in 1996, and as a percentage of movie revenue increased to
46.5% at June 30, 1997 from 41.1% at June 30, 1996. The increase is principally
attributed to lower revenues from free-to-guest programming from the hotels, 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 61.3% to $1.0 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 53.0% from 70.8% 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 second quarter of 1997
increased $8.5 million or 77.9% to $19.5 million, as compared to $11.0 million
for the second quarter of 1996, and increased as a percentage of total revenue
to 34.6% at June 30, 1997 from 34.3% at June 30, 1996, however, decreased as a
percentage of movie revenue to 35.8% at June 30, 1997 from 38.6% at June 30,
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 and with
incremental depreciation and amortization resulting from the acquisition of
SpectraVision's in-room assets.
Operations costs for the second quarter of 1997 increased $5.2 million
or 191.8% to $7.9 million, as compared to $2.7 million in the second quarter of
1996, and as a percentage of total revenue increased to 14.0% from 8.4% in 1996.
The increase is primarily due to the higher field service costs to support the
acquired SpectraVision equipment and the SpectraVision spare part depot used to
refurbish SpectraVision equipment.
Research and development expenses for the second quarter of 1997
increased $0.5 million or 49.5% to $1.5 million from $1.0 million in the second
quarter of 1996, but decreased as a percentage of total revenue to 2.6% from
3.1% in 1996. Research and development activities were focused on the
development of systems to integrate SpectraVision equipment and the development
of new products and services.
Selling, general and administrative expenses for the second quarter
of 1997 increased $3.5 million or 276.6% to $4.7 million, as compared to $1.2
million in the second quarter of 1996, and as a percentage of total revenue
increased to 8.3% from 3.9% in 1996. The increase is principally due to costs to
support the SpectraVision room base, activities to integrate SpectraVision's and
OCV's accounting and operational systems, and higher administrative costs
associated with being a public company.
Interest expense for the second quarter of 1997 increased $1.2 million
or 219.1% to $1.8 million, as compared to $0.6 million in the second 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 second quarter of 1997 decreased $0.1
million or 23.4% to $0.5 million as compared to an income tax expense of $.6
million in the second quarter of 1996. The income tax expense in 1997
represents tax on income in foreign jurisdictions whereas the tax expense in
1997 represents an effective tax rate of 45% of income before tax.
Redeemable common stock accretion was eliminated in 1997 as this
security was converted to common stock in 1996. The accretion in the second
quarter of 1996 was $0.2 million.
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EBITDA for the second quarter of 1997 increased $3.2 million or 24.5%
to $16.0 million as compared to $12.8 million in the second quarter of 1996.
EBITDA as a percentage of total revenue decreased to 28.4% in 1997 from 40.2% in
1996. The reduced percentage is primarily due to the higher operating costs
currently associated with the SpectraVision business, costs associated with
integration of the OCV and SpectraVision accounting and operating systems and
higher administrative expenses necessary to operate as a public entity.
Net income (loss) decreased to a net loss of $5.8 million for the second
quarter of 1997 from net income of $0.7 million for the second quarter of 1996
due to the factors described above.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30,1996
Total revenues for the six months ended June 30, 1997 increased $46.0
million or 73.5% to $108.5 million, as compared to $62.5 million for the
comparable period of 1996. Movie revenues increased $49.0 million or 88.1% in
the six months of 1997 to $104.5 million, as compared to $55.6 million in the
six months of 1996. The increase was primarily due to the acquisition of
SpectraVision and to a lesser degree, increases in OCV room base. Management
believes revenues in the first six months 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 $3.0 million or 43.4% to $3.9
million as compared to $6.9 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 six months ended June 30, 1997
increased $23.9 million or 85.5% to $51.8 million, as compared to $27.9 million
for the same period of 1996. Direct costs associated with movie revenue in the
first six months of 1997 increased 117.2% to $49.8 million, as compared to $22.9
million for the same period in 1996, and as a percentage of movie revenue
increased to 47.6% for the six months ended June 30, 1997 from 41.3% for the six
months ended June 30, 1996. The increase is principally attributed to lower
revenues from free-to-guest programming from the hotels, higher royalties to the
studios and hotel commissions expense on the SpectraVision room revenues. Direct
costs from video system sales and other revenues decreased 59.6% to $2.0 million
in 1997, as compared to $5.0 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 51.8% from 72.5% 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 six months ended June 30,
1997 increased $17.2 million or 83.3% to $38.5 million, as compared to $21.3
million for the same period in 1996, and increased as a percentage of total
revenue to 35.5% for the first six months of 1997 from 33.6% for 1996, however,
as a percentage of movie revenue decreased to 36.8% for 1997 from 37.8% for
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 and with
incremental depreciation and amortization resulting from the acquisition of
SpectraVision's in-room assets.
Operations costs for the six months ended June 30, 1997 increased $12.5
million or 238.3% to $17.7 million, as compared to $5.2 million in six months
ended June 30, 1996, and as a percentage of total revenue increased to 16.3% in
1997 from 8.4% in 1996. The increase is primarily due to the higher field
service costs to support the acquired SpectraVision equipment, the SpectraVision
spare part depot used to refurbish SpectraVision equipment, and expenses
associated with the satellite outage, as previously discussed. Expenses in the
first six months associated with the deployment of alternative satellite
capacity in the affected SpectraVision hotels was approximately $1 million.
Research and development expenses for the six months ended June 30, 1997
increased $1.2 million or 60.9% to $3.1 million from $1.9 million in the six
months of 1996, but decreased slightly as a percentage of total revenue to 2.9%
for 1997 from 3.1% for 1996. Research and development activities were focused on
the develoment of systems to integrate SpectraVision equipment and the
development of new products and services.
Selling, general and administrative expenses for the six months ended
June 30, 1997 increased $8.4 million or 339.1% to $10.9 million, as compared to
$2.5 million for the same period of 1996, and as a percentage of total revenue
increased to 10.0% in 1997 from 4.0% in 1996. The increase is principally due to
costs to support the SpectraVision room base, activities to integrate
SpectraVision's and OCV's accounting and operational systems, and higher
administrative costs associated with being a public company.
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Interest expense for the six months ended June 30, 1997 increased $2.7
million or 271.4% to $3.7 million, as compared to $1.0 million for the same
period of 1996. The increase is due to the Company's greater reliance on debt
financing to continue the expansion of its installed customer base and debt used
to complete the acquisition of SpectraVision.
Provision for income taxes for the six months ended June 30, 1997
decreased $0.8 million or 64.2% to $0.5 million as compared to an income tax
expense of $1.3 million in the same period of 1996. The income tax expense in
1997 represents tax on income in foreign jurisdictions whereas the tax expense
in 1997 represents an effective tax rate of 45% of income before tax.
Redeemable common stock accretion was eliminated in 1997 as this security
was converted to common stock in 1996. The accretion in the first six months of
1996 was $0.3 million.
EBITDA for the six months ended June 30, 1997 remained constant with the
same period of 1996 at $24.9 million. EBITDA as a percentage of total revenue
decreased to 23.0% in 1997 from 39.8% 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 $17.8 million for the six
months ended June 30, 1997 from net income of $1.3 million for the same period
of 1996 due to the factors described above.
SEASONALITY
The Company's business is expected to be seasonal, with higher revenues
generally realized during the summer months and lower revenues realized during
the winter months due to business and vacation travel patterns.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash during the six months ended June 30, 1997
were cash from operations of $28.0 million, and borrowing of $17.0 million from
the revolving line of credit with NationsBank of Texas, N.A. (NationsBank). Cash
was expended primarily for capital expenditures of $43.9 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 June
30, 1997, the Company had $115 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 Merger & Acquisitions 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.
Prior to the Distribution, pursuant to an agreement between Ascent and
COMSAT (the "COMSAT Agreement"), Ascent agreed to certain limitations on its
indebtedness. As a result of amendments to 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. Although, as a result of the Distribution, the
debt limitations of the COMSAT Agreement are no longer a factor for On Command
Corporation, the Company remains subject to the debt limitations in the
Corporate Agreement with 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 2. CHANGES IN SECURITIES:
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
a. An annual meeting of stockholders of the Company was held on May 15,
1997 for the following purposes:
1. Election of all directors.
2. Approval of the Company's 1997 Employee Stock Purchase Plan.
3. Approval of the Company's 1997 Non-employee Directors Stock Plan.
4. Appointment of independent public accountants.
b. The directors elected at the meeting are as follows:
Charles Lyons, James A. Cronin, III, Robert M. Kavner, Brian A.C.
Steel, Gary Wilson and Warren Zeger, Esq.
c. In connection with matters voted on at the Annual meeting, the
following results were obtained:
For Against Withheld Abstentions
--------- ------- -------- -----------
Charles Lyons 27,165,316 0 44,422 0
James A. Cronin, III 27,208,252 0 1,486 0
Robert M. Kavner 27,208,252 0 1,486 0
Brian A.C. Steel 27,208,252 0 1,486 0
Gary Wilson 27,208,252 0 1,486 0
Warren Zeger, Esq. 27,165,316 0 44,422 0
APPROVAL OF THE COMPANY'S 1997 EMPLOYEE STOCK PURCHASE PLAN.
26,786,363 422,743 0 632
APPROVAL OF THE COMPANY'S 1997 NON-EMPLOYEE DIRECTORS STOCK PLAN.
26,742,822 466,085 0 831
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS.
27,209,177 28 0 533
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K:
(A) EXHIBIT
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EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.0 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Jose, State of California on August 13, 1997.
On Command Corporation
By: /s/ BRIAN A.C.STEEL
----------------------------
Brian A.C. Steel
Executive Vice President,
Chief Financial Officer,
Chief Operating Officer, and
Director
(Principal Financial Officer)
/s/ PAUL J. MILLEY
-------------------------------
Paul J. Milley
Senior Vice President, Finance
(Principal Accounting Officer)
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EXHIBIT INDEX
---------------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.0 Financial Data Schedule
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