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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 00-21315
ON COMMAND CORPORATION
(Exact Name of Registrant as specified in its charter)
DELAWARE 77-04535194
(State of Incorporation) (IRS Employer Identification No.)
6331 SAN IGNACIO AVENUE, SAN JOSE, CALIFORNIA 95119
(Address of Principal Executive Offices) (Zip code)
Registrant's telephone number, including area code: (408) 360-4500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock NASDAQ National Market System
Series A Common Stock Purchase Warrants NASDAQ National Market System
Series B Common Stock Purchase Warrants NASDAQ National Market System
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of March 3, 1997, was $103,817,349 based
upon a price of $13.50 per share, which was the average of the bid and asked
prices of such stock on March 3, 1997, as reported on the NASDAQ National Market
Reporting System. As of March 3, 1997, there were 29,181,065 shares of the
Registrant's Common Stock issued and outstanding and 1,424,875 Series A
Warrants, 2,501,697 Series B Warrants, and 3,450,000 Series C Warrants (non-
registered) issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement with respect to its annual meeting
of stockholders is incorporated by reference herein.
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TABLE OF CONTENTS
Page
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Industry Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Operating and Growth Strategies . . . . . . . . . . . . . . . . . . . . . 3
Services and Products . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Sales and Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Installation and Service Operations . . . . . . . . . . . . . . . . . . . 5
Hotel Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Integrating Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Patents, Trademarks, and Copyrights . . . . . . . . . . . . . . . . . . . 8
International Markets . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Interactive and Other Services . . . . . . . . . . . . . . . . . . . . . . 9
Markets and Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . 10
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . 22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . 43
Item 10. Directors and Officers of the Registrant . . . . . . . . . . . . . . . . 43
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . 43
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . 43
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . 43
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K . . . 43
-i-
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PART I
This Form 10-K 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 On
Command Corporation'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. Important results
which could cause actual results to differ materially are described in the
following paragraphs and are particularly noted under Business Risks on pages
19 through 22 and the Company's Amendment No. 3 to Form S-4 and the Company's
Report on Form 10-Q, as filed with the Securities and Exchange Commission.
ITEM 1. BUSINESS
INTRODUCTION
On Command Corporation (the "Company" or "OCC") is a Delaware
corporation formed by Ascent Entertainment Group, Inc. ("Ascent") for the
purpose of (i) effecting the merger (the "Merger") of On Command Video
Corporation ("OCV"), a majority-owned subsidiary of Ascent Entertainment
Group, Inc. ("Ascent"), with a wholly owned subsidiary of OCC, after which OCV
became a wholly-owned subsidiary of OCC, and (ii) effecting the acquisition
(the "Acquisition") of Spectradyne, Inc., a wholly-owned subsidiary of
SpectraVision, Inc. ("Oldco"). Following the Acquisition, Spectradyne, Inc.
changed its name to SpectraVision, Inc. ("SpectraVision"). Ascent is a
majority-owned subsidiary of Comsat Corporation ("COMSAT").
The Merger and Acquisition was effective on October 8, 1996. 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. The Acquisition was accounted for as a purchase using
the fair value of the assets acquired and liabilities assumed from
SpectraVision. Prior to the Merger and Acquisition (collectively hereafter, the
"Acquisition"), OCC had no significant operations.
As of the closing date of the Acquisition, the stockholders of OCV
received 21,750,000 shares of OCC Common Stock (72.5% of the initial OCC Common
Stock, of which Ascent received 17,149,766 shares.) In consideration for the
acquisition of the assets and properties of SpectraVision by OCC, OCC paid $4
million in cash and issued 8,041,618 shares of OCC Common Stock to the Oldco
bankruptcy estate for distribution to Oldco's creditors. Additionally, 208,382
shares were held in reserve pursuant to the Acquisition for potential
adjustments. Of these, 196,382 shares of reserve 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.
In connection with the Acquisition, 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
1,123,823 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 $4.0 million in cash was paid and
Series C warrants to purchase for cash an aggregate of 3,450,000 shares of OCC
Common Stock were issued to OCC's investment advisors in consideration for
certain banking and advisory services provided in connection with the
Acquisition.
Unless otherwise indicated, all references to "On Command
Corporation", "OCC" or the "Company" will include On Command Corporation and
its wholly-owned subsidiaries.
GENERAL
On Command Corporation, a newly-formed Delaware corporation, is a
holding company whose principal assets are OCV, SpectraVision, and On Command
Development Corporation, each of which operates as a separate, wholly-owned
subsidiary of On Command Corporation.
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On Command Video is the leading provider (by number of hotel rooms
served) of on-demand in-room video entertainment for the United States lodging
industry. The OCV 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. OCV 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 466,000 rooms at December 31, 1996. OCV also provides
in-room viewing of free-to-guest programming of select cable channels (such as
HBO, Showtime, the Disney Channel, ESPN, and CNN) and other interactive
services. OCV provides its services under long-term contracts primarily to
business and luxury hotel chains such as Marriott, Hilton, Wyndham, Doubletree,
Fairmont, Embassy Suites, and Holiday Inn, and to other select hotels.
At December 31, 1996, approximately 96% of OCV's installed rooms were
located in the United States, with the balance located in Canada, the
Caribbean, and Europe. In addition to installing OCV systems in hotels served
by OCV, OCV sells its systems to certain other providers of in-room
entertainment, including MagiNet Corporation (formerly Pacific Pay Video
Limited), which is licensed to use OCV's system to provide on- demand in-room
entertainment in the Asia-Pacific region.
SpectraVision is a leading provider of interactive in-room video
entertainment services to the lodging industry. Founded in 1971,
SpectraVision's former parent, Oldco, originally developed and patented a
system which provides in-room television viewing of recently released major and
other motion pictures on a pay-per-view basis. SpectraVision subsequently
expanded its services to include providing pay-per-view motion pictures in an
on-demand format, delivering free-to-guest programming, and providing
interactive services that capitalized on SpectraVision's proprietary two-way
communications equipment. SpectraVision has been a major provider of these
services to the lodging industry since 1971 and, at December 31, 1996, provided
pay-per-view services to approximately 452,000 rooms in approximately 1,500
hotels. Like OCV, SpectraVision also provides in-room viewing of free-to-guest
programming of similar select cable channels and other interactive services.
SpectraVision provides its services under contracts to hotel chains including
Hyatt, Loews, Four Seasons, Wyndham, Stouffer, and Harvey Hotels; hotel
management companies; and individually owned and franchised hotel properties.
At December 31, 1996, approximately 78% of SpectraVision's installed
rooms were located in the United States, with the balance located in Canada,
Asia, Europe and Mexico.
On Command Development Corporation develops technologies to be used by
OCV and SpectraVision to support and enhance OCV's and SpectraVision's
operations and to develop new applications to be marketed by OCV and
SpectraVision. The operations of OCV and SpectraVision are being integrated as
of December 31, 1996, so in this document the reference to "OCC" or "On Command
Corporation" or the "Company" refers to the combined operations of these two
entities.
INDUSTRY OVERVIEW
Providing in-room video entertainment and information services to the
lodging industry includes offering pay-per-view major motion pictures,
free-to-guest programming of select pay cable channels, and an increasing array
of interactive services. Pay-per-view services were introduced in the early
1970's and have since become a standard amenity offered by many hotels to their
guests. Historically, providers of programming to hotels delivered their
content on a fixed time schedule that did not provide the hotel guest
flexibility in choosing when to watch a movie. Typically, a guest would be
offered a choice of four to eight movies, each of which would be shown once
every two to four hours. The development of video switches (including OCV's
patented video switch) has enabled providers of pay-per-view services to offer
scheduling flexibility to the viewer. Changes in technology have also led to
the ability to provide a number of on-demand interactive services such as guest
folio review, automatic checkout, survey completion, guest messaging, and video
games. The market for in-room entertainment and information is characterized
as a highly-competitive environment among a few industry-dedicated companies,
as well as new entrants.
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OPERATING AND GROWTH STRATEGY
On Command Corporation's operating and growth strategy is to (i)
increase its installed hotel customer base by obtaining contracts with business
and luxury hotels and select mid-priced hotels without current service,
converting hotels currently served by other providers whose contracts are
expiring, and servicing hotels which are acquired or constructed by existing
customers, (ii) increase revenues and decrease costs in certain hotels acquired
in the SpectraVision acquisition by installing OCC technology offering greater
reliability, broader selection, and more viewing flexibility, (iii) create new
revenue sources through an expanding range of interactive and information
services offered to the lodging industry, and (iv) expand into foreign markets.
Prior to the Acquisition, OCV had experienced rapid growth in the past
three and one half years, increasing its base of installed rooms from
approximately 37,000 rooms in approximately 90 hotels at the end of 1992 to
approximately 466,000 rooms in approximately 1,675 hotels at December 1996.
Conversely, SpectraVision, as a result of financial constraints and its
bankruptcy filing in June 1995, had experienced deterioration in its room base.
SpectraVision's room base had decreased from approximately 1,059,000 installed
rooms in 2,543 hotels at December, 1992 to approximately 451,000 rooms in 1,469
hotels at December, 1996.
SERVICES AND PRODUCTS
Pay Per View
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. Negotiated fees are related to the popularity of the picture and the
volume of pictures licensed from a given studio. License fees typically
decline over the time the movie is played. Typically, OCC obtains rights to
exhibit major motion pictures during the "Hotel/Motel Pay-Per-View Window,"
which is the time period after initial theatrical release and before release
for home video distribution or cable television exhibition. OCC attempts to
license pictures as close as possible to a motion picture's theatrical release
date to benefit from the studios' advertising and promotional efforts. OCC
also obtains independent motion pictures, most of which are non-rated and are
intended for mature audiences, for a one-time flat fee that is nominal in
relation to the licensing fees paid for major motion pictures.
OCC provides service under contracts with hotels that generally run
for a term of five to seven years. Under these contracts, OCC installs its
system into the hotel at OCC's cost, and OCC retains ownership of all its
equipment used in providing the service. Traditionally, the hotel provides and
owns the televisions; however, based on certain economic evaluations, OCC may
provide televisions to certain hotels. OCC undertakes a significant investment
when it installs its system in a hotel property, sometimes rewiring part of the
hotel. 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 approximately from $400 to $700 per room, or approximately
$300 per room if the Video NOW(TM) system is used. OCC's contracts with hotels
provide that OCC will be the exclusive provider of in-room, pay-per-view
television entertainment services to the hotel and generally permit OCC to set
the movie price. 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 varies depending upon the size and profitability of the system. Some
contracts also require OCC to upgrade its system to the extent that new
technologies and features are introduced during the term of the contract. At
the scheduled expiration of a contract, OCC generally seeks to extend the
contract on terms substantially similar to the current terms.
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The revenue generated from OCC'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 and competitive position within its marketplace and, over
time, based on 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. Movie price levels are established by OCC and are set
based on the guest mix profile at each property and overall economic
conditions. Currently, OCC's movie prices typically are $8.95 for the first
purchase by the hotel guest and $4.95 for each subsequent purchase by the same
guest on the same day. The SpectraVision equipped hotels do not currently
discount second buys.
On Command Video(TM) On Demand System, the On Command Video System was
patented by OCV in 1992 and consists of a microprocessor controlling the
television in each room, a hand held remote control, and a central "head-end"
video rack and system computer located elsewhere in the hotel. Programming
signals originate from video cassette players located within the head-end rack
and are transmitted to individual rooms by way of OCV's proprietary video
switching technology. Movie starts are controlled automatically by the system
computer. The system computer also records the purchase by a guest of any
title and reports billing data to the hotel's accounting system, which posts
the charge to the guest's bill. Manual functions of the OCV equipment and
system are limited to changing video cassettes once a month, which is handled
by OCC's installation and service personnel. OCV's information system is
capable of generating regular reports of guests' entertainment selections,
permitting OCV to adjust its programming to respond to viewing patterns. The
number of guests that can view a particular movie at the same time varies from
hotel to hotel depending upon the popularity of the movie. OCV provides more
copies of the most popular programming to hotels. In a typical hotel with 300
rooms, for example, the central head-end video rack would consist of
approximately 120 video cassette recorders containing up to ten copies of the
most popular movies and a total of up to 50 different titles. The OCV system
includes a computerized in-room on-screen menu that offers to guests a list of
only those movie selections available to the guest at that time. As a result,
even though the on-screen menu may not include a list of all titles available
in the particular hotel, the list includes all movies available to the guest at
that particular time, thus eliminating the possibility of a guest being
disappointed when the guest's selection is not available. OCC markets the full
scale OCV video on demand systems to business and luxury hotels.
Video NOW(TM). OCV is also marketing lower cost Video NOW(TM) systems
to select mid-priced hotels. The Video NOW(TM) system works with the hotel's
existing televisions and telephones allowing guests to use their touch-tone
telephones to access on-demand movies and other programming.
SpectraVision hotels contain several products including: (i)
SpectraVision(TM), a scheduled tape-based play system; (ii) SpectraVision Guest
Theater(TM), a scheduled play system using satellite delivery; (iii) Guest
Choice(TM), an analog tape system which provides on-demand viewing of up to 200
videotapes; and (iv) Digital Guest Choice(TM), the industry's only digital video
on-demand service.
Tape Based SpectraVisio(TM). SpectraVision originated a tape based
system which typically offers a hotel guest eight movies per day at
predetermined times. The movie schedule typically consists of a mix of major
motion pictures available after commencing first-run theatrical exhibition and
before release on cable or home video, and independently produced movies for
mature audiences. On the first day of each month, SpectraVision typically
replaces a majority of the movies on each schedule with new features. At
December 31, 1996, SpectraVision had SpectraVision(TM) installed in 564 hotels
with a total of 161,892 rooms.
Guest Theater(TM). Guest Theater(TM) (originated by SpectraVision)
system using digital satellite delivery technology was introduced in 1993. Guest
Theater(TM) increases the number of movies available in a SpectraVision(TM)
system from eight to 20 by varying movie selections on a nightly basis. At
December 31, 1996, SpectraVision had Guest Theater(TM) installed in 970 hotels
with a total of 318,963 rooms.
Guest Choice(TM). In 1991, SpectraVision introduced Guest Choice(TM)
to provide hotel guests with on-demand viewing from a library of up to 200
videotapes per hotel. At December 31, 1996, Guest Choice(TM) was installed in
541 hotels with a total of 243,310 rooms, substantially all of which also offer
either SpectraVision(TM) or
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Guest Theater(TM) services. The on-demand capability significantly increases
usage of the pay-per-view service by hotel guests, and SpectraVision experienced
increases in viewership on average of approximately 40% in the hotels in which
Guest Choice(TM) systems have been installed. Through Guest Choice(TM),
SpectraVision provides on-demand viewing of major motion pictures, independently
produced movies for mature audiences, and a variety of other topics, such as
exercise programs, business information, children's programming, and other
special interest tapes. The Guest Choice(TM) system includes SpectraVision's
proprietary equipment and software and uses a patented video rack designed and
manufactured by a third party.
Digital Guest Choice(TM). During 1994, SpectraVision introduced its
new digital video on-demand service, Digital Guest Choice(TM), that provides
on-demand viewing of digitally stored movies. Digital Guest Choice(TM) uses
satellite technology to deliver digitized movies to high capacity disk arrays.
The digitized movies are stored at the hotel site and then decoded and forwarded
to the guest instantaneously and on-demand. Digital Guest Choice(TM) allows
multiple users to access the same digitally stored movie image at the same time.
This on-demand system virtually eliminates lost views due to another guest
already viewing a particular videotape or if all tape players are in use. At
December 31, 1996, SpectraVision had installed Digital Guest Choice(TM) in 102
hotels with a total of 56,707 rooms.
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.
SALES AND MARKETING
OCC's marketing efforts are focused on business and luxury hotels with
approximately 150 rooms or more, as management believes that such hotels
consistently generate the highest revenues per room in the lodging industry.
The Company also targets smaller business and luxury hotels and select
mid-priced hotels that meet its profitability criteria. On Command intends to
continue targeting established hotel chains, certain business and luxury hotel
management companies, and selected independent hotels.
INSTALLATION AND SERVICE OPERATIONS
At December 31, 1996, OCC's installation and service organization
consisted of approximately 400 installation and service personnel in the United
States and Canada. Company-employed installation and service personnel are
responsible for all of the hotel rooms served by On Command. Installation and
service personnel are responsible for system maintenance and distribution of
video cassettes. The Company's installation personnel prepare site surveys to
determine the type of equipment to be installed at each hotel, install systems,
train the hotel staff to operate the systems, and perform quality control tests.
The Company also uses local installation subcontractors supervised by full-time
Company personnel to install its systems.
OCC maintains a toll-free technical support hot line that is monitored
24 hours a day by trained support technicians. The on-line diagnostic
capability of the OCV and SpectraVision's systems enables the technician to
identify and resolve a majority of the reported system malfunctions from OCC's
service control center without visiting the hotel property. When a service
visit is required, the modular design of the OCV and SpectraVision systems
generally permits installation and service personnel to replace defective
components at the hotel site.
HOTEL CONTRACTS
On Command Corporation typically enters into a separate contract with
each hotel for the services provided. Contracts with the corporate-managed
hotels in any one chain generally are negotiated by that chain's corporate
management, and the hotels subscribe at the direction of corporate management.
In the case of franchised or independently owned hotels, the contracts are
generally negotiated separately with each hotel. Existing contracts generally
have a term of five or seven years from the date the system becomes
operational. At expiration, OCC
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typically seeks to extend the term of the contract on terms competitive in the
market. At December 31, 1996, approximately 8.5% of the pay-per-view hotels
served by OCC have contracts that have expired and are on a month-to-month
basis. Approximately 9.5% of the pay-per-view hotels served by OCC have
contracts expiring in 1997.
TECHNOLOGY
OCC's product development philosophy is to design high quality
entertainment and information systems which incorporate features allowing the
Company to add system enhancements as they become commercially available and
economically viable. The high speed, two-way digital communications capability
of the OCV system enables the Company to provide advanced interactive features
such as video games in addition to basic interactive services such as video
checkout, room service ordering, and guest survey.
The Company's systems incorporate proprietary communications system
designs with commercially manufactured components and hardware such as video
cassette players, amplifiers, and computers. Because the Company's systems
generally use industry standard interfaces, OCC can integrate new technologies
as they become economically viable. Such technologies might include digital
compression and store-and-forward, which would permit multiple users to access
the same stored movie at varying start times.
In 1993, SpectraVision, through its parent company Oldco, entered into
an agreement with EDS to install a satellite-based digital movie delivery system
to replace its existing tape-based delivery systems. In conjunction with the
installation of this system, SpectraVision introduced its new SPEXIS(TM)
computer system which provides hotels with new and improved interactive
services. SpectraVision and EDS first installed equipment to enable
SpectraVision to provide its scheduled play movies in a compressed digital video
format on a real time basis via satellite (Guest Theater(TM). In late 1994,
SpectraVision and EDS began the second phase of the technology conversion and
initiated the installation of a digital video on-demand system (Digital Guest
Choice(TM) in selected hotels. This system consists of high capacity disk
arrays, which are used to store digitized movies, delivered to a hotel via
satellite, for instantaneous on-demand viewing by hotel guests.
Upon completing the Acquisition, On Command Corporation entered into a
new agreement with EDS for the continued delivery of the satellite delivered
service for up to 45 months after the closing. After the loss of AT&T's
Telestar 401 satellite in January 1997, the satellite through which EDS
provided transmission services to SpectraVision, the Company entered into a
six-month agreement with Hughes Network Systems for transponder capacity on a
GE Americom Communications, Inc. satellite to resume the service interrupted by
the loss of Telestar 401. (See Note 14 - Subsequent Events - in the Notes
to Consolidated Financial Statements.)
SUPPLIERS
OCC contracts directly with various electronics firms for the
manufacture and assembly of its systems hardware, the design of which is
controlled by On Command Development Corporation. Historically, these
suppliers have been dependable and able to meet delivery schedules on time.
The Company believes that, in the event of a termination of any of its sources,
alternate suppliers could be located without incurring significant costs or
delays. However, certain electronic component parts used with the Company's
products are available from a limited number of suppliers and can be subject to
temporary shortages because of general economic conditions and the demand and
supply for such component parts. In addition, some of SpectraVision systems
currently installed in hotels require a high level of service and repair. As
these systems become older, sourcing replacement parts will become more
difficult. If the Company were to experience a shortage of any given electronic
part, the Company believes that alternative parts could be obtained or system
design changes could be made. In such event, the Company could experience a
temporary reduction in the rate of new installations and/or an increase in the
cost of such installations.
The head-end electronics are assembled at the Company's facilities for
testing prior to shipping. Following assembly and testing of equipment
designed specifically for a particular hotel, the system is shipped to each
location, where it is installed by OCC-employed and trained technicians,
typically assisted by independent contractors.
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OCC, through its OCV and SpectraVision subsidiaries, maintains direct
contractual relations with various suppliers of pay-per-view and free-to-guest
programming, including the motion picture studios and programming networks.
OCC believes its relationships with all suppliers are good, except for Showtime
Networks Inc., ("Showtime") which is disputing OCV's performance of the
contract with Showtime in connection with OCV's termination of scheduled
satellite pay-per-view service. [Supreme Court of the State of New York,
County of New York, Index No. 95-600849]. In addition, OCC is negotiating the
renewal of a contract with HBO which expired in June 1996, although OCC
continues to provide HBO programming under the expired contract.
INTEGRATING OPERATIONS
On Command Corporation is working towards the full integration of its
operations in support of the OCV and SpectraVision systems. Some of the work
had been completed by December 31, 1996, however, significant system
development and field support projects will continue throughout 1997, and
possibly into 1998, to complete the integration. In addition, OCC intends to
pursue the renewal or extension of hotel customers with SpectraVision equipment
by offering these customers the opportunity to obtain OCV on-demand pay-per-view
movie service and related services.
Certain of SpectraVision's customers will not be offered the
opportunity to receive OCV equipment. These customers are located in Hong
Kong, Australia, Singapore, and Thailand. OCV is currently a party to an
agreement with MagiNet Corporation ("MagiNet") to provide OCV systems and
technology to MagiNet in the Asia-Pacific region.
COMPETITION
There are several providers of in-room video entertainment to the
lodging industry, at least two of which provide on-demand pay-per-view and
free-to-guest programming and other interactive services by means of the
in-room television. Pay-per-view, the most profitable component of the
services offered, competes for a guest's time and entertainment resources with
broadcast television, free-to-guest programming, and cable television services.
In addition, there are a number of potential competitors that could use their
existing infrastructure to provide in-room entertainment to the lodging
industry including cable companies (including wireless cable),
telecommunications companies, and direct-to-home and direct broadcast satellite
companies. Some of these potential competitors are already providing
free-to-guest services to hotels and testing video-on-demand.
On Command Corporation, through OCV and SpectraVision, is the leading
provider of in-room video entertainment services and the leading provider of
in-room on-demand video entertainment services to the United States lodging
industry. OCC competes on a national scale primarily with LodgeNet
Entertainment Corporation ("LodgeNet") and on a regional basis with certain
other smaller entities. Based on publicly filed information, OCC estimates
that, at December 31, 1996, LodgeNet served approximately 400,000 pay-per-view
rooms, of which approximately 359,000 are equipped with on-demand service. At
December 31, 1996, OCC served approximately 918,000 rooms, of which
approximately 709,000 are on-demand rooms.
Competition with respect to new pay-per-view contracts centers on a
variety of factors, depending upon the circumstances important to a particular
hotel. Among the more important factors are (i) the features and benefits of
the entertainment systems, (ii) the quality of the vendor's technical support
and maintenance services, and (iii) the financial terms and conditions of the
proposed contract. With respect to hotel properties already receiving in-room
entertainment services, the current provider may have certain informational and
installation cost advantages compared to outside competitors.
On Command Corporation believes its competitive advantages include (i)
technological leadership represented by its superior on-demand capability and
range of services offered, and (ii) system reliability and high quality service.
OCC believes that its growth (including OCV's growth over the previous three
years) reflects the strong competitive position of its products and services.
The OCC system offers an expansive library of on-demand movies and will allow
OCC to upgrade and add new features to the OCC system during the terms of the
pay-per-view contracts.
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On Command Corporation anticipates substantial competition in
obtaining new contracts with major hotel chains. The Company believes that
hotels view the provision of in-room on-demand entertainment both as a revenue
source and as a source of competitive advantage in that sophisticated hotel
guests are increasingly demanding a greater range of quality entertainment and
informational alternatives. At the same time, OCC believes that certain major
hotel chains have awarded contracts based primarily on the level and nature of
financial and other incentives offered by the pay-per-view service provider.
While the Company believes its competitive advantages will enable OCC to
continue to offer financial arrangements that are attractive to hotels, its
competitors may attempt to maintain or gain market share at the expense of
profitability. OCC may not always be willing to match incentives provided by
its competitors.
The communications industry is subject to rapid technological change.
New technological developments could adversely effect On Command Corporation's
operations unless it is able to provide equivalent services at competitive
prices.
REGULATION
The Federal Communications Commission (the "FCC") has broad
jurisdiction over electronic communications. The FCC does not directly
regulate On Command Corporation's pay-per-view or free-to-guest services.
However, the FCC's jurisdiction does encompass certain aspects of On Command
Corporation's operations as they relate to the offering of satellite-delivered
pay-per-view movies.
The FCC's jurisdiction also encompasses certain aspects of On Command
Corporation's operations as they relate to its use of the radio frequency
spectrum in certain hotels acquired in connection with SpectraVision.
SpectraVision had obtained optional licenses from the FCC for a number of its
downlink, television receive-only satellite receivers, which are used to
receive transmissions from communications satellites in connection with its
free-to-guest services. SpectraVision had also obtained the required licenses
for the microwave point-to-point relay facilities.
On February 1, 1996, Congress passed The Telecommunications Act of
1996 (the "Telecommunications Act"), which was signed into law on February 8,
1996. The Telecommunications Act has and will continue to alter federal,
state, and local laws and regulations for telecommunications providers and
services, and may affect On Command Corporation. There are numerous
rulemakings to be undertaken by the FCC that will interpret and implement the
Telecommunications Act. It is not possible at this time to predict the outcome
of such rulemakings.
PATENTS, TRADEMARKS, AND COPYRIGHTS
OCV and SpectraVision own a number of patents and patent licenses
covering various aspects of its pay-per-view and interactive systems. Although
OCV and SpectraVision maintain these patents, On Command Corporation believes
that the design, innovation, and quality of OCV's and SpectraVision's products
and their relations with their customers are at least as important, if not more
so, to the maintenance and growth of the Company. OCV and SpectraVision also own
various trade names, trademarks, service marks, and logos used in their
businesses, which OCC intends to actively protect.
INTERNATIONAL MARKETS
In addition to its operations in the United States, On Command
Corporation offers its services in Canada, Mexico, Puerto Rico, the U.S. Virgin
Islands, Hong Kong, Singapore, Thailand, Australia, the Bahamas, and certain
European countries. SpectraVision has been a leading provider of in-room video
entertainment in the Asia-Pacific region and Australia.
The Company generally experiences higher revenues and operating cash
flow per room than in the United States because of higher prices, higher buy
rate, and the lack of programming alternatives. At December 31, 1996, the
Company serviced 451 hotels with a total of 121,918 rooms located outside the
United States.
The competition to provide pay-per-view services to hotels is even more
dispersed in international markets than in the United States. Expansion of
OCC's operations into foreign markets involves certain risks that are not
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associated with further expansion in the United States including availability
of programming, government regulation, currency fluctuations, language
barriers, differences in signal transmission formats, local economic and
political conditions, and restriction on foreign ownership and investment.
Consequently, these risks may hinder OCC's efforts to grow its base of hotel
rooms in foreign markets.
INTERACTIVE AND OTHER SERVICES
In addition to entertainment services, OCC provides interactive
services to the lodging industry. These services generate revenues and cash
flows which are independent of viewing levels. These services use two-way
interactive communications capability of the Company's equipment and room
availability monitoring. The hotel typically pays a fixed monthly fee for
each service selected. Interactive services are also currently available in
Spanish, French, and certain other foreign languages. In most cases, the
interactive services are made a part of the contract for pay-per-view services
which typically runs for a term of five to seven years.
In addition to installing systems in hotels served by OCC, OCC sells
systems to certain other providers of in-room entertainment including MagiNet
Corporation (formerly Pacific Pay Video Limited), which is licensed to use
OCC's system to provide on-demand in-room entertainment in the Asia Pacific
region and at December 31, 1996, provided service to approximately 63,000 rooms.
MARKETS AND CUSTOMERS
On Command currently provides pay-per-view services to hotels that are
part of chains including Marriott, Hilton, Wyndham, Doubletree, Fairmont,
Embassy Suites, Holiday Inn, Westin, and Sheraton. SpectraVision's chain
customers include Hyatt, Loew's, Four Seasons, Wyndham, Stouffer, and Harvey
Hotels. Together, OCC serves majors chains and selected other hotels
throughout the United States, Canada, Mexico, Australia, and the Asia-Pacific
region. The following table sets forth certain information regarding the
number of hotels and rooms served by OCC as of December 31, 1996 and served by
OCV and SpectraVision combined as of December 31, 1995:
As of December 31,
-------------------------------------------
1996 1995
---- ----
Hotels Served:
U.S. 2,706 2,661
Non-U.S. 438 451
Rooms Served: 801,952 789,200
U.S. 115,653 121,918
Non-U.S
Revenue per Equipped $20.87/month $20.28/month
Room (RER)*
- ----------------
* Average for the full year assuming both OCV and SpectraVision combined
operations.
EMPLOYEES
As of December 31, 1996, OCC employed a total of 808 persons,
including 63 in engineering, 433 in installation and service, 167 in
manufacturing, 17 in sales and 128 in management, administration and finance.
During fiscal year 1996, the vast majority of research and development efforts
have been performed by the Company's employees rather than outside consultants.
None of the Company's employees is represented by a labor union. The Company
has experienced no work stoppages and believes employee relations are good.
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ITEM 2. PROPERTIES
On Command Corporation currently leases its headquarters located in
San Jose, California. The headquarters contain approximately 131,000 square
feet of office, light manufacturing, and storage space. In connection with the
acquisition of SpectraVision, On Command Corporation acquired the SpectraVision
headquarters building in Richardson, Texas which contains approximately 84,000
square feet of office, light manufacturing, and storage space. It also
acquired other leased space throughout the United States, Canada, Mexico,
Puerto Rico, Hong Kong, and Australia which housed SpectraVision's customer
support operations. The Company's properties are suitable and adequate for the
Company's business operations.
ITEM 3. LEGAL PROCEEDINGS
On Command Corporation, or its operating entities, is a defendant and
may be a potential defendant, in lawsuits and claims arising in the ordinary
course of business. While the outcomes of such claims, lawsuits, or other
proceedings cannot be predicted with certainty, management expects that such
liability, to the extent not provided for by insurance or otherwise, will not
have a material adverse effect on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
In accordance with General Instruction G to the Annual Report on Form
10-K, included herein is the following table, which sets forth the names, ages,
at March 1, 1997, and titles of executive officers of the Company, and
biographical information with respect to such officers.
Name Age Position
----------------------------------------- --- -----------------------------------------------
Robert M. Kavner . . . . . . . . . . . . 53 President, Chief Executive Officer, and Director
Brian A.C. Steel . . . . . . . . . . . . 37 Executive Vice President, Chief Financial Officer,
Chief Operating Officer, and Director
Robert Snyder . . . . . . . . . . . . . . 60 Vice Chairman (not a director)
Richard C. Fenwick, Jr. . . . . . . . . . 39 Senior Vice President, Engineering
Ronald D. Lessack . . . . . . . . . . . . 49 Senior Vice President, Operations
Paul J. Milley . . . . . . . . . . . . . 43 Senior Vice President, Finance
Jill E. Fishbein . . . . . . . . . . . . 35 Senior Vice President, Legal, General Counsel,
and Secretary
Jean A. deVera . . . . . . . . . . . . . 47 Vice President, National Accounts
Edward B. Neumann . . . . . . . . . . . . 60 Vice President, Finance
Richard A. Swift . . . . . . . . . . . . 45 Vice President, Sales
Robert M. Kavner has been President, Chief Executive Officer, and
Director of On Command Corporation since September 1996. Prior thereto, Mr.
Kavner was a principal in Kavner & Associates, a consulting firm for media and
communication companies. From June 1994 through September 1995, Mr. Kavner was
an Executive Vice President of Creative Artists Agency, Inc. Prior to joining
Creative Artists Agency, Mr. Kavner was Executive
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Vice President of AT&T Corp. ("AT&T") and Chief Executive Officer of AT&T's
Multimedia Products and Services Group. He was also a member of AT&T's
Management Executive Committee. From 1992 to 1994, Mr. Kavner was Group
Executive for Communications Products Group of AT&T. From 1988 to 1991, Mr.
Kavner was President of AT&T's Data Systems Group. Mr. Kavner is also a
director of the Fleet Financial Corp. and Tandem Computers, Incorporated.
Brian A.C. Steel has been Executive Vice President, Chief Financial
Officer, and Chief Operating Officer of On Command Corporation since September
1996 and a Director of On Command Corporation since October 1996. Prior
thereto, Mr. Steel was Executive Vice President, Strategic Development, and
Chief Financial Officer for TELE-TV since August 1995. Prior to joining
TELE-TV, Mr. Steel was Vice President, Strategic Development of Pacific Telesis
Enhanced Services, General Manager of Pacific Telesis Electronic Publishing
Services, and Executive Director, Corporate Development of Pacific Telesis
Group from January 1994 to July 1995. Prior to joining Pacific Telesis, Mr.
Steel was a principal in Conversion Management Associates from January 1993 to
December 1993. From June 1986 to December 1992, Mr. Steel was employed by
Shearson Lehman Brothers Inc. as Senior Vice President, Real Estate Merchant
Banking Group and First Vice President, E.F. Hutton Properties.
Robert Snyder has been Vice Chairman, but not a Director, of On Command
Corporation since September 1996, prior to which he was President and Chief
Executive Officer of On Command Corporation since August 1996. Mr. Snyder was
President and a Director of OCV from 1987 to October 1996 and Chief Executive
Officer of OCV from July 1995 to October 1996.
Richard C. Fenwick, Jr. has been Senior Vice President of Engineering
since December 1996 and was named Vice President, Engineering of On Command
Corporation in September 1996. Mr. Fenwick had been Vice President,
Engineering of OCV since September 1992, prior to which Mr. Fenwick served in
various engineering and program management positions at Electrospace Systems,
Inc.
Ronald D. Lessack has been Senior Vice President, Operations since
December 1996 and was named Vice President, Operations of On Command
Corporation in September 1996. Prior to joining On Command Corporation, Mr.
Lessack was Vice President, Operations of OCV since January 1994. Prior to
that he was self employed as a consultant from July 1992 to February 1994, and
prior to that he was a Vice President of Watkins Johnson Co. Group.
Paul J. Milley has been Senior Vice President, Finance since December,
1996. Prior thereto, Mr. Milley was Vice President and Chief Financial Officer
of the 3DO company where he worked since October 1993. Prior to joining the
3DO company, Mr. Milley was Senior Vice President and Chief Financial Officer
of Computerland Corporation where he worked from July 1989 to September 1993.
Jill E. Fishbein has been Senior Vice President, Legal, General Counsel
and Secretary since December 1996. Ms. Fishbein was Vice President, General
Counsel, and Secretary of Network General Corporation at which she worked from
October 1994 through December 1996. Prior to joining Network General
Corporation, Ms. Fishbein was Legal Counsel at Electronic Arts Inc. from April
1992 to September 1994. From October 1989 to March 1992, Ms. Fishbein was an
Associate at the law firm of Fenwick & West.
Jean A. deVera has been Vice President, National Accounts of On Command
Corporation since September 1996. Prior to joining On Command Corporation, Ms.
deVera was Vice President, National Accounts of OCV since January 1994. From
1977 through December 1993, Ms. deVera held various positions at COMSAT Video
Enterprises, the last of which was Director of Sales Administration.
Edward B. Neumann has been Vice President, Finance of On Command
Corporation since September 1996. Prior to joining On Command Corporation, Mr.
Neumann was Vice President, Finance and Chief Financial Officer of OCV for more
than five years. Mr. Neumann retired from OCC on February 28, 1996 and
currently serves in a consulting capacity.
Richard A. Swift has been Vice President, Sales of On Command
Corporation since September 1996. Prior to joining On Command Corporation, Mr.
Swift was Vice President, Sales of OCV since August 1995, and prior to that he
was Vice President, Sales of COMSAT Video Enterprises since 1991.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On Command Corporation's Common Stock and Series A and B Warrants are
traded on the NASDAQ National Market System under the symbols ONCO, ONCOW, and
ONCOZ respectively. Series C Warrants were given to an advisor to the
Acquisition transaction but were not registered for public trading. The high
and low closing prices for On Command Corporation's securities during the
period October 8 through December 31, 1996 are as follows:
High Low
---- ---
Common Stock $25 1/4 $15 5/8
Series A Warrants $10 1/2 $ 7 1/8
Series B Warrants $ 6 3/4 $ 6 3/4
As of March 3, 1997 there were 29,181,065 shares of Common Stock,
1,424,875 Series A Warrants, 2,501,697 Series B Warrants, and 3,450,000 Series
C Warrants issued and outstanding. The Company's Transfer Agent and Registrar
is the Bank of New York located at 101 Barclay Street, New York, New York.
Concurrent with the Acquisition transaction, the Company paid a dividend in the
amount of $10.7 million to stockholders of record as of September 18, 1996.
This dividend was distributed through the assignment to Ascent of a $8.9
million promissory note received from Hilton Hotels Corporation and cash of
$1.8 million paid to the minority stockholders. The Company had not paid cash
dividends prior to the transaction, and any payment of such dividends in the
future will depend upon the earnings and financial position of the Company, its
capital needs, and such other factors as the Board of Directors deem
appropriate.
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ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
The financial data set forth below, except hotel, room and installation
backlog data, was derived from the audited consolidated financial statements of
the Company and should be read in connection with the Consolidated Financial
Statements and related Notes included elsewhere herein. References herein are to
the financial statements and footnotes included in Part II, Item 8 "Financial
Statements and Supplementary Data".
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------------
1996(1) 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
INCOME STATEMENT DATA:
Total revenues.................................. $147,469 $102,059 $ 81,609 $ 30,204 $ 8,595
Total direct costs of revenues.................. 71,019 48,417 47,786 12,912 5,461
Total operating expenses........................ 87,770 45,091 27,976 14,955 2,780
Income (loss) from operations................... (11,320) 8,551 5,847 2,337 354
Net income (loss)(3)............................ (14,739) 4,902 3,456 1,358 168
Net income (loss) applicable to nonredeemable
common stock................................. (15,222) 4,261 2,856 1,179 168
Net income (loss per common and equivalent
share........................................ (0.67) 0.22 0.18 0.11 0.03
Shares used in per share calculations (in
thousands).................................. 22,625 19,406 15,822 11,065 6,683
CASH FLOW DATA
Net cash povided by operating activities........ 42,784 41,374 20,051 11,760 3,384
Net cash used in investing activities........... (80,505) (63,693) (64,110) (56,123) (16,128)
Net cash provided by financing activities....... 42,521 14,952 47,285 47,541 9,161
OTHER DATA:
EBITDA (2)...................................... $ 41,960 $ 37,288 $ 23,381 $ 10,517 $ 2,257
Cash dividends per share........................ $ 0.49 -- -- -- --
Rooms served at end of period................... 917,000 361,000 248,000 124,000 37,000
On Demand rooms at period end................. 709,000 361,000 248,000 124,000 37,000
Scheduled rooms at period end................. 208,000 -- -- -- --
Hotels served at end of period.................. 3,144 1,221 751 272 89
Capital expenditures............................ 70,545 63,693 64,110 56,153 16,628
Installation backlog (4)........................ 58,000 113,000 128,000 137,000 27,000
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.................................... $396,538 $211,005 $138,884 $ 92,363 $48,646
Total debt...................................... 98,000 15,942 1,025 1,842 2,634
Redeemable common stock......................... -- 11,684 11,043 10,443 --
Total stockholder's equity...................... 250,917 169,804 108,949 67,817 40,675
- ---------------
(1) 1996 data reflects the acquisition of SpectraVision which was recorded
using the purchase method of accounting as defined by generally
accepted accounting principles. As such, all revenues, expenses and
capital expenditures of SpectraVision for the period October 8 through
December 31, 1996, are included herein. Also included are the room and
hotel counts, installation backlog, and the assets, liabilities and
stockholders equity of SpectraVision at December 31, 1996.
(2) 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
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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 8 and discussed in Item 7
under Liquidity and Capital Resources. See the Consolidated Financial
Statements and the Notes thereto appearing elsewhere in this document
(3) 1996 data also includes $8.7 million of charges which management
believes are one-time in nature which consist of asset write-downs,
reserves, and expense accruals related to the Acquisition and
integration of SpectraVision; re-alignment of the Company's operating
practices; and the establishment of On Command Corporation as a new
public company. Of the non-recurring charges, $6.7 million effected
EBITDA (see note 2). Excluding non-recurring charges, the net loss
applicable to nonredeemable common stock for 1996 would have been $6.5
million, net loss per common and equivalent share would have been
$0.29, and EBITDA would have been $48.7 million.
(4) OCC backlog represents the approximate number of hotel rooms under
contract with OCC which are awaiting installation of OCV systems. The
vast majority of such hotel rooms in the December 31, 1996 backlog
represent SpectraVision system hotel rooms which are to be converted to
OCV systems.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis addresses results of
operations for the calendar years ended December 31, 1996, 1995, and 1994.
CURRENT FINANCIAL CONDITION
On Command Corporation generated improved earnings before
interest, income taxes, depreciation, and amortization (EBITDA) in 1996 of
$42.0 million compared to $37.3 million in 1995, however depreciation and
amortization expense resulting from new installations and the acquisition of
SpectraVision contributed to producing a current year net loss of $14.7 million
compared to net income of $4.9 million in 1995.
On Command Corporation's reported results for 1996 include
charges management believes are non-recurring in nature. These charges,
totaling $8.7 million (includes $2 million which was an adjustment to
depreciation expense) and recorded in the fourth quarter, result from asset
write-downs, reserves, and expense accruals associated with the acquisition and
integration of SpectraVision; the re-alignment of the Company's operating
practices; and the establishment of On Command Corporation as a new public
company. If these non-recurring charges were excluded from 1996 reported
results, the Company would have reported a net loss of $6.0 million and EBITDA
of $48.7 million in 1996.
On Command Corporation grew its business in 1996 through
internal growth and the acquisition of SpectraVision. Total revenues grew by
44.5% to $147.5 million in 1996 compared to $102.1 million in 1995. The
acquisition of SpectraVision was effective on October 8, 1996 and contributed
revenues of $21.4 million from October 8, 1996 to December 31, 1996.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenues increased to $147.5 million in 1996 from $102.1
million in 1995, reflecting an increase of $45.4 million or 44.5%. Movie
revenues increased to $134.4 million in 1996 from $75 million in 1995. The
increase was primarily due to the acquisition of SpectraVision ($21.4 million);
increased net movie revenues
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resulting from an increase in the number of OCV's installed on-demand rooms to
approximately 466,000 in 1996 compared to 361,000 in 1995; and, to a lesser
extent, as a result of selected price increases by OCV. Video system sales
decreased to $13.1 million in 1996 from $22.9 million in 1995, reflecting a
decrease of $9.8 million or 42.8%. The decrease was primarily the result of the
elimination of low margin video system sales to Ascent following Ascent's
contribution to OCV of Ascent's hotel video assets (the "Contribution") pursuant
to the Contribution Agreement (see Note 10 to the consolidated financial
statements). The Contribution also resulted in the elimination of the revenue
from video management services which totaled $4.2 million in 1995.
Movie revenue direct costs increased to $59.6 million in 1996
from $24.1 million in 1995, an increase of $35.5 million or 147%. On an
absolute basis the increase can be attributed to the acquisition of
SpectraVision ($9.9 million ) and increased rooms serviced by OCV. Movie
revenue direct costs as a percentage of movie revenue increased to 44.4% in 1996
from 32.1% in 1995. This increase is due to lower margins in SpectraVision
rooms, increased free-to-guest costs, increased property tax expense and
slightly declining revenue on a per room basis at OCV.
Video system sales direct costs decreased to $11.4 million in
1996 from $20.0 million in 1995, reflecting a decrease of $8.6 million or
43.0%. The decrease is a result of the elimination of video system sales to
Ascent described in Total Revenues above. Direct costs declined slightly as a
percent of video system sales revenue from 87.6% in 1995 to 86.8% in 1996.
Video management services direct costs were zero in 1996 due
to the Contribution as described in Total Revenues above. Video management
services totaled $4.24 million in 1995.
Depreciation and amortization expense increased to $53.3
million in 1996 from $28.7 million in 1995, an increase of $24.6 million or
85.7%. The increase is primarily due to capital investments associated with
installing on-demand service in hotel rooms ($13.4 million), the acquisition of
assets in 1995 from Ascent under the Contribution Agreement ($5.7 million), and
the acquisition of SpectraVision ($5.2 million).
Field service costs increased to $15.9 million in 1996 from
$9.1 million in 1995, an increase of $6.8 million or 74.7%. The increase is
primarily due to the additional labor and material necessary to maintain the
growing volume of installed on-demand equipment, and the acquisition of
SpectraVision ($3.2 million). Field service expenses as a percentage of movie
revenue decreased to 11.8% in 1996 from 12.1% in 1995 as a result of operating
efficiencies from the larger installed base of rooms and greater management
focus.
Research and development expenses increased to $4.6 million in
1996 from $2.6 million in 1995, an increase of $2.0 million or 76.9%. The
increase is a result of the Company's continued commitment to maintain and
enhance current products, develop new products, and create commonality with
SpectraVision's video systems.
Selling, general, and administrative expenses increased to
$14.0 million in 1996 from $3.1 million in 1995, an increase of $10.9 million.
The increase is primarily due to higher levels of business activity; increased
facility costs resulting from the addition of the former SpectraVision
headquarters in Richardson, Texas; non-recurring costs including transaction
and integration costs associated with the acquisition of SpectraVision,
employee relocation and severance costs (including former SpectraVision
employees), and the relocation of Company headquarters to San Jose, California.
Non-recurring costs account for approximately $3.2 million of the increase.
Interest expense increased to $3.3 million in 1996 from
$413,000 in 1995, an increase of $2.9 million. 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 decreased to $174,000 in 1996 from
$3.3 million in 1995, a decrease of $3.1 million or 93.9%. The decrease is
primarily due to the current year loss offset by higher foreign taxes resulting
from the acquisition of SpectraVision. The Company has not recorded a tax
benefit in 1996 from the net operating losses generated in that year because it
has established a valuation allowance against its otherwise recognizable net
deferred tax asset at December 31, 1996 due to the uncertainty surrounding the
realizability of these benefits in future tax returns.
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Redeemable common stock accretion decreased to $483,000 in 1996
from $641,000 in 1995, reflecting a decrease of $158,000 or 24.6%. Concurrent
with the Merger and Acquisition, the Redeemable Common Stock was converted to
common stock of the Company. Therefore, accretion was recorded for a partial
year in 1996 compared to a full year in 1995.
EBITDA increased to $42.0 million in 1996 from $37.3 million in
1995, reflecting an increase of $4.7 million or 12.6%. EBITDA, as a percentage
of total revenue, decreased to 28.5% in 1996 from 36.5% in 1995. Eliminating
non-recurring adjustments, EBITDA totaled $48.7 million in 1996 or 33% of total
revenues. The reduced percentage is primarily due to the higher operating costs
currently associated with the SpectraVision business, higher free-to-guest
costs, and higher administrative expense necessary to operate as a public
company.
Net income (loss) decreased to a net loss of $14.7 million in
1996 from net income of $4.9 million in 1995 due to the factors described above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues increased by $20.5 million or 25.1% to $102.1
million in 1995, as compared to total net revenues of $81.6 million in 1994,
primarily as a result of net movie revenues from 361,000 installed on-demand
rooms as of December 31, 1995, compared to 248,000 such rooms as of December
31, 1994. This increase in net movie revenues was partially offset by the
elimination of video systems sales and video management services to Ascent in
the August through December, 1995 period. Video system sales and video
management services to Ascent totaled approximately $18.9 million and $28.1
million in 1995 and 1994, respectively.
Total direct cost of revenues was $48.4 million or 47.4% of
total net revenues in 1995, compared to $47.8 million, or 58.6% of total net
revenues in 1994. This percentage decrease resulted from a reduction in film
share expense from 13.7% of net movie revenues in 1994 to 11.7% in 1995 and
from the elimination of low margin video system sales and video management
services to Ascent in the August through December, 1995 period.
Depreciation and amortization expense was $28.7 million or
38.3% of net movie revenues in 1995, compared to depreciation and amortization
of $17.5 million, or 38.2% of net movie revenues, for the comparable period in
1994. This increase in depreciation and amortization is attributable to the
capital investment associated with installing on-demand service in additional
hotel rooms combined with the depreciation and amortization resulting from the
contribution by Ascent (see Note 10 to the Consolidated Financial Statements).
Field service costs, which consist primarily of labor and
material expense required to maintain the existing on-demand equipment, were
$9.1 million in 1995, or 12.1% of net movie revenue compared to $5.3 million or
11.5% of net movie revenue for the same period in 1994. This increase in field
service expense was broad based and included increases in personnel, travel,
facility, and spare equipment purchase and repair costs.
Research and development expenses in 1995 were $2.6 million
as compared to $1.8 million for the 1994 period, as OCV continued its efforts
to be competitive through continued investment in the development of new
products, as well as new features for existing products. The increase across
the periods was attributable to an increase in the costs associated with
executing these efforts, primarily an increase in personnel costs of $700,000.
Selling, general, and administrative expenses decreased to
$3.1 million in 1995, as compared to $3.4 million in 1994, primarily due to
reduced legal expenses in 1995.
Settlement of litigation expense of $1.5 million was recorded
in 1995 resulting from a charge of wrongful termination of a former employee of
OCV.
Interest expense increased to $413,000 in 1995, as compared to
$256,000 for the comparable 1994 period. This is the result of OCV obtaining
debt financing from Ascent in the latter half of 1995 to finance OCV's
continuing expansion of its installed customer base, in contrast to the
comparable period in 1994 when equity financing was used in lieu of debt.
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Provision for income taxes increased to $3.3 million in 1995
from $2.3 million in 1994, an increase of $1.0 million or 43.5%. The increase
was primarily due to increased earnings.
Redeemable common stock accretion increased to $641,000 in
1995 from $600,000 in 1994, reflecting an increase of $41,000 or 6.8%. The
price at which the shares can be put to the company escalates based upon the
average one year U.S. Treasure Bill rate compounded annually. As such, the
amount of accretion recorded by the Company fluctuates based upon the movement
of interest rates. (See Note 10 to the Consolidated Financial Statements.)
EBIDTA increased to $37.3 million in 1995 from $23.4 million
in 1994 or an increase of 59.4%. As a percent of revenue, EBITDA increased from
28.7% in 1994 to 36.5% in 1995. The major factor in this improvement was the
reduction in direct cost percentage, explained above.
Net Income increased to $4.9 million in 1995 from $3.5 million
in 1994 due to the factors described above.
SEASONALITY
The Company's business is expected to be seasonal with higher
revenues realized during the summer months and lower revenues realized during
the winter months. This seasonality reflects recognized business and vacation
travel patterns.
LIQUIDITY AND CAPITAL RESOURCES
In 1995, OCV entered into a promissory note agreement with
Ascent to supplement OCV's ongoing financing needs. At December 31, 1995,
borrowings under the note payable were $15.7 million. In connection with the
Merger and Acquisition transaction, the promissory note was repaid in October
1996.
The primary sources of cash during 1996 were cash from
operations of $42.8 million consisting primarily of a net loss of $14.7 million
offset by $53.3 million in depreciation and amortization, short-term borrowings
from Ascent of $22.5 million, and $97.6 million of borrowings under a $125
million bank revolving credit facility. Primary expenditures of cash included
capital expenditures of $70.5 million for the installation of on-demand
systems, cash expended for the acquisition of SpectraVision of $49.6 million
including repayment of debt assumed in the transaction, and $38.5 million
repayment of borrowings from Ascent.
REVOLVING CREDIT FACILITY
In conjunction with the acquisition of SpectraVision, On
Command Corporation entered into a $125 million credit facility (the "OCC
Credit Facility") with NationsBank of Texas, N.A. ("NationsBank"). The OCC
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 under the five year
facility will reduce the amount available under the 364-day facility. On March
23, 1997 the OCC Credit Facility was increased to $150 million. (See Note 14
to Consolidated Financial Statements.)
The OCC Credit Facility contains customary covenants and
agreements, including, among other things, compliance by On Command Corporation
with certain financial covenants. At December 31, 1996, OCC was in compliance
with these covenants. The OCC Credit Facility also limits OCC's ability to incur
additional indebtedness and pay dividends, but does not preclude OCC from paying
cash dividends on its common stock.
Revolving loans extended under the OCC Credit Facility
generally will bear interest at either the London InterBank Offering Rate
("LIBOR") plus a spread that may range from 0.375% to 0.625% depending upon On
Command Corporation's consolidated ratio of total debt to EBITDA (calculated in
accordance with the OCC Credit Facility) or the greater of the prime rate or the
federal funds rate plus 0.50%. Upon the closing of the SpectraVision
acquisition, OCC borrowed $92.0 million under its credit facility to (i) pay off
debt obligations of SpectraVision of approximately $40.0 million, (ii) pay off
intercompany obligations of OCV to Ascent and other OCC obligations of
approximately $43.6 million, and (iii) to pay certain administrative claims and
other bankruptcy costs of
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SpectraVision and its affiliated debtors of approximately $8.4 million. As a
result of the March 23, 1997 amendment to the OCC Credit Facility, and the
borrowings outstanding, as of March 23, 1997, OCC had $47 million available,
subject to certain covenant restrictions, under the OCC Credit Facility.
On Command Corporation's principal cash requirements are
expected to include continued installation of on-demand systems including
installations for new customers and the upgrade of hotels currently under
contract and receiving only scheduled service. These installations and
upgrades will be completed as cash is available.
LIMITATIONS ON ADDITIONAL DEBT FINANCING
On Command Corporation and Ascent entered into a Corporate
Agreement (the "Corporate Agreement"), pursuant to which OCC has agreed with
Ascent not to incur any indebtedness without Ascent's prior consent, other than
indebtedness under the OCC Credit Facility, and indebtedness incurred in the
ordinary course of operations which together shall not exceed $100 million in
the aggregate; provided that not more than $50 million of such indebtedness may
constitute long-term debt. In addition, pursuant to an agreement between
Ascent and COMSAT (the "COMSAT Agreement"), Ascent has agreed not to incur any
indebtedness, other than under Ascent's existing credit facility (and
refinancings thereof) and indebtedness incurred in the ordinary course of
business, which together shall not exceed $175 million in the aggregate,
without COMSAT's consent. In contemplation of the closing of the Merger and
the Acquisition, COMSAT consented to permit Ascent to incur consolidated
indebtedness (including indebtedness of OCC) of up to $216 million in the
aggregate provided that: (i) no more than $50 million of such indebtedness may
constitute long-term debt; and (ii) indebtness in excess of $175 million could
only be incurred to satisfy funding requirements for 1996. At that time,
COMSAT also consented to Ascent entering into a new credit facility with
aggregate available borrowings of up to $200 million, and OCC entering into a
$125 million credit facility, as discussed above.
In November 1996, COMSAT consented to increase the limitation
on consolidated indebtedness which Ascent may incur pursuant to the COMSAT
Agreement to $236 million; provided that: (i) no more than $50 million of such
indebtedness may constitute long term debt; and (ii) indebtedness in excess of
Ascent's indebtedness existing at December 31, 1996 may only be used to satisfy
Ascent's consolidated funding requirements through June 30, 1997, as approved by
the Ascent Board of Directors.
A primary purpose of both the Corporate Agreement and the
COMSAT Agreement is to require Ascent and On Command Corporation to coordinate
their capital requirements with COMSAT so that COMSAT can monitor its compliance
with the regulations of the Federal Communications Commission (FCC) applicable
to the capital structure and debt financing activities of COMSAT and its
consolidated subsidiaries. COMSAT is required to submit a financial plan to the
FCC for review annually. Under the existing FCC guidelines, COMSAT is subject
to a limit of $200 million in short-term debt, a maximum long-term debt to total
capital ratio of 45%, and interest coverage ratio of not less than 2.3 to 1.
The latter two guidelines are measured at year end. In October 1996, the FCC
approved a temporary decrease in the interest coverage ratio of 1.9 to 1.0, and
an increase in the short-term debt limit to $325 million for the 1996 plan year
and until the FCC acts on COMSAT's 1997 capital plan. COMSAT has informed OCC
that COMSAT was in compliance with the FCC guidelines, as modified, at December
31, 1996.
As part of Ascent's 1997 operating and capital planning process, Ascent
management requested that COMSAT increase its debt limit beginning in January
1997, which resulted in the increase described herein. On March 21, 1997,
COMSAT consented to increase the limitation on aggregate consolidated
indebtedness which Ascent may incur pursuant to the COMSAT Agreement to $270.0
million for the remainder of 1997; provided that (i) no more than $50 million of
such indebtedness may constitute long term debt; and (ii) indebtedness
subordinated to indebtedness under Ascent's existing credit facility could only
be incurred on terms which did not adversely affect COMSAT's proposed tax-free
distribution of its interest in Ascent to COMSAT stockholders. In connection
with COMSAT's consent under the COMSAT Agreement, Ascent consented under the OCC
Corporate Agreement to increase OCC's limitation on indebtedness to a total of
not more than $116 million by June 30, 1997 and not more than $130 million by
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 in the OCC Credit Facility,
with any amendments to such covenants subject to the written consent of Ascent.
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A number of factors could cause the funding requirements of OCC to
differ materially from those projected, including, but not limited to, the
performance of the OCV and SpectraVision business, unanticipated costs
associated with the integration of SpectraVision's and OCV's businesses, and
general market conditions.
Finally on October 18, 1996 COMSAT announced that it intends to divest
its 80.67 percent ownership interest in Ascent through a sale, spin-off or
other transaction. COMSAT has engaged Morgan Stanley & Co. Incorporated to act
as its financial advisor for the divestiture. On March 24, 1997, COMSAT
announced that in January 1997 it had filed for a ruling with the Internal
Revenue Service to allow the spin-off of Ascent as a tax-free dividend to its
shareholders, and that it expects to receive the ruling by May 1997. Pending
the ruling, COMSAT will continue efforts to identify a purchaser for its
interest in Ascent.
FOREIGN EXCHANGE
On Command Corporation believes the risks of foreign exchange
rate fluctuations on its present operations are not material to the Company's
overall financial condition. However, should the Company's international
operations continue to grow, OCC will consider using foreign currency
contracts, swap arrangements, or other financial instruments designed to limit
exposure to foreign exchange rate fluctuations.
INTEREST RATES AND INFLATION
Fluctuations in interest rates and inflation have not had a
material effect on the operations of On Command Corporation to date. However,
if management believes the direction of future interest rates pose a
significant risk to the operations of the Company, it will consider using
interest rate contracts, swap arrangements, or other financial instruments
designed to limit exposure to interest rate fluctuations.
BUSINESS RISKS
CONTROL BY ASCENT
Ascent owned approximately 57.2% of the outstanding OCC Common Stock
at December 31, 1996. Accordingly, Ascent will have the ability to control the
management and policies of On Command Corporation and the outcome of matters
submitted to the stockholders for approval, including the election of
directors. In turn, COMSAT owns 80.7% of Ascent outstanding Common Stock.
RESTRICTIONS ON DEBT FINANCINGS
Pursuant to the Corporate Agreement entered into between Ascent and On
Command Corporation, On Command Corporation has agreed, among other things, not
to incur any indebtedness without Ascent's prior written consent, other than
indebtedness under the OCC Credit Facility entered into by On Command
Corporation in connection with the Transactions and indebtedness incurred in the
ordinary course of operations, which together shall not exceed $100 million in
the aggregate. Restrictions on On Command Corporation's ability to incur
additional debt could adversely affect On Command Corporation's plans for
growth, its ability to develop new products and technologies and its ability to
meet its liquidity needs. In addition, pursuant to the COMSAT Agreement between
Ascent and COMSAT, Ascent has agreed not to incur any indebtedness, other than
under Ascent's existing credit facility (and refinancings thereof) and
indebtedness incurred in the ordinary course of business, which together shall
not exceed $175 million in the aggregate, without COMSAT's consent. In March
1997, COMSAT consented to increase the limitation on Ascent's consolidated
indebtedness to $270 million through December 31, 1997; provided that (i) no
more than $50 million of such indebtedness may constitute long term debt; and
(ii) indebtedness subordinated to indebtedness under Ascent's existing credit
facility could only be incurred on terms which did not adversely affect COMSAT's
proposed tax-free distribution of its interest in Ascent to COMSAT stockholders.
In connection with COMSAT's consent under the COMSAT Agreement, Ascent consented
under the Corporate Agreement to increase OCC's limitation of 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. A number of
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factors could cause the funding requirements of COMSAT, Ascent and On Command
Corporation to differ materially from those projected, including, but not
limited to, the performance of their respective operating subsidiaries,
unanticipated costs associated with the consummation of the Acquisition and
integration of SpectraVision's and OCV's businesses and market conditions. In
the event that On Command requires additional debt to service its existing
business or to support growth, there can be no assurance, however, that COMSAT
will approve any increase in Ascent's or OCC's debt limits. If On Command
Corporation's debt limit were not increased, On Command Corporation may be
required to reduce or reschedule planned capital investments, reduce cash
outlays, reduce debt, sell assets or sell equity. Finally, COMSAT has informed
Ascent that if COMSAT were to fail to satisfy one or more of the FCC guidelines
as of an applicable measurement date, COMSAT would be required to seek advance
FCC approval of future financing activities on a case by case basis. If such
approval were not granted, On Command Corporation could be required to reduce or
reschedule planned capital investments, reduce cash outlays, reduce debt or sell
assets.
DEPENDENCE ON ADDITIONAL CAPITAL FOR GROWTH
The growth of On Command Corporation's business requires substantial
investment on a continuing basis to finance capital expenditures and related
expenses. Historically, OCV has relied on capital provided by Ascent and cash
flow from operations to finance its growth. However, Ascent is not obligated
to provide any additional capital or debt financing to OCV or On Command
Corporation after the closing of the Transactions. On Command Corporation
intends to use cash flow from operations and additional borrowings (subject to
the limitations discussed under "Restrictions on Debt Financings") to support
its growth. Whether or when On Command Corporation can achieve cash flow
levels sufficient to support its anticipated growth cannot be accurately
predicted. Unless such cash flow levels are achieved, On Command Corporation
may require additional borrowings or the sale of debt or equity securities
(subject to the limitations described under "Restrictions on Debt Financings"),
or some combination thereof, to provide funding for growth or, alternatively,
may have to reduce growth to a level that can be supported by internally
generated cash flow. On Command Corporation can give no assurances with
respect to the impact on the results of operations and financial condition if
On Command Corporation is required to reduce growth to a level that can be
supported by internally generated cash flow.
INTEGRATION OF OCV AND SPECTRAVISION BUSINESSES
The integration of the OCV and SpectraVision businesses will require
the coordination of operating systems, financial reporting, sales, marketing
and management. This will require substantial attention from the management of
On Command Corporation, throughout 1997 and potentially beyond, particularly in
light of SpectraVision's status prior to the Acquisition as an entity operating
under the protection of Chapter 11 of the U.S. Bankruptcy Code. In addition,
successfully integrating the businesses of OCV and SpectraVision may require
additional capital. See "Dependence on Additional Capital for Growth." There
can be no assurance that the businesses of OCV and SpectraVision can be
successfully integrated. The inability to successfully integrate the
businesses of OCV and SpectraVision could have a material adverse effect on the
financial condition or results of operations of On Command Corporation.
THINLY TRADED STOCK IN THE PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
As approximately 42.8% of the outstanding On Command Common Stock, is
traded on the Nasdaq National Market as of March 3, 1997, the public market for
the OCC Common Stock and the On Command Corporation Warrants may not be subject
to an active public market which can be sustained. Further, the stock markets
may experience volatility that affects the market prices of companies in ways
unrelated to the operating performance of such companies. These market
fluctuations may adversely affect the market price of the OCC Common Stock or
Warrants.
HIGHLY COMPETITIVE IN-ROOM ENTERTAINMENT INDUSTRY
The hotel in-room entertainment industry is highly competitive. Due
to the high level of penetration in the United States lodging industry already
achieved by participants in the in-room entertainment industry and the low rate
of construction and expansion of hotel properties in the United States, most of
the growth opportunities in the in-room entertainment industry currently
involve securing contracts to serve hotels that are already being served by a
competing vendor, expanding internationally and broadening the range of
services provided. These circumstances have led to increasing competition for
contract renewals, particularly at hotels operated by major hotel chains.
There can be no assurance that On Command Corporation will obtain new contracts
with hotels currently served by other vendors or that On Command Corporation
will be able to retain contracts with the hotels served by OCV and
SpectraVision when
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those contracts expire. The loss by On Command Corporation of one or
more of the major hotel chain customers, such as Marriott, Hyatt, Holiday Inn
or Hilton, could have a material adverse impact on On Command Corporation's
results of operations. See "--Dependence on Significant Customers." In
addition, there are a number of potential competitors that could utilize their
existing infrastructure to provide in-room entertainment to the lodging
industry, including cable companies (including wireless cable),
telecommunications companies, and direct-to-home and direct broadcast satellite
companies. Some of these potential competitors already are providing
free-to-guest services to hotels and testing video-on-demand. Some of these
potential competitors have substantially greater resources than On Command
Corporation.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
Marriott, Hilton and Holiday Inn accounted for approximately 25%, 13%
and 14%, respectively, of On Command Corporation's revenues for the year ended
December 31, 1996. The loss of any of these customers, or the loss of a
significant number of other hotel chain customers, could have a material adverse
effect on On Command Corporation's results of operations or financial condition.
However, these customers represent both chain-owned/managed hotels, as well as
franchisees. The Company often has different contracts on different terms with
the chain-owned/managed hotels, on the one hand, and with the franchisees (or
groups of franchisees), on the other.
DEPENDENCE ON PERFORMANCE OF LODGING INDUSTRY
The business of each of On Command is closely linked to the
performance of the hotel industry which has been at a recent nearly all-time
high. Declines in hotel occupancy as a result of general business, economic,
seasonal and other factors can have a significant adverse impact on On Command
Corporation's results of operations.
RISK OF TECHNOLOGICAL OBSOLESCENCE
Technology in the entertainment and communications industry is
continuously changing as new technologies and developments continue to be
introduced. There can be no assurance that future technological advances will
not result in improved equipment or software systems that could adversely
affect On Command Corporation's competitive position. In order to remain
competitive, On Command Corporation must maintain the programming enhancements,
engineering and technical capability and flexibility to respond to customer
demands for new or improved versions of its systems and new technological
developments, and there can be no assurance that On Command Corporation will
have the financial or technological resources to be successful in doing so.
DEPENDENCE ON KEY PERSONNEL
On Command Corporation's success will be dependent upon the
contributions of its executive officers, especially Robert M. Kavner, its
President and Chief Executive Officer, Brian A.C. Steel, its Executive Vice
President, Chief Financial Officer and Chief Operating Officer, and Robert
Snyder, its Vice Chairman. The loss of the services of such executive officers
could have a material adverse effect on On Command Corporation. On Command
Corporation's success also depends on its continued ability to attract and
retain highly skilled and qualified personnel. There can be no assurance that
On Command Corporation or its subsidiaries will be successful in attracting and
retaining such personnel. Messrs. Kavner and Steel have entered into
employment agreements with On Command Corporation, and Mr. Snyder has entered
into an employment agreement with OCV.
SEASONALITY
The business of On Command Corporation is seasonal, with higher
revenues per room realized during the summer months and lower revenues per room
realized during the winter months due to business and vacation travel patterns.
ANTI-TAKEOVER PROTECTIONS
Following the consummation of the SpectraVision acquisition, Ascent
owns approximately 57.2% of the OCC Common Stock and before giving effect to any
Reserved Stock and the exercise of any Warrants. Accordingly, On Command
Corporation will not be able to engage in any strategic transactions without the
approval of Ascent.
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Even if Ascent's interest in On Command Corporation were reduced below such
level, On Command Corporation's Certificate of Incorporation contains certain
provisions that could make it more difficult for a third party to acquire, or
discourage a third party from attempting to acquire, control of On Command
Corporation. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of OCC Common Stock. Certain of such
provisions allow On Command Corporation to issue preferred stock with rights
senior to those of the OCC Common Stock and impose various procedural and other
requirements which could make it more difficult for stockholders to effect
certain corporate actions.
SATELLITE REPLACEMENT
The Company has an agreement with Hughes Network Systems for
transponder capacity on a GE Americom Communications satellite which delivers
SpectraVision programming services to 810 hotels. (The company previously
serviced approximately 950 hotels via a satellite transmission service.
One-hundred and forty (140) of those hotels are now served by terrestrial-based
technology.) Satellite service is expected to expire in July 1997, at which
time the Company anticipates providing programming service to such hotels via
terrestrial-based systems or alternative satellite service. However, there can
be no assurance that the Company will have the capital to provide for such
transition, or will be able to find such alternative satellite capacity, or that
any transition to alternative terrestrial-based technology will be successful.
PROGRAMMING
The cost to the Company to license feature movies from major
movie studios is subject to change as the major movie studios continue to
negotiate for higher royalty rates as well as higher minimum payments by the
Company. Such changes may have adverse impacts on the Company's earnings. In
addition the Company has, and may continue, to experience a decline in the
buy-rate for independent movies for mature audiences.
While the Company intends to address such trends, there can be no assurance that
the Company's efforts will prove effective.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31, 1996,
1995, and 1994
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995, and 1994
Notes to the Consolidated Financial Statements
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of On Command Corporation:
We have audited the accompanying consolidated balance sheets of On Command
Corporation (a majority-owned subsidiary of Ascent Entertainment Group, Inc.)
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a)(2). These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of On Command Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE L.L.P.
San Jose, California
January 27, 1997
(March 27, 1997 as to Note 14)
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ON COMMAND CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 (in thousands, except par value amounts)
- -------------------------------------------------------------------------------
ASSETS 1996 1995
CURRENT ASSETS:
Cash and cash equivalents $ 5,733 $ 956
Accounts receivable (less allowances for doubtful accounts of $629 in 1996
and $100 in 1995) 25,328 9,853
Other current assets 4,283 831
Deferred income taxes 1,593 1,163
-------- --------
Total current assets 36,937 12,803
VIDEO SYSTEMS, Net 250,600 188,910
PROPERTY AND EQUIPMENT, Net 11,037 2,971
GOODWILL, Net 89,503 --
OTHER ASSETS, Net 8,461 6,321
-------- --------
TOTAL $396,538 $211,005
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 16,823 $ 6,187
Accounts payable to stockholder 21 206
Accrued compensation 4,931 1,726
Other accrued liabilities 7,557 740
Income taxes payable 5,692 1,813
Other taxes payable 8,807 --
Deferred revenues 232 803
Current portion of revolving credit facility 48,000 --
Current portion of stockholders' ??? payable -- 15,942
-------- --------
Total current liabilities 92,063 27,417
OTHER ACCRUED LIABILITIES 1,700 1,841
LONG-TERM PORTION OF REVOLVING CREDIT FACILITY 50,000 --
DEFERRED INCOME TAXES 1,858 259
-------- --------
Total liabilities 145,621 29,517
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE COMMON STOCK, $.01 par value; shares issued and
outstanding: none in 1996 and 1,166 in 1995 -- 11,684
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; shares authorized - 10,000; none outstanding -- --
Common stock, $0.01 par value; shares authorized - 50,000 in 1996 and
25,560 in 1995; shares issued and outstanding, 29,087 in 1996 and 20,669 in 1995;
shares subscribed - 960 in 1996 and none in 1995 300 207
Additional paid-in capital 249,164 165,521
Common stock warrants 31,450 840
Cumulative translation adjustments (260) --
Retained earnings (deficit) (29,737) 3,236
-------- --------
Total stockholders' equity 250,917 169,804
-------- --------
TOTAL $396,538 $211,005
======== ========
See notes to consolidated financial statements.
24
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ON COMMAND CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(in thousands, except PER SHARE amounts)
- -------------------------------------------------------------------------------
1996 1995 1994
REVENUE:
Movie revenues .................................................. $134,351 $ 75,009 $45,931
Video system sales............................................... 13,118 22,852 31,698
Video management services ..................................... -- 4,198 3,980
-------- -------- -------
Total revenues (see Note 10 for related party revenues).... 147,469 102,059 81,609
-------- -------- -------
DIRECT COSTS OF REVENUES:
Movie revenues................................................... 59,628 24,052 16,593
Video systems sales.............................................. 11,391 20,015 27,600
Video management services........................................ -- 4,350 3,593
-------- -------- -------
Total direct costs of revenues............................. 71,019 48,417 47,786
-------- -------- -------
OPERATING EXPENSES:
Depreciation and amortization.................................... 53,280 28,737 17,534
Field service.................................................... 15,870 9,054 5,274
Research and development......................................... 4,628 2,642 1,771
Marketing, general and administrative............................ 13,992 3,118 3,397
Settlement of litigation......................................... -- 1,540 --
-------- -------- -------
Total operating expenses................................... 87,770 45,091 27,976
-------- -------- -------
INCOME (LOSS) FROM OPERATIONS..................................... (11,320) 8,551 5,847
INTEREST INCOME................................................... 104 61 178
INTEREST EXPENSE.................................................. (3,349) (413) (256)
-------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES................................. (14,565) 8,199 5,769
PROVISION FOR INCOME TAXES........................................ 174 3,297 2,313
------- ------- -------
NET INCOME (LOSS)................................................. (14,739) 4,902 3,456
REDEEMABLE COMMON STOCK ACCRETION................................. (483) (641) (600)
-------- -------- -------
NET INCOME (LOSS) APPLICABLE TO NONREDEEMABLE
COMMON STOCK.................................................... $(15,222) $ 4,261 $ 2,856
======== ======== =======
NET INCOME (LOSS) PER COMMON AND EQUIVALENT
SHARE........................................................... $ (0.67) $ 0.22 $ 0.18
======== ======== =======
SHARES USED IN PER SHARE COMPUTATIONS............................. 22,625 19,406 15,822
======= ======== =======
See notes to consolidated financial statements.
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ON COMMAND CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (In thousands)
- --------------------------------------------------------------------------------
Common Stock Additional Common Cumulative Retained Total
--------------- Paid-In Stock Translations Earnings Stockholders'
Shares Amount Capital Warrants Adjustments (Deficit) Equity
BALANCES, January 1, 1994 12,099 $121 $ 70,737 $ 840 $ - $ (3,881) $ 67,817
Sale of common stock to investors 3,053 30 37,470 37,500
Exercise of stock options 174 2 600 602
Income tax benefit of stock option
transactions 174 174
Accretion of redeemable common stock (600) (600)
Net income 3,456 3,456
------ ---- -------- -------- ----- -------- --------
BALANCES, December 31, 1994 15,326 153 108,981 840 - (1,025) 108,949
Common stock issued in connection with
contribution agreement with
Comsat (see Note 10) 5,337 53 56,486 56,539
Exercise of stock options 6 1 34 35
Income tax benefit of stock option
transactions 20 20
Accretion of redeemable common stock (641) (641)
Net income 4,902 4,902
------ ---- -------- -------- ----- -------- --------
BALANCES, December 31, 1995 20,669 207 165,521 840 - 3,236 169,804
Issuance of common stock and
warrants in connection with
the acquisition of SpectraVision 8,250 82 57,627 24,353 82,062
Exercise of stock options and
warrants 1,298 13 12,319 (840) 11,492
Income tax benefit of stock option
transactions 143 143
Dividends 7,097 (17,751) (10,654)
Accretion of redeemable common stock (483) (483)
Conversion of redeemable common stock 1,166 11 12,156 12,167
Cancellation of common stock issued
and additional contribution
of assets by Comsat (see Note 10) (1,336) (13) 1,398 1,385
Translation adjustments (260) (260)
Net loss (14,739) (14,739)
------ ---- -------- -------- ----- -------- --------
BALANCES, December 31, 1996 30,047 $300 $249,164 $31,450 $(260) $(29,737) $250,917
====== ==== ======== ======== ===== ======== ========
See notes to consolidated financial statements
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ON COMMAND CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
- -------------------------------------------------------------------------------
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(14,739) $ 4,902 $ 3,456
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 53,280 28,737 17,534
Deferred income taxes, net 195 4,506 (383)
Loss on disposal of fixed assets 64 232 -
Changes in assets and liabilities net of effects from acquired operations:
Accounts receivable (962) 3,959 (2,711)
Accounts receivable from stockholder - 4,500 (3,100)
Other current assets (1,024) (499) (192)
Accounts payable (5,542) (3,235) 482
Accounts payable to stockholder (185) (2,900) 4,000
Accrued compensation 1,950 (355) 838
Other accrued liabilities (2,771) 159 1,054
Income taxes payable 4,282 1,746 (1,120)
Other taxes payable 8,807 - -
Deferred revenue (571) (378) 193
-------- -------- --------
Net cash provided by operating activities 42,784 41,374 20,051
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid in acquisition of SpectraVision (9,572) - -
Capital expenditures (70,545) (63,693) (64,110)
Proceeds from sale of property and equipment 46 - -
Other assets (434) - -
-------- -------- --------
Net cash used in investing activities (80,505) (63,693) (64,110)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stockholders' notes payable 22,526 15,734 -
Proceeds from revolving credit facility 97,625 - -
Payment of SpectraVision debt (40,000) - -
Principal payments on stockholders' notes payable (38,468) (817) (817)
Proceeds from issuance of common stock 2,587 35 38,102
Collection of note receivable from stockholder - - 10,000
Dividends paid (1,749) - -
-------- -------- --------
Net cash provided by financing activities 42,521 14,952 47,285
-------- -------- --------
Effect of exchange rate changes on cash (23) - -
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,777 (7,367) 3,226
CASH AND CASH EQUIVALENTS, Beginning of year 956 8,323 5,097
-------- -------- --------
CASH AND CASH EQUIVALENTS, End of year $ 5,733 $ 956 $ 8,323
======== ======== ========
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes $ - $ 1,426 $ 3,762
======== ======== ========
Cash paid for interest $ 2,702 $ 413 $ 256
======== ======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Net assets acquired from contribution agreement with Comsat $ 1,385 $ 56,539 $ -
======== ======== ========
Common stock issued for note receivable $ 8,905 $ - $ -
======== ======== ========
Dividends paid through issuance of note and common stock warrants $ 16,002 $ - $ -
======== ======== ========
Acquisition of SpectraVision:
Fair value of assets acquired (including intangibles of $92,636) $158,916 $ - $ -
Liabilities assumed (67,282) - -
Acquisition costs paid (5,829) - -
Net cash paid (3,743) - -
-------- -------- --------
Common stock and warrants issued $ 82,062 $ - $ -
======== ======== ========
See notes to consolidated financial statements.
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ON COMMAND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
On Command Corporation (the "Company" or "OCC") is a Delaware
corporation formed by Ascent Entertainment Group, Inc. ("Ascent") for
the purpose of effecting (i) the merger (the "Merger") of On Command
Video Corporation ("OCV"), a majority-owned subsidiary of Ascent, with
a wholly-owned subsidiary of OCC, after which OCV became a
wholly-owned subsidiary of OCC, and (ii) the acquisition (the
"Acquisition") of Spectradyne, Inc., a wholly-owned subsidiary of
SpectraVision, Inc. ("Oldco"). Following the Acquisition,
Spectradyne, Inc. changed its name to SpectraVision, Inc.
("SpectraVision"). Ascent is a majority-owned subsidiary of Comsat
Corporation ("Comsat"). Effective October 8, 1996, the Merger and
Acquisition were consummated. The Merger has been accounted for using
the historical book value of the assets, liabilities and stockholders'
equity acquired from OCV in a manner similar to a pooling of interests
and the Acquisition was accounted for as a purchase using the fair
value of the assets acquired and liabilities assumed from Oldco.
Accordingly, the consolidated financial statements of the Company
include the historical statements of financial position and the
results of operations and cash flows of OCV as well as the acquired
operations of SpectraVision subsequent to the date of 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.)
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business - The Company designs, develops,
manufactures and installs proprietary video systems. OCV's video
system is a patented video selection and distribution system that
allows hotel guests to select motion pictures on computer-controlled
television sets located in their hotel rooms at any time. The Company
also provides in-room viewing of free-to-guest programming of select
cable channels and other interactive services under long-term
contracts to hotels and businesses. The Company has operating
subsidiaries in the United States, Canada, Mexico, Hong Kong,
Singapore, Thailand and Australia. All significant intercompany
accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
debt instruments, with insignificant interest rate risk, acquired with
an original maturity of less than three months to be cash equivalents.
Cash equivalents, consisting primarily of municipal obligations, money
market funds, certificates of deposit and bank savings accounts, are
stated at amortized cost which approximates market.
VIDEO SYSTEMS, PROPERTY AND EQUIPMENT - Video systems and property and
equipment are stated at cost less accumulated depreciation and
amortization. Installed video systems consist of equipment and
related costs of installation at hotel locations. Construction in
progress consists of purchased and manufactured parts of partially
constructed video systems. Depreciation and amortization are provided
using the straight-line method over the shorter of the estimated
useful lives, generally three to twenty years, or lease terms.
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31
Effective October 1, 1994, the Company changed the estimated useful
life of certain installed video systems costs from five years to the
term of the contract, generally five to seven years. The effect in
1994 from this change in estimate was to increase net income and net
income per common and equivalent share by approximately $420,000 and
$.03, respectively.
OTHER ASSETS - Other assets consist primarily of payments made to
customers as inducements for them to enter into contracts with the
Company for the installation of pay-per-view video systems. These
assets are amortized on a straight-line basis over the term of the
contracts, five to seven years. Additionally, other assets include an
investment of $1,265,000 in MagiNet Corporation accounted for at cost,
as well as approximately $2,000,000 at December 31, 1996 for
technology acquired in the SpectraVision Acquisition (amortized on a
straight-line basis over five years).
GOODWILL - Goodwill resulted from the SpectraVision Acquisition, as
described in Note 3, and represents the excess of the aggregate
purchase price over the fair value of net assets acquired. The goodwill
is being amortized over 20 years using the straight-line method.
Amortization expense for 1996 was $1,133,000.
EVALUATION OF LONG-LIVED ASSETS - The Company evaluates the potential
impairment of long-lived assets and long-lived assets to be disposed
of in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" (SFAS No. 121). SFAS No. 121
establishes procedures for review of recoverability, and measurement
of impairment if necessary, of long-lived assets and certain
identifiable intangibles held and used by an entity. SFAS No. 121
requires that those assets be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an
asset may not be fully recoverable. SFAS No. 121 also requires that
long-lived assets and certain identifiable intangibles to be disposed
of be reported at the lower of carrying amount or fair value less
estimated selling costs. As of January 1, 1996 and December 31, 1996,
management believes that there was not any impairment of the Company's
long-lived assets or other identifiable intangibles.
REVENUE RECOGNITION - The Company installs pay-per-view video systems
in hotels, generally under five- to seven-year agreements, whereby it
recognizes revenues at the time of viewing. Revenue from the sale of
video systems is recognized when the equipment is shipped, except for
systems requiring installation by the Company, which is recognized
upon completion of the installation. Revenues from video management
services and royalties are recognized when earned.
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees.
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 net loss applicable to
nonredeemable common stock by the weighted average number of common
shares outstanding as including common stock equivalents would be
antidilutive.
INCOME TAXES - The Company accounts for income taxes under Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" which requires an asset and liability approach to account for
income taxes.
29
32
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and
cash equivalents, accounts receivable and accounts payable
approximate fair value because of the short-term maturity of these
instruments. The fair value of the revolving credit facility
approximates its carrying amount based on the current rate offered to
the Company for debt of the same remaining maturities. It is not
practicable to determine the fair value of notes payable to
stockholder due to the related party relationship.
FOREIGN CURRENCY TRANSLATION - For translation of its international
currencies, the Company has determined that the local currencies of
its international subsidiaries are the functional currencies. Assets
and liabilities of the international subsidiaries are translated at
the rate of exchange in effect at period end. Results of operations
are translated at the approximate rate of exchange in effect during
the period. The translation adjustment is shown as a separate
component of stockholders' equity. Balances of international
subsidiaries denominated in currencies other than the functional
currency are restated at the rate of exchange at year end and any
resulting gains or losses are included in the results of operations.
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES - The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Such management estimates include the allowance
for doubtful accounts receivable, the estimated useful lives of video
systems, property and equipment and intangible assets, including
goodwill, reducing construction in progress to its net realizable
value and the amounts of certain accrued liabilities.
The Company participates in the highly competitive in-room
entertainment industry and believes that changes in any of the
following areas could have a material adverse affect on the Company's
future financial position or results of operations: decline in hotel
occupancy as a result of general business, economic, seasonal or other
factors; loss of one or more of the major hotel chain customers;
ability to obtain additional capital to finance capital expenditures;
disruption of satellite service; ability to retain senior management
and key employees; and risks of technological obsolescence.
RECENTLY ISSUED ACCOUNTING STANDARD - In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standard No. 128, "Earnings Per Share." This Statement establishes
standards for computing and presenting earnings per share. This
Statement is effective for financial statements issued in periods
ending after December 15, 1997, including interim periods; early
application is not permitted. The Company will adopt this Statement
in the fourth quarter of 1997 and will restate all prior period
earnings per share data presented as required. The Company has not
yet determined the impact of adopting this Statement on its reported
net income (loss) per share.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified
to conform to the current year presentation. These reclassifications
had no effect on net income or total stockholders' equity.
3. BUSINESS COMBINATION
Effective October 8, 1996 (the "Closing Date"), the Company consummated
the Acquisition of the assets and properties (including, but not
limited to, copyrights, patents, personal property, real property,
equipment and records) and certain liabilities of Oldco. The
Acquisition was consummated pursuant to an acquisition agreement dated
August 13, 1996, among Ascent, OCC, Oldco and the other parties named
therein (the "Acquisition Agreement"). Pursuant to the
30
33
Acquisition Agreement, OCC 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.
Immediately prior to the Closing Date, OCV was merged into a subsidiary
of OCC and became a wholly-owned subsidiary of OCC pursuant to an
agreement and plan of merger (the "Merger Agreement") by and among OCC,
OCV and On Command Merger Corporation dated August 13, 1996. The
Acquisition Agreement and the Merger Agreement were entered into to
effect the terms of the Agreement dated April 19, 1996 entered into
among Ascent, OCV and the other parties named therein and to effectuate
the transaction contemplated thereby. In accordance with Emerging
Issues Task Force Issue No. 95-19, "Determination of the Measurement
Date for the Market Price of Securities Issued in a Purchase Business
Combination," the fair value of the Acquisition was determined as of
April 19, 1996 based on an independent appraisal of the net assets
acquired.
As of the Closing Date, the stockholders of OCV received 21,750,000
shares of OCC common stock (72.5% of the initial OCC common stock). In
consideration for the acquisition of the net assets and properties of
SpectraVision by OCC, OCC paid $4 million in cash and issued 8,041,618
shares of OCC common stock to the Oldco bankruptcy estate for
distribution to Oldco's creditors. Additionally, 208,382 shares were
held in reserve pursuant to the Acquisition for potential adjustments.
Of these, 196,382 shares of reserved stock were subsequently
distributed to the Oldco bankruptcy estate for the benefit of Oldco's
creditors with the remaining 12,000 shares distributed to the OCV
stockholders. Ascent owned approximately 57.2% of the outstanding
common stock of OCC at December 31, 1996.
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 fair value of the Series A warrants has been
recognized as a dividend to the former OCV stockholders while the fair
value of Series B and Series C warrants has been accounted for as a
cost of the Acquisition. Subsequent to the Acquisition, OCC's
investment advisor obtained a seat on the Company's Board of Directors.
The Acquisition was accounted for using the purchase method of
accounting. Accordingly, a portion of the purchase price was
allocated to the net assets acquired based on their estimated fair
values. The fair value of tangible assets acquired and liabilities
assumed was $66 million and $67 million, respectively. In addition,
$2 million of the purchase price was allocated to purchased
technology. The balance of the purchase price, $90.6 million, was
recorded as goodwill and is being amortized over twenty years on a
straight-line basis. The accompanying financial statements reflect
the preliminary allocation of the purchase price as the purchase price
allocation has not been finalized.
The reported results of operations of the Company for the year ended
December 31, 1996 includes the operating results of SpectraVision since
the date of the Acquisition. Unaudited pro forma results of operations
as if the Acquisition had occurred at the beginning of fiscal year 1995
and 1996 are as follows (in thousands except per share amounts):
31
34
1996 1995
Total revenues $232,817 $226,045
Net loss $(25,683) $(17,504)
Net loss per common and equivalent share $ (0.83) $ (0.62)
The pro forma combination of the companies is for presentation purposes
only and is not necessarily indicative of the actual results of
operations had the Acquisition occurred on the above dates.
4. VIDEO SYSTEMS
Video systems at December 31 consist of the following (in thousands):
1996 1995
Installed video systems $320,294 $210,335
Construction in progress 29,768 31,805
-------- --------
350,062 242,140
Accumulated depreciation (99,462) (53,230)
-------- --------
Video systems, net $250,600 $188,910
======== ========
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following (in
thousands):
1996 1995
Land $ 2,000 $ -
Buildings and leasehold improvements 2,372 319
Furniture, fixtures, machinery and equipment 10,061 4,362
-------- --------
14,433 4,681
Accumulated depreciation and amortization (3,396) (1,710)
-------- --------
Property and equipment, net $ 11,037 $ 2,971
======== ========
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6. NOTES PAYABLE
Notes payable at December 31 consists of the following (in thousands):
1986 1985
Revolving credit facility $ 98,000 $ --
Stockholders' notes payable - Ascent -- 15,734
Stockholders' notes payable - Other stockholders -- 208
-------- --------
98,000 15,942
Less current portion (48,000) (15,942)
-------- --------
Long-term (due in 2001) $ 50,000 $ --
======== ========
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 facility; provided, however,
that any amounts borrowed under the five-year facility will reduce the
amount available under the 364-day facility. At December 31, 1996,
$50,000,000 was outstanding as a long-term revolving loan and is repayable
in 2001, while $48,000,000 is considered a short-term borrowing. Revolving
loans extended under the Credit Facility generally will bear interest at
the London Interbank Offering Rate ("LIBOR") plus a spread that may range
from 0.375% to 0.625% depending on certain operating ratios of the
Company. At December 31, 1996, the weighted average interest rate on the
Credit Facility was 6.17%. 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. (See
additional discussion in Note 14).
In 1995, the Company entered into a promissory note agreement with Ascent
which was payable upon demand. Interest on principal up to $12,500,000
bore interest at the prime rate, and principal in excess of $12,500,000
bore interest at the prime rate plus 0.5% per annum. In 1990 and 1991,
the Company entered into promissory note agreements, which bore interest
at 14% per annum, with certain of its stockholders. The amounts
outstanding under these agreements were repaid in 1996, using proceeds
from the Credit Facility.
As a consolidated subsidiary of Ascent, and in turn, COMSAT, the Company
is subject to restrictions on its debt structure as a result of Federal
Communications Commission regulations applicable to COMSAT (see Note 10).
7. COMMITMENTS
Operating Leases
The Company leases its principal facilities from a stockholder under a
noncancelable operating lease which expires in December 2003. In
addition to lease payments, the Company is responsible for taxes,
insurance and maintenance of the leased premises. The Company also
leases certain other office space and equipment. These operating leases
expire at dates ranging from 1997 to 2000.
33
36
Rental payments to a related party were approximately $538,000 in each of
the years ended December 31, 1996, 1995 and 1994. Rental expense under
all operating leases was approximately $3,892,000, $616,000 and $572,000
for the years ended December 31, 1996, 1995 and 1994, respectively.
Future minimum annual payments under noncancelable operating leases at
December 31, 1996 are as follows (in thousands):
1997 $13,285
1998 12,204
1999 11,541
2000 6,328
2001 1,327
Thereafter 2,775
-------
Total $47,460
=======
Purchase Commitments
Noncancelable commitments for the purchase of video systems and office
equipment amounted to approximately $6,500,000 at December 31, 1996.
8. STOCKHOLDERS' EQUITY
Common Stock Subscribed
As of December 31, 1996, there were approximately 960,000 shares of common
stock and related warrants that had not been issued as certain of the
former OCV and SpectraVision shareholders had not yet tendered their
shares in connection with the Merger and Acquisition. Such shares are
considered to be subscribed common stock at December 31, 1996 and have
been included in the earnings per share computations.
Dividends
In August 1996, OCV declared a dividend equal to the proceeds from the
exercise of the Hilton Warrants (see Note 10) to be paid to stockholders
of record as of September 18, 1996. The dividend was contingent upon the
exercise of Hilton Warrants. Accordingly, on October 7, 1996, when
Hilton exercised its warrants, a dividend was distributed to the OCV
stockholders through the assignment to Ascent of the $8.9 million
promissory note received from Hilton and cash of $1.8 million was paid to
the minority stockholders.
As stated in Note 3, the fair value of the Series A warrants issued to
the former OCV stockholders has been recorded as a dividend in 1996.
Stock Option Plan
The Company adopted a stock option plan (the 1996 Plan), expiring in 2006,
under which employees may be granted incentive or nonstatutory stock
options for the purchase of common stock of the Company. In addition,
restricted stock purchases, performance awards, dividend equivalents,
stock payment or appreciation rights or deferred stock may be granted
under the plan. A total of 3,000,000 shares were reserved for the plan.
34
37
The exercise price is set by the Board of Directors. Incentive stock
options are granted at no less than fair market value on the date of
grant. Options generally expire in ten years, vest over a five-year
period and are exercisable in installments of 20% one year from the date
of grant and 5% quarterly thereafter. Unvested options are canceled upon
termination of employment.
Under employment agreements with certain officers, 1,426,874 options were
granted with a three-year vesting period. The shares become exercisable
as follows: 25% one year from date of grant, 25% after two years and 50%
after three years.
Upon the merger of OCV with a wholly-owned subsidiary of OCC, outstanding
options under OCV's stock option plan were assumed by OCC. The number
and price of the assumed options was adjusted by the exchange ratio of
2.84 to reflect the equivalent OCC per share value (see Note 1). These
options retained their original terms and are exercisable in installments
of 20% one year from the date of grant and 1.67% per month thereafter.
The following table reflects the adjusted option activity for 1994, 1995
and 1996:
OPTIONS OUTSTANDING
--------------------------
OPTIONS WEIGHTED
AVAILABLE NUMBER AVERAGE
FOR GRANT OF SHARES EXERCISE PRICE
Balances, January 1, 1994 311,832 584,901 $ 5.76
Granted (56,800) 56,800 11.44
Exercised -- (173,141) 3.48
Canceled 8,761 (8,761) 7.04
---------- ---------
Balances, December 31, 1994 (191,892 exercisable
at a weighted-average price of $6.42) 263,793 459,799 7.29
Exercised -- (6,390) 5.52
---------- ---------
Balances, December 31, 1995 (280,500 exercisable
at a weighted-average price of $6.72) 263,793 453,409 7.31
Additional shares authorized 2,288,478 -- --
Granted (weighted-average fair value of $7.33) (1,781,074) 1,781,074 15.60
Exercised -- (52,918) 4.62
---------- ---------
Balances, December 31, 1996 771,197 2,181,565 $14.14
========== =========
35
38
Additional information regarding options outstanding as of December 31, 1996 is
as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (years) Price Exercisable Price
$ 2.64 - 4.72 99,829 4.9 $ 4.62 96,989 $ 4.62
$ 5.92 - 8.80 243,862 6.2 $ 8.04 185,169 $ 7.98
$11.44 - 16.40 1,837,874 9.9 $15.47 32,187 $11.44
--------- -------
2,181,565 9.3 $14.14 314,345 $ 7.30
========= =======
As discussed in Note 2, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board No. 25, "Accounting for Stock Issued to Employees", and its related
interpretations. Accordingly, no compensation expense has been recognized in
the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", (SFAS No. 123) requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted-average assumptions for 1996: expected life, 5.2 years; stock
volatility, 43%; risk free interest rates, 6%; and no dividends during the
expected term. The Company's calculations are based on a single option
valuation approach and forfeitures are recognized as they occur. If the
computed fair values of the 1996 awards had been amortized to expense over the
vesting period of the awards, pro forma net loss applicable to nonredeemable
common stock would have been $16,056,000 ($0.71 per share) in 1996. As no
awards were granted in 1995, pro forma net loss applicable to nonredeemable
common stock and net loss per share amounts do not differ from the reported
amounts in 1995. However, the impact of outstanding nonvested stock options
granted prior to 1995 has been excluded from the pro forma calculation;
accordingly, the 1996 and 1995 pro forma adjustments are not indicative of
future period pro forma adjustments, when the calculation will apply to all
applicable stock options.
Warrants
In 1991, the Company issued warrants to two stockholders to purchase 79,418
shares of common stock at $7.08 per share. The warrants were exercised in 1996
(see additional discussion regarding other warrants at Notes 3 and 10).
36
39
Shares Reserved for Future Issuance
Common stock reserved for future issuance at December 31, 1996 are as
follows:
Option plan 2,952,762
Warrants 7,500,000
----------
Total 10,452,762
==========
9. INCOME TAXES
As a result of the Contribution Agreement discussed in Note 10, on August
1, 1995 Comsat's ownership in the Company exceeded 80% and the Company
became a member of Comsat's consolidated tax group for income tax
purposes. However, as a result of the exercise of the Hilton Warrants on
October 7, 1996 (see Note 10), Comsat's ownership in the Company fell
below 80% and, accordingly, the Company dropped out of Comsat's
consolidated tax group. The Company has prepared its 1995 and 1996
income tax provisions based on inclusion in Comsat's consolidated returns
for the respective periods. However, the provision as calculated would
approximate the provision if prepared on a separate return basis. The
current and deferred tax expense represent the Company's separately
computed tax liability.
In connection with the SpectraVision Acquisition, the Company has until
July 15, 1997 to determine whether it will elect under Internal Revenue
Code Section 338(h)(10) to treat the transaction as a purchase of assets
for tax purposes. The computation of deferred taxes has been made on the
assumption that the Company will make this election. However, management
will continue to evaluate the alternative tax treatment for the
Acquisition and may choose to treat it as a taxable stock purchase
whereby the Company would assume carryover basis in SpectraVision's
assets, including net operating losses.
The provision for income taxes for the years ended December 31 consists
of the following (in thousands):
1996 1995 1994
Current:
Federal $(776) $ (714) $2,525
State 257 48 171
Foreign 498 - -
----- ------ ------
(21) (666) 2,696
Deferred:
Federal 354 3,572 (508)
State (159) 391 125
----- ------ ------
195 3,963 (383)
----- ------ ------
Total $ 174 $3,297 $2,313
===== ====== ======
37
40
The provision for income taxes differs from the amount obtained by applying the
federal statutory rate (35%) to income (loss) before income taxes for the years
ended December 31 as follows (in thousands):
1996 1995 1994
Tax computed at federal statutory rate $(5,097) $2,870 $2,019
State taxes net of federal benefit (580) 439 296
Other 20 (12) (2)
Foreign 498 - -
Valuation allowance 5,333 - -
------- ------ ------
Provision for income taxes $ 174 $3,297 $2,313
------- ------ ------
Income (loss) before income taxes for the years ended December 31 consists of
the following (in thousands):
1996 1995 1994
Domestic $(14,387) $8,199 $5,769
Foreign (178) - -
-------- ------ ------
Total $(14,565) $8,199 $5,769
======== ====== ======
Deferred income taxes, which result from the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, at December 31
consist of the following (in thousands):
1996 1995
Deferred tax assets:
Tax net operating loss and credit
carryforwards $ 4,991 $ 1,856
Accruals not recognized for
tax purposes 5,536 839
Deferred revenue 72 322
Other 646 120
Tax basis in excess of book basis
(338 election) 52,397 -
Valuation allowance (56,885) -
------- -------
Total deferred tax assets 6,757 3,137
Deferred tax liabilities:
Depreciation and amortization (6,860) (2,233)
Other (162) -
------- -------
Total deferred tax liabilities (7,022) (2,233)
------- -------
Net deferred tax asset (liability) $ (265) $ 904
======= =======
The Company has placed a valuation allowance of $56,885,000 at December 31, 1996
(none at December 31, 1995) against its otherwise recognizable net deferred tax
assets due to the uncertainty surrounding the realizability of these benefits in
future tax returns.
38
41
The Company has federal net operating loss carryforwards of approximately
$6,100,000, which expire beginning in 2012. In addition, the Company has
state net operating loss carryforwards of approximately $15,000,000 which
expire beginning in 2000 and may be subject to limitation in the event of
certain defined changes in stock ownership. Alternative minimum tax
credit carryforwards of approximately $1,700,000 and $250,000 are
available to offset future regular federal and state tax liabilities,
respectively. State research and development tax credit carryforwards of
approximately $165,000 are available to offset future liabilities.
10. RELATED PARTY TRANSACTIONS
ASCENT/COMSAT
On August 1, 1995, the Company entered into a Contribution Agreement with
Ascent, whereby the Company acquired various assets and liabilities
(primarily installed video systems and related construction in progress,
accounts receivable, deferred income taxes and other assets) from Ascent
with a net book value of approximately $56,539,000 in exchange for
approximately 5,337,000 shares of common stock of the Company. During
1996, in connection with the aforementioned Contribution Agreement,
Ascent contributed additional assets and liabilities with a net book
value of $1,385,000 to the Company. Both of these transfers of net
assets and shares between companies under common control have been
accounted for at historical cost.
The Company sold video systems and provided video management services to
Ascent totaling approximately $18,900,000 and $28,100,000 which accounted
for 18% and 34% of total revenues in 1995 and 1994, respectively (none in
1996). The Company had approximately $21,000 and $206,000 in payables to
Ascent at December 31, 1996 and 1995. The Company had approximately
$645,000 and $312,000 in payables to Comsat at December 31, 1996 and
1995. Marketing, general and administrative expenses in the accompanying
financial statements are net of $732,000 and $1,316,000 in 1995 and 1994,
respectively, paid by Ascent based on a percentage of video system sales
to Ascent (none in 1996). Research and development expenses in the
accompanying financial statements are net of $436,000 and $742,000 in
1995 and 1994, respectively, paid by Ascent based on a percentage of
video system sales to Ascent (none in 1996).
During 1996, the Company and Ascent entered into a Corporate Agreement,
pursuant to which the Company has agreed with Ascent not to incur any
indebtedness without Ascent's prior consent, other than indebtedness under
the Company's Credit Facility (see Note 6), and indebtedness incurred in
the ordinary course of operations which together shall not exceed $100
million in the aggregate; provided that not more than $50 million of such
indebtedness may constitute long-term debt. In addition, pursuant to an
agreement between Ascent and Comsat (the "Comsat Agreement"), Ascent has
agreed not to incur any indebtedness, other than under Ascent's existing
credit facility (and refinancings thereof) and indebtedness incurred in
the ordinary course of business, which together shall not exceed $236
million in the aggregate, without Comsat's consent. (See additional
discussion in Note 14.)
Effective October 8, 1996, the Company entered into an "Intercompany
Management Services Agreement" with Ascent under which Ascent will provide
certain management services to OCC through December 31, 1999. Services to
be provided include insurance administration, coordination and advisory
services regarding corporate financing, employee benefits administration,
public relations, and various other general corporate functions. Fees for
management services are $100,000 per month. The Company paid in cash a
total of $100,000 in management service fees to Ascent in 1996.
39
42
Finally, on October 18, 1996, Comsat announced that it intends to divest
its 80.67% ownership interest in Ascent through a sale, spin-off or other
transaction.
In July 1993, pursuant to a stock purchase agreement with
Hilton, the Company sold 1,165,993 shares of redeemable common stock at
$8.80 per share. The stock purchase agreement provided that, until May
1998 or until the Company became a publicly traded entity, the stockholder
may elect to sell the shares back to the Company upon the earlier of (i)
June 1, 1995 or (ii) the date the stockholder determines that ownership of
such shares may directly or indirectly jeopardize its ability to retain
material licenses in connection with its business. The put price is equal
to the original purchase price plus interest from the date the shares were
initially purchased, at an interest rate equal to the average of the
one-year U.S. Treasury Bill rate compounded annually. Accordingly, the
Company has accreted the value assigned to the redeemable common stock for
the increasing put price. Upon consummation of the SpectraVision
Acquisition, the Company became publicly traded; therefore, the redemption
feature expired. Accordingly, the carrying value of the redeemable common
stock was reclassified to permanent equity.
In July 1993, in connection with the signing of a contract to provide
services, the Company issued Hilton warrants (the "Hilton Warrants") to
purchase 1,165,993 shares of common stock at $9.68 per share through May
1996, increasing to $10.65 per share in June 1996 and $11.72 per share in
June 1997, subject to anti-dilution. The original value ascribed to the
Hilton Warrants of $840,000 is included in other assets and is being
amortized over the estimated period of benefit of seven years.
Amortization expense was $120,000 in 1996, 1995 and 1994.
In August 1996, OCV, Ascent and Hilton entered into a letter of agreement
(the "Letter Agreement") providing for the cancellation of approximately
1,336,000 shares of OCV common stock issued to Ascent pursuant to the
Contribution Agreement discussed above. The Letter Agreement also
provided for an extension of the effective date of the increase in the
exercise price of the Hilton Warrants from June 1, 1996 to 90 days after
the closing of the Acquisition of SpectraVision. On October 7, 1996,
Hilton exercised its warrants and the Company received proceeds of $1.8
million in cash and $8.9 million in the form of a promissory note.
The Letter Agreement also provided Hilton the right to put to Ascent all,
but not less than all, of the shares acquired from exercise of the Hilton
Warrants and still held by Hilton on the date 90 days after the closing
of the SpectraVision Acquisition at the same exercise price at which
Hilton exercised its warrants. On January 5, 1997, this put right
expired unexercised.
The Company earned revenues of approximately $18,900,000, $15,000,000 and
$12,400,000, which accounted for 13%, 15% and 15%, of total revenues in
1996, 1995 and 1994, respectively, from Hilton and its affiliates.
Accounts receivable from Hilton and its affiliates at December 31, 1996
was approximately $1.7 million.
MAGINET CORPORATION
The Company also earned video system sales of approximately $4,420,000
and $3,000,000 and movie revenues of approximately $524,000 and $362,000
in 1996 and 1995 from MagiNet Corporation which is a related party by
virtue of the Company's preferred stock investment in this company.
Accounts receivable from MagiNet at December 31, 1996 was approximately
$1 million.
Interest expense to related parties was approximately $1,800,000,
$400,000 and $200,000 in 1996, 1995 and 1994, respectively.
40
43
11. CONCENTRATION OF CREDIT RISK
The Company generates the majority of its revenues from the guest usage
of proprietary video systems located in various hotels primarily
throughout the United States, Canada, Mexico and the Far East. The
Company performs periodic credit evaluations of its installed hotel
locations and generally requires no collateral. While the Company does
maintain allowances for potential credit losses, actual bad debt losses
have not been significant. The Company invests its cash in high-credit
quality institutions. These instruments are short-term in nature and,
therefore, bear minimal risk.
Marriott Corporation and its affiliates accounted for 25%, 35% and 29% of
revenues in 1996, 1995 and 1994, respectively, while a second customer
accounted for 14% of revenues in 1996. No customers other than Ascent
and Hilton, as described in Note 10 to the Notes to Financial Statements
accounted for more than 10% of revenues during 1996, 1995 or 1994.
12. EMPLOYEE BENEFIT PLAN
Qualified employees are eligible to participate in the Company's 401(k)
tax-deferred savings plan. Participants may contribute up to 20% of
their eligible earnings (to a maximum of approximately $9,000 per year)
to this plan, for which the Company, at the discretion of the Board or
Directors, may make matching contributions. Contributions made by the
Company were approximately $1,014,000, $351,000 and $227,000 in 1996,
1995 and 1994, respectively.
13. LEGAL MATTERS
In 1995, the Company recorded a charge of $1,540,000 related to the
settlement with a former employee who alleged wrongful termination and
breach of contract.
In 1995, the Company filed suit against a competitor alleging patent
infringement and seeking unspecified damages. In 1996, the competitor
filed a countersuit against the Company alleging patent infringement and
seeking unspecified damages. The Company intends to contest the
countersuit vigorously and believes the claim is without merit and will
not result in a material adverse effect to the Company's financial
position or results of operations or cash flows.
14. SUBSEQUENT EVENTS
On January 11, 1997, SpectraVision experienced an interruption in service
caused by the loss of communication with a satellite used to deliver
pay-per-view programming to 950 of OCC's approximately 3,100 hotels. Of
the hotels affected, approximately 410 hotels continued to provide limited
pay-per-view services through alternate disk or tape-based systems. By
February 9, 1997, OCC was able to obtain alternate satellite service and
had restored full service to all the hotels affected. The Company
believes the loss of service will result in approximately $4,000,000 of
decreased revenues and incremental expenses in the first quarter of 1997.
41
44
On March 21, 1997, COMSAT consented to increase the limitation on
aggregate consolidated indebtedness which Ascent may incur pursuant to the
COMSAT Agreement to $270.0 million for the remainder of 1997; provided
that (i) no more than $50 million of such indebtedness may constitute long
term debt; and (ii) indebtedness subordinated to indebtedness under
Ascent's existing credit facility could only be incurred on terms which
did not adversely affect COMSAT's proposed tax-free distribution of its
interest in Ascent to COMSAT stockholders. In connection with COMSAT's
consent under the COMSAT Agreement, Ascent consented under the OCC
Corporate Agreement to increase OCC's limitation on indebtedness to a
total of not more than $116 million by June 30, 1997 and not more than
$130 million by 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 the OCC's existing $150 million credit facility,
with any amendments to such covenants subject to the written consent
of Ascent.
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.
* * * * *
42
45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Except for the portion of Item 10 relating to Executive Officers which
is included in Part I of this Report, the information called for by Items 10
through 13 is incorporated by reference from the On Command Corporation 1997
Annual Meeting of Stockholders - Notice and Proxy Statement - (the "Proxy
Statement") (to be filed pursuant to Regulation 14A not later than 120 days
after the close of the fiscal year ended December 31, 1996) which meeting
involves election of directors, in accordance with General Instruction G to the
Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 is hereby incorporated by reference
to the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item 12 is hereby incorporated by reference
to the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 13 is hereby incorporated by
reference to the Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of On Command
Corporation are included in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31,
1996, 1995, and 1994
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995, and 1994
Notes to the Consolidated Financial Statements
(A)(2) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of On Command
Corporation is included:
43
46
Schedule II -- Valuation Accounts
Information required by the other schedules has been presented in the
Notes to the Consolidated Financial Statement or such schedule is not
applicable and, therefore, has been omitted.
44
47
(A)(3) EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBIT
EXHIBIT NO. DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of August 13, 1996, which is
incorporated by reference to Amendment to No.3 to Form S-4 ("Form
S-4), by and among On Command Corporation, On Command Merger
Corporation, and On Command Video Corporation
2.2 Acquisition Agreement, dated as of August 13, 1996, which is
incorporated by reference to Form S-4, by and among On Command
Corporation, Ascent Entertainment Group, Inc., the Official Creditors'
Committee for Spectra Vision, Inc. and certain of its subsidiaries,
Spectra Vision, Inc., Spectradyne, Inc. and the other Debtors named
therein
3.1 Certificate of Amended and Restated Certificate of Incorporation of On
Command Corporation, which is incorporated by reference to Form S-4
3.2 Form of Certificate of Merger of On Command Merger Corporation with and
into On Command Video Corporation, which is incorporated by reference
to Form S-4
3.3 Bylaws of On Command Corporation, which is incorporated by reference to
Form S-4
4.1 Registration Rights Agreement by and among On Command Corporation and
the other parties named therein, which is incorporated by reference to
Form S-4
4.2 Warrant Agreement by and among On Command Corporation and the other
parties named therein, which is incorporated by reference to Form S-4
10.1 Master Services Agreement, dated as of August 3, 1993, by and between
Marriott International, Inc., Marriott Hotel Services, Inc. and On
Command Video Corporation (confidential treatment granted), which is
incorporated by reference to Form S-4, (Incorporated by reference to
Exhibit 10.6 of the Registration statement on form S-1 (File No.
33-98502) of Ascent Entertainment Group, Inc.)
10.2 Amended and Restated Spectra Vision and Interactive Services National
Agreement, by and between Hyatt Corporation and Spectradyne, Inc.,
which is incorporated by reference to Form S-4, (confidential
treatment granted)
10.3 Amended and Restated SpectraMax National Agreement, dated August 31,
1993, by and between Hyatt Corporation and Spectradyne, Inc., which is
incorporated by reference to Form S-4, (confidential treatment
granted)
10.4 Hilton Hotels Corporation-On Command Video Agreement, dated April 27,
1993, by and between Hilton Hotels Corporation and On Command Video
Corporation, which is incorporated by reference to Form S-4
(confidential treatment granted)
10.5 EDS Agreement, dated August 5, 1996, among Electronic Data Systems
Corporation, EDS Technical Products Corporation, Ascent Entertainment
Group, Inc. and On Command Video Corporation, which is incorporated by
reference to Form S-4
10.6* Form of Employment Agreement between On Command Corporation and Robert
Kavner, which is incorporated by reference to Form S-4
10.7 Credit Agreement dated as of October 8, 1996 among On Command
Corporation, the Lender named therein and NationsBank of Texas, N.A.
(Incorporated by reference to Exhibit 10.19 of the Annual Report on
Form 10-K for the year ended December 31, 1996 of Ascent Entertainment
Group, Inc. (Commission File No. 0-27192).
10.7(a) First Amendment to Credit Agreement and related documents, dated March,
1997, between NationsBank of Texas, N.A. and On Command Corporation.
(Incorporated by reference to Exhibit 10.19(a) of the Annual Report on
Form 10-K for the year ended December 31, 1996 at Ascent Entertainment
Group, Inc. (Commission File No. 0-27192)).
10.8* Form of Employment Agreement between On Command Corporation and Brian
Steel, which is incorporated by reference to Form S-4
10.9* Employment and Consulting Agreement, dated November 20, 1991, between
Robert Snyder and On Command Video Corporation which is incorporated
by reference to Form S-4
10.10 Standard Lease, dated June, 1996, between Berg & Berg Developers, and On
Command Video Corporation
10.11 Sublease Agreement, dated January, 1997, between On Command Corporation
and Hughes Network Systems, Inc.
45
48
10.12 Corporate Agreement dated as of October 8, 1996, between On Command
Corporation and Ascent Entertainment Group, Inc. (Incorporated
by reference to Exhibit 10.22 of the Annual Report on Form 10-K
for the year ended December 31, 1996 at Ascent Entertainment
Group, Inc. (Commission File No. 0-27192)).
10.13* 1996 Key Employee Stock Plan
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of On Command Corporation.
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
* Indicates compensatory plan or arrangement.
- ---------------
(B) REPORTS
1. The Registrant filed with the Commission on October 25, 1996 a Form 8-K
describing the acquisition of the assets and certain liabilities of
SpectraVision, Inc. by On Command Corporation. Financial Statements
included in this Form 8-K are as follows:
(1) The following financial statements of SpectraVision, Inc. were
incorporated by reference from Amendment No. 3 to the On Command
Corporation Registration Statement on Form S-4, Commission file
No. 333-10407, filed with the Commission on October 7, 1996:
Audited Financial Statements for the years ended December 31, 1995,
1994 and 1993 including:
Independent Auditor's Report
Consolidated Balance Sheets at December 31, 1995 and 1994
Consolidated Statements of Operations for the years ended December 31,
1995, 1994 and 1993
Consolidated Statements of Stockholders' Deficit for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993
Notes to Consolidated Financial Statements
Unaudited Interim Financial Statements for the six months ended
June 30, 1996 and 1995
Condensed Balance Sheets at June 30, 1996 and December 31, 1995
Condensed Statements of Operations for the six months ended June 30,
1996 and 1995
Condensed Statements of Cash Flows for the six months ended June 30,
1996 and 1995
Notes to Condensed Financial Statements
(2) The following financial statements of OCV, were incorporated by
reference from Amendment No. 3 to On Command Corporation registration
Statement on Form S-4, Commission file No. 333-10407, filed with the
Commission on October 7, 1996:
Audited Financial Statements for the years ended December 31, 1995, 1994
and 1993 including:
46
49
Report of Deloitte & Touche LLP
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets at December 31, 1995 and 1994
Statements of Income for the years ended December 31, 1995, 1994, and
1993
Statements of Stockholders' Equity for the years ended December 31,
1995, 1994, and 1993
Statements of Cash Flows for the years ended December 31, 1995, 1994,
and 1993 Notes to Financial Statements
Unaudited Interim Financial Statements for the six months ended
June 30, 1996 and 1995
Condensed Balance Sheets at June 30, 1996 and December 31, 1995
Condensed Statements of Income for the six months ended June 30, 1996
and 1995
Condensed Statements of Cash Flows for the six months ended June 30,
1996 and 1995
Notes to Condensed Financial Statements
47
50
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 SAN
JOSE, STATE OF CALIFORNIA ON MARCH 31, 1997.
On Command Corporation
By: /s/ ROBERT M. KAVNER
Robert M. Kavner
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ ROBERT M. KAVNER President, Chief Executive Officer, March 31, 1997
- -------------------------------------
Robert M. Kavner and Director
(Principal Executive Officer)
/s/ BRIAN A. C. STEEL Executive Vice President, March 31,1997
- -----------------------------------------
Brian A. C. Steel Chief Financial Officer,
Chief Operating Officer, and
Director
(Principal Financial Officer)
/s/ PAUL J. MILLEY Senior Vice President, Finance March 31, 1997
- -------------------------------------------
Paul J. Milley (Principal Accounting Officer)
/s/ JAMES A. CRONIN,III Director March 31, 1997
- ---------------------------------------
James A. Cronin, III
/s/ CHARLES LYONS Chairman of the Board March 31, 1997
- --------------------------------------
Charles Lyons
/s/ GARY L. WILSON Director March 31, 1997
- -----------------------------------------
Gary L. Wilson
/s/ WARREN Y. ZEGER Director March 31, 1997
- ---------------------------------------
Warren Y. Zeger
48
51
ON COMMAND CORPORATION
Schedule II
VALUATION ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
Additions
--------------
Balance at
Beginning of Acquired with Charged to Costs Balance at
Description Period Spectra Vision and Expenses Deduction End of Period
----------- ------------ -------------- ---------------- --------- -------------
From January 1, 1996 to December 31, 1996
Deferred tax asset valuation allowance $52,397,000 $5,333,000 $845,000 $56,885,000
Bad debt allowance 100,000 100,000 450,000 21,000 629,000
Tax receivable reserve
From January 1, 1995 to December 31, 1995
Bad debt allowance 100,000 -- -- -- $ 100,000
From January 1, 1994 to December 31, 1994
Bad debt allowance $ 50,000 $ -- $50,000 -- $ 100,000
49
52
Officers
Robert M. Kavner
President, Chief Executive Officer and Director
Brian A.C. Steel
Executive Vice President, Chief Financial Officer,
Chief Operating Officer and Director
Robert Snyder
Vice Chairman
Richard C. Fenwick, Jr.
Senior Vice President, Engineering
Ronald D. Lessack
Senior Vice President, Operations
Paul J. Milley
Senior Vice President, Finance
Jill E. Fishbein
General Counsel and Secretary, Senior Vice President,
Legal
Jean A. deVera
Vice President, National Accounts
Edward B. Neumann
Vice President, Finance
Richard A. Swift
Vice President, Sales
Directors
Charles Lyons, Chairman
President and Chief Executive Officer, Ascent
Entertainment Group, Inc.
Robert M. Kavner
President, Chief Executive Officer
Brian A.C. Steel
Executive Vice President, Chief Financial Officer,
Chief Operating Officer
James A. Cronin, III
Chief Operating Officer and Executive Vice President
of Finance, Ascent Entertainment Group, Inc.
Gary L. Wilson
Co-chairman, Northwest Airlines, Inc.
Warran Y. Zeger
Vice President, General Counsel, Secretary,
Comsat Corporation
Robert Snyder
Vice Chairman
COMMON STOCK
The Company's common stock commenced trading on October 8, 1996, and is listed
on the NASDAQ National Market under the symbol ONCO.
SERIES A COMMON STOCK PURCHASE WARRANTS
The Series A Warrants commenced trading on October 8, 1996, and are listed on
the NASDAQ National Market under the ticker symbol ONCOW.
SERIES B COMMON STOCK PURCHASE WARRANTS
The Series B Warrants commenced trading on January 10, 1997, and are listed on
the NASDAQ National Market under the ticker symbol ONCOZ.
FORM 10-K AND OTHER INVESTOR INFORMATION
A copy of our Form 10-K, filed with the Securities and Exchange Commission
(SEC), is included in this report. Additional copies are available upon request.
To have your name placed on a mailing list for copies of press releases and
periodic reports to the SEC, please call or fax our corporation headquarters.
AUDITORS
Deloitte & Touche LLP
60 S. Market Street, Suite 800
San Jose, California 95113
TRANSFER AGENT
Bank of New York
101 Barclay Street (22W)
New York, New York 10286
SHAREHOLDER SERVICES AGENT
If you have questions concerning your ownership or records, please write to
On Command Corporation
c/o The Bank of New York
Church Street Station
PO Box 11258
New York, New York 10286-1258
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