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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q


ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                              to                             

Commission File Number: 00-21315

ON COMMAND CORPORATION
(Exact name of Registrant as specified in its charter)

State of Delaware
(State or other jurisdiction of
incorporation or organization)		   77-04535194
(I.R.S. Employer Identification No.)

4610 South Ulster Street, 6th Floor
Denver, Colorado
(Address of principal executive offices)
 
80237
(Zip Code)

Registrant's telephone number, including area code: (720) 873-3200

        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    ý Yes    o No

        The number of shares outstanding of the Registrant's Common Stock as of November 1, 2002 was 30,956,607 shares.


ON COMMAND CORPORATION
(An Indirect Consolidated Subsidiary of Liberty Media Corporation)
Condensed Consolidated Balance Sheets
(unaudited)

 
   September 30,
2002
   December 31,
2001
  
 
   (amounts in thousands)

  
Assets              
Current assets:              
  Cash and cash equivalents   $ 1,813   $ 2,869  
  Accounts receivable, net     31,279     33,460  
  Other current assets     3,250     2,964  
   
 
 
    Total current assets     36,342     39,293  
   
 
 

Property and equipment:
 
 
 
 
 
 
 
  Video systems              
    In service     689,552     670,318  
    Construction in progress     44,244     53,754  
   
 
 
      733,796     724,072  
  Support equipment, vehicles and leasehold improvements     27,541     27,148  
   
 
 
      761,337     751,220  
  Accumulated depreciation     (478,485 )   (442,757 )
   
 
 
      282,852     308,463  
   
 
 

Goodwill (note 2)
 
 
65,580
 
 
65,580
 

Cost investments (note 6)
 
 
9,358
 
 
6,759
 

Other assets, net
 
 
11,367
 
 
12,943
 
   
 
 
    Total assets   $ 405,499   $ 433,038  
   
 
 

Liabilities and Stockholders' Equity (Deficit)
 
 
 
 
 
 
 
Current liabilities:              
  Accounts payable   $ 22,902   $ 21,021  
  Accounts payable to parent (note 8)     2,133     711  
  Accrued compensation     6,455     5,492  
  Sales, use and property tax liabilities     5,734     5,163  
  Other accrued liabilities (note 9)     7,993     6,678  
  Current portion of debt (note 7)     915     909  
   
 
 
   
Total current liabilities
 
 
46,132
 
 
39,974
 

Long-term debt (note 7)
 
 
259,060
 
 
264,761
 
Other long-term liabilities (note 9)     836     1,642  
   
 
 
      Total liabilities     306,028     306,377  
   
 
 

Minority interest in consolidated subsidiary (note 5)
 
 
324
 
 
117
 
   
 
 

Redeemable securities:
 
 
 
 
 
 
 
  Mandatorily redeemable preferred stock     95,569     89,185  
  Common stock subject to repurchase obligation (note 6)     4,125     4,125  
   
 
 
    Total redeemable securities     99,694     93,310  
   
 
 

Stockholders' equity (deficit):
 
 
 
 
 
 
 
Preferred stock, $.01 par value; shares authorized—10,000,000; shares issued and outstanding—98,500 in 2002 and 2001     —     —  
Common stock, $.01 par value; shares authorized—150,000,000; shares issued and outstanding—30,941,269 in 2002 and 30,884,459 in 2001     309     309  
Additional paid-in-capital     299,367     304,429  
Accumulated other comprehensive loss     (4,263 )   (5,115 )
Accumulated deficit     (271,504 )   (243,170 )
Note receivable from stockholder (note 8)     (24,456 )   (23,219 )
   
 
 
      Total stockholders' equity (deficit)     (547 )   33,234  
   
 
 

Commitments and contingencies (notes 7, 10 and 11)
 
 
 
 
 
 
 
     
Total liabilities and stockholders' equity (deficit)
 
$
405,499
 
$
433,038
 
   
 
 

See accompanying notes to condensed consolidated financial statements.

I-2


ON COMMAND CORPORATION
(An Indirect Consolidated Subsidiary of Liberty Media Corporation)
Condensed Consolidated Statements of Operations
(unaudited)

 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
 
   2002
   2001
   2002
   2001
  
 
   (amounts in thousands, except per share amounts)

  
Revenue:                          
  Room revenue   $ 58,009   $ 55,342   $ 171,393   $ 175,359  
  Video system and equipment sales and other     2,781     2,980     7,779     8,516  
   
 
 
 
 
    Total revenue     60,790     58,322     179,172     183,875  
   
 
 
 
 

Direct costs of revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Content fees, commissions and other in-room services     28,901     28,037     85,874     85,841  
  Video system, equipment and other costs     1,427     1,914     4,349     6,049  
   
 
 
 
 
    Total costs of revenue     30,328     29,951     90,223     91,890  
   
 
 
 
 
   
Direct margin (exclusive of other operating expenses shown separately below)
 
 
30,462
 
 
28,371
 
 
88,949
 
 
91,985
 
   
 
 
 
 

Other operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Operations support     6,668     7,241     20,003     24,536  
  Research and development     1,135     1,627     3,148     4,667  
  Selling, general and administrative (note 8)     5,615     4,550     15,914     18,326  
  Depreciation and amortization     19,276     20,697     59,277     61,956  
  Asset impairments and other charges (notes 5 and 6)     684     137     7,925     422  
  Relocation and restructuring (note 9)     —     1,824     —     13,269  
   
 
 
 
 
    Total other operating expenses     33,378     36,076     106,267     123,176  
   
 
 
 
 
   
Loss from operations
 
 
(2,916
)
 
(7,705
)
 
(17,318
)
 
(31,191
)

Interest expense
 
 
(3,535
)
 
(4,506
)
 
(10,569
)
 
(15,310
)
Impairment of cost investment (note 6)     —     —     —     (1,100 )
Loss on settlement of litigation (note 6)     —     —     —     (3,700 )
Other income (expense)     313     (75 )   (81 )   (54 )
   
 
 
 
 
   
Loss before income taxes
 
 
(6,138
)
 
(12,286
)
 
(27,968
)
 
(51,355
)

Income tax benefit (expense)
 
 
14
 
 
(184
)
 
(366
)
 
(239
)
   
 
 
 
 
   
Net loss
 
 
(6,124
)
 
(12,470
)
 
(28,334
)
 
(51,594
)

Dividends on mandatorily redeemable preferred stock
 
 
(2,200
)
 
(1,251
)
 
(6,384
)
 
(2,287
)
   
 
 
 
 
   
Net loss attributable to common stockholders
 
$
(8,324
)
$
(13,721
)
$
(34,718
)
$
(53,881
)
   
 
 
 
 

Basic and diluted net loss per common share (note 3)
 
$
(0.27
)
$
(0.44
)
$
(1.12
)
$
(1.75
)
   
 
 
 
 

Basic and diluted weighted average number of common shares outstanding
 
 
30,925
 
 
30,855
 
 
30,908
 
 
30,770
 
   
 
 
 
 

See accompanying notes to condensed consolidated financial statements.

I-3


ON COMMAND CORPORATION
(An Indirect Consolidated Subsidiary of Liberty Media Corporation)
Condensed Consolidated Statements of Comprehensive Loss
(unaudited)

 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
 
   2002
   2001
   2002
   2001
  
 
   (amounts in thousands)

  
Net loss   $ (6,124 ) $ (12,470 ) $ (28,334 ) $ (51,594 )

Foreign currency translation adjustment, net of tax
 
 
(1,453
)
 
(1,232
)
 
(78
)
 
(1,958
)
Reclassification adjustment for translation losses included in net loss (note 5)     930     —     930     —  
   
 
 
 
 

Comprehensive loss
 
$
(6,647
)
$
(13,702
)
$
(27,482
)
$
(53,552
)
   
 
 
 
 

See accompanying notes to condensed consolidated financial statements.

I-4


ON COMMAND CORPORATION
(An Indirect Consolidated Subsidiary of Liberty Media Corporation)
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
Nine Months Ended September 30, 2002
(unaudited)

 
   Preferred
stock
   Common
stock
   Additional
paid-in
capital
   Accumulated
other
comprehensive
loss
   Accumulated
deficit
   Note
receivable
from
stockholder
   Total
stockholders'
equity
(deficit)
  
 
   (amounts in thousands)

  
Balance at December 31, 2001   $ —   $ 309   $ 304,429   $ (5,115 ) $ (243,170 ) $ (23,219 ) $ 33,234  
Net loss     —     —     —     —     (28,334 )   —     (28,334 )
Other comprehensive income     —     —     —     852     —     —     852  
Issuance of common stock for employee stock purchase plan     —     —     85     —     —     —     85  
Interest on stockholder note     —     —     1,237     —     —     (1,237 )   —  
Accretion of dividends on mandatorily redeemable preferred stock     —     —     (6,384 )   —     —     —     (6,384 )
   
 
 
 
 
 
 
 
Balance at September 30, 2002   $ —   $ 309   $ 299,367   $ (4,263 ) $ (271,504 ) $ (24,456 ) $ (547 )
   
 
 
 
 
 
 
 

See accompanying notes to condensed consolidated financial statements.

I-5


ON COMMAND CORPORATION
(An Indirect Consolidated Subsidiary of Liberty Media Corporation)
Condensed Consolidated Statements of Cash Flows
(unaudited)

 
   Nine Months Ended September 30,
  
 
   2002
   2001
  
 
   (amounts in thousands)
(note 4)

  
Cash flows from operating activities:              
  Net loss   $ (28,334 ) $ (51,594 )
  Adjustments to reconcile net loss to net cash provided (used) by operating activities:              
    Depreciation and amortization     59,277     61,956  
    Amortization of debt issuance costs     873     433  
    Restructuring charges     —     2,212  
    Payments of restructuring costs     (829 )   (1,927 )
    Asset impairments and other changes     7,925     422  
    Impairment of cost investment     —     1,100  
    Loss on settlement of litigation     —     3,700  
    Other non-cash items     207     (82 )
  Changes in assets and liabilities:              
    Accounts receivable     1,739     (1,483 )
    Other assets     (225 )   (2,017 )
    Accounts payable     1,640     (15,535 )
    Accounts payable to parent     1,422     570  
    Accrued compensation     1,039     (1,437 )
    Sales, use and property tax liabilities     563     (604 )
    Other accrued liabilities     2,153     (1,336 )
   
 
 
     
Net cash provided (used) by operating activities
 
 
47,450
 
 
(5,622
)
   
 
 

Cash flows from investing activities:
 
 
 
 
 
 
 
  Capital expenditures     (41,444 )   (72,870 )
  Cost investments     (2,599 )   (15,992 )
  Cash proceeds from depositions, net of cash transferred     1,135     —  
   
 
 
     
Net cash used in investing activities
 
 
(42,908
)
 
(88,862
)
   
 
 

Cash flows from financing activities:
 
 
 
 
 
 
 
  Borrowings of debt     7,000     59,388  
  Repayments of debt     (12,666 )   (31,585 )
  Proceeds from issuance of common and preferred stock     85     65,048  
   
 
 
     
Net cash provided (used) by financing activities
 
 
(5,581
)
 
92,851
 
   
 
 

Effect of exchange rate changes on cash
 
 
(17
)
 
61
 
   
 
 

Net decrease in cash and cash equivalents
 
 
(1,056
)
 
(1,572
)

Cash and cash equivalents, beginning of period
 
 
2,869
 
 
3,569
 
   
 
 

Cash and cash equivalents, end of period
 
$
1,813
 
$
1,997
 
   
 
 

See accompanying notes to condensed consolidated financial statements.

I-6


ON COMMAND CORPORATION
(An Indirect Consolidated Subsidiary of Liberty Media Corporation)
Notes to Condensed Financial Statements

September 30, 2002
(unaudited)

(1)
Basis Of Presentation

        On Command Corporation is a Delaware corporation formed in July 1996 by Ascent Entertainment Group, Inc. ("Ascent"). Ascent is the controlling stockholder of On Command Corporation (together with its consolidated subsidiaries, "On Command" or the "Company"). On March 28, 2000, Liberty Media Corporation ("Liberty") closed a cash tender offer for the common stock of Ascent and thereby obtained control of the Company. On June 8, 2000, Liberty completed a merger with Ascent pursuant to which Ascent became an indirect, wholly-owned subsidiary of Liberty. The portion of Liberty's cost to acquire Ascent that is attributable to the Company has not been reflected in the accompanying condensed consolidated financial statements of the Company due to the fact that a significant percentage of the Company's common stock ("Company Common Stock") is owned by stockholders other than Liberty. In April 2002, Liberty Satellite & Technology, Inc., a majority-owned subsidiary of Liberty, acquired 100% of the common equity of Ascent. At September 30, 2002, Liberty, through its subsidiaries, owned approximately 63% of the outstanding Company Common Stock.

        The Company develops, assembles, installs and operates proprietary video systems. The Company's primary distribution system allows hotel guests to select, on an on-demand basis, motion pictures on computer-controlled television sets located in their hotel rooms. The Company also provides, under long-term contracts, in-room viewing of select cable and satellite channels and other interactive services to hotels and businesses. These interactive services include video games, Internet offerings, digital music and various hotel and guest services. At September 30, 2002, the Company had operating subsidiaries or branches in the United States, Canada, Mexico, Argentina, Spain and Portugal. All significant inter-company accounts and transactions have been eliminated in consolidation.

        These interim condensed consolidated financial statements are unaudited. In the opinion of management, all adjustments (consisting only of normal recurring accruals) have been made which are necessary to present fairly the financial position of the Company as of September 30, 2002, as well as the results of its operations for the three and nine months ended September 30, 2002 and 2001. The results of operations for any interim period are not necessarily indicative of the results for the entire year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company's December 31, 2001 Annual Report on Form 10-K.

        The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities, as well as the reported amounts of revenue and expenses. Significant estimates include the allowance for doubtful accounts receivable, property and equipment impairments, the estimated useful lives of property and equipment and intangible assets, and the amounts of certain accrued liabilities. Actual results may differ from these estimates.

        Certain amounts have been reclassified for comparability with the 2002 presentation.

(2)
New Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations ("Statement 141"), and Statement of Financial Accounting

I-7


Standards No. 142, Goodwill and Other Intangible Assets ("Statement 142"). Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also specifies, for all purchase method business combinations completed after June 30, 2001, criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

        The Company adopted the provisions of Statement 141 upon issuance, and adopted Statement 142 effective January 1, 2002. Statement 141 requires that upon adoption of Statement 142, the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. In connection with Statement 142's transitional goodwill impairment evaluation, the Company was also required to perform an assessment of whether there was an indication that goodwill was impaired as of the date of adoption. No impairment losses were required to be recognized under Statement 142 at the date of adoption. Adjusted net loss attributable to common stockholders and pro forma loss per common share for the three and nine months ended September 30, 2001, exclusive of amortization expense related to goodwill are as follows (amounts in thousands, except per share amounts):

 
   Three
Months
Ended
September 30,
2001
   Nine
Months
Ended
September 30,
2001
  
Net loss attributable to common stockholders, as reported   $ (13,721 ) $ (53,881 )
Amortization of goodwill     1,146     3,378  
   
 
 

Net loss attributable to common stockholders, as adjusted
 
$
(12,575
)
$
(50,503
)
   
 
 

Basic and diluted loss per common share, as reported
 
$
(0.44
)
$
(1.75
)
Amortization of goodwill     0.04     0.11  
   
 
 

Pro forma basic and diluted loss per common share, as adjusted
 
$
(0.40
)
$
(1.64
)
   
 
 

        In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The statement also requires that the associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of this statement is not expected to have a material impact on the Company's financial position, results of operations or cash flows.

        In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("Statement 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Statement 144 supercedes prior statements that address the disposal of a segment of a business, and eliminates the

I-8


exception to consolidation for subsidiaries for which control is likely to be temporary. Statement 144 retains the prior statement's fundamental provisions for the recognition and measurement of impairment of long-lived assets to be held and used, as well as the measurement of long-lived assets to be disposed of by sale. Statement 144 is effective for fiscal years beginning after December 15, 2001. The adoption of this statement did not have a material impact on the Company's financial position, results of operations or cash flows.

        In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("Statement 145"). Statement 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. Statement 145 also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. Statement 145 amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transaction and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Statement 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Statement 145 is generally effective for financial statements issued for fiscal years beginning after May 15, 2002. The adoption of Statement 145 is not expected to have a material impact on the Company's financial position, results of operations or cash flows.

        In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("Statement 146"). Statement 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for certain Employee Termination benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Statement 146 is effective for exit or disposal activities initiated after December 31, 2002. The adoption of Statement 146 is not expected to have a material impact on the Company's financial position, results of operations or cash flows.

(3)
Earnings (Loss) Per Common Share

        Basic earnings per share is measured as the income or loss attributable to common stockholders divided by the weighted average outstanding common shares for the period. Net earnings (loss) is reduced (increased) by preferred stock dividends and accretion to arrive at income (loss) attributable to common stockholders. Diluted earnings per share is similar to basic earnings per share but presents the dilutive effect on a per share basis of potential dilutive common shares (e.g., convertible securities, options, etc.) as if they had been converted at the beginning of the periods presented, or at original issuance date, if later. Potential dilutive common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from diluted earnings per share.

        The loss per common share for the three and nine months ended September 30, 2002 and 2001 is based on 30,925,000 and 30,855,000 weighted average