1
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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
September 30, 1999 was 30,242,948 shares.
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ON COMMAND CORPORATION
FORM 10-Q
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets as of September 30,1999 and December 31,1998. 3
Condensed Consolidated Statements of Operations for the Three Months and Nine Months
Ended September 30, 1999 and 1998. 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30,1999 and 1998. 5
Notes to Condensed Consolidated Financial Statements. 6-7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. 8-14
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ON COMMAND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,434 $ 7,235
Accounts receivable, net 33,687 32,167
Other current assets 1,248 2,633
--------- ---------
Total current assets 45,369 42,035
Video systems, net 264,163 267,880
Property and equipment, net 14,092 11,829
Goodwill, net 74,391 77,674
Other assets, net 2,471 3,550
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$ 400,486 $ 402,968
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,161 $ 23,443
Accrued compensation 5,369 5,916
Other accrued liabilities 13,481 11,977
Taxes payable 6,410 7,632
--------- ---------
Total current liabilities 50,421 48,968
Other accrued liabilities 60 995
Revolving credit facility 177,000 163,000
--------- ---------
Total liabilities 227,481 212,963
--------- ---------
Stockholders' equity:
Common stock, $.01 par value; shares authorized - 50,000 in 1999 and 1998
shares issued and outstanding, 30,243 in 1999 and 30,160 in 1998;
shares subscribed - 0 in 1999 and 2 in 1998 302 302
Additional paid-in capital 251,641 249,809
Common stock warrants 31,450 31,450
Cumulative translation adjustments (1,067) (2,539)
Accumulated deficit (109,321) (89,017)
--------- ---------
Total stockholders' equity 173,005 190,005
--------- ---------
$ 400,486 $ 402,968
========= =========
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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues:
Room $ 61,800 $ 57,918 $ 179,574 $ 170,816
Video system sales/other 5,952 5,057 11,975 8,922
--------- --------- --------- ---------
Total revenues 67,752 62,975 191,549 179,738
--------- --------- --------- ---------
Direct costs:
Room 28,037 25,564 79,742 74,167
Video system sales/other 1,115 1,132 5,353 3,311
--------- --------- --------- ---------
Total direct costs 29,152 26,696 85,095 77,478
--------- --------- --------- ---------
Direct income 38,600 36,279 106,454 102,260
Operating expenses:
Operations 7,573 7,879 22,032 24,869
Research and development 2,182 1,708 6,290 5,418
Selling, general and administrative 6,418 5,722 19,181 18,015
Depreciation, amortization, and stock based compensation 24,768 22,246 71,857 65,488
--------- --------- --------- ---------
Total operating expenses 40,941 37,555 119,360 113,790
--------- --------- --------- ---------
Operating loss (2,341) (1,276) (12,906) (11,530)
Interest/other expense, net 2,576 2,708 7,262 7,472
--------- --------- --------- ---------
Loss before income taxes (4,917) (3,984) (20,168) (19,002)
Income tax (benefit) expense 65 (10) 136 (112)
--------- --------- --------- ---------
Net loss $ (4,982) $ (3,974) $ (20,304) $ (18,890)
========= ========= ========= =========
Basic and diluted net loss per share $ (0.16) $ (0.13) $ (0.67) $ (0.63)
========= ========= ========= =========
Shares used in basic and diluted per share computations 30,232 30,164 30,198 30,143
========= ========= ========= =========
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)
Nine Months Ended
September 30,
---------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net loss $(20,304) $(18,890)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, amortization, and stock based compensation 71,857 65,567
Loss on disposal of fixed assets 2 72
Changes in assets and liabilities:
Accounts receivable, net (5,107) (7,864)
Other assets 214 359
Accounts payable 4,907 3,996
Accrued compensation 40 (564)
Taxes payable (2,228) (3,794)
Other accrued liabilities 3,366 (1,314)
-------- --------
Net cash provided by operating activities 52,747 37,568
Cash flows from investing activities:
Capital expenditures (64,209) (64,805)
-------- --------
Net cash used in investing activities (64,209) (64,805)
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Cash flows from financing activities:
Proceeds from revolving credit facility 14,000 27,000
Proceeds from issuance of common stock 536 344
-------- --------
Net cash provided by financing activities 14,536 27,344
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Effect of exchange rate changes in cash 125 (127)
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Net increase (decrease) in cash and cash equivalents 3,199 (20)
Cash and cash equivalents, beginning of period 7,235 6,287
-------- --------
Cash and cash equivalents, end of period $ 10,434 $ 6,267
======== ========
Non-cash activity:
Stock based compensation $ 1,295 $ --
======== ========
Supplemental information:
Cash paid for income taxes $ 233 $ --
======== ========
Cash paid for interest $ 7,378 $ 6,992
======== ========
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
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1. BASIS OF PRESENTATION
On Command Corporation (the "Company" or "OCC") is a Delaware
corporation formed by Ascent Entertainment Group, Inc. ("Ascent") for the
purpose of effecting (i) the merger (the "Merger") of On Command Video
Corporation ("OCV"), a majority-owned subsidiary of Ascent, with a
wholly-owned subsidiary of OCC, after which OCV became a wholly owned
subsidiary of OCC, and (ii) the acquisition of SpectraDyne, Inc., a wholly
owned subsidiary of SpectraVision, Inc. Following the Acquisition in 1996,
SpectraDyne, Inc. changed its name to SpectraVision, Inc.
("SpectraVision"). Ascent was a majority-owned subsidiary of COMSAT
Corporation ("COMSAT") until June 27, 1997, when COMSAT consummated the
distribution of its 80.67% ownership interest in Ascent to the COMSAT
shareholders on a pro-rata basis in a transaction that was tax-free for
federal income tax purposes.
The condensed consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). While the quarterly financial information
contained in this filing is unaudited, the financial statements presented
reflect all adjustments (consisting only of normal recurring adjustments)
which the Company considers necessary for a fair presentation of the
financial position at September 30, 1999 and December 31, 1998, and the
results of operations and cash flows for the nine months ended September
30, 1999 and 1998. The results for interim periods are not necessarily
indicative of the results to be expected for the entire year.
2. NET LOSS PER SHARE
Basic and diluted net loss per share are computed by dividing net loss
(numerator) by the weighted-average number of common shares outstanding
(denominator) for the period. Common equivalent shares include common stock
options and warrants and at September 30, 1999 and 1998 approximately 9.4
million and 10.1 million equivalent dilutive securities, respectively, have
been excluded in weighted-average number of common shares outstanding for
the diluted net loss per share computation as common stock equivalents
because their effect is antidilutive.
3. COMPREHENSIVE LOSS
Total comprehensive loss of $18.8 million for the nine months ended
September 30, 1999 is comprised of $20.3 million net loss less $1.5 million
net change in the cumulative translation account. At September 30, 1998,
total net comprehensive loss of $20.1 million is comprised of $18.9 million
net loss plus $1.2 million net change in the cumulative translation
account.
4. DEBT
On November 24, 1997, the Company refinanced its former credit
facility and entered into an amended and restated agreement with its lender
(the "Credit Facility"). Under the amended Credit Facility, the amount
available to the Company was increased from $150 million to $200 million,
and certain other terms were amended. The Credit Facility matures in
November 2002, and subject to certain conditions, can be renewed for two
additional years. At September 30, 1999, there was $23 million of available
borrowing under the Credit Facility, subject to certain covenant
restrictions.
5. LITIGATION
In September 1998, OCV filed suit against Maginet, alleging breach by
Maginet of a license agreement between OCV and Maginet, and terminating the
license agreement. OCV has also demanded the payment of license fees from
Maginet, which OCC believes were due and payable under the License
Agreement and have not been paid by Maginet. Maginet has counter-claimed
against OCV, alleging that OCV breached the license agreement, and alleging
various torts by OCV in its relationship with Maginet.
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The Company is a defendant, and may be a potential defendant, in
lawsuits and claims arising in the ordinary course of its business. While
the outcomes of such claims, lawsuits, or other proceedings cannot be
predicted with certainty, management expects that such liability, to the
extent not provided for by insurance or otherwise, will not have a material
adverse effect on the financial condition of the Company.
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", (SFAS 133) which defines
derivatives, requires that all derivatives be carried at fair value, and
provides for hedge accounting when certain conditions are met. This
statement, as amended by SFAS 137, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. On a forward-looking basis,
although the Company has not fully assessed the implications of this new
statement, the Company does not believe adoption of this statement will
have a material impact on the Company's financial position or results of
operations.
7. PENDING MERGER AGREEMENT
On October 20, 1999, Ascent entered into an Agreement and Plan of
Merger (the "Merger Agreement") with AT&T, Ranger Acquisition Corp. and
Liberty Media Corporation ("Liberty"). Pursuant to the Merger Agreement,
upon consummation of the merger each share of Ascent common stock would be
converted into .4626 shares of Liberty Media Group Class A Common Stock
(LMGA). LMGA is issued by AT&T Corp. and is a tracking stock designed to
reflect the economic performance of the business and assets of AT&T Corp.
attributed to Liberty, which is a group of companies previously acquired by
AT&T Corp. The Merger is conditioned upon, among other things, the sale of,
and will not include: Ascent's sports-related assets, the Colorado
Avalanche, the Denver Nuggets or the Pepsi Center. Consummation of the
Merger is also subject to the affirmative vote of the holders of a majority
of the outstanding shares of Ascent Common Stock, the approval of all
appropriate governmental and regulatory authorities, the closing of the
sale of Common Stock, the approval of all appropriate governmental and
regulatory authorities, the closing of the sale of the sports businesses
and other customary conditions.
However, as a result of certain provisions of various Amendments to
the Sale Agreement relating to Ascent's sports related assets, Ascent and
Liberty have agreed that certain conditions to the consummation of the
Merger Agreement are incapable of being satisfied. Notwithstanding the
foregoing, the Ascent and Liberty have agreed to negotiate through November
30, 1999 toward an amendment to the Merger Agreement containing mutually
acceptable terms, during which period Liberty agrees not to terminate the
Merger Agreement unless the parties reach an impasse. After November 30,
1999, if the parties have not amended the Merger Agreement, then Liberty
may elect to terminate the Merger Agreement at any time through December 3,
1999. If Liberty does not so terminate, then it shall have been deemed to
waive its right to terminate the Merger Agreement as a result of those
provisions of the Amendments to the Sports Sale agreement that caused the
conditions of the Merger Agreement not to be satisfied. Finally, if the
Sports Sale agreement, as amended, is terminated, then the Merger Agreement
with Liberty can be terminated at any time. There can be no assurance that
Liberty will not terminate the Merger Agreement if the Sports Sale
Agreement is terminated and Ascent expects that Liberty would do so soon
after any such termination or, that even if the sale of the sports-related
businesses is consummated in accordance with the Sports Sale Agreement, as
amended to-date, that Liberty will not elect to use its right to terminate
the Merger Agreement or will agree to a merger transaction only on revised
terms that are less favorable to Ascent.
In connection with the Merger Agreement, the Company's Board of
Directors has approved Liberty as an "interested stockholder" for purposes
of Delaware General Corporation Law Section 203. As a result, Liberty will
not be subject to the restrictions on transactions with the Company and its
stockholders that would otherwise apply.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which reflect OCC's current
expectations and assumptions on those issues. Because such statements apply to
future events, they are subject to risks and uncertainties that could cause the
actual results to differ materially. The following should be read in conjunction
with the Condensed Consolidated Financial Statements (unaudited) included
elsewhere herein, and with the Consolidated Financial Statements, notes thereto,
and Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's 1998 Annual Report on Form 10-K, as filed
with the Securities and Exchange Commission.
OVERVIEW
OCC is the leading provider (by number of hotel rooms served) of on-demand
in-room video entertainment for the lodging industry. The on-demand OCC system
is a patented video selection and distribution system that allows guests to
select at any time, on a pay-per-view basis, from up to 50 movies on the
television sets located in their rooms. OCC also provides in-room viewing of
free-to-guest programming of select cable channels and other interactive
services. OCC (OCV prior to October 8, 1996) has experienced rapid growth in the
past six years, increasing its base of installed rooms from approximately 37,000
rooms at the end of 1992 to approximately 950,000 rooms at September 30, 1999.
OCC provides its services under long-term contracts primarily to business and
luxury hotel chains such as Marriott, Hilton, Hyatt, Wyndham, Doubletree,
Fairmont, Four Seasons, Loews, Stouffer, Embassy Suites, Holiday Inn and Harvey
Hotels, and to other hotel management companies and individually owned and
franchised hotel properties.
At September 30, 1999, approximately 87% of OCC's 950,000 installed rooms
were located in the United States, with the balance located in Canada, Asia,
Europe and Mexico. Of these installed systems, approximately 92% had on-demand
capability.
OCC provides scheduled and on-demand in-room television viewing of major
motion pictures (including new releases) and independent non-rated motion
pictures for mature audiences for which a hotel guest generally pays on a
per-view basis. Depending on the type of system installed and the size of the
hotel, guests can choose among twenty (20) to fifty (50) different movies with
an on-demand system or among eight (8) to twelve (12) movies with a scheduled
system.
OCC obtains the non-exclusive rights to show recently released motion
pictures from major motion picture studios generally pursuant to a master
agreement with each studio. The license period and fee for each motion picture
are negotiated individually with each studio, which typically receives a
percentage of that picture's gross revenues generated by the pay-per-view
system. Typically, OCC obtains rights to exhibit major motion pictures during
the time frame after initial theatrical release and before release for home
video distribution or cable television exhibition. OCC also obtains independent
motion pictures, most of which are non-rated and are intended for mature
audiences, for a one-time flat fee that is nominal in relation to the licensing
fees paid for major motion pictures.
Under OCC's standard arrangements with hotels, OCC installs its system
into the hotel and retains ownership of all its equipment used in providing the
service. The hotels collect movie viewing charges from their guests and retain a
commission equal to a percentage of the total pay-per-view revenue that can vary
depending on the system, the hotel, and amount of revenue generated.
The revenues generated from the Company's pay-per-view service are
influenced by occupancy rates at the hotel property, the "buy rate" or
percentage of occupied rooms that buy movies or other services at the property,
and the price of the movie or service. Occupancy rates vary by property based on
the property's location, competitive position within its marketplace, seasonal
factors and general economic conditions. Buy rates generally reflect the hotel's
guest mix profile, the popularity of the motion pictures or services available
at the hotel, and the guests' other entertainment alternatives. Buy rates also
vary over time with general economic conditions.
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OCC also markets a cable programming 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.
On July 1, 1999, the Company commercially launched its new in-room,
multimedia, interactive services platform for hotels, called OCX. New OCX
installations include a digital server video storage system which utilizes
rewriteable magneto-optical delivery systems for providing high quality, MPEG-2
video on-demand. OCX conversions of existing On Command Video systems can be
accomplished at a reduced cost from the full digital server implementation and
still provide hotel guests with the same complement of interactive
video-on-demand and internet functionality.
In addition to installing systems in hotels served by OCC, OCC sells
systems to certain other providers of in-room entertainment including
Hospitality Networks, a provider of pay-per-view services to the certain hotels
primarily in the Las Vegas, Nevada region, and Allin Interactive, a provider of
pay-per-view services to the cruise ship industry.
In conjunction with the acquisition of SpectraVision's assets and certain
liabilities in October 1996, OCC acquired, among other assets, video systems and
equipment. These specific assets, which were recorded at their estimated fair
market value of approximately $41,800,000 in October 1996, are being depreciated
over 36 months. Accordingly, OCC's fourth quarter operating results will be
impacted from a reduction in depreciation and amortization expense charges
relating to these specific assets.
ANALYSIS OF OPERATIONS
ROOM AND INVESTMENT ACTIVITY
Following is selected financial information for the three and nine months ended
September 30, 1999 compared to the same period for 1998.
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SELECTED FINANCIAL INFORMATION
(In thousands, except hotel and room amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------------- ----------------------------------------
% OF % OF % OF % OF
SEPT. 30, TOTAL SEPT. 30, TOTAL SEPT. 30, TOTAL SEPT. 30, TOTAL
1999 REVENUE 1998 REVENUE 1999 REVENUE 1998 REVENUE
----------------- ----------------- ------------------- ------------------
Revenues:
Room Revenues $ 61,800 91.2% $ 57,918 92.0% $ 179,574 93.7% $ 170,816 95.0%
Video Systems/Other(1) 5,952 8.8% 5,057 8.0% 11,975 6.3% 8,922 5.0%
-------- ----- -------- ----- --------- ---- --------- -----
Total Revenues 67,752 100.0% 62,975 100.0% 191,549 100.0% 179,738 100.0%
Direct Costs:
Room Revenues 28,037 41.4% 25,564 40.6% 79,742 41.6% 74,167 41.3%
Video Systems/Other 1,115 1.6% 1,132 1.8% 5,353 2.8% 3,311 1.8%
-------- ----- -------- ----- --------- ---- --------- -----
Total Direct Costs 29,152 43.0% 26,696 42.4% 85,095 44.4% 77,478 43.1%
-------- ----- -------- ----- --------- ---- --------- -----
Direct Profit 38,600 57.0% 36,279 57.6% 106,454 55.6% 102,260 56.9%
Operations 7,573 11.2% 7,879 12.5% 22,032 11.5% 24,869 13.8%
Research & Development 2,182 3.2% 1,708 2.7% 6,290 3.3% 5,418 3.0%
Selling, General & Administrative 6,418 9.5% 5,722 9.1% 19,181 10.0% 18,015 10.0%
-------- ----- -------- ----- --------- ---- --------- -----
16,173 23.9% 15,309 24.3% 47,503 24.8% 48,302 26.9%
-------- ----- -------- ----- --------- ---- --------- -----
EBITDA(2) 22,427 33.1% 20,970 33.3% 58,951 30.8% 53,958 30.0%
Depreciation, Amortization, and
Stock Based Compensation 24,768 36.6% 22,246 35.3% 71,857 37.5% 65,488 36.4%
Interest/other exp, net 2,576 3.8% 2,708 4.3% 7,262 3.8% 7,472 4.2%
Taxes 65 0.1% (10) (0.0)% 136 0.1% (112) (0.1)%
-------- ----- -------- ----- --------- ---- --------- -----
27,409 40.5% 24,944 39.6% 79,255 41.4% 72,848 40.5%
-------- ----- -------- ----- --------- ---- --------- -----
Net Loss $ (4,982) (7.4)% $ (3,974) (6.3)% $(20,304) (10.6)% $ (18,890) (10.5)%
======== ===== ======== ===== ========= ====== ========= =====
CAPITAL EXPENDITURES $ 23,558 $ 19,560 $ 64,209 $ 64,805
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AS OF % OF AS OF % OF
SEPT. 30, TOTAL SEPT. 30, TOTAL
1999 ROOMS 1998 ROOMS
--------- ----- --------- -----
TOTAL HOTELS 3,355 3,181
TOTAL ROOMS 950,000 921,000
ROOM COMPOSITION:
Geographic
Domestic 826,000 86.9% 799,000 86.8%
International 124,000 13.1% 122,000 13.2%
System Type
Scheduled Only 77,000 8.1% 106,000 11.5%
On-Demand 873,000 91.9% 815,000 88.5%
- ----------
(1) Includes the $3.9 million and $2.9 million net LodgeNet royalty payment
received during the three months ended September 30, 1999 and 1998,
respectively.
(2) EBITDA represents earnings before interest, income taxes, depreciation,
amortization, and stock based compensation. The most significant
difference between EBITDA and cash provided from operations is changes in
working capital and interest expense. EBITDA is presented because it is a
widely accepted financial indicator used by certain investors and
analysts to analyze and compare companies on the basis of operating
performance. In addition, management believes EBITDA provides an
important additional perspective on the Company's operating results and
the Company's ability to service its long-term debt and fund the
Company's continuing growth. EBITDA is not intended to represent cash
flows for the period, or to depict funds available for dividends,
reinvestment or other discretionary uses. EBITDA has not been presented
as an alternative to operating income or as an indicator of operating
performance and should not be considered in isolation or as a substitute
for measures of performance prepared in accordance with generally
accepted accounting principles, which are presented in the financial
statements in Item 1 and discussed in Item 2 under Liquidity and Capital
Resources.
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THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30,1998
Total revenues for the third quarter of 1999 increased $4.8 million or
7.6% to $67.8 million, as compared to $63.0 million for the comparable period of
1998. Room revenues increased $3.9 million or 6.7% in the third quarter of 1999
to $61.8 million, as compared to $57.9 million in the third quarter of 1998. The
increase was primarily due to, new hotel installations, continued conversions of
SpectraVision equipped properties, lower movie denial rates, higher average
movie prices, higher game and internet revenues, and, on average, more cable
programming channels in each room, during the third quarter of 1999 compared to
the third quarter of 1998. Video system sales and other revenues increased $0.9
million or 17.7% to $6.0 million in the third quarter of 1999, as compared to
$5.1 million in the third quarter of 1998. The increase was primarily due to an
increase in the net royalty payment received in 1999 from LodgeNet.
Total direct costs of revenues for the third quarter of 1999 increased
$2.5 million or 9.2% to $29.2 million, as compared to $26.7 million for the
third quarter of 1998. Direct costs associated with room revenue in the third
quarter of 1999 increased $2.4 million or 9.7% to $28.0 million, as compared to
$25.6 million for the same period of 1998, and as a percentage of room revenue
increased to 45.4% for the quarter ended September 30, 1999 from 44.1% for the
quarter ended September 30, 1998. The increase in the direct cost as a percent
of revenue is primarily due to an increase in movie royalties as a percent of
movie revenues. Direct costs from video system sales and other revenues remained
relatively flat in the third quarter of 1999 as compared to the same period of
1998. Direct costs associated with video systems sales and other revenue as a
percentage of video system sales and other revenues decreased to 18.7% for the
third quarter of 1999 from 22.4% for the same period of 1998, primarily
attributable to the increase in the LodgeNet royalty payment for which there
were no direct costs. With the net LodgeNet payment excluded, direct costs as a
percentage of video system sales and other revenue would have increased to 54.3%
for the third quarter of 1999 from 53.3% for the third quarter of 1998. The
increase is primarily due to lower margins on hotel contracts to provide wiring
services prior to the movie system installation.
Operations expenses, which consists primarily of technical field support
for the hotels, for the third quarter of 1999 decreased $0.3 million or 3.9% to
$7.6 million, as compared to $7.9 million in the third quarter of 1998, and as a
percentage of room revenue decreased to 12.3% from 13.6% for the same period of
1998. The decrease is primarily due to lower costs for repair material, freight,
and TV repair.
Research and development expenses for the third quarter of 1999
increased $0.5 million or 27.8% to $2.2 million for the third quarter of 1999
from $1.7 million for the third quarter of 1998. The increase is largely due to
lower costs in the third quarter of 1998, which were the result of the
capitalization of certain test systems that were converted to production during
that period.
Selling, general and administrative expenses for the third quarter of
1999 increased $0.7 million or 12.2% to $6.4 million, as compared to $5.7
million in the third quarter of 1998. The increase is principally due to higher
Account Management, Product Management, and Corporate expenses as the Company
continues to build its infrastructure in support of new interactive services
(i.e. internet) offered with OCX, the Company's new interactive platform.
Depreciation, amortization, and stock based compensation expenses for
the third quarter of 1999 increased $2.5 million or 11.3% to $24.8 million, as
compared to $22.2 million for the third quarter of 1998, and as a percentage of
total revenue increased to 36.6% for the quarter ended September 30, 1999 from
35.3% for the quarter ended September 30, 1998. The increase is mainly due to
depreciation on capital investments associated with the growing room base and an
$0.5 million non-cash expense associated with accounting for cashless stock
options in an executive compensation agreement, reflecting the increased share
price.
Interest/other expense, net decreased $0.1 million or 4.9% to $2.6
million for the third quarter of 1999 from $2.7 million for the third quarter of
1998. The decrease is largely due to a loss on disposal of assets recorded in
the third quarter of 1998.
Provision for income taxes for the third quarter of 1999 represents tax
on income in certain international and domestic jurisdictions.
EBITDA for the third quarter of 1999 increased $1.4 million or 6.9% to
$22.4 million as compared to $21.0 million in the third quarter of 1998. EBITDA
as a percentage of total revenue decreased to 33.1% in the third quarter of 1999
from 33.3% in the same period of 1998. The decline in the EBITDA percentage is
primarily attributable to the increase in direct costs in the third quarter of
1999 as compared to the same period of 1998.
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Net loss increased to $5.0 million for the third quarter of 1999 from $4.0
million for the third quarter of 1998 due to the factors described above.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30,1998
Total revenues for the nine months ended September 30, 1999 increased
$11.8 million or 6.6% to $191.5 million, as compared to $179.7 million for the
comparable period of 1998. Room revenues increased $8.8 million or 5.1% in the
first nine months of 1999 to $179.6 million, as compared to $170.8 million in
the first nine months of 1998. The increase was primarily attributable to new
hotel installations, continued conversions of SpectraVision equipped properties,
lower movie denial rates, higher average movie price, higher game and internet
revenue, and, on average, more cable programming channels in each room during
1999 than in 1998. Video system sales and other revenues increased $3.1 million
or 34.2% to $12.0 million in the nine months ended September 30, 1999, as
compared to $8.9 million in the nine months ended September 30, 1998. The
increase was primarily due to increased ordering of video systems by our major
licensee, sales of our new digital system (OCX) to a provider of entertainment
systems to the cruise ship industry, and an increase in the net royalty payment
received from LodgeNet.
Total direct costs of revenues for the nine months ended September 30,
1999 increased $7.6 million or 9.8% to $85.1 million, as compared to $77.5
million for the nine months ended September 30, 1998. Direct costs associated
with room revenue in the first nine months of 1999 increased $5.5 million or
7.5% to $79.7 million, as compared to $74.2 million for the same period of 1998,
and as a percentage of room revenue increased to 44.4% for the nine months ended
September 30, 1999 from 43.4% for the nine months ended September 30, 1998. The
increase in the direct cost as a percent of revenue is primarily due to an
increase in movie royalties, and hotel commissions. Direct costs from video
system sales and other revenues increased $2.1 million or 61.7% to $5.4 million
in the first nine months of 1999, as compared to $3.3 million in the same period
of 1998, primarily due to the increase in video system sales. Direct costs
associated with video systems sales and other revenue as a percentage of video
system sales and other revenues increased to 44.7% for the nine months ended
September 30, 1999 from 37.1% for the same period of 1998. The increase is
primarily due to lower margins on projects where the Company will contract with
the hotel to provide wiring services prior to the movie system installation and
lower margins on system sales.
Operations expenses, which consists primarily of technical field support
for the hotels, for the nine months ended September 30, 1999 decreased $2.9
million or 11.4% to $22.0 million, as compared to $24.9 million for the nine
months ended September 30, 1998, and as a percentage of room revenue decreased
to 12.3% from 14.6% for the same period of 1998. The decrease is primarily due
to the shut-down of the Company's Richardson facility in the first quarter of
1998, lower costs for repair material, freight, and TV repair during the first
nine months of 1999.
Research and development expenses for the nine months ended September
30, 1999 increased $0.9 million or 16.1% to $6.3 million, as compared to $5.4
million for the nine months ended September 30, 1998. The increase is primarily
due to the continued development of the Company's interactive multimedia
technology and other new product offerings such as high-speed laptop
connectivity.
Selling, general and administrative expenses for the nine months ended
September 30, 1999 increased $1.2 million or 6.5% to $19.2 million, as compared
to $18.0 million for the nine months ended September 30, 1998. The increase is
principally due to increased expenses in the areas of Account Management and
Product Management expenses as the Company continues to build its infrastructure
in support of new interactive services (i.e. internet) offered with OCX, the
Company's new digital platform.
Depreciation, amortization, and stock based compensation expenses for
the nine months ended September 30, 1999 increased $6.4 million or 9.7% to $71.9
million, as compared to $65.5 million for the nine months ended September 30,
1998, and as a percentage of total revenue increased to 37.5% for the first nine
months of 1999 from 36.4% for the first nine months of 1998. The increase is
mainly due to depreciation on capital investments associated with the growing
room base and an $1.3 million non-cash expense associated with accounting for
cashless stock options in an executive compensation agreement, reflecting the
increased share price.
Interest/other expense, net for the nine months ended September 30,
1999 remained relatively flat as compared to the same period for 1998.
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Provision for income taxes for the nine months ended September 30, 1999
represents tax on income in certain international and domestic jurisdictions.
EBITDA for the nine months ended September 30, 1999 increased $5.0
million or 9.3% to $59.0 million as compared to $54.0 million for the nine
months ended September 30, 1998. EBITDA as a percentage of total revenue
increased to 30.8% in the first nine months of 1999 from 30.0% in the same
period of 1998. The improved EBITDA percentage is primarily attributable to the
decrease in operation expenses in 1999 as compared to the same period of 1998.
Net loss increased to $20.3 million for the nine months ended September
30, 1999 from $18.9 million for the nine months ended September 30, 1998 due to
the factors described above.
SEASONALITY
The Company's business is expected to be seasonal where revenues are
influenced principally by hotel occupancy rates and the "buy rate" or percentage
of occupied rooms at hotels that buy movies or other services at the property.
Higher revenues are generally realized during the summer months and lower
revenues realized during the winter months due to business and vacation travel
patterns which impact the lodging industry's occupancy rates. Buy rates
generally reflect the hotel's guest demographic mix, the popularity of the
motion picture or services available at the hotel and the guests' other
entertainment alternatives.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash during the nine months ended
September 30, 1999 were cash from operations of $52.7 million, and borrowings of
$14.0 million from the Company's Credit Facility (see note 4 of Notes to
Condensed Consolidated Financial Statements). Cash was expended primarily for
capital expenditures which totaled $64.2 million for the first nine months of
the year, primarily for the conversion of SpectraVision systems, the
installation of new hotels with OCV's on-demand system, increased inventory, and
internal fixed asset purchases. At September 30, 1999, the Company's installed
room base was approximately 950,000, as compared to approximately 929,000 at the
end of 1998. In the first nine months of 1999, the Company installed its
on-demand system in approximately 63,000 rooms, of which approximately 39,700
were new hotel installations, and approximately 23,300 were conversions of
SpectraVision properties.
The amount of the Company's Credit Facility is $200 million. At
September 30, 1999, the Company had $177.0 million outstanding under its Credit
Facility and had access to an additional $23.0 million of long-term financing.
The Company expects that the available cash, cash flows from operations and
funds available under the Credit Facility will be sufficient to finance its
expected investment in in-room video systems through at least the first quarter
of 2000. The Company anticipates capital expenditures in connection with the
continued installation and conversion of hotel rooms will be approximately $20
to $25 million per quarter through this date. The Company expects to need
additional financing in 2000 and is currently considering financing
alternatives.
RESTRICTIONS ON DEBT FINANCINGS
Pursuant to the Corporate Agreement entered into between Ascent and OCC,
the Company has agreed, among other things, not to incur any indebtedness
without Ascent's prior written consent, other than indebtedness under the OCC
Credit Facility and indebtedness incurred in the ordinary course of operations,
as limited by Ascent. Ascent's limitation on such OCC indebtedness currently
stands at $182 million and covers the period through December 31, 1999.
YEAR 2000 SOFTWARE ISSUE
The year 2000 software issue is the result of certain computer programs
being written using two digits rather than four digits to define the application
year, such that computer programs that are date sensitive may recognize a date
using "00" as the Year 1900 rather than the Year 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions or engage in
normal business activities for both the Company and its customers who rely on
its products.
The Company is actively engaged in, but has not yet completed,
correcting and testing all of the Year 2000 compliance issues. Based on the
current review, the primary Year 2000 compliance issue facing the Company is
that it must replace some of its internally developed application systems. A
second category of systems are those that reside at the hotel and operate the
Company's pay-per-view services. The Company utilizes embedded technology in all
of its hotel system design. The Company
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is currently developing solutions to this and Other Year 2000 issues affecting
the Company's hotel systems. In addition, the Company has also determined that
it will be required to modify and/or replace certain third-party software so
that it will function properly with respect to dates in the Year 2000 and
thereafter. The Company presently believes that with the proper modifications to
its internal applications, hotel systems, and third-party software and the
replacement of non-compatible hardware, the Year 2000 issue will not pose
significant operational problems for the Company or its customers.
The Company is currently working to resolve all significant Year 2000
issues by the end of 1999. If these modifications are not completed by
year-end, the Company believes that manual processes can be utilized to
mitigate any operating issues until these modifications are fully implemented.
This is discussed in more detail below. On an overall basis, if all such
modifications are not implemented by December 1999 and manual processes are not
effective, the Year 2000 issue could have a material impact on the Company.
The cost to the Company for addressing its Year 2000 issues is estimated
to be less than $1 million with less than $100,000 incurred through December 31,
1998 and less than $500,000 incurred in the first nine months of 1999. The costs
of Year 2000 compliance and the date on which the Company plans to complete the
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions including third parties' Year 2000
readiness and other factors.
The Company has and will continue to have communications with its
significant suppliers and customers to determine the extent to which the Company
may be vulnerable in the event that those parties fail to properly address their
own Year 2000 issues. The Company has taken steps to monitor the progress made
by those parties, and intends to test critical system interfaces, as the Year
2000 approaches. There is some unknown level of risk based upon the compliance
issue affecting a given hotel, and generally this should be limited to a
specific hotel. Conditions that make a hotel unable to take in guests would
affect the Company's revenue. A large number of the Company's systems are
interfaced with the hotel's property management system. If this interface fails
all movie charges will require manual processing. Processes to perform this are
in place in all hotels and are occasionally utilized at times when the property
management system interface is not functioning. This typically causes a slightly
higher number of lost charges, which could have a material effect if applied to
a large number of customers.
While the Company has not completed a formal contingency plan for the Year
2000 problem, it has evaluated several anticipated scenarios for failures
affecting both its critical business systems and hotel systems. It is
management's opinion that any of the potential scenarios can be managed by
manual means, although less efficient, while the necessary corrective action is
taken. However, there can be no guarantee that the systems of third parties on
which the Company relies will be corrected in a timely manner, that manual
processing of the Company's movie charges would be accomplished, or that the
failure to properly convert by another company would not have a material adverse
effect on the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates,
which could impact its results of operations and financial condition,
particularly, the Company's interest expense and cash flow. Revolving loans
extended under the Credit Facility generally bear an interest rate that is
variable and based on the London Interbank Offering Rate ("LIBOR") and on
certain operating ratios of the Company. At September 30, 1999, the Company had
$177.0 million outstanding on the Credit Facility and the weighted average
interest rate on the Credit Facility was 6.2%. Assuming no increase or decrease
in the amount outstanding, a hypothetical immediate 100 basis point increase (or
decrease) in interest rates at September 30, 1999 would increase (or decrease),
the Company's annual interest expense and cash outflow by approximately $0.4
million for the remaining three months of the year.
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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 legal
proceedings incidental to the conduct of its business. While the outcome of such
proceedings cannot be predicted with certainty, the Company does not believe any
such proceedings presently pending will have a material adverse effect on the
Company's financial position or its results of operations. (See note 5).
ITEM 2. CHANGES IN SECURITIES:
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
None
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 November 15, 1999.
On Command Corporation
/s/ PAUL J. MILLEY
--------------------------
Paul J. Milley
Senior Vice President, Finance
(Principal Accounting Officer)
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INDEX TO EXHIBITS
Exhibit
Number Description
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27.0 Financial Data Schedule