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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, 2000
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.)
7900 E. Union Ave., Denver, CO 80237
(Address of Principal Executive Offices) (Zip code)
Registrant's telephone number, including area code: (720) 873-3200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock
Series A Common Stock Purchase Warrants
Series B Common Stock Purchase Warrants
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 28, 2001, was $191,033,000 based
upon a price of $6.25 per share, which was the last sales prices of such stock
on March 28, 2001, as reported on the NASDAQ National Market Reporting System.
As of March 28, 2001, there were 30,565,362 shares of the Registrant's Common
Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12, and 13) has been
incorporated herein by reference to the Company's definitive Proxy Statement to
be used in connection with the 2001 Annual Meeting of Stockholders in accordance
with General Instruction G (3) of Form 10-K.
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TABLE OF CONTENTS
PART I
PAGE
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security 14
Holders
PART II
Item 5. Market Price of and Dividends on OCC's 15
Common Equity
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of 17
Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 24
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 45
PART III
Item 10. Directors and Executive Officers of the 46
Registrant
Item 11. Executive Compensation 46
Item 12. Security Ownership of Certain Beneficial 46
Owners and Management
Item 13. Certain Relationships and Related Transactions 46
PART IV
Item 14. Exhibits, Financial Statements, Schedules and 47
Reports on Form 8-K
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PART I
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. In particular, some of the statements contained
under the captions "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," are forward-looking. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other important factors that could cause the actual results, performance, or
achievements of On Command, or industry results, to differ materially from
future results, performance, or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors include,
among others: general economic and business conditions and industry trends; the
regulatory and competitive environment of the industry in which On Command
operates; uncertainties inherent in new business strategies; new product
launches and development plans, including the future profitability of such added
services and the large capital expenditures involved; rapid technological
changes; the acquisition, development and/or financing of telecommunications
networks and services; the development and provision of new services, including
the customer acceptance and use rates; future financial performance, including
availability, terms and deployment of capital; the ability of vendors to deliver
required equipment, software and services; availability of qualified personnel;
changes in the nature of key strategic relationships with hotel chains and their
franchises, including the renewal of existing agreements on favorable terms;
competitor responses to On Command's products and services, and the overall
market acceptance of such products and services; and other factors. These
forward-looking statements (and such risks, uncertainties and other factors)
speak only as of the date of this Report, and On Command expressly disclaims any
obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained herein, to reflect any change in On
Command's expectations with regard thereto, or any other changes in events,
conditions, or circumstances on which any such statement is based.
ITEM 1. BUSINESS
GENERAL
On Command Corporation (the "Company", "On Command", or "OCC", which terms
shall, unless otherwise indicated, include On Command Corporation and its
wholly-owned subsidiaries) is the leading provider (by number of hotel rooms
served) of in-room, on-demand video entertainment and information services to
the domestic lodging industry. OCC has experienced growth in the past eight
years, increasing its base of installed rooms from approximately 37,000 rooms at
the end of 1992 to approximately 977,000 rooms at December 31, 2000, of which
approximately 929,000 rooms are served by on-demand systems. OCC is a holding
company whose principal assets are On Command Video Corporation ("OCV"),
SpectraVision, Inc., and On Command Development Corporation, each of which
operates as a separate, wholly-owned subsidiary of OCC.
OCC provides in-room video entertainment and information services on three
technology platforms: the OCX video system, the OCV video system, and the
SpectraVision video system. The OCX video system provides enhanced multimedia
applications, including an improved graphical interface for movies and games,
television-based internet with a wireless keyboard, and other guest services. At
December 31, 2000, OCC had installed the OCX video system in approximately
145,000 hotel rooms, 120,000 with internet capability. The OCV video system is a
patented video selection and distribution technology platform that allows hotel
guests to select, at any time, movies and games through the television sets in
their hotel rooms. At December 31, 2000, OCC had installed OCV Video systems in
approximately 710,000 hotel rooms. The SpectraVision video system, which
provides in-room movie entertainment on a rolling schedule basis, and in some
upgraded variations on an on-demand basis, was, as of December 31, 2000,
installed in approximately 122,000 hotel rooms. The SpectraVision video system
generally offers fewer movie choices than the OCV or OCX video systems.
In addition to movies, OCC's platforms provide for in-room viewing of select
cable channels (such as HBO, Starz Encore, ESPN, CNN and Disney Channel) and
other interactive and information services, which include the capability for
high-speed internet access through the OCX platform. OCC primarily provides its
services under long-term contracts to hotel chains, hotel management companies,
and individually owned and franchised hotel properties. OCC's services are
offered predominantly in the large deluxe, luxury, and upscale hotel categories
serving business travelers, such as Marriott, Hyatt, Wyndham, Starwood,
Doubletree, Fairmont, Embassy Suites, Four Seasons and other select hotels. See
"COMPETITION" below and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Business Risks - Dependence on Significant
Customers".
At December 31, 2000, approximately 86% of OCC's 977,000 installed rooms
were located in the United States, with the balance located primarily in Canada,
the Caribbean, Australia, Europe, Latin America, and the Asia-Pacific region. In
addition to installing
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systems in hotels served by OCC, OCC sells its systems to certain other
providers of in-room entertainment, including Hospitality Network, Inc., which
is licensed to use OCC's systems to provide on-demand, in-room entertainment and
information services to certain gaming-based hotel properties, and ALLIN
Interactive, who is licensed to install OCC's systems on cruise ships.
The Company is a Delaware corporation that was formed in July 1996. On March
28, 2000, Liberty Media Corporation ("Liberty") closed a cash tender offer for
the common stock of Ascent Entertainment Group, Inc. ("Ascent"), the Company's
controlling stockholder, and thereby obtained control of the Company. On June 8,
2000, Liberty completed a merger with Ascent (the "Merger") pursuant to which
Ascent became an indirect, wholly-owned subsidiary of Liberty.
INDUSTRY BACKGROUND
The provision of in-room entertainment and information services to the
lodging industry includes offering pay-per-view motion pictures, archived
television content, games, music, internet connectivity, guest programming of
select pay cable channels, and an increasing array of interactive programs and
information services. Pay-per-view services were introduced in the early 1970s
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) enabled
providers of pay-per-view services to offer scheduling flexibility to the
viewer. Depending on the type of system installed and the size of the hotel,
guests can choose up to 50 different movies with an on-demand system. 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, video games, and internet service. The market for
in-room entertainment and information is characterized as a highly competitive
environment among several industry-dedicated companies and a number of new
entrants including cable companies, telecommunications companies, laptop
connectivity companies and others. See additional discussion in "Competition"
below.
OPERATING AND GROWTH STRATEGY
OCC's operating and growth strategy is to: (i) increase revenues and create
new revenue sources through an expanding range of interactive and information
services offered to the lodging industry through the OCX platform, including
@Hotel TV-based internet; (ii) 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; and (iii) increase revenues and decrease
costs in certain hotels acquired in the SpectraVision acquisition by installing
more current technology offering greater reliability, broader selection, and
more viewing flexibility.
OCC has been actively pursuing the renewal or extension of most of the
contracts with hotel customers with SpectraVision equipment by offering these
customers the opportunity to obtain OCV or OCX on-demand pay-per-view movies and
related services. As of December 31, 2000, OCC had converted approximately
218,000 rooms previously served by SpectraVision's systems to OCC's on-demand
system. Management expects to have a substantial majority of the remaining
SpectraVision rooms converted to OCC's on-demand system over the next several
years.
PLATFORMS
OCX Platform
OCX is a multimedia platform that can incorporate digital content storage.
At December 31, 2000, OCC had installed the OCX system in 145,000 hotel rooms,
which includes 112,000 rooms with television-based internet capability. The OCX
platform currently provides interactive multimedia menus, high-speed
television-based internet service, e-mail access over the internet, Sony
PlayStation(TM) games, and music, as well as the ability to offer more video
choices of higher-quality for OCC's on-demand movie services. Potential
offerings using the digital platform include non-theatrical short videos (such
as business, lifestyle, and sports videos) and special events, including
out-of-market sports events. OCC has a fully trained field service staff that
supports its systems. OCC is developing changes to the OCX system which will
reduce the cost of the hardware and the labor time required to install the OCX
system. These changes are expected to be available by mid-2001. OCC has been
actively marketing OCX. At December 31, 2000, OCC had signed contracts to
install OCX in an additional 66,000 rooms. In addition, on March 27, 2001, OCC
entered into an agreement with Marriott pursuant to which the OCX video system
will be installed in approximately 165,000
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rooms in hotels managed by Marriott, and an additional approximately 135,000
U.S. and Canadian rooms in hotels franchised by Marriott. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Subsequent Events".
OCX provides enhanced multimedia applications and @Hotel internet access
using a customized version of Microsoft's Internet Explorer, adapted for use
over the television in conjunction with a wireless keyboard. @Hotel internet
service is available to guests for a daily fee and includes complete web access
and e-mail capability. OCC has also partnered with several internet content
providers to organize hotel-friendly internet sites. OCX operates by means of
several client computers that serve multiple guestrooms and are located outside
of the actual rooms.
The OCX platform supports a high degree of interactivity and customization,
including a multimedia user interface. The OCX platform is a standards-based,
client-server architecture utilizing Windows NT Server in the "back end" and a
customized NTSC version of Microsoft's Internet Explorer running on Windows 98
PC clients in the "front end." HTML-based menus allow integration of content and
navigational elements. Video content is provided via a digital file server or an
array of video cassette players.
A key component of OCX is the "Site Manager" software application that
controls the system, interfaces with the hotel billing management systems, and
acts as the OCX system's overall resource manager (including user session
management and resource allocation). In its design and functionality, this
application reflects OCC's years of operational experience and offers OCC a key
strategic advantage within the lodging industry.
The OCX platform provides a significant increase both in the breadth of
possible services and in the efficiency of providing them. While the platform
itself may be extended to support extensive product offerings, early
implementations include video-on-demand, television-based internet access, Sony
PlayStation(TM) video games, and a rich multimedia user interface. With the OCX
technology, each component of the platform has multiple uses. For example, the
same PC client used for navigating graphics-intensive menus is used subsequently
for accessing the internet and sending e-mail. With digital content storage, a
feature film could be replaced by four 30-minute short subject videos (for
example, instructional videos, self-help videos or comedy videos), unlike
one-for-one replacement with videocassettes. More importantly, digital content
storage will allow the Company to begin a transition to electronic delivery of
program content.
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, the quality of the cabling and antenna system at the hotel,
and the configuration of the system installed, the installation cost of a new,
OCV on-demand system with movies, guest services, and video game capabilities,
including the head-end equipment averages from approximately $375 to $450 per
room. If the Company provides televisions, the cost can increase by $200 to $325
per room, depending on the size of the TV. The installation cost of a full OCX
system, including digital content storage and internet capability with a
wireless keyboard is approximately $75 per room higher than the OCV system in
the same size hotel. The OCV system can be modified to enable OCX functionality
for movies, games, internet, and guest services at a cost of $280 per room. OCX
is only installed in association with videocassette players, rather than digital
content storage, in certain international markets due to constraints placed on
OCC by most movie studies that provide OCC with movie content.
OCC is in the process of developing next generation versions of its OCX
platform. These new versions will expand upon the basic architecture of OCX,
allowing OCC to take advantage of general cost reductions in hardware technology
while preserving its investment in its Site Manager software. Because of the
flexible and open architecture of OCX, OCC anticipates that it will be able to
develop additional versions of the current OCX platform, each with corresponding
improvements in price and performance, in future years.
OCV Platform
The On Command Video System, called OCV, is the Company's original platform,
and the predecessor to the OCX. OCV was patented by OCC 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
videocassettes once per month and are all handled by OCC's service personnel,
who also update the system's movie titles screens. 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
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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. The high-speed, two-way
digital communications capability of the OCV system enables OCC to provide
advanced interactive and information features, such as video games, in addition
to basic guest services such as video checkout, room service ordering and guest
satisfaction surveys. The OCV system also enables hotel owners to broadcast
informational and promotional messages and to monitor room availability.
For example, in a typical hotel with 400 rooms, the central head-end video
rack would consist of approximately 120 videocassette 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 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 currently
available to the guest, thus eliminating the possibility of a guest being
disappointed when the guest's selection is not available.
SpectraVision Platform
In comparison with OCV systems, hotels still equipped with SpectraVision
technology generally offer fewer choices if served by SpectraVision on-demand
systems, or only offer hotel guests eight movies per day at scheduled times, or
some combination thereof. SpectraVision originated a tape-based system that
typically offered a hotel guest eight movies per day at predetermined times. In
1991, SpectraVision introduced the Guest Choice system to provide hotel guests
with on-demand viewing of videotapes based upon proprietary equipment and
software. In 1994, SpectraVision introduced a digital video on-demand service,
called Digital Guest Choice. The Digital Guest Choice system provides on-demand
viewing of digitally stored movies that reside on high capacity disk arrays. The
Company has converted the Digital Guest Choice systems in the United States to
its OCV on-demand systems although some units of Digital Guest Choice equipment
continue to be used in Asia.
SERVICES
Pay-Per-View Movie Services
Through its OCV and SpectraVision subsidiaries, OCC provides on-demand and,
in some cases, scheduled in-room television viewing of major motion pictures 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 up to 50 different movies with an
on-demand system, or from eight to twelve movies with a scheduled system.
OCC obtains the non-exclusive rights to show recently released motion
pictures from major motion picture studios generally pursuant to a master
agreement with each studio. The license period and fee for each motion picture
are negotiated individually with each studio, which typically receives a
percentage of that picture's gross revenues generated by the pay-per-view
system. Typically, OCC obtains rights to exhibit major motion pictures during
the "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
motion pictures' 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 provide 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. In many cases, OCC has provided hotels with
televisions, but in other cases OCC has required the hotels to provide
televisions. OCC's contracts with hotels generally provide that OCC will be the
exclusive provider of in-room, pay-per-view video entertainment services to the
hotel and generally permit OCC to set the movie price. Under certain
circumstances, certain hotels may have the right to prior approval of the price
increases, which approval may not be unreasonably withheld. The hotels collect
movie-viewing charges from their guests and retain a commission equal to a
negotiated percentage of the total pay-per-view revenue, which varies in
relationship with the size and profitability of the system. Some contracts also
require OCC to upgrade systems 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 agreement on terms that are based
upon the competitive situation in the market.
The revenue generated from OCC's pay-per-view service is dependent on 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 based on the property's location, its competitive
position within the marketplace, and, over time, based on seasonal factors
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and general economic conditions. For instance, OCC's occupancy rates and
revenues per room typically are higher during the summer months and lower during
the winter months due to seasonal travel patterns. 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 and the business of
OCC is closely related to the performance of the business and luxury hotel
segments of the lodging industry. Movie price levels are set based on the guest
mix profile at each property and overall economic conditions. Currently, OCC's
movie prices typically range from $8.95 to $9.95 for a purchase by the hotel
guest.
Short Subjects
In addition to movies, OCC has begun providing short video current
programming options to the hotel guest, in conjunction with various programming
partners. These include such programming as HBO's Sex and the City and The
Sopranos, two very popular series, the On Command Golf Academy, yoga and
exercise programs, as well as multi-channel sports and entertainment packages.
These offer an alternative to many guests with limited time who cannot watch a
full-length feature. OCC believes these will grow significantly in popularity
with the traveling business customer.
Guest Programming Services
OCC also markets guest programming services pursuant to which a hotel may
elect to receive one or more programming channels, such as HBO, CNN, ESPN, TBS,
Disney Channel, Discovery Channel, and other cable networks, which the hotel
provides to guests at no additional cost. OCC provides hotels with guest
programming services through a variety of arrangements, including having the
hotel pay the company a monthly fee per room for each programming channel
selected or including the cost or part of the cost of such programming within
the Company's overall contractual arrangements with the hotel or hotels. OCC has
a unique contract with each network vendor (approximately 30 vendors, serving
50-60 channels). Payment to network vendors is based on subscriber/room count
but also use variables such as the combination of channels received, occupancy,
volume, and penetration. The term of the contracts with network vendors average
three to five years.
Internet Services
Beginning in 1997, OCC developed and selectively deployed for market testing
several new services to complement its existing offerings and strengthen its
growth strategy by creating new potential revenue sources. In July 1999, OCC
commercially released its OCX platform, which enables guests to access the
internet through the television and wireless keyboard in their room. This
service allows up to 24 hours of access for a typical price of $9.95. OCC is
continually upgrading this service through improved versions of its internet
browser software that offer better reformatting for the television and improved
speed. OCC believes its television internet product will continue to increase in
popularity, as OCC is able to develop and acquire aggregated television
formatted internet content of particular interest to the hotel guest. At
December 31, 2000, OCC had installed this internet service in approximately
112,000 rooms.
OCC has also tested high-speed laptop connectivity for hotel rooms and
high-bandwidth services for conference spaces in a small number of properties.
Due to the poor financial results experienced and projected in this small base
of rooms, OCC decided in 2000 to significantly limit the number of new
installations of this service. This resulted in only a small increase in
installed rooms in 2000 for this service, and only a few properties in the
current backlog. OCC is continuing to explore new technologies and business
models in this market. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Subsequent Events" regarding OCC's
investment in STSN, a high-speed access provider.
Music
In 2001, OCC acquired 80% control of Hotel Digital Network, Inc. (d/b/a
Digital Music Network) ("DMN"), a company that provides advanced in-room music
capabilities to hotels. With the DMN system, an OCC hotel guest can choose from
an array of 600 CD titles of many genres to listen to for a two-hour period,
typically. The DMN system, called MusicOnCommand, integrates seamlessly into the
OCX architecture, and in trials has been very well received by guests. The
available data on guest use indicates that it occurs at times apart from those
associated with heavy television viewing times and suggests that it will
supplement OCC's other pay-per-view offerings. OCC also is able to take
advantage of an associated e-commerce opportunity if the guest decides to
purchase the CD to which the guest listens through MusicOnCommand. OCC plans to
install and market MusicOnCommand aggressively in 2001.
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Game Services
At December 31, 2000, On Command offered video games in approximately
279,000 rooms. Both the OCV and OCX platforms support Sony PlayStation(TM)
games. Children, families, and business travelers can entertain themselves with
the most popular video game titles available on the market. There are on average
8 to 10 titles available in most rooms in which video games are offered at a
guest price of $6.99/hour.
Other Hotel and Guest Services
In addition to entertainment services, OCC provides other guest services to
the lodging industry. These additional services use the two-way interactive
communications capability of the Company's equipment. Among the guest services
provided are video check-out, room service ordering and guest satisfaction
surveys. Guest services are also currently available in Spanish, French, and
certain other foreign languages. In most cases, the guest services are made a
part of the contract for pay-per-view services, which typically runs for a term
of five to seven years.
SALES AND MARKETING
Substantially all of OCV's growth to date has been derived from obtaining
contracts with hotels in the United States not under contract with existing
vendors or whose contracts with other vendors are expiring or have expired. OCC
believes that opportunities for additional growth in the deluxe, luxury and
upscale hotel markets in the United States are more limited than in the past.
Therefore, the Company has broadened its strategy for obtaining new hotel
customers to target both smaller hotels and some lower cost hotels as well.
Management anticipates that the lower costs and flexibility afforded by the
continued design improvements in the Company's products will make marketing to
smaller hotels and some lower cost hotels more economically attractive than in
the past.
OCC's marketing efforts have historically been primarily focused on business
and leisure hotels with approximately 150 rooms or more. Management believes
that such hotels consistently generate the highest revenues per room in the
lodging industry and have the highest potential for new service revenue growth.
The Company also targets smaller deluxe, luxury and upscale hotels and select
mid-priced hotels serving business travelers that meet its profitability
criteria. As mentioned above, the Company has recently begun to employ
additional engineering, development and marketing efforts to target hotels under
150 rooms and certain lower cost hotels. OCC intends to continue targeting
established hotel chains, certain business and leisure hotel management
companies, and selected independent hotels.
OCC markets its services to hotel guests by means of on-screen advertising
that highlights the services and motion picture selections of the month as well
as an in-room entertainment guide distributed to more than 823,000 hotel rooms
each month.
ADVERTISING
OCC's platforms offer a wide range of venues that could be used to generate
advertising revenues. These include advertising on guest programming, as well as
advertising on the various menu screens that the hotel guest uses to navigate to
movies, games, music or internet access. OCC currently receives no revenue from
advertising.
The OCX system is designed with an HTML page-based client server
architecture with internet access. Since the typical guest views many of the OCC
screens, this presents multiple potential customer exposures for a potential
advertiser. In addition, as the market leader for in-room, on-demand video
entertainment and information services in the deluxe, luxury and upscale hotel
markets, OCC offers advertisers exposure to a very high-end viewer demographics.
The ability to tie together menu-screen based advertising and internet
advertising to a national television advertising capability gives OCC a unique
strength in the market. OCC is also developing systems which will allow for ad
insertion on the cable channels provided to the guest without charge by the
hotel. See "Guest Programming Services" above. May require amendment to current
agreements with programmers.
INSTALLATION AND SERVICE OPERATIONS
At December 31, 2000, OCC's installation and service organization consisted
of approximately 406 installation and service personnel in the United States and
Canada. OCC installation and service personnel are responsible for all of the
hotel rooms served by OCC in the United States and Canada, including system
maintenance and distribution of video and audio content. OCC's installation
personnel also 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. OCC also uses local installation
subcontractors supervised by full-time OCC personnel to install its systems.
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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 OCX, OCV and SpectraVision 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. Should a service visit be
required, the modular design of the OCX, OCV and SpectraVision systems generally
permits service personnel to replace defective components at the hotel site.
HOTEL CONTRACTS
The Company typically negotiates and enters into a separate contract with
each hotel for the services provided. However, for some of the Company's large
hotel management customers, the Company negotiates and enters into a single
master contract for the provision of services for all of the corporate-managed
hotels of such management company. 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 to seven years from the date
the system becomes operational. At expiration, OCC typically seeks to extend the
term of the contract on market terms. At December 31, 2000, approximately 17% of
the pay-per-view hotel rooms served by OCC have contracts that have expired and
are operating on a month-to-month basis. Approximately 12% of the pay-per-view
hotel rooms served by OCC have contracts expiring in 2001. However, some of the
SpectraVision hotel contracts, which the Company classifies internally as
expired, have two-year automatic renewal provisions under certain conditions and
may continue to be in effect. As a result, the expiration rates set forth above
may overstate the actual number of hotel contracts that are expiring.
TECHNOLOGY - RESEARCH AND DEVELOPMENT
The Company, through its wholly-owned subsidiary On Command Development
Corporation, develops technologies to be used in the OCX, OCV and SpectraVision
video systems to support and enhance their operations and develops new
applications to be marketed by the Company. OCC incurred costs of approximately
$8.5 million in both 2000 and 1999 related to research and development.
OCC's product development philosophy is to design high quality entertainment
and information systems that 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 OCX
system enables the Company to provide advanced interactive features such as
video games and internet access in addition to basic guest 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, digital video disk players, other digital storage media, televisions,
amplifiers, and computers. Because the Company's systems generally use industry
standard interfaces, OCC can integrate new technologies that may prove to be
useful.
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. 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. In addition,
some of the SpectraVision systems currently installed in hotels require a high
level of service and repair. As the SpectraVision systems become older,
obtaining replacement parts and servicing those systems 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.
The head-end electronics for the Company's systems 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 OCC-employed and trained technicians install the
system, typically assisted by independent contractors.
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For those hotels in which the Company supplies televisions, OCC purchases
such televisions from a small number of television vendors. In the event of a
significant price increase for televisions by such vendors, the Company could
face additional, unexpected capital expenditure costs.
OCC, through its OCV and SpectraVision subsidiaries, maintains direct
contractual relations with various suppliers of pay-per-view and guest
programming services, including the motion picture studios and/or their domestic
and international distributors and programming networks. OCC believes its
relationships with all suppliers are good.
COMPETITION
In the U.S., taking into account the various providers of cable television
services, there are numerous providers of in-room video entertainment to the
lodging industry, at least three of which provide on-demand pay-per-view, guest
programming and guest services by means of the in-room television.
Internationally, there are more companies competing in the pay-per-view lodging
industry than in the United States.
Pay-per-view, the most profitable component of the services currently
offered, competes for a guest's time and entertainment resources with broadcast
television, guest programming, and cable television services. In addition, there
are a number of competitors that are developing ways to use their existing
infrastructure to provide in-room entertainment and/or information services to
the lodging industry, including cable companies (including wireless cable),
telecommunications companies, internet and high-speed connectivity companies,
and direct-to-home and direct broadcast satellite companies. Some of these
competitors have been providing guest programming services to hotels and are
beginning to provide video-on-demand, internet and high-speed connectivity to
hotels.
OCC is the leading provider (by number of hotel rooms served) of in-room
video entertainment services to the United States lodging industry. OCC is also
the leading provider (by number of hotel rooms served) of in-room on-demand
video entertainment services to the lodging industry on a worldwide basis.
Domestically, OCC competes on a national scale primarily with LodgeNet
Entertainment Corporation ("LodgeNet") and on a domestic and international basis
with other entities smaller than LodgeNet. Based on publicly available
information, OCC estimates that, at December 31, 2000, LodgeNet serves
approximately 5,000 properties, in which 725,000 rooms are equipped with
on-demand service. At December 31, 2000, OCC served approximately 977,000 rooms,
of which approximately 929,000 are on-demand rooms. In October 2000, Hilton
Corporation announced that it would not be renewing its Master Agreement with
the Company and would be signing an agreement with LodgeNet. The Company
currently services approximately 60,300 Hilton - owned rooms and approximately
60,300 Hilton managed and franchised rooms. The effects of Hilton's decision not
to renew the Master Agreement will be spread out over eight years since the
Hilton hotels under contract with the Company have contracts that are not
coterminous with the Master Agreement. See Note 10 to Notes to Consolidated
Financial Statements.
Competition with respect to the provision of in-room video entertainment and
information systems 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 and information 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.
Furthermore, while the Company is addressing the likelihood of increased
demand for internet services in the hotel guestroom, OCC may face additional
competition in this area from traditional as well as new competitors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Subsequent Events" regarding OCC's investment in STSN, a high-speed
access provider. 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 customers already are providing guest
programming services to hotels and testing on-demand video. Some of these
competitors may be better funded from public capital or private venture capital
markets and have access to additional capital resources that OCC does not have.
OCC 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 reflects the strong competitive position of its
products and services.
OCC also competes with local cable television operators by customizing
packages of programming to provide only those channels desired by the hotel
subscriber, which typically reduces the overall cost of the service provided.
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OCC 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 and information both as a revenue source and as
a source of competitive advantage because sophisticated hotel guests are
increasingly demanding a greater range of quality entertainment and information
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 service provider. While the Company believes its
competitive advantages will enable OCC to continue to enter into contractual
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 OCC's operations unless the
Company is able to provide equivalent services at competitive prices.
REGULATION
The Communications Act of 1934, as amended by the Cable Communications
Policy Act of 1984, the Cable Television Consumer Protection and Competition Act
of 1992 and the Telecommunications Act of 1996, governs the distribution of
video programming by cable, satellite or over-the-air technology, through
regulation by the Federal Communications Commission ("FCC"). However, because
the Company's video distribution systems do not use any public rights of way,
they are not classified as cable systems and are subject to minimal regulation.
Thus, the FCC does not directly regulate the pay-per-view or free-to-guest
services provided by the Company to hotel guests.
The internet-based services offered by the Company potentially may be
affected by various laws and governmental regulations. There are currently few
laws or regulations directly applicable to access to or commerce on commercial
online services or the internet. However, because of the increasing popularity
and use of commercial online services and the internet, a number of laws and
regulations may be adopted with respect to commercial online services and the
internet. For example, the Internet Tax Freedom Act expires in 2001, but
Congress may extend this moratorium in some form. Other internet-related laws
and regulations may cover issues such as user privacy, defamatory speech,
copyright infringement, pricing and characteristics and quality of products and
services. The adoption of such laws or regulations in the future may slow the
growth of commercial online services and the internet, which could in turn cause
a decline in the demand for the Company's internet-based services and products
or otherwise have an adverse effect on the Company. Moreover, the applicability
to commercial online services and the internet of existing laws governing issues
such as property ownership, libel, personal privacy and taxation is uncertain
and could expose the Company to liability.
On January 18, 2001, the FCC released a Notice of Inquiry regarding
interactive television services ("ITV") over cable television. The FCC seeks
comment on, among other things, an appropriate definition of ITV services,
whether access to a high-speed connection is necessary to realize ITV
capabilities, and whether a nondiscrimination rule is necessary and/or
appropriate. The outcome of this proceeding and any rules ultimately adopted by
the FCC could affect the ITV services currently offered by the Company and the
ITV services which the Company may offer in the future.
Although the FCC generally does not directly regulate the services provided
by the Company, the regulation of video distribution and communications services
is subject to the political process and has been in constant flux over the past
decade. Further material changes in the law and regulatory requirements must be
anticipated and there can be no assurance that the Company's business will not
be adversely affected by future legislation or new regulations.
Because most music is copyrighted, license agreements are required for the
DMN service. Agreements and arrangements with major rights holders and/or
organizations permit the distribution of music. However, such licensing has been
the subject of industry-wide arbitration and/or litigation for a number of
years. Depending upon the outcome of on-going proceedings, the license fees for
such distribution may increase.
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company owns a number of patents and patent licenses covering various
aspects of its pay-per-view and interactive systems. With the rate of
technological development currently being experienced, a patents utility and
value may diminish before the end of its term. Although OCC maintains these
patents, OCC believes that the design, innovation, and quality of its products
and its relations with its customers are at least as important, if not more so,
to the maintenance and growth of the Company. The Company also owns various
trade names, trademarks, service marks, and logos used in its businesses, which
OCC intends to actively protect. In
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connection with a settlement with LodgeNet in 1998, the Company and LodgeNet
have licensed each other's patented technology through 2003.
INTERNATIONAL MARKETS
In addition to its operations in the fifty United States, OCC offers its
services in Canada, Latin America, Puerto Rico, the U.S. Virgin Islands, Hong
Kong, Singapore, Thailand, Australia, the Bahamas, Europe, and elsewhere in the
Asia-Pacific region. See additional discussion under in Part II - Subsequent
Events related to the Asia-Pacific region.
The Company historically experienced higher international revenues and
operating cash flow per room than in the United States because of higher prices,
higher buy rates, and the general lack of programming alternatives. However, the
Company generally also incurs greater capital expenditures and operating and
servicing costs outside the United States. At December 31, 2000, the Company
serviced 465 hotels with a total of approximately 135,000 rooms located outside
the United States.
The competition to provide pay-per-view services to hotels is greater in
international markets than in the United States. Expansion of OCC's operations
into foreign markets involves certain risks that are not 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 ability to grow its base of hotel rooms in foreign markets.
The following represents OCC's total revenues for the years ended December
31, 2000, 1999 and 1998 and its long-lived assets (excluding goodwill) as of
December 31, 2000, 1999 and 1998 by geographic territory (in thousands):
2000 1999 1998
------------------------- ------------------------- -------------------------
LONG- LONG- LONG-
TOTAL LIVED TOTAL LIVED TOTAL LIVED
REVENUES* ASSETS REVENUES* ASSETS REVENUES* ASSETS
---------- ---------- ---------- ---------- ---------- ----------
United States $ 237,975 $ 289,292 $ 227,904 $ 251,448 $ 215,054 $ 254,769
Canada 13,441 21,130 13,034 21,021 12,690 17,984
All other foreign 13,964 17,431 12,010 14,931 11,076 10,506
---------- ---------- ---------- ---------- ---------- ----------
Total $ 265,380 $ 327,853 $ 252,948 $ 287,400 $ 238,820 $ 283,259
========== ========== ========== ========== ========== ==========
*Net revenues are attributed to countries based on invoicing location of
customer.
LICENSEES AND OTHER SYSTEM SALES
OCC sells systems to certain other providers of in-room entertainment
including Hospitality Network, Inc., which is licensed to use OCV's system to
provide on-demand, in-room entertainment and information services to certain
gaming-based, hotel properties, and Allin Interactive, which is licensed to
install OCX equipment on cruise ships.
MARKETS AND CUSTOMERS
OCC currently provides entertainment and information services to hotels that
are associated with major hotel chains, management companies and independent
hotels including Adam's Mark, Fairmont, Four Seasons, Doubletree, Embassy
Suites, Hampton Inn, Holiday Inn, Hyatt, Loews, Marriott (including Courtyard By
Marriott, Fairfield Inn, Renaissance, Residence Inn, & Ritz-Carlton), Wyndham
International, Inc., Radisson, Sheraton and Starwood Hotels and Resorts (W and
Westin). OCC serves major chains and selected other hotels throughout the United
States, Canada, Latin America, the United Kingdom, Spain, France, 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
2000 1999
------------ ------------
Hotels Served:
U.S. 3,054 2,871
Non-U.S. 465 423
Rooms Served:
U.S. 842,000 830,000
Non-U.S. 135,000 126,000
Total Net Room Revenue per Equipped
Room (NRER) $21.46/month $21.19/month
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SIGNIFICANT CUSTOMERS
Marriott, Hilton and Holiday Inn accounted for approximately 24%, 12% and
11%, respectively, of OCC's room revenues for the year ended December 31, 2000.
These revenue percentages represent all chain affiliations including owned,
managed, and franchised hotels. Contracts are written at the hotel level and
therefore expirations occur over extended periods of time depending on the
installation date of the particular hotel. 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 OCC's results of operations or financial condition.
As described in more detail in "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Business Risks--Dependence on
Significant Customers" below and "Competition" above, Hilton has elected not to
renew its Master Agreement with OCC.
SEASONALITY
The business of OCC 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.
EMPLOYEES
As of December 31, 2000, OCC employed a total of 981 persons, including 74
in engineering, 384 in domestic installation and service, 145 in domestic
manufacturing and operations, 18 in sales, 232 in management, administration and
finance, and 128 in international service and operations. None of the Company's
employees are represented by a labor union. The Company has experienced no work
stoppages and believes employee relations are good.
ITEM 2. PROPERTIES
OCC began the relocation of its corporate headquarter operations from San
Jose, California to Denver, Colorado in the second half of 2000. The new
headquarters contain approximately 55,000 square feet of leased office and
storage space. As of March 2001, an additional 16,000 square feet has been
leased at the Denver corporate headquarters. The San Jose, California facility,
contains approximately 131,000 square feet of leased office, light
manufacturing, and storage space. By the end of 2001, the Company will have
moved the balance of functions currently remaining in San Jose to Denver and
intends to sublease its San Jose space. In connection with the SpectraVision
acquisition, OCC acquired other leased space that housed SpectraVision's
customer support operations throughout the United States, Canada, Latin America,
Puerto Rico, Hong Kong, and Australia. The Company's properties are suitable and
adequate for the Company's business operations.
ITEM 3. LEGAL PROCEEDINGS
In September 1998, OCV filed suit against the MagiNet Corporation
("MagiNet") in the Superior Court State of California, County of Santa Clara,
Case No. CV776723, for past due royalties and for judicial declaration that the
license agreement between OCV and MagiNet was terminated by MagiNet's material
breach. MagiNet counter-claimed against OCV, alleging, among other things, that
OCV breached the license agreement. On January 4, 2001, the Company signed a
settlement agreement with MagiNet. In exchange for contributing its Asia-Pacific
subsidiary assets to MagiNet, payment of $1.0 million cash, and the issuance of
275,000 shares of OCC common stock the Company will receive shares of MagiNet
common stock representing approximately 7.5% of the issued and outstanding
common equity of MagiNet. OCC also agreed that MagiNet will have the option,
exercisable during the period of 15 days beginning on the second anniversary of
the execution of the settlement agreement, to require OCC to repurchase all, but
not less than all, of the shares of OCC common stock issued to MagiNet at a per
share price of $15.00. This option will not become exercisable, however, if (i)
the closing price of OCC's common stock equals or exceeds $15.00 per share for a
period of ten consecutive trading days occurring prior to the second anniversary
of the execution of the settlement agreement and (ii) all such shares held by
MagiNet could have been sold in the public markets during such period, either
because such shares are covered by an effective registration statement or such
sale in the public markets would be exempt from registration. The Company
estimated the fair
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value of its 7.5% interest in MagiNet at approximately $5.3 million and valued
the assets, stock and cash transferred to MagiNet at $10.1 million. As a result,
the Company recorded a charge of approximately $4.8 million in 2000 relating to
this settlement.
OCC, 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 2000.
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PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON OCC'S COMMON EQUITY
The Company's Common Stock and Series A and B Warrants are traded on the
NASDAQ National Market under the symbols ONCO, ONCOW, and ONCOZ respectively.
Series C Warrants were issued to an advisor to the transaction in which
SpectraDyne was acquired but were not registered for public trading. The
following table sets forth the high and low last sale prices for the Company's
common stock, Series A Warrants, and Series B Warrants for the periods
indicated, as reported on the Nasdaq Stock Market's National Market:
PRICE RANGE
-----------------------------
COMMON STOCK HIGH LOW
- -------------------- ------------ ------------
2000:
First Quarter $ 18.0625 $ 14.8750
Second Quarter $ 21.5000 $ 12.9375
Third Quarter $ 14.3125 $ 9.7500
Fourth Quarter $ 12.9375 $ 6.8750
1999:
First Quarter $ 10.3750 $ 8.7500
Second Quarter $ 17.7500 $ 13.1250
Third Quarter $ 19.1900 $ 17.2800
Fourth Quarter $ 19.0000 $ 14.9400
PRICE RANGE
-----------------------------
SERIES A WARRANTS HIGH LOW
- -------------------- ------------ ------------
2000:
First Quarter $ 7.2500 $ 4.4375
Second Quarter $ 9.1250 $ 4.5000
Third Quarter $ 5.5000 $ 3.0625
Fourth Quarter $ 2.6250 $ 1.5000
1999:
First Quarter $ 4.2500 $ 3.7500
Second Quarter $ 6.0000 $ 3.7500
Third Quarter $ 9.3750 $ 5.7500
Fourth Quarter $ 7.8750 $ 5.2500
PRICE RANGE
-----------------------------
SERIES B WARRANTS HIGH LOW
- -------------------- ------------ ------------
2000:
First Quarter $ 6.2500 $ 4.5000
Second Quarter $ 8.0000 $ 4.5000
Third Quarter $ 4.0000 $ 4.0000
Fourth Quarter $ 2.6250 $ 1.2500
1999:
First Quarter $ 2.7500 $ 2.7500
Second Quarter $ 5.3750 $ 2.5000
Third Quarter $ 6.5000 $ 5.0000
Fourth Quarter $ 7.7500 $ 3.8750
As of December 31, 2000, there were 30,554,388 shares of Common Stock,
13,500 shares of Convertible Participating Preferred Stock, Series A, 1,419,979
Series A Warrants, 2,625,000 Series B Warrants, and 3,450,000 Series C Warrants
issued and outstanding. As of December 31, 2000 there were 364 Common
Stockholders, 15 Series A Warrant holders, 267 Series B Warrant holders, and 8
Series C Warrant holders of record. The Company has never paid dividends on any
class of its equity securities. OCC's management does not intend to pay any cash
dividends on OCC's Common Stock in the foreseeable future. Rather, it is
expected that OCC will retain any earnings to finance its operations and growth.
In addition, OCC's $320 million revolving credit facility contains certain
restrictive covenants including a restriction on the Company's ability to pay
dividends or make other distributions. The Company's Transfer Agent and
Registrar is the Bank of New York, located at 101 Barclay Street, New York, New
York.
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ITEM 6. SELECTED FINANCIAL DATA
The financial data set forth below, except hotel and room 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
thereto, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in Item 7. The consolidated statement of
operations data for each of the three years in the period ended December 31,
2000 and the consolidated balance sheet data at December 31, 2000 and 1999 are
derived from the audited financial statements included in Item 8. The
consolidated statements of operations data for the two years ended December 31,
1997 and 1996, and the consolidated balance sheet data for December 31, 1998,
1997 and 1996, are derived from audited consolidated financial statements not
included herein.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
2000(2) 1999 1998 1997 1996(1)
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues .................................... $ 265,380 $ 252,948 $ 238,820 $ 222,103 $ 147,469
Total direct costs of revenues .................... 123,412 113,218 103,902 103,343 71,019
Total operating expenses .......................... 158,344 158,636 151,068 142,166 87,770
Loss from operations .............................. (16,376) (18,906) (16,150) (23,406) (11,320)
Net loss(3) ....................................... (39,043) (29,394) (25,966) (33,314) (14,739)
Net loss applicable to
common stockholders ......................... (39,043) (29,394) (25,966) (33,314) (15,222)
Basic and diluted net loss per share .............. (1.28) (0.97) (0.86) (1.11) (0.67)
Basic and diluted weighted average number of
common shares outstanding ................... 30,483 30,222 30,150 30,081 22,625
CASH FLOW DATA:
Net cash provided by operating activities ........ $ 52,272 $ 70,893 $ 53,913 $ 53,481 $ 42,784
Net cash used in investing activities ............ (124,740) (85,478) (83,208) (88,044) (80,505)
Net cash provided by financing activities ........ 66,947 16,337 30,379 35,268 42,521
OTHER DATA:
EBITDA(4) ......................................... $ 74,299 $ 75,912 $ 72,049 $ 55,578 $ 41,960
Cash dividends per share .......................... -- -- -- -- 0.49
Rooms served at end of period(5) .................. 977,000 956,000 929,000 893,000 917,000
On Demand rooms ............................... 929,000 884,000 829,000 765,000 709,000
Scheduled rooms ............................... 48,000 72,000 100,000 128,000 208,000
Hotels served at end of period .................... 3,519 3,366 3,220 3,060 3,144
Capital expenditures(6) ........................... 117,065 85,478 83,208 92,307 70,545
CONSOLIDATED BALANCE SHEET DATA:
Total assets ...................................... $ 439,294 $ 402,917 $ 402,968 $ 401,388 $ 396,538
Total long-term debt .............................. 247,133 180,000 163,000 133,000 98,000
Total stockholders' equity ........................ 125,057 164,147 190,005 217,167 250,917
- ----------
(1) 1996 data reflects the acquisition of SpectraVision, which was recorded
using the purchase method of accounting. As such, all revenues, expenses and
capital expenditures of SpectraVision for the period from October 8 through
December 31, 1996, are included in the data for 1996. Also included are the
room and hotel counts and the assets and liabilities of SpectraVision at
December 31, 1996.
(2) 2000 data includes $6.1 million of relocation costs associated with the move
of the sales, marketing, field support, accounting, finance, and executive
management from San Jose, California to Denver, Colorado. The relocation
expenses include severance, stay bonuses, search fees, contractors, travel
and redundant salaries. The 2000 data also includes legal fees of
approximately $1.5 million related to the MagiNet settlement.
(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 OCC as a new public company. Of the non-recurring charges,
$6.7 million affected EBITDA (see note 4).
(4) EBITDA represents earnings before interest, income taxes, depreciation,
amortization, relocation expense, stock-based compensation and other
non-operating items such as gain/loss on disposal of assets, loss on legal
settlements, and exchange rate gain/loss. The most significant difference
between EBITDA and cash provided from operations is changes in working
capital. EBITDA is presented because it is a widely accepted financial
indicator used by certain investors and analysts to analyze and
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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.
(5) The decrease in rooms in 1997 is primarily due to the sale and termination
of certain U.S. hotel contracts, which hotels received satellite only
broadcasts of pay-per-view movies.
(6) Capital expenditures primarily include the installation of systems in new
hotels, the conversion of SpectraVision systems, conversions of installed
OCV video systems to OCX video systems and upgrades made to existing
equipment in hotels, and internal fixed asset purchases.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues
Revenues consist primarily of fees from hotels for guest programming and
fees associated with pay-per-view movies, video games, internet services and
other services provided through OCC's in-room video systems. Total revenues for
the year ended December 31, 2000 increased $12.4 million, or 4.9%, to $265.4
million, as compared to $253.0 million in 1999. Room revenues increased $9.4
million, or 3.9%, in 2000 to $248.9 million, as compared to $239.5 million in
1999. The increase was primarily attributable to new hotel installations,
continued conversions of SpectraVision equipped properties, conversions of
installed OCV video systems to OCX video systems, lower movie denial rates,
higher average movie price, and higher video game and internet revenue during
2000. Movie denials occur when hotel customers deny use of the products, and
refuse payment for the services. Video system sales and other revenues increased
$3.0 million, or 22.2%, to $16.5 million in 2000, as compared to $13.5 million
in 1999. The increase was primarily due to increased ordering of video systems
by a major customer and sales of OCX systems to a provider of entertainment
systems to the cruise ship industry.
Direct Costs
Direct costs consist primarily of costs of installing, maintaining and
repairing video systems in hotels, including labor costs and fees paid to movie
and other content providers. Total direct costs of revenues for the year ended
December 31, 2000 increased $10.2 million, or 9.0%, to $123.4 million, as
compared to $113.2 million in 1999. Direct costs associated with room revenue in
2000 increased $7.2 million, or 6.8%, to $114.0 million, as compared to $106.8
million in 1999, and as a percentage of room revenue increased to 45.8% for the
year ended December 31, 2000 from 44.6% for the year ended December 31, 1999.
The increase in the direct costs as a percentage of room revenue was due to
increases in the costs associated with providing "guest programming" to the
hotels, and the higher costs (and lower margins) of providing internet services
to the hotels. Direct costs from video system sales and other revenues increased
$3.0 million, or 46.2%, to $9.4 million in 2000, as compared to $6.4 million in
1999, primarily due to the increase in video system sales. Direct costs
associated with video systems sales and other revenue as a percentage of video
system sales and other revenues increased to 57.1% for the year ended December
31, 2000 from 47.7% for the year ended December 31, 1999. The increase is
primarily due to capital expenditures on projects where the Company contracts
with the hotel to provide wiring services prior to the video system installation
and lower margins on certain hardware sales completed throughout the year.
Operating Expenses
Operating expenses, which consist primarily of labor and material expense
required to maintain the existing equipment in hotels, for the year ended
December 31, 2000 increased $2.1 million, or 7.0%, to $32.0 million, as compared
to $29.9 million for the year ended December 31, 1999, and as a percentage of
room revenue increased to 12.9% from 12.5% for the same period of 1999.
Research and Development
Research and development expenses for the year ended December 31, 2000
remained relatively flat at $8.5 million as compared to the year ended December
31, 1999.
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Sales, General, and Administrative Expense
Selling, general and administrative expenses, including stock-based
compensation, for the year ended December 31, 2000 increased $0.8 million, or
3.0%, to $27.2 million, as compared to $26.4 million for the year ended December
31, 1999. The increase is due to legal expenses associated with the MagiNet
litigation (see Note 14 to Consolidated Financial Statements), and higher
executive and travel costs, offset by lower stock-based compensation as a result
of the lower price of the Company's common stock.
Depreciation and Amortization
Depreciation and amortization expenses for the year ended December 31, 2000
decreased $9.3 million, or 10.0%, to $84.5 million, as compared to $93.8
million for year ended December 31, 1999, and as a percentage of total revenue
decreased to 31.8% for 2000 from 37.1% during 1999. This decrease occurred
primarily due to the absence of depreciation on certain video systems assets
acquired during the 1996 acquisition of SpectraVision by OCC, which became fully
depreciated in October 1999.
Relocation Expense
Relocation expenses of $6.1 million for 2000 include all severance, stay
bonuses, hiring costs, moving costs, travel, contractors, and redundant salaries
associated with relocating the Company's headquarters to Denver. The majority of
sales, marketing, field support, accounting, finance, and executive management
have been transitioned to Denver as of December 2000. OCC anticipates incurring
approximately $11.0 to $12.0 million in additional relocation expenses in 2001.
Interest Income
Interest income for the year ended December 31, 2000 remained relatively
flat as compared to 1999.
Interest Expense
Interest expense/other expense for the year ended December 31, 2000
increased $6.3 million to $17.1 million, as compared to $10.8 million for the
year ended December 31, 1999. This increase is attributable to additional
borrowings incurred by OCC during 2000, as well as an increase in the interest
rates applicable to these borrowings. In order to meet its current obligations
for capital expenditures totaling approximately $100.0 to $120.0 million for
2001, OCC anticipates that it will need to incur additional borrowings, which
will result in a higher interest expense in 2001.
Provision for Income Taxes
Provision for income taxes for the year ended December 31, 2000 represents
tax on income in certain international and domestic jurisdictions.
Net Loss
Net loss increased to $39.0 million for the year ended December 31, 2000
from $29.4 million for the year ended December 31, 1999 due to the factors
described above. OCC anticipates that it will have a net loss in 2001.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues
Revenues consist primarily of fees from hotels for guest programming and
fees associated with pay-per-view movies, video games, internet services and
other services provided through OCC in-room video systems. Total revenues for
the year ended December 31, 1999 increased $14.2 million, or 5.9%, to $253.0
million, as compared to $238.8 million in 1998. Room revenues increased $12.3
million, or 5.4%, in 1999 to $239.5 million, as compared to $227.2 million in
1998. The increase was primarily attributable to new hotel installations,
continued conversions of SpectraVision equipped properties, lower movie denial
rates, higher average movie price, higher game and internet revenue, and, on
average, more cable programming channels in each room during 1999 than in 1998.
Video system sales and other revenues increased $1.9 million, or 16.4%, to $13.5
million in 1999, as compared to $11.6 million in 1998. The increase was
primarily due to increased ordering of video systems by a major customer, sales
of OCX systems to a provider of entertainment systems to the cruise ship
industry, and an increase in the net royalty payment received from LodgeNet.
(See Note 14 to Notes to Consolidated Financial Statements).
Direct Costs
Direct costs consist primarily of costs of installing, maintaining and
repairing video systems in hotels, including labor costs and fees paid to movie
and other content providers. Total direct costs of revenues for the year ended
December 31, 1999 increased $9.3 million, or 9.0%, to $113.2 million, as
compared to $103.9 million in 1998. Direct costs associated with room revenue in
1999 increased $7.8 million, or 7.9%, to $106.8 million, as compared to $99.0
million in 1998, and as a percentage of room revenue
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increased to 44.6% for the year ended December 31, 1999 from 43.6% for the year
ended December 31, 1998. The increase in the direct cost as a percentage of
revenue is primarily due to an increase in movie royalties and hotel
commissions. Direct costs from video system sales and other revenues increased
$1.5 million, or 30.6%, to $6.4 million in 1999, as compared to $4.9 million in
1998, primarily due to the increase in video system sales. Direct costs
associated with video systems sales and other revenue as a percentage of video
system sales and other revenues increased to 47.7% for the year ended December
31, 1999 from 42.1% for the year ended December 31, 1998. The increase is
primarily due to lower margins on projects where the Company will contract with
the hotel to provide wiring services prior to the movie system installation and
lower margins on system sales.
Operating Expenses
Operations expenses, which consist primarily of labor and material expense
required to maintain the existing equipment in hotels, for the year ended
December 31, 1999 decreased $1.4 million, or 4.5%, to $29.9 million, as compared
to $31.3 million for the year ended December 31, 1998, and as a percentage of
room revenue decreased to 12.5% from 13.8% for the same period of 1998. The
decrease is primarily due to the shut-down of the Company's Richardson facility
in the first quarter of 1998 and lower costs for repair material, freight, and
TV repair during 1999.
Research and Development
Research and development expenses for the year ended December 31, 1999
increased $1.0 million, or 13.3%, to $8.5 million, as compared to $7.5 million
for the year ended December 31, 1998. The increase is primarily due to the
continued development of the OCX system, the Company's interactive multimedia
technology and other new product offerings such as high-speed laptop
connectivity.
Selling, General and Administrative Expense
Selling, general and administrative expenses, including stock-based
compensation, for the year ended December 31, 1999 increased $2.4 million, or
10%, to $26.4 million, as compared to $24.0 million for the year ended December
31, 1998. The increase is principally due to increased expenses in the areas of
Account Management and Product Management as the Company continues to build its
infrastructure in support of new interactive services (e.g., @Hotel internet
service) offered with the OCX video systems. In addition, a $1.1 million
non-cash expense associated with accounting for cashless stock option in an
executive compensation agreement, reflecting the increased share price, was
noted in 1999 compared to $0.0 in 1998.
Depreciation and Amortization
Depreciation and amortization expenses for the year ended December 31, 1999
increased $5.6 million, or 6.3%, to $93.8 million, as compared to $88.2 million
for the year ended December 31, 1998, and as a percentage of total revenue
increased to 37.1% for 1999 from 36.9% during 1998. The increase is mainly due
to depreciation on capital investments associated with the growing room base and
converting hotels served by SpectraVision equipment, accelerated depreciation on
certain end-of-life assets, partially offset by the fact that the SpectraVision
equipment became fully depreciated in October 1999.
Interest Income
Interest income for the year ended December 31, 1999 remained relatively
flat as compared to 1998.
Interest Expense
Interest expense/other expense for the year ended December 31, 1999
increased $0.4 million to $10.8 million, as compared to $10.4 million for the
year ended December 31, 1998. This increase is attributable to additional
borrowings incurred by On Command during 1999 under its revolving credit
facility in order to fund OCC's operations and capital expenditures.
Provision for Income Taxes
Provision for income taxes for the year ended December 31, 1999 represents
tax on income in certain international and domestic jurisdictions.
Net Loss
Net loss increased to $29.4 million for the year ended December 31, 1999
from $26.0 million for the year ended December 31, 1998 due to the factors
described above.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash during 2000 were net cash from operations of
$52.3 million and net borrowings of $67.1 million from the Company's revolving
credit facility. Cash was expended primarily for capital expenditures, which
totaled $117.1 million during
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2000, primarily for the conversion of SpectraVision systems, the installation of
new hotels with the OCX and OCV systems, the conversion of OCV systems to OCX,
increased inventory, and internal fixed asset purchases, as well as interest
expenses. At December 31, 2000, the Company's installed room base was
approximately 977,000, as compared to approximately 956,000 at the end of 1999.
During 2000, the Company installed its OCX and OCV systems in approximately
131,000 rooms, of which approximately 49,000 were new hotel installations,
approximately 37,000 were conversions of SpectraVision properties, and 45,000
were conversions of OCV systems to OCX.
The Company's principal cash requirements in 2001 are expected to include
the installation of the Company's OCX system in new hotels, the continued
conversion of SpectraVision properties to the more flexible OCX system,
conversions of OCV rooms to OCX, and internal fixed asset purchases. The Company
anticipates these activities will require capital expenditures of approximately
$100.0 to $120.0 million in 2001, as well as funding for the operational
requirements of the Company, including additional relocation costs estimated at
$11 to $12 million.
At December 31, 2000, the Company had $247.1 million outstanding under its
revolving credit facility. The Company's ability to draw additional funds under
the revolving credit facility is limited by the total amount of borrowing
permitted by the revolving credit facility and certain financial covenants
contained in that facility. In particular, prior to the amendment described
below, a covenant contained in the revolving credit facility limited the total
amount of indebtedness of the Company to 3.5 times the Company's EBITDA plus
certain non-recurring expenses ($1.5 million in 2000) for the trailing four
quarters. On March 27, 2001, the Company entered into an amendment to the
revolving credit facility that (a) reduces the total amount of borrowing allowed
from $350 million to $320 million and (b) amends the financial covenant
described in the previous sentence to allow for total indebtedness of the
Company up to 4.25 times the Company's EBITDA plus certain non-recurring
expenses ($1.5 million in 2000) for the trailing four quarters. Subject to the
following paragraph, the Company could obtain an additional $72.9 million in
long-term financing under the revolving credit facility, as amended.
In addition to the limitations on borrowing contained in the revolving
credit agreement, certain covenants in the public indebtedness of Ascent
effectively prevent the Company's total indebtedness from exceeding an aggregate
of $275 million so long as such public indebtedness of Ascent is outstanding. At
March 30, 2001, the total indebtedness of the Company was equal to $275 million
and therefore no funds are or will be available for borrowing under the
revolving credit facility, as amended, or under any other debt arrangements
while the public indebtedness of Ascent remains outstanding.
Without additional sources of capital, the Company will not be able to
satisfy its future working capital, capital expenditure and debt service
requirements from existing cash, cash generated from operations and funds
available under existing borrowing arrangements. It will be necessary for the
Company to raise additional capital through additional debt or equity financing
in order to satisfy these requirements. However, there can be no assurance that
such financing would be available on terms acceptable to the Company or, if
available, that the proceeds of such financing would be sufficient to enable the
Company to satisfy all of its requirements. In addition, while Ascent's public
indebtedness referred to in the previous paragraph is outstanding, the Company
will not be able to raise additional debt financing. If the Company is unable to
raise additional financing, the Company would need to reduce its capital
spending well below the levels stated above for the year 2001. See "Business
Risks--Dependence on Additional Capital for Growth."
FOREIGN EXCHANGE
The Company 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 grow, OCC will
consider using foreign currency contracts, swap arrangements, or other financial
instruments designed to limit exposure to foreign exchange rate fluctuations.
BUSINESS RISKS
Control by Liberty Media Corporation
As of December 31, 2000, Liberty beneficially owned approximately 56.13% of
the outstanding OCC common stock through its wholly-owned subsidiary Ascent.
Accordingly, Liberty currently has the voting power to control all matters
requiring approval of OCC's stockholders. For example, Liberty can elect a
majority of OCC's board of directors, approve most matters submitted to a vote
of OCC's stockholders and reject any matter submitted to a vote of OCC's
stockholders. This concentration of ownership would prevent a third party from
effecting a change of control of OCC, absent Liberty's approval. In addition,
Liberty is not subject to any standstill or similar obligations with respect to
OCC that would prevent it from acquiring additional shares of OCC common stock,
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causing OCC to merge with another entity or taking similar corporate action with
respect to OCC. Liberty's interests may not be the same as that of the other OCC
stockholders.
Dependence on Additional Capital
OCC's ability to meet its obligations and grow its business requires
substantial investment on a continuing basis to finance current obligations,
planned capital expenditures and related expenses. The Company intends to use
cash flow from operations and additional debt or equity financing to support its
current obligations and its growth. Whether or when OCC can achieve cash flow
levels sufficient to support its anticipated growth cannot be accurately
predicted. Unless such cash flow levels are achieved, OCC will require
additional borrowings or the sale of debt or equity securities, or some
combination thereof, to provide funding for its obligations and its growth or,
alternatively, may have to reduce its operations and growth to a level that can
be supported by internally generated cash flow. OCC can give no assurances with
respect to the impact on the results of operations and financial condition if
OCC is required to reduce growth to a level that can be supported by internally
generated cash flow. OCC's ability to raise additional debt financing is limited
by the provisions of its existing revolving credit facility as well as certain
provisions contained in the public indebtedness of Ascent. See "Liquidity and
Capital Resources" above.
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 current 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 OCC will obtain new contracts with hotels currently served by other vendors
or that OCC will be able to retain contracts with the hotels served by the
Company when those contracts expire. The loss by OCC of one or more of the major
hotel chain customers, such as Marriott, Starwood or Hyatt, could have a
material adverse impact on OCC'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 guest programming services to hotels and testing on-demand video. Some
of these potential competitors have substantially greater resources than OCC.
Dependence on Significant Customers
Marriott, Hilton, Holiday Inn, Hyatt and Starwood accounted for
approximately 24%, 12%, 11%, 7%, and 5%, respectively, of On Command's
room revenues for the year ended December 31, 2000. These revenue
percentages represent all chain affiliations including owned, managed, and
franchised hotels. Contracts are written at the hotel level and therefore
expirations occur over extended periods of time depending on the installation
date of the particular hotel. 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 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. In October 2000, Hilton Corporation announced
that it would not be renewing its Master agreement with the Company. The loss of
the Hilton Master Agreement resulted in the loss of 26,000 hotel rooms owned and
60,300 hotel rooms managed and operated by Hilton. These rooms expire in
accordance with the individual hotel contracts over the next eight years. See
Note 10 and Note 16 to Consolidated Financial Statements.
Dependence on Performance of Lodging Industry
On Command's business is closely linked to the performance of the hotel
industry in which overall occupancy rates may vary as a result of many factors.
Declines in hotel occupancy as a result of general business, economic, seasonal
and other factors can have a significant adverse impact on On Command results of
operations. In addition, On Command markets primarily to the deluxe, luxury and
upscale hotel categories. Any acute or prolonged downturn in general business or
economic factors could have an adverse effect on the hotel categories comprising
On Command's market that is more significant than the effect on the lodging
industry taken as a whole.
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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 OCC's
competitive position. In order to remain competitive, OCC 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 OCC will have
the financial or technological resources to be successful in doing so.
Anti-Takeover Protections
Liberty indirectly owned approximately 56.13% of the outstanding OCC common
stock at December 31, 2000 through its wholly-owned subsidiary Ascent. Assuming
the exercise of all outstanding warrants to purchase OCC common stock as well as
the conversion of all shares of Series A Preferred Stock, Liberty owned
approximately 46.4% of the OCC common stock at December 31, 2000. Accordingly,
OCC may not complete any merger or similar transaction without Liberty's
approval. In addition, Liberty's ownership of OCC's common stock enables it to
elect a majority of OCC's board of directors and otherwise influence OCC's
management. See "Control By Liberty Media Corporation". Even if Liberty's
interest in OCC were reduced below 50%, OCC'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
OCC. 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. Such provisions could limit
the price that certain investors might be willing to pay in the future for
shares of OCC Common Stock.
Programming
The cost to OCC 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. While the Company intends to
address such trends, there can be no assurance that the Company's efforts will
prove effective.
SUBSEQUENT EVENTS
Sale of Series B Preferred Stock
On March 5, 2001, OCC sold 15,000 newly issued shares of its Cumulative
Redeemable Preferred Stock, Series B, par value $.01 per share (the "Series B
Preferred Stock"), to Ascent in consideration of $15,000,000 in cash, pursuant
to a Preferred Stock Purchase Agreement, dated March 5, 2001 (the "Ascent
Purchase Agreement"), between OCC and Ascent.
The liquidation preference (the "Liquidation Preference") of each share of
the Series B Preferred Stock as of any date of determination is equal to the sum
of (a) the stated value per share of $1,000, plus (b) an amount equal to all
dividends accrued on such share which have been added to and remain a part of
the Liquidation Preference as of such date, plus (c) for purposes of the
liquidation and redemption provisions of the Series B Preferred Stock, an amount
equal to all unpaid dividends accrued on the sum of the amounts specified in
clauses (a) and (b) above during the period from and including the immediately
preceding dividend payment date to but excluding the date in question.
The holders of Series B Preferred Stock are entitled to receive cumulative
dividends, when and as declared by OCC, in preference to dividends on junior
securities, including the common stock and the Series A Preferred Stock.
Dividends accrue on the Series B Preferred Stock on a daily basis at the rate of
8.5% per annum of the Liquidation Preference from and including March 5, 2001 to
but excluding April 15, 2001 and at the rate of 12% per annum of the Liquidation
Preference from and including April 15, 2001 to but excluding the date on which
the Liquidation Preference is made available pursuant to a redemption of the
Series B Preferred Stock or a liquidation of OCC. Accrued dividends are payable
monthly, commencing on April 15, 2001, in cash. Dividends not paid on any
dividend payment date are added to the Liquidation Preference on such date and
remain a part of the Liquidation Preference until such dividends are paid.
Dividends added to the Liquidation Preference shall accrue dividends on a daily
basis at the rate of 12% per annum. Accrued dividends not paid as provided above
on any dividend payment date accumulate and such accumulated unpaid dividends
may be declared and paid at any time without reference to any regular dividend
payment date, to holders of record of Series B Preferred Stock as of a special
record date fixed by OCC. Subject to certain specified exceptions, OCC is
prohibited from paying
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dividends on any parity securities or any junior securities (including common
stock) during any period in which OCC is in arrears with respect to payment of
dividends on Series B Preferred Stock.
Upon any liquidation, dissolution or winding up of OCC, the holders of
Series B Preferred Stock are entitled to receive from the assets of OCC
available for distribution to stockholders an amount in cash per share equal to
the Liquidation Preference of a share of Series B Preferred Stock, after payment
is made on any senior securities and before any distribution or payment is made
on any junior securities, which payment will be made ratably among the holders
of Series B Preferred Stock and the holders of any parity securities. The
holders of Series B Preferred Stock will be entitled to no other or further
distribution of or participation in the remaining assets of OCC after receiving
the Liquidation Preference per share. Series B Preferred Stock is not
convertible into any other security of OCC.
Shares of Series B Preferred Stock are redeemable at the option of OCC at
any time after March 5, 2001 at a redemption price per share payable in cash
equal to the Liquidation Preference of such share on the redemption date. Any
redemptions by OCC are required to be made pro rata if less than all shares of
Series B Preferred Stock are to be redeemed.
At any time on or after April 15, 2001, or prior to that date if an event
described as a "default" below has occurred and is continuing, any holder of
Series B Preferred Stock has the right to require OCC to redeem all or any
portion of such holder's shares for a redemption price per share payable in cash
equal to the Liquidation Preference of that share on the redemption date. OCC
will redeem shares at the option of the holder out of funds that are legally
available for that purpose and not restricted pursuant to OCC's revolving credit
agreement. If the legally available funds are insufficient for that purpose, OCC
will redeem the maximum number possible of the shares requested to be redeemed
on the redemption date and will redeem the balance of such shares as additional
funds become legally available.
If and so long as OCC fails to redeem all shares of Series B Preferred
Stock required to be redeemed on a particular redemption date, OCC may not
redeem or discharge any sinking fund obligation with respect to any shares of
Series B Preferred Stock or any parity securities or junior securities or pay
any dividends on any junior securities, and neither OCC nor any of its
subsidiaries may purchase or otherwise acquire any shares of Series B Preferred
Stock, parity securities or junior securities unless all shares of Series B
Preferred Stock required to be redeemed are redeemed. The foregoing prohibitions
do not apply to certain purchase or exchange offers made to all holders of
Series B Preferred Stock.
Series B Preferred Stock will not rank junior to any other capital stock of
OCC in respect of rights of redemption or rights to receive dividends or
liquidating distributions. OCC may not issue any senior securities without the
consent of the holders of at least 66 2/3% of the number of shares of Series B
Preferred Stock then outstanding.
Holders of Series B Preferred Stock are not entitled to vote on any matters
submitted to a vote of the stockholders of OCC, except as required by law and
except that without the consent of the holders of at least 66 2/3% of the number
of shares of Series B Preferred Stock then outstanding, OCC may not take any
action, including by merger, to amend any of the provisions of the certificate
of designations of the Series B Preferred Stock (the "Certificate of
Designations") or amend any of the provisions of the Amended and Restated
Certificate of Incorporation of OCC so as to adversely affect any preference or
right of the Series B Preferred Stock. Any provision of the Certificate of
Designations which, for the benefit of the holders of Series B Preferred Stock,
prohibits, limits or restricts actions by, or imposes obligations on, OCC may be
waived in whole or in part by the affirmative vote or with the consent of the
holders of record of at least 66 2/3% of the number of shares of Series B
Preferred Stock then outstanding. Holders of Series B Preferred Stock do not
have any preemptive right to purchase any class of securities that may be issued
by OCC.
A default under the Certificate of Designations occurs if any of the
following occur: (1) the entry of a decree or order for relief in respect of OCC
under any bankruptcy law or the appointment of a receiver of OCC or of any
substantial part of its properties, or ordering the winding up or liquidation of
the affairs of OCC or the filing of an involuntary petition and the entry of a
temporary stay and such petition and stay are not diligently contested or
continue undismissed for a period of 60 consecutive days; or (2) the filing by
OCC of a petition, answer or consent seeking relief under any bankruptcy law or
the consent by OCC to the institution of proceedings under any bankruptcy law or
to the filing of any such petition or to the appointment or taking of possession
of a Receiver of OCC or any substantial part of its properties or OCC failing
generally to pay its respective debts as they become due or taking any action in
furtherance of any such action.
In the event of any action at law or suit in equity with respect to the
Series B Preferred Stock, OCC may be required to pay reasonable sums for
attorneys' fees incurred by the holder thereof in connection with such action or
suit and all other costs of collections.
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Bylaw Amendment
In March 2001, at a duly called special meeting of OCC's board of
directors, the board of directors adopted an amendment to OCC's Bylaws in order
to provide that any committee of the board of directors may, to the extent
provided in resolutions of the board of directors, exercise all powers of the
board of directors in the management of the business and affairs of OCC to the
maximum extent permitted by the General Corporation Law of the State of
Delaware.
Marriott Agreement
In March 2001, OCC and Marriott International, Inc. entered into a
definitive agreement pursuant to which OCC will distribute its interactive
television platform in approximately 165,000 U.S. and Canadian hotel rooms
managed by Marriott and an additional approximately 135,000 U.S. and Canadian
hotel rooms franchised by Marriott.
Hotel Digital Network
On August 22, 2000, OCC and Hotel Digital Network, Inc. (d/b/a Digital
Music Network) ("DMN") entered into an agreement pursuant to which DMN agreed to
provide digital music to OCC, for use by OCC in its Music OnCommand service. DMN
provides music-on-demand services to the hospitality industry through a patented
platform and licenses with major record labels. As of the date of this Report,
the distribution of such music-on-demand was in its test phase.
On February 28, 2001, pursuant to a stock purchase agreement with DMN, for
aggregate payments by OCC of approximately $1.7 million and a commitment to fund
up to an additional $2.7 million, DMN issued to OCC a number of shares of
DMN's common stock equal to 80% of the equity interests in DMN, on a fully
diluted basis, and approximately 85% of the voting securities of DMN.
STSN
In March 2001, the Company completed a strategic $20 million investment in
convertible preferred stock of STSN, Inc., ("STSN") a high-speed broad band
internet access provider for hotels. Other strategic investors in STSN include
Marriott International, Inc., and Siemens Corporation, a German corporation,
which among other things, manufactures electronic equipment and supplies. STSN
is a provider of high-speed internet access to the hotel industry and has an
exclusive contract to provide its service with Marriott International, Inc.
Amendment to Revolving Credit Facility
On March 27, 2001, the Company signed an amendment to its revolving credit
facility. This amendment to the revolving credit facility increases the
borrowing ratio from 3.5 times EBITDA plus certain non-recurring expenses ($1.5
million in 2000) over the preceding four quarters to 4.25 times EBITDA plus
certain non-recurring expenses ($1.5 million in 2000) over the preceding four
quarters and decreases the borrowings allowed under the revolving credit
facility from $350 million to $320 million. The Company is restricted to total
borrowings of $275 million while certain public indebtedness of Ascent remains
outstanding.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates, which
could impact its results of operations and financial condition, particularly the
Company's interest expense and cash flow. The Company does not hedge this
exposure. Revolving loans extended under the Credit Facility generally bear an
interest rate that is variable and based on the London Interbank Offering Rate
("LIBOR") and on certain operating ratios of the Company. At December 31, 2000,
the Company had $247.1 million outstanding on the Credit Facility and the
weighted average interest rate on the Credit Facility was 8.151%. Assuming no
increase or decrease in the amount outstanding, a hypothetical immediate 100
basis point increase (or decrease) in interest rates at December 31, 2000 would
increase (or decrease) the Company's annual interest expense and cash outflow by
approximately $2.5 million.
OCC transacts business in various foreign currencies, primarily in Canada,
Asia and in certain European countries. OCC believes the risks of foreign
exchange rate fluctuations on its present operations are not material to OCC's
overall financial condition. However, should OCC'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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report(s)
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended December 31, 2000,
1999 and 1998
Consolidated Statements of Stockholders' Equity for the years ended December 31,
2000, 1999 and 1998
Consolidated Statements of Comprehensive Loss for the years ended December 31,
2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
1999 and 1998
Notes to the Consolidated Financial Statements
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
On Command Corporation:
We have audited the accompanying consolidated balance sheet of On Command
Corporation (a majority-owned subsidiary of Ascent Entertainment Group, Inc.)
and subsidiaries as of December 31, 2000, and the related consolidated
statements of operations, stockholders' equity and comprehensive loss and cash
flows for the year ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of On Command Corporation and
subsidiaries as of December 31, 2000, and the results of their operations and
their cash flows for the year ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Denver, Colorado
February 16, 2001, except as to Note 16,
which is as of March 30, 2001
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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 and subsidiaries as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss and cash flows for each of the two years in the period ended December 31,
1999. Our audits also included the financial statement schedule for the years
ended December 31, 1999 and 1998 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 auditing standards generally accepted
in the United States of America. 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, 1999, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 1999
in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedule for the
years ended December 31, 1999 and 1998, 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 LLP
San Jose, California
March 3, 2000
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ON COMMAND CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
ASSETS DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,569 $ 8,972
Accounts receivable (net of allowance for
doubtful accounts of $1,366 in 2000
and $2,287 in 1999) 35,514 32,037
Note receivable 1,445 --
Other current assets 1,993 1,211
------------ ------------
Total current assets 42,521 42,220
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VIDEO SYSTEMS, Net 296,221 266,947
PROPERTY AND EQUIPMENT, Net 21,18