**UNITED STATES**

 

**SECURITIES AND EXCHANGE COMMISSION**

 

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                           |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       | **For the quarterly period ended  September 30, 2003**                                                                                                                                                                                                 |
|       |
| **OR**     |
|       |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                          |
|       | **For the transition period from                     to                   ** |

 

**Commission File Number: 00-21315**

 

| **ON COMMAND CORPORATION**                                                   |
|------------------------------------------------------------------------------|
| (Exact name of  Registrant as specified in its charter)                      |
|                                                                         |
| **Delaware**                                                                 |   | **77-0435194** |
| (State or other  jurisdiction of  incorporation or organization)             |   | (I.R.S. Employer  Identification No.) |
|                                                                         |
| **4610  South Ulster Street, 6th Floor  Denver, Colorado**                   |   | **80237** |
| (Address of principal  executive offices)                                    |   | (Zip Code) |
|                                                                         |
|                                                                         |
| Registrant’s telephone  number, including area code: **(720) 873-3200** |

 

Indicate by check mark whetherthe registrant is an accelerated filer (as described in Rule 12(b)-2 of theSecurities Exchange Act).  o Yes ý No

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days ý Yes o No

 

The number of shares outstanding of the Registrant’sCommon Stock as of October 31, 2003 was 30,822,340 shares.

 

 

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**ON COMMAND CORPORATION**(An Indirect Consolidated Subsidiary of Liberty MediaCorporation)Condensed Consolidated Balance Sheets****(unaudited)

 
|                                                    |   | **September 30,  2003**    |    | **December 31,  2002** |   |
|---------------------------------------------------------|--------|----------------------------|---------|------------------------|--------|
|                                                    |   | **(amounts in thousands)** |    |
| Assets                                                  |   |                       |    |                   |   |
| Current assets:                                         |   |                       |    |                   |   |
| Cash and cash equivalents                               |   | $                          | 1,642   |                   | $      | 4,501 |   |
| Accounts receivable, net                                |   | 29,675                     |    | 33,525                 |   |
| Other current assets                                    |   | 3,305                      |    | 3,461                  |   |
| Total current assets                                    |   | 34,622                     |    | 41,487                 |   |
|                                                    |   |                       |    |                   |   |
| Property and equipment:                                 |   |                       |    |                   |   |
| Video systems                                           |   |                       |    |                   |   |
| In service                                              |   | 680,719                    |    | 668,697                |   |
| Construction in progress                                |   | 28,924                     |    | 37,511                 |   |
|                                                    |   | 709,643                    |    | 706,208                |   |
| Support equipment, vehicles and leasehold  improvements |   | 26,774                     |    | 26,245                 |   |
|                                                    |   | 736,417                    |    | 732,453                |   |
| Accumulated depreciation                                |   | (483,159                   | )       | (457,482               | )      |
|                                                    |   | 253,258                    |    | 274,971                |   |
|                                                    |   |                       |    |                   |   |
| Goodwill                                                |   | 65,642                     |    | 65,580                 |   |
|                                                    |   |                       |    |                   |   |
| Other assets, net                                       |   | 14,798                     |    | 14,444                 |   |
|                                                    |   |                       |    |                   |   |
| Total assets                                            |   | $                          | 368,320 |                   | $      | 396,482 |   |

 

I-1

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**ON COMMAND CORPORATION**(An Indirect Consolidated Subsidiary of Liberty MediaCorporation)Condensed Consolidated Balance Sheets (continued)(unaudited)

 
|                                                                                                                                                           |   | **September 30,  2003**    |    | **December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|---------|------------------------|--------|
|                                                                                                                                                           |   | **(amounts in thousands)** |    |
| Liabilities and  Stockholders’ Deficit                                                                                                                    |   |                       |    |                   |   |
| Current liabilities:                                                                                                                                           |   |                       |    |                   |   |
| Accounts payable                                                                                                                                               |   | $                          | 18,807  |                   | $      | 28,689 |   |
| Accounts payable to parent (note 7)                                                                                                                            |   | 1,724                      |    | 1,906                  |   |
| Accrued compensation                                                                                                                                           |   | 5,523                      |    | 6,433                  |   |
| Sales, use and property tax liabilities                                                                                                                        |   | 5,125                      |    | 4,585                  |   |
| Other accrued liabilities                                                                                                                                      |   | 8,142                      |    | 7,987                  |   |
| Common stock subject to repurchase obligation (notes 3 and 9)                                                                                                  |   | 1,876                      |    | 2,333                  |   |
| Current portion of debt (note 6)                                                                                                                               |   | 9,704                      |    | 833                    |   |
| Total current liabilities                                                                                                                                      |   | 50,901                     |    | 52,766                 |   |
|                                                                                                                                                           |   |                       |    |                   |   |
| Long-term debt (note 6):                                                                                                                                       |   |                       |    |                   |   |
| Third party                                                                                                                                                    |   | 218,890                    |    | 261,946                |   |
| Due to parent                                                                                                                                                  |   | 40,000                     |    | —                 |   |
|                                                                                                                                                           |   | 258,890                    |    | 261,946                |   |
|                                                                                                                                                           |   |                       |    |                   |   |
| Other long-term liabilities                                                                                                                                    |   | —                     |    | 496                    |   |
|                                                                                                                                                           |   |                       |    |                   |   |
| Total liabilities                                                                                                                                              |   | 309,791                    |    | 315,208                |   |
|                                                                                                                                                           |   |                       |    |                   |   |
| Minority interest in consolidated subsidiary                                                                                                                   |   | —                     |    | 259                    |   |
|                                                                                                                                                           |   |                       |    |                   |   |
| Mandatorily redeemable preferred stock                                                                                                                         |   | 104,612                    |    | 97,848                 |   |
|                                                                                                                                                           |   |                       |    |                   |   |
| Stockholders’ deficit:                                                                                                                                    |   |                       |    |                   |   |
| Preferred stock, $.01 par value; shares authorized – 10,000,000; shares  issued and outstanding – 98,500 at September 30, 2003 and December 31, 2002 |   | —                     |    | —                 |   |
| Common stock, $.01 par value; shares authorized - 150,000,000; shares  issued – 30,977,840 at September 30, 2003 and 30,973,989 at December 31, 2002      |   | 310                        |    | 310                    |   |
| Additional paid-in capital                                                                                                                                     |   | 294,500                    |    | 299,398                |   |
| Accumulated other comprehensive loss                                                                                                                           |   | (1,704                     | )       | (4,533                 | )      |
| Accumulated deficit                                                                                                                                            |   | (311,092                   | )       | (285,777               | )      |
|                                                                                                                                                           |   | (17,986                    | )       | 9,398                  |   |
| Common stock held in treasury, at cost (155,500 shares at September 30,  2003 and 119,500 shares at December 31, 2002)                                         |   | (1,884                     | )       | (1,344                 | )      |
| Note receivable from stockholder (note 7)                                                                                                                      |   | (26,213                    | )       | (24,887                | )      |
| Total stockholders’ deficit                                                                                                                               |   | (46,083                    | )       | (16,833                | )      |
|                                                                                                                                                           |   |                       |    |                   |   |
| Commitments and contingencies (notes 6, 8 and 9)                                                                                                               |   |                       |    |                   |   |
|                                                                                                                                                           |   |                       |    |                   |   |
| Total liabilities and stockholders’ deficit                                                                                                               |   | $                          | 368,320 |                   | $      | 396,482 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

I-2

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**ON COMMAND CORPORATION**(An Indirect Consolidated Subsidiary of Liberty MediaCorporation)Condensed Consolidated Statements of Operations(unaudited)

 
|                                                                          |   | **Three  Months Ended  September 30,**                |    | **Nine  Months Ended  September 30,** |   |
|-------------------------------------------------------------------------------|--------|-------------------------------------------------------|---------|---------------------------------------|--------|
|                                                                          |   | **2003**                                              |    | **2002**                              |   | **2003** |   | **2002** |   |
|                                                                          |   | **(amounts  in thousands, except per share amounts)** |    |
| Net Revenue:                                                                  |   |                                                  |    |                                  |   |   |   |   |   |
| Net room revenue                                                              |   | $                                                     | 59,462  |                                  | $      | 58,009 |   | $ | 171,687 |   | $ | 171,393 |   |
| System and  equipment sales and other                                         |   | 1,504                                                 |    | 2,781                                 |   | 5,551 |   | 7,779 |   |
|                                                                          |   | 60,966                                                |    | 60,790                                |   | 177,238 |   | 179,172 |   |
|                                                                          |   |                                                  |    |                                  |   |   |   |   |   |
| Direct costs of  net revenue:                                                 |   |                                                  |    |                                  |   |   |   |   |   |
| Content fees,  commissions and other in-room services (note 7)                |   | 31,358                                                |    | 28,901                                |   | 90,310 |   | 85,874 |   |
| System,  equipment and other costs                                            |   | 812                                                   |    | 1,333                                 |   | 2,797 |   | 3,964 |   |
| Total costs of  net revenue                                                   |   | 32,170                                                |    | 30,234                                |   | 93,107 |   | 89,838 |   |
|                                                                          |   |                                                  |    |                                  |   |   |   |   |   |
| Direct margin  (exclusive of other operating expenses shown separately below) |   | 28,796                                                |    | 30,556                                |   | 84,131 |   | 89,334 |   |
|                                                                          |   |                                                  |    |                                  |   |   |   |   |   |
| Other operating  expenses:                                                    |   |                                                  |    |                                  |   |   |   |   |   |
| Operations  support                                                           |   | 5,729                                                 |    | 6,073                                 |   | 17,473 |   | 19,714 |   |
| Research and  development                                                     |   | 1,071                                                 |    | 1,143                                 |   | 3,071 |   | 3,178 |   |
| Selling, general  and administrative (note 7)                                 |   | 6,487                                                 |    | 5,847                                 |   | 18,319 |   | 16,816 |   |
| Depreciation and  amortization                                                |   | 18,297                                                |    | 19,276                                |   | 56,724 |   | 59,277 |   |
| Asset  impairments and other charges                                          |   | 1,502                                                 |    | 751                                   |   | 2,758 |   | 8,401 |   |
| Total other  operating expenses                                               |   | 33,086                                                |    | 33,090                                |   | 98,345 |   | 107,386 |   |
|                                                                          |   |                                                  |    |                                  |   |   |   |   |   |
| Loss from  operations                                                         |   | (4,290                                                | )       | (2,534                                | )      | (14,214 | ) | (18,052 | ) |
|                                                                          |   |                                                  |    |                                  |   |   |   |   |   |
| Interest expense                                                              |   | (4,518                                                | )       | (3,535                                | )      | (11,182 | ) | (10,569 | ) |
| Other income  (expense), net                                                  |   | (68                                                   | )       | (69                                   | )      | 251 |   | 653 |   |
|                                                                          |   |                                                  |    |                                  |   |   |   |   |   |
| Loss before  income taxes                                                     |   | (8,876                                                | )       | (6,138                                | )      | (25,145 | ) | (27,968 | ) |
|                                                                          |   |                                                  |    |                                  |   |   |   |   |   |
| Income tax  benefit (expense)                                                 |   | (39                                                   | )       | 14                                    |   | (170 | ) | (366 | ) |
|                                                                          |   |                                                  |    |                                  |   |   |   |   |   |
| Net loss                                                                      |   | (8,915                                                | )       | (6,124                                | )      | (25,315 | ) | (28,334 | ) |
|                                                                          |   |                                                  |    |                                  |   |   |   |   |   |
| Dividends on  mandatorily redeemable preferred stock                          |   | (2,158                                                | )       | (2,200                                | )      | (6,764 | ) | (6,384 | ) |
|                                                                          |   |                                                  |    |                                  |   |   |   |   |   |
| Net loss  attributable to common stockholders                                 |   | $                                                     | (11,073 | )                                     | $      | (8,324 | ) | $ | (32,079 | ) | $ | (34,718 | ) |
|                                                                          |   |                                                  |    |                                  |   |   |   |   |   |
| Basic and  diluted net loss per common share (note 4)                         |   | $                                                     | (0.36   | )                                     | $      | (0.27 | ) | $ | (1.04 | ) | $ | (1.12 | ) |
|                                                                          |   |                                                  |    |                                  |   |   |   |   |   |
| Basic and  diluted weighted average number of common shares outstanding       |   | 30,853                                                |    | 30,925                                |   | 30,856 |   | 30,908 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

I-3

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

 
|                                                                     |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|--------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                     |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
|                                                                     |   | **(amounts  in thousands)**            |   |
|                                                                     |   |                                   |   |                                  |   |   |   |   |   |
| Net loss                                                                 |   | $                                      | (8,915 | )                                     | $      | (6,124 | ) | $ | (25,315 | ) | $ | (28,334 | ) |
| Foreign currency  translation adjustment, net of tax                     |   | (845                                   | )      | (1,453                                | )      | 2,829 |   | (78 | ) |
| Reclassification  adjustment for translation losses included in net loss |   | —                                 |   | 930                                   |   | — |   | 930 |   |
|                                                                     |   |                                   |   |                                  |   |   |   |   |   |
| Comprehensive  loss                                                      |   | $                                      | (9,760 | )                                     | $      | (6,647 | ) | $ | (22,486 | ) | $ | (27,482 | ) |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

I-4

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**ON COMMAND CORPORATION**(An Indirect Consolidated Subsidiary of Liberty MediaCorporation)Condensed Consolidated Statement of Stockholders' DeficitNine Months Ended September 30, 2003(unaudited)

 
|                                                                                                                  |   | **Preferred  Stock**        |   | **Common  stock** |   | **Additional  paid-in capital** |   | **Accumulated  other comprehensive loss** |    | **Accumulated  deficit** |   | **Treasury  stock** |   | **Note  receivable from stockholder** |     | **Total  stockholders’ deficit** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|-------------------|--------|---------------------------------|--------|-------------------------------------------|---------|--------------------------|--------|---------------------|--------|---------------------------------------|----------|---------------------------------------|--------|
|                                                                                                                  |   | **(amounts  in thousands)** |   |
|                                                                                                                  |   |                        |   |              |   |                            |   |                                      |    |                     |   |                |   |                                  |     |                                  |   |
| Balance at  December 31, 2002                                                                                         |   | $                           | — |              | $      | 310                             |   | $                                         | 299,398 |                     | $      | (4,533              | )      | $                                     | (285,777 | )                                     | $      | (1,344 | ) | $ | (24,887 | ) | $ | (16,833 | ) |
| Net loss                                                                                                              |   | —                      |   | —            |   | —                          |   | —                                    |    | (25,315                  | )      | —              |   | —                                |     | (25,315                               | )      |
| Other  comprehensive income                                                                                           |   | —                      |   | —            |   | —                          |   | 2,829                                     |    | —                   |   | —              |   | —                                |     | 2,829                                 |   |
| Interest on  stockholder note (note 7)                                                                                |   | —                      |   | —            |   | 1,326                           |   | —                                    |    | —                   |   | —              |   | (1,326                                | )        | —                                |   |
| Acquisition of  Company Common Stock and related reduction of obligation to repurchase  Company Common Stock (note 9) |   | —                      |   | —            |   | 540                             |   | —                                    |    | —                   |   | (540                | )      | —                                |     | —                                |   |
| Dividends on  mandatorily redeemable preferred stock                                                                  |   | —                      |   | —            |   | (6,764                          | )      | —                                    |    | —                   |   | —              |   | —                                |     | (6,764                                | )      |
| Balance at  September 30, 2003                                                                                        |   | $                           | — |              | $      | 310                             |   | $                                         | 294,500 |                     | $      | (1,704              | )      | $                                     | (311,092 | )                                     | $      | (1,884 | ) | $ | (26,213 | ) | $ | (46,083 | ) |
|                                                                                                                       |        |                             |        |                   |        |                                 |        |                                           |         |                          |        |                     |        |                                       |          |                                       |        |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to condensed consolidated financial statements.

 

I-5

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

 
|                                                                             |   | **Nine  Months Ended September 30,** |       |
|----------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                             |   | **2003**                             |       | **2002** |   |
|                                                                             |   | **(amounts  in thousands)**          |       |
|                                                                             |   | **(note 5)**                         |       |
| Cash flows from operating activities:                                            |   |                                 | ** ** |   | ** ** |
| Net loss                                                                         |   | $                                    | (25,315    | ) | $ | (28,334 | ) |
| Adjustments to reconcile net loss to net cash provided by operating  activities: |   |                                 |       |   |   |
| Depreciation and amortization                                                    |   | 56,724                               |       | 59,277 |   |
| Payments of restructuring costs                                                  |   | (1,060                               | )          | (829 | ) |
| Asset impairments and other charges                                              |   | 2,758                                |       | 8,401 |   |
| Other non-cash items                                                             |   | 1,790                                |       | 1,080 |   |
| Changes in assets and liabilities:                                               |   |                                 |       |   |   |
| Accounts receivable                                                              |   | 4,276                                |       | 1,739 |   |
| Other assets                                                                     |   | 695                                  |       | (701 | ) |
| Accounts payable                                                                 |   | (10,295                              | )          | 3,062 |   |
| Accrued liabilities                                                              |   | (558                                 | )          | 3,755 |   |
|                                                                             |   |                                 |       |   |   |
| Net cash provided by operating activities                                        |   | 29,015                               |       | 47,450 |   |
|                                                                             |   |                                 |       |   |   |
| Cash flows from investing activities:                                            |   |                                 |       |   |   |
| Capital expenditures                                                             |   | (35,396                              | )          | (41,444 | ) |
| Acquisition of minority interest                                                 |   | (300                                 | )          | — |   |
| Cash proceeds from dispositions, net of cash transferred                         |   | —                               |       | 1,135 |   |
| Cost investments                                                                 |   | —                               |       | (2,599 | ) |
|                                                                             |   |                                 |       |   |   |
| Net cash used in investing activities                                            |   | (35,696                              | )          | (42,908 | ) |
|                                                                             |   |                                 |       |   |   |
| Cash flows from financing activities:                                            |   |                                 |       |   |   |
| Borrowings of debt                                                               |   | 49,000                               |       | 7,000 |   |
| Repayments of debt                                                               |   | (43,185                              | )          | (12,666 | ) |
| Payment of deferred financing costs                                              |   | (2,160                               | )          | — |   |
| Proceeds from issuance of common and preferred stock                             |   | —                               |       | 85 |   |
|                                                                             |   |                                 |       |   |   |
| Net cash provided (used) by financing activities                                 |   | 3,655                                |       | (5,581 | ) |
|                                                                             |   |                                 |       |   |   |
| Effect of exchange rate changes on cash                                          |   | 167                                  |       | (17 | ) |
|                                                                             |   |                                 |       |   |   |
| Net decrease in cash and cash equivalents                                        |   | (2,859                               | )          | (1,056 | ) |
|                                                                             |   |                                 |       |   |   |
| Cash and cash equivalents, beginning of period                                   |   | 4,501                                |       | 2,869 |   |
|                                                                             |   |                                 |       |   |   |
| Cash and cash equivalents, end of period                                         |   | $                                    | 1,642      |   | $ | 1,813 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

I-6

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

September 30, 2003(unaudited)

 

(1)                    Basis OfPresentation

 

On Command Corporation is a Delaware corporationformed in July 1996 by Ascent Entertainment Group, Inc. (“Ascent”).  Ascent is the controlling stockholder of OnCommand Corporation (together with its consolidated subsidiaries, “On Command”or the “Company”). On March 28, 2000, Liberty Media Corporation (“Liberty”)closed a cash tender offer for the common stock of Ascent and thereby obtainedcontrol of the Company.  On June 8,2000, Liberty completed a merger with Ascent pursuant to which Ascent became anindirect, wholly-owned subsidiary of Liberty. The portion of Liberty’s cost to acquire Ascent that is attributable tothe Company has not been reflected in the accompanying condensed consolidatedfinancial statements of the Company due to the fact that a significantpercentage of the Company’s common stock (“Company Common Stock”) is owned bystockholders other than Liberty.  InApril 2002, Liberty Satellite & Technology, Inc., (“LSAT”), amajority-owned subsidiary of Liberty, acquired 100% of the common equity ofAscent.  At September 30, 2003, LSAT,through its ownership interest in Ascent, owned approximately 74% of theoutstanding Company Common Stock and 100% of certain series of the Company’spreferred stock, which ownership interests collectively representedapproximately 80%****of the voting power associated with On Command’s common andpreferred securities.

 

The Company develops, assembles and operatesproprietary video systems. The Company’s primary distribution system allowshotel guests to select, on an on-demand basis, motion pictures oncomputer-controlled television sets located in their hotel rooms. The Companyalso provides in-room viewing of select cable channels and other interactiveservices under long-term contracts to hotels. These interactive servicesinclude Internet offerings, short subject products, video games, digital music,and various hotel and guest services. At September 30, 2003, the Company’sprimary operating subsidiaries or branches were located in the United States,Canada and Mexico.

 

These interim condensed consolidated financialstatements are unaudited. In the opinion of management, all adjustments(consisting only of normal recurring accruals) have been made which arenecessary to present fairly the financial position of the Company as ofSeptember 30, 2003, as well as the results of its operations for the three andnine months ended September 30, 2003 and 2002. The results of operations forany interim period are not necessarily indicative of the results for the entireyear. These condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and related notesthereto included in the Company’s December 31, 2002 Annual Report on Form 10-K.

 

The preparation of consolidated financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure of contingentliabilities, as well as the reported amounts of revenue and expenses.Significant estimates are involved in determining the allowance for doubtfulaccounts receivable, asset impairments, the estimated useful lives of propertyand equipment and intangible assets, and the amounts of certain accruedliabilities. Actual results may vary significantly from these estimates.

 

Certain prior period amounts have been reclassifiedfor comparability with the 2003 presentation.

 

I-7

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(2)                    Liberty Transaction

 

On April 2, 2003, the Companyannounced that it had received an expression of interest from Liberty regardingthe possibility of Liberty acquiring all the issued and outstanding shares ofthe Company that Liberty (through its subsidiaries) does not already own.  As originally proposed by Liberty, theCompany’s stockholders would receive 0.0787 of a share of Liberty MediaCorporation Series A common stock (“Liberty Series A Common Stock”) for eachshare of Company Common Stock held.  Thetransaction would be taxable to the Company’s stockholders.

 

On Command’s Board of Directorsestablished a committee of independent directors to consider the proposal fromLiberty.  The committee engagedindependent legal counsel and financial advisors and had authority, among otherthings, to review and evaluate the terms and conditions of the proposedtransaction, to determine whether the proposed transaction is in the bestinterests of the Company and its public stockholders, to negotiate withLiberty, and to accept, reject, or modify the proposed transaction.

 

On September 9, 2003, theCompany, Liberty, and a wholly-owned subsidiary of Liberty, executed anAgreement and Plan of Merger pursuant to which Liberty would acquire the publiclyheld Company Common Stock not already owned by Liberty and its consolidatedsubsidiaries by exchanging 0.166 of a share of Liberty Series A Common Stockfor each share of Company Common Stock held. However, if the implied value of the exchange ratio in the merger isless than $1.90 or more than $2.10 per share of Company Common Stock, based onthe average closing price of the Liberty Series A Common Stock for the fivetrading days ending on the third trading day prior to the closing of themerger, then the exchange ratio will be adjusted upward or downward, asapplicable, to yield an implied value of $1.90 or $2.10 per share,respectively, based on such average closing price.  Any adjustment of the exchange ratio to more than 0.190 of ashare of Liberty Series A Common Stock for each share of Company Common Stockwill be at Liberty’s sole discretion. If Liberty determines not to increase the exchange ratio further, thenthe exchange ratio would be fixed at 0.190 and the Company would be entitled toterminate the merger agreement.  Anydecision of the On Command board of directors to terminate the merger agreementwould be made by vote of the On Command independent directors.  Prior to the consummation of the merger, theCompany will issue a press release stating the final exchange ratio, if otherthan 0.166.  Consummation of the mergeris subject to On Command shareholder approval and certain customaryconditions.  A special meeting ofstockholders of the Company has been called for December 5, 2003, to considerthe Liberty merger proposal.  Inconnection with this special meeting, a proxy statement/prospectus was mailedon or about November 4, 2003, to On Command’s stockholders as of the October24, 2003 record date for the special meeting. The Company currently expects that the merger proposal will be approvedand that the merger will be consummated on or about December 12, 2003.

 

(3)                    RecentAccounting Pronouncements

 

In May 2003, the Financial Accounting Standards Boardissued *StatementNo. 150, Accounting for Certain Financial Instruments with Characteristics ofBoth Liabilities and Equity* (“Statement No. 150”).  StatementNo. 150 provides guidance as to whether certain financial instruments arerequired to be classified as liabilities, subject to its recognition andmeasurement provisions. Generally, Statement No. 150 is effective forfinancial instruments entered into or modified after May 31, 2003 and isotherwise effective at the beginning of the first interim period beginningafter June 15, 2003.  The Companyadopted the provisions of Statement No. 150 on July 1, 2003. As a result of theadoption of Statement No. 150 for

 

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existing financial instruments entered into on orbefore May 31, 2003, the Company began classifying common stock subject toredemption as a liability in its condensed consolidated balance sheets.

 

(4)                    Earnings(Loss) Per Common Share

 

The loss per common share is based on 30,853,000 and30,925,000 weighted average shares outstanding during the three months endedSeptember 30, 2003 and 2002, respectively, and 30,856,000 and 30,908,000weighted average shares outstanding during the nine months ended September 30,2003 and 2002, respectively.  Potentialcommon shares were not included in the computation of diluted earnings pershare because their inclusion would be anti-dilutive.  At September 30, 2003 and 2002, the number of potentialdilutive common shares was approximately 21,100,000 and 20,197,000,respectively.  Such potential commonshares consist of stock options to acquire shares of Company Common Stock,warrants and convertible securities. The foregoing potential common share amount does not take into accountthe assumed number of shares that may be repurchased by the Company upon theexercise of stock options.

 

(5)                    SupplementalDisclosures to Consolidated Statements of Cash Flows

 

Cash paid for interest was$10,558,000 and $9,279,000 during the nine months ended September 30, 2003and 2002, respectively.  Cash paid forincome taxes was not significant during these periods.

 

(6)                    Debt

 

On September 30, 2003, theCompany (i) received a $40,000,000 unsecured subordinated loan from Liberty,the proceeds of which were used to repay a portion of the outstanding principalamount of loans under the Company’s then existing revolving credit facility, asamended (the “Original Revolving Credit Facility”), and (ii) closed on anAmended and Restated Credit Agreement that replaced the Original Revolving Credit Facility.  In connection with the repayment of theOriginal Revolving Credit Facility, the Company recorded a $170,000 lossrepresenting the write-off of a portion of the remaining unamortized deferredfinancing costs related to the Original Revolving Credit Facility.  Such write-off is included in interestexpense in the accompanying condensed consolidated statements of operations.

 

Debt is summarized asfollows (amounts in thousands):

 
|                                       |   | **September 30,  2003** |    | **December 31,  2002** |   |
|--------------------------------------------|--------|-------------------------|---------|------------------------|--------|
| Amended and  Restated Credit Agreement (a) |   |                    |    |                   |   |
| Term loan                                  |   | $                       | 182,500 |                   | $      | — |   |
| Revolving loan                             |   | 45,633                  |    | —                 |   |
| Subordinated  note payable to Liberty (b)  |   | 40,000                  |    | —                 |   |
| Original  Revolving Credit Facility        |   | —                  |    | 261,633                |   |
| Capital lease obligations                  |   | 461                     |    | 1,146                  |   |
|                                       |   | 268,594                 |    | 262,779                |   |
| Less current portion                       |   | (9,704                  | )       | (833                   | )      |
|                                       |   | $                       | 258,890 |                   | $      | 261,946 |   |

 

(a)          The Amended and Restated Credit Agreementprovides for a $235,000,000 senior secured credit facility, consisting of a$50,000,000 revolving loan and a $185,000,000 term loan.  Both the

 

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revolving and term loans matureon December 31, 2007, and the term loan is subject to scheduled quarterlyamortizations of principal, which began on September 30, 2003 and end onDecember 31, 2007.  Pursuant to suchamortization schedule, the Company repaid $2,500,000 of the term loan onSeptember 30, 2003.  Loans under theAmended and Restated Credit Agreement can be extended as either “ABR” loans or“Eurodollar” loans.  ABR loans bearinterest at the per annum rate equal to the greater of (i) the prime rate and(ii) the federal funds rate plus 0.5%, plus, in each case, a spread of between0.125% and 2.5% depending on the Company’s leverage ratio, with such termsresulting in an effective borrowing rate for ABR loans of 6.5% per annum at September30, 2003.  Eurodollar loans bearinterest at the London interbank offered rate for United States dollar depositsplus a spread of between 1.125% and 3.5% depending on the Company’s leverageratio, with such terms resulting in an effective borrowing rate of 4.64% atSeptember 30, 2003.  At September 30,2003, $2,000,000 of the outstanding borrowings under the Amended and RestatedCredit Agreement were classified as ABR loans and the remaining outstandingamounts were classified as Eurodollar loans.  In addition to the effective borrowing rate, a facility feeranging from 0.375% to 0.5% per annum is charged on the revolving loandepending on the Company’s leverage ratio. The Amended and Restated Credit Agreement contains customary covenantsand agreements, including restrictions on the Company’s ability to paydividends or make other distributions and covenants to maintain leverage ratiosand interest coverage ratios. Substantially all of the Company’s assets are pledged as collateral forborrowings under the Amended and Restated Credit Agreement. The Company had$4,367,000 of remaining availability under the revolving loan at September 30,2003.  The Company’s ability to drawadditional funds under the revolving loan is subject to the Company’s continuedcompliance with applicable financial covenants.  The Company was in compliance with such covenants at September30, 2003.

 

(b)         The subordinated note payable to Liberty isunsecured, bears interest at the rate of 10% per annum and matures on the laterof December 31, 2008 and the date that is one year after the maturity date ofthe Amended and Restated Credit Agreement, as it may be amended, supplementedor otherwise modified from time to time. Pursuant to a subordination agreement between the Company and Libertyentered into on September 30, 2003, the Company’s obligations with respect tothis loan are subordinated to its obligations to the lenders under the Amendedand Restated Credit Agreement and no payment of principal or interest on suchloan may be made until all obligations under the Amended and Restated CreditAgreement are indefeasibly paid in full.

 

Annual maturities of theCompany’s debt for the remainder of 2003 and each of the next five years are asfollows (amounts in thousands):

 

| 2003   |   | $       | 129     |   |
|--------|--------|---------|---------|--------|
| 2004   |   | 13,396  |    |
| 2005   |   | 30,068  |    |
| 2006   |   | 55,001  |    |
| 2007   |   | 130,000 |    |
| 2008   |   | 40,000  |    |
|   |   | $       | 268,594 |   |

 

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(7)                    RelatedParty Transactions

 

On September 30, 2003, theCompany received a $40,000,000 unsecured subordinated loan from Liberty.  For additional information, see note 6.

 

Liberty allocates certain general and administrativeexpenses to the Company.  Although thereare no written agreements with Liberty for these allocations, the Companybelieves the amounts to be reasonable. Allocations from Liberty totaled $111,000 for each of the nine monthperiods ended September 30, 2003 and 2002, and such amounts are included inselling, general and administrative expenses in the accompanying condensedconsolidated statements of operations. In addition, the Company reimburses Liberty for certain expenses,including various insurance premiums, paid by Liberty on behalf of theCompany.  Amounts owed to Libertypursuant to these arrangements ($1,724,000 at September 30, 2003) arenon-interest bearing.

 

Since October 1, 2002, Ascent Media Group, Inc., aconsolidated subsidiary of Liberty (“Ascent Media”) has provided uplink andsatellite transport services to the Company for a negotiated monthly fee.  The terms for these services are set forthin a Content Preparation and Distribution Services Agreement that covers thefive-year period beginning on April 1, 2003. During the period from April 2003 to September 30, 2003, Ascent alsoinstalled satellite equipment at On Command’s downlink sites at hotels pursuantto a separate Services Agreement. During the nine months ended September 30, 2003, Ascent Media chargedthe Company $434,000 for services rendered under both of such agreements.  Ascent Media also may supply the Companywith content preparation services at a negotiated rate during the term of theagreement.  No content preparationservices have been provided through September 30, 2003.

 

Since July 2002, the Company has acquired certainprogramming content from a consolidated subsidiary of Liberty pursuant to anaffiliation agreement that expires in September 2008.  During the nine months ended September 30, 2003, the amountcharged to the Company pursuant to this agreement was $70,000.

 

On August 8, 2000, the Companyissued 13,500 shares of the Company's Series A, $.01 Par Value ConvertibleParticipating Preferred Stock (“Series A Preferred Stock”), to the formerChairman and Chief Executive Officer of the Company in exchange for a$21,080,000 promissory note and a $13,500 cash payment.  The promissory note is secured by the SeriesA Preferred Stock or proceeds thereon and the former Chairman and ChiefExecutive Officer’s personal obligations under such promissory note are limitedto 25% of the principal amount of the note plus accrued interest thereon.  The note, which may not be prepaid, is dueand payable on August 1, 2005, and interest on the note accrues at a rate of 7%per annum, compounded quarterly.

 

(8)                    SignificantCustomers

 

During the nine months ended September30, 2003, hotels owned, managed or franchised by Marriott International, Inc.(“Marriott”), Hilton Hotels Corporation (“Hilton”), InterContinental HotelGroup (formerly Six Continents Hotels, Inc.) (“InterContinental”), Hyatt HotelCorporation (“Hyatt”), and Starwood Hotels and Resorts Worldwide, Inc.(“Starwood”) accounted for 32%, 14%, 11%, 7% and 7%, respectively, of theCompany’s total net room revenue. Accordingly, hotels owned, managed or franchised by the Company’s fivelargest hotel chain customers accounted for 71% of the Company’s total net roomrevenue during the nine months ended September 30, 2003.  The loss of any of these

 

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hotel chain customers, or theloss of a significant number of other hotel chain customers, could have amaterial adverse effect on the Company’s results of operations and financial condition.

 

On March 21, 2001, the Company and Marriott enteredinto a master agreement pursuant to which the Company distributes its servicesin hotel rooms owned or managed by Marriott. In addition, the Company has the opportunity to enter into agreements toprovide its services to additional hotel rooms franchised by Marriott.  The master agreement with Marriott expireson the date when the last contract that is entered into under the masteragreement with a hotel that is owned or managed by Marriott expires.  At September 30, 2003, On Command providedentertainment services to approximately 167,000 rooms that were owned ormanaged by Marriott, and approximately 90,000 rooms that were franchised byMarriott.

 

On Command’s master contract with Hilton expired inApril 2000, and in October 2000, Hilton announced that it would not be renewingsuch master contract.  As a result,domestic hotels owned, managed or franchised by Hilton are currently subject toa master contract between Hilton and a competitor of the Company.  Accordingly, the Company anticipates thatdomestic hotels owned by Hilton will not renew their contracts with the Companyas they expire.  However, domestichotels that are managed or franchised by Hilton are not precluded from renewingtheir contracts with the Company, and, although no assurance can be given, theCompany anticipates that certain of those domestic hotels will choose to renewwith the Company.  At September 30,2003, the Company provided service to approximately 115,000 rooms in 497****domestichotels that are owned, managed or franchised by Hilton.  The majority of these rooms are located inmanaged or franchised hotels that are not owned by Hilton.  Through September 30, 2003, the Company’scontracts with 63 of the aforementioned 497 hotels (16,000 rooms) had expiredand service to these hotels is currently provided under monthly or othershort-term renewals.  The Company’sindividual contracts with the remaining 434 domestic Hilton hotels (99,000rooms) expire at various dates through 2010, with 47% of those rooms expiringby 2005.  In the period from January 1,2002 through September 30, 2003, the Company has entered into new contracts, orrenewed existing contracts, with respect to 10,000 domestic rooms that werefranchised by Hilton, and 2,600 domestic rooms that were managed byHilton.  The net room revenue derived fromdomestic hotels that were owned, managed, or franchised by Hilton decreasedapproximately 18% during the nine months ended September 30, 2003, as comparedto the corresponding prior year period. Over time, the Company anticipates that the revenue it derives fromhotels that are owned, managed or franchised by Hilton will continue todecrease.  However, due to theuncertainties involved, the Company is currently unable to predict the amountand timing of the revenue decreases**.**

 

The Company does not have mastercontracts with either Starwood or InterContinental, and the Company’s mastercontract with Hyatt provides for the simultaneous expiration of the Company’scontractual relationships with all of the individual hotels that are subject tothe Hyatt master contract as of December 31, 2004.  At September 30, 2003, the Company provided entertainmentservices to approximately 59,000rooms in hotels that are owned, managed or franchised by Hyatt, andapproximately 176,000 rooms in hotels that are owned, managed or franchised byStarwood or InterContinental. Agreements with respect to approximately 42% of such Starwood andInterContinental rooms have already expired, or will expire by December 31,2004.  At September 30, 2003,approximately 37,000 or 60% of the Company’s Starwood rooms were located inSheraton or Four Points hotels that, depending on whether such hotels areowned, managed or franchised by Starwood, may be covered by a master contractwith a competitor of the Company upon the expiration of such hotels’ contractswith the Company.  The Company isactively pursuing master agreements

 

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with InterContinental, withStarwood with respect to the Starwood brands that are not already covered by acompetitor’s contract, and with Hyattfor the period after December 31, 2004.

 

In certain cases, the Company isalso pursuing direct contractual relationships with individual hotels that areowned, managed or franchised by these hotel chains.  No assurance can be given that the Company will be successful inexecuting master or individual hotel contracts.  However, the Company expectsthat, regardless of the expiration dates of master contracts or individualcontracts with hotels, the Company will continue to be the provider of in-roomentertainment services for individual hotels that are not under contract untilsuch time as a competitor’s equipment can be installed.

 

(9)                    Commitmentsand Contingencies

 

In connection with a first quarter 2001 acquisition ofa 7.5% interest in MagiNet Corporation, formerly e-ROOM CORPORATION(“MagiNet”), and the settlement of certain litigation, the Company agreed thatMagiNet would have the option during the 15 day period beginning on March 1,2003 to cause the Company to repurchase all, but not less than all, of the 275,000shares of Company Common Stock issued to MagiNet at a price of $15 pershare.  During the fourth quarter of2002, the Company repurchased 119,500 of such shares for an aggregate price of$1,344,000 or $11.25 per share. In connection with this transaction, theparties agreed to postpone until March 1, 2004 the date on which the Companycan be required to repurchase 119,500 of the remaining shares subject torepurchase.  The Company is not precluded from repurchasing such sharesat an earlier date.  The repurchaseprice for such shares will be $15 per share, plus an adjustment factorcalculated from March 1, 2003 to the date of repurchase, at a rate of 8% perannum.  On March 1, 2003, the date onwhich the remaining 36,000 shares will first become subject to repurchase bythe Company was postponed until March 1, 2004. On July 29, 2003, MagiNet agreed to assign the above-described 36,000shares to the Company in exchange for a $540,000 credit against the cost of equipmentto be purchased by MagiNet from the Company through March 1, 2004.  To the extent that MagiNet has not used allof such credit by March 1, 2004, the remaining credit will be settled incash.  Through September 30, 2003,MagiNet equipment purchases totaling $214,000 have been applied against thiscredit.

 

On February 28, 2001, the Company acquired acontrolling interest in Hotel Digital Network, Inc. (“Hotel DigitalNetwork”).  In connection with suchacquisition, the Company entered into a stockholders agreement (the “HDNStockholders Agreement”) with the then controlling stockholder of Hotel DigitalNetwork (the “HDN Stockholder”).  TheHDN Stockholders Agreement provided the HDN Stockholder with the right duringeach of the 30-day periods beginning on March 1, 2003 and 2004 to require the Companyto exchange shares of Company Common Stock for all, but not less than all, ofthe Hotel Digital Network common shares held by the HDN Stockholder. On March20, 2003, the HDN Stockholder exercised such right, and in May 2003, theCompany acquired all of the HDN Stockholder’s interests in Hotel DigitalNetwork common stock for cash and certain other consideration, which in theaggregate was not material to the Company’s financial condition.  Such acquisition, which did not require theissuance of any shares of Company Common Stock, represented the finalsettlement of the Company’s purchase obligation under the HDN StockholdersAgreement.

 

The Company is a party to affiliation agreements withprogramming suppliers.  Pursuant tocertain of these agreements, the Company is committed to distribute suchsuppliers’ programming on its video systems. Additionally, certain of these agreements provide for minimum paymentsand per room rates that escalate as the number of rooms receiving programmingdecreases.

 

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In certain cases, the Company has entered into mastercontracts whereby the Company has agreed to purchase televisions and/or providecapital assistance and, to a lesser extent, provide television maintenanceservices to hotels during the respective terms of the applicable contracts.

 

On November 7, 2003, a civil action was filed byNationwide Telecom, Inc. and Capitol Telecommunications against the Company,arising out of Nationwide Telecom’s and Capitol Telecommunications’ performanceof installation services for the Company. The plaintiffs allege breach of contract, promissory estoppel, fraud,civil theft, misappropriation, tortuous interference with prospective businessrelations, tortuous interference with contract, conspiracy and negligence.  The Company is investigating theallegations.

 

The Company has received a series of letters fromAcacia Media Technologies Corporation (“Acacia”) regarding a portfolio ofpatents owned by Acacia.  Acacia has allegedthat its patents cover certain activities performed by the Company and hasproposed that the Company take a license under those patents.  The Company has reviewed Acacia’s patentsand believes there are substantial arguments that Acacia’s claims lackmerit.  On November 13, 2003, Acaciaannounced that it initiated a patent infringement lawsuit against the Companyin the District Court for the Central District of California.  The Company has not yet received service ofprocess.

 

The Company has contingent liabilities related tolegal proceedings and other matters arising in the ordinary course ofbusiness.  Although it is reasonablypossible the Company may incur losses upon conclusion of such matters, anestimate of any loss or range of loss cannot be made.  In the opinion of management, it is expected that amounts, ifany, which may be required to satisfy such contingencies will not be materialin relation to the accompanying condensed consolidated financial statements.

 

(10)              StockCompensation

 

The Company applies the intrinsic value-based methodof accounting prescribed by Accounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees,* (“APB Opinion No. 25”) and relatedinterpretations, to account for its fixed plan stock options.  Under this method, compensation expense forstock options or awards that are fixed generally is required to be recognizedover the vesting period only if the current market price of the underlyingstock exceeds the exercise price on the date of grant.  Statement of Financial Accounting StandardsNo. 123, *Accountingfor Stock-Based Compensation,*(“Statement No. 123”) establishedaccounting and disclosure requirements using a fair value-based method ofaccounting for stock-based employee compensation plans.  As allowed by Statement No. 123, the Companyhas elected to continue to apply the intrinsic value-based method of accountingprescribed by APB Opinion No. 25, and has adopted the disclosure requirementsof Statement No. 123, as amended by Statement of Financial Accounting StandardsNo. 148, *Accountingfor Stock-Based Compensation  –Transition and Disclosure  – AnAmendment of FASB Statement No. 123*.

 

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The following table illustrates the effects on netloss and loss per share if the Company had applied the fair value recognitionprovisions of Statement No. 123 to stock-based employee compensation (amountsin thousands except per share amounts).

 
|                                                                         |   | **Nine  months ended September 30,** |    |
|------------------------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                                         |   | **2003**                             |    | **2002** |   |
|                                                                         |   |                                 |    |   |   |
| Net loss, as  reported:                                                      |   | $                                    | (25,315 | ) | $ | (28,334 | ) |
| Stock  compensation expense determined under fair value method, net of taxes |   | (2,106                               | )       | (3,026 | ) |
| Pro forma net  loss                                                          |   | $                                    | (27,421 | ) | $ | (31,360 | ) |
| Pro forma net  loss applicable to common stockholders                        |   | $                                    | (34,185 | ) | $ | (37,744 | ) |
|                                                                         |   |                                 |    |   |   |
| Loss per share:                                                              |   |                                 |    |   |   |
| Basic and  diluted - as reported                                             |   | $                                    | (1.04   | ) | $ | (1.12 | ) |
| Basic and  diluted - pro forma                                               |   | $                                    | (1.11   | ) | $ | (1.22 | ) |

 

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Management's Discussion And Analysis Of FinancialCondition And Results Of Operations

 

General

 

The following discussion and analysis providesinformation concerning the financial condition and results of operations of theCompany and should be read in conjunction with the accompanying condensed consolidatedfinancial statements of the Company, as well as the Company’s Annual Report onForm 10-K for the year ended December 31, 2002.

 

Certain statements in this Quarterly Report on Form10-Q constitute forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. 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 differmaterially from future results, performance, or achievements expressed orimplied by such forward-looking statements. Such risks, uncertainties and other factors include, among others:

 

•                  Generaleconomic and business conditions, and trends in the travel and entertainmentindustries;

•                  Trendsin hotel occupancy rates and business and leisure travel patterns, includingthe potential impacts that wars, actual or threatened terrorist attacks andnational security responses thereto, contagious diseases such as severe acuterespiratory syndrome, or other events might have on such occupancy rates andtravel patterns;

•                  Uncertaintiesinherent in the Company’s efforts to renew or enter into agreements onacceptable terms with its significant hotel chain customers and their owned,managed and franchised hotels;

•                  TheCompany’s ability to access quality movies, programming networks and othercontent on acceptable terms;

•                  Theregulatory and competitive environment of the industry in which On Command operates;

•                  Thepotential impact that any negative publicity, lawsuits, or boycotts byopponents of mature-themed programming content distributed by the Company couldhave on the willingness of hotel industry participants to deliver such contentto guests;

•                  Thepotential for increased government regulation and enforcement actions, and thepotential for changes in laws that would restrict or otherwise inhibit theCompany’s ability to make mature-themed programming content available over itsvideo systems;

•                  Uncertaintiesregarding the acceptance and buy rates for mature-themed programming contentdistributed by the Company;

•                  Uncertaintiesinherent in new business strategies such as the Company’s recent efforts toexpand its target market to include smaller hotels;

•                  Competitivethreats posed by rapid technological changes;

•                  Thedevelopment, provision and marketing of new platforms and services, andcustomer acceptance, usage rates, and profitability of such platforms andservices;

•                  Uncertaintiesinherent in the Company’s efforts to improve future operating results byincreasing revenue and decreasing costs;

•                  Uncertaintiesinherent in the Company’s efforts to effectively manage capital expenditures;

•                  Uncertaintiesinherent in the Company’s ability to execute planned upgrades of its videosystems, including uncertainties associated with operational, economic andother factors;

•                  Theability of vendors to deliver required equipment, software and services;

•                  Availabilityof qualified personnel;

•                  Competitorresponses to On Command’s products and services, and the overall marketacceptance of such products and services; and

•                  Otherfactors discussed in this Report.

 

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These forward-looking statements (and such risks,uncertainties and other factors) speak only as of the date of this Report, andOn Command expressly disclaims any obligation or undertaking to disseminate anyupdates or revisions to any forward-looking statement contained herein, toreflect any change in On Command's expectations with regard thereto, or anyother changes in events, conditions, or circumstances on which any suchstatement is based.

 

Material Changes in Results of Operations

 

Revenue

 

Revenue consists primarily of fees collected from hotelsfor in-room services provided to hotel guests by the Company.  Services provided by the Company to hotelguests include pay-per-view movies, free-to-guest television programming,Internet service, short subject products, video games, and digital music.  The Company also earns revenue from the saleof video and music systems to third parties and the sale of video equipment tohotels.  The Company’s total net revenuewas $60,966,000 and $60,790,000 during the three months ended September 30,2003 and 2002, respectively, and $177,238,000 and $179,172,000 during the ninemonths ended September 30, 2003 and 2002, respectively.

 

Net room revenue increased $1,453,000 or 2.5% duringthe three months ended September 30, 2003, and $294,000 or less than one percentduring the nine months ended September 30, 2003, as compared to thecorresponding prior year periods.  Suchincreases in net room revenue are primarily attributable to the net effect of(i) decreases in revenue associated with reductions in the volume ofpay-per-view movie buys; (ii) increases in revenue attributable to increases inthe average rates charged for pay-per-view feature films; (iii) increases of$1,895,000 and $3,961,000, respectively, in the aggregate revenue derived fromshort subject, digital music and television-based Internet products dueprimarily to increased buy rates and, in the case of the digital music andtelevision-based Internet products, growth in equipped rooms; and (iv)increases in free-to-guest programming revenue of $275,000 and $1,670,000,respectively, that are primarily the result of rate increases.  The Company believes that the decreases inpay-per-view movie buys during both the three-month and nine-month periods areattributable to the combined effect of (i) a decrease in buy rates formature-themed pay-per-view products; (ii) decrease in occupancy rates; (iii) achange in hotel occupancy mix; and (iv) a reduction in the average number ofrooms served by the Company.  During thenine-months ended September 30, 2003, the Company experienced a 3.4% decline inthe average number of rooms served by the Company.  Such decrease is attributable to (i) the July 2002 sale of theCompany’s European operations; (ii) the loss of rooms to competitors; and (iii)the discontinuance of service to certain non-profitable hotels.

 

Overall domestic hoteloccupancy rates, as reported by Smith Travel Research, declined less than onepercent during the nine months ended September 30, 2003, as compared tothe corresponding prior year period. ** **Inaddition, occupancy rates for hotels in the top 25 markets, as reported bySmith Travel Research, declined less than one percent over the same period.  Sincethe Company derives a significant portion of its revenue from hotels located inthe top 25 markets, the Company believes that the occupancy rate for thissegment is the best indicator of the impact changes in hotel occupancy arehaving on the Company’s business.  Hoteloccupancy rates are outside of the Company’s control, and changes in hoteloccupancy rates can have a significant impact on the Company’s results ofoperations.

 

During the nine months endedSeptember 30, 2003, hotels owned, managed or franchised by Marriott, Hilton,InterContinental, Hyatt, and Starwood accounted for 32%, 14%, 11%, 7% and 7%,respectively, of the Company’s total net room revenue.  Accordingly, hotels owned, managed orfranchised by the Company’s five largest hotel chain customers accounted for71% of the Company’s total net room revenue during the nine months ended September30, 2003.  The loss of any of thesehotel chain customers, or the loss of a significant number of other hotel chaincustomers, could have a material adverse effect on the Company’s results ofoperations and financial condition.  Foradditional information concerning the

 

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Company’s relationships with its significantcustomers, see note 8 to the accompanying condensed consolidated financialstatements.

 

System and equipment sales and other revenue decreased$2,228,000 or 28.6% during the nine months ended September 30, 2003, ascompared to the corresponding prior year period.  Such decreases are attributable to (i) a $1,667,000 decrease inthe sales of hardware-based music systems and (ii) a $663,000 decrease in thesales of video systems and equipment. The decrease in the Company’s hardware-based music system sales islargely attributable to the Company’s efforts to convert its primary musicsystem customer to a software-based music system from a hardware-based musicsystem. The Company expects to initiate sales of its software-based musicsystems to this customer during the****firstquarter of 2004.  As a result,the Company will not realize significant revenue from the sale ofhardware-based music systems during 2003 and future periods, and no revenuewill be derived from the sale of its software-based music systems during 2003.System and equipment sales and other revenue decreased $1,277,000 or 45.9%during the three months ended September 30, 2003, as compared to thecorresponding prior year period.  Suchdecrease generally is attributable to the same factors that are described abovewith respect to the nine-month period.

 

Direct Costs

 

Direct costs consist primarily of fees paid to movieand other content providers, hotel commissions, direct costs associated withthe Company’s Internet product, and costs associated with video and musicsystems sold to other providers, and video equipment sold to hotels.

 

Content fees, commissions and other in-room servicescosts increased $4,436,000 or 5.2% during the nine months ended September 30,2003, as compared to the corresponding prior year periods.  Such increase is primarily attributable to(i) a $2,379,000 increase in hotel commissions; (ii) a $1,402,000 increase inroyalties associated with the Company’s mature-themed pay-per-view movies;(iii) an $881,000 increase in duplication and distribution costs; (iv) a$980,000 decrease in free-to-guest programming costs; and (v) otherindividually insignificant changes in the components of this line item. Theincrease in hotel commissions is primarily due to a third quarter 2002 reversalof a $1,329,000 accrual that was deemed to be no longer needed for its intendedpurpose, and a slightly higher average commission rate during 2003 as a resultof changes in the commission structure for certain hotels.  The increase in mature-themed royalties isthe result of an increase in the quality and quantity of mature-themed moviesavailable through the Company’s video systems due to the initiation of a newvendor relationship in March 2003 and increases in the capacity of certain ofthe Company’s video systems.  Theincrease in system duplication and distribution expense is due to an increasein the quantity of videocassettes duplicated and shipped and an increase in thefrequency of title exchanges.  Thedecrease in free-to-guest programming costs is attributable to cost savingsresulting from the optimization of certain channel line-ups and changes incertain distribution agreements that were only partially offset by higher ratesfrom certain programming networks. Feature film royalties decreased slightly as increases due to higherfeature film revenue during the nine-month 2003 period were more than offset bya $515,000 benefit associated with the second quarter 2003 settlement offeature film royalty audits. In the aggregate, content fees, commissions andother in-room service costs represented 52.6% and 50.1% of total net roomrevenue during the nine-month 2003 and 2002 periods, respectively. Certain ofthe Company’s content fees and other in-room service costs do not vary withroom revenue and occupancy rates. Content fees, commissions and other in-room services costs increased$2,457,000 or 8.5% during the three months ended September 30, 2003, ascompared to the corresponding prior year period.  Such increase generally is attributable to the same factors thatare described above with respect to the nine-month period.

 

The Company is a party to various agreements with programmingsuppliers that permit the Company to distribute movies and programmingnetworks.  The Company expects that thecost of such movies and programming networks will increase in future periods ascontracts expire and renewals are negotiated. Certain of the Company’s contracts with hotel customers limit the amountof any cost increases that can be

 

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passed on to any such hotels. Any cost increases that the Company is not able to pass on to its customerswould result in increased pressure on the Company’s operating margins.

 

System, equipment and other costs decreased $521,000or 39.1% and $1,167,000 or 29.4% during the three and nine months endedSeptember 30, 2003, respectively, as compared to the corresponding prior yearperiods.  Such decreases primarily areattributable to lower costs as a result of the combined effect of lower musicand video system sales and improved margins on video system sales.

 

Operations Support

 

Operations support expense includes the labor,materials and overhead costs associated with the repair, maintenance andsupport of video systems and other room service equipment.  Operations support expense decreased$344,000 or 5.7% and $2,241,000 or 11.4% during the three and nine months endedSeptember 30, 2003, respectively, as compared to the corresponding prior yearperiods. Such decreases are attributable primarily to (i) cost saving measuresthat resulted in lower rent and other occupancy costs, reduced televisionrepair costs, and in other individually insignificant expense reductions; and(ii) the impact of the July 2002 sale of the Company’s European operations.

 

Research and Development

 

Research and development expense decreased $72,000 or6.3% and $107,000 or 3.4% during the three and nine months ended September 30,2003, respectively, as compared to the corresponding prior year periods.  Such fluctuations are attributable toindividually insignificant changes in the components of this line item.

 

Selling, General and Administrative

 

Selling, general and administrative expenses increased$640,000 or 10.9% and $1,503,000 or 8.9% during the three and nine months endedSeptember 30, 2003, respectively, as compared to the corresponding prior yearperiods.  Such increases are attributable primarily to (i) costs of$577,000 and $709,000, respectively, associated with Liberty’s April 2003proposal to acquire all of the Company Common Stock not already owned byLiberty and its consolidated subsidiaries; and (ii) higher labor costs.  Such increases were offset in part byreductions in the amounts accrued for employee bonuses.  The percentage of total net revenue that isrepresented by selling, general and administrative expenses was 10.3% and 9.4%during the nine-month 2003 and 2002 periods, respectively.

 

Depreciation andAmortization

 

Depreciation and amortization expense decreased$979,000 or 5.1% and $2,553,000 or 4.3% during the three and nine months endedSeptember 30, 2003, respectively, as compared to the corresponding prior yearperiods.  Such decreases represent thenet effect of reductions to the Company’s depreciable asset base that were onlypartially offset by increases attributable to capital expenditures.  The reductions in the Company’s depreciableasset base are attributable to (i) assets becoming fully depreciated, and (ii)asset dispositions.

 

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Asset Impairment andOther Charges

 

The Company recorded impairment and other charges of$2,758,000 and $8,401,000 during the nine months ended September 30, 2003and 2002, respectively.  The 2002 amountincludes a loss of $5,103,000 related to the July 2002 sale of the Company’sEuropean operations, and a loss of $1,411,000 relating to a transaction inwhich certain equipment was transferred to STSN, Inc.  The 2003 charges and the remaining 2002 charges are comprised ofamounts related to obsolete materials and equipment, and losses on variousdispositions of property and equipment, and other assets**.**

 

Interest Expense

 

Interest expense increased $983,000 or 27.8% and$613,000 or 5.8% during the three and nine months ended September 30, 2003,respectively, as compared to the corresponding prior year periods.  Such increases are primarily attributable toincreases associated with higher amortization of deferred financing costs as aresult of fees paid in connection with the Amended and Restated CreditAgreement and amendments to the Original Revolving Credit Facility.  Changes in average interest rates andaverage outstanding borrowings did not significantly impact the comparisons.

 

Income Taxes

 

The Company’s income tax expense of $170,000 and$366,000 during the nine months ended September 30, 2003 and 2002,respectively, represents taxes in certain foreign, state and local jurisdictions.  The Company’s reported income tax expensediffers from the expected benefit that would result by applying the statutoryrates to the Company’s pre-tax losses primarily because the Company is onlyable to realize income tax benefits for financial reporting purposes to theextent that the Company generates taxable income, or to the extent that taxbenefits (i) represent refunds due to the Company or (ii) offset recordedincome tax liabilities.  For financialreporting purposes, all of the Company’s income tax liabilities had been fullyoffset by income tax benefits at September 30, 2003 and 2002, respectively.

 

Net Loss

 

As a result of the factors described above, theCompany’s net loss decreased from $28,334,000 during the nine months endedSeptember 30, 2002 to $25,315,000 during the nine months ended September 30,2003.  The Company is attempting toimprove its operating results by increasing revenue while containing, andwherever possible, reducing expenses and capital expenditures.  Specifically, the Company plans to increaserevenue by (i) developing and, to the extent economically feasible,implementing new technologies that will enhance the Company’s ability to manageits existing products and/or allow the Company to introduce new or more technologicallyadvanced systems or products; (ii) retaining existing hotel customers andselectively increasing the number of rooms in the Company’s traditional targetmarket (generally hotels with 150 or more rooms);  (iii) expanding the Company’s target market by marketing theMiniMateTM platform to smaller hotels (generally hotels with less than 150rooms) and lower cost hotels; and (iv) selectively increasing prices.  In addition, the Company expects to continueto focus on all available opportunities to reduce or contain costs for theforeseeable future.  In this regard, theCompany believes vendor and customer relationships, outsourcing, and newtechnologies, are among the areas that will provide opportunities for costreduction and containment during the remainder of 2003 and in futureperiods.  The Company intends to containand reduce capital expenditures by continuing its efforts to manage and deploycapital with a view towards improving the Company’s return on its capitalexpenditures. The Company cannot presently predict the amount of increasedrevenue, decreased costs or other benefits that might result from its effortsto improve operating results. Furthermore, the Company’s ability to accomplish its operatingobjectives is dependent to a degree on hotel occupancy rates and other factorsoutside of its

 

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control.  No assurance can begiven that the Company will be able to significantly increase its revenue baseor reduce its expenses or capital expenditures.  To the extent that changes in hotel occupancy rates impact theCompany’s revenue base, the Company will not experience proportionate changesin its expenses since many of the Company’s expenses do not vary with hoteloccupancy rates.

 

Material Changes inFinancial Condition

 

During the nine months ended September 30, 2003, theCompany used****$29,015,000 of cash provided by operating activities,$3,655,000 of cash provided by financing activities and a $2,859,000 decreasein cash and cash equivalents to fund the **$**35,696,000 used by its investingactivities.  For additional information,see the accompanying condensed consolidated statements of cash flows.

 

On September 30, 2003, theCompany (i) received a $40,000,000 unsecured subordinated loan from Liberty,the proceeds of which were used to repay a portion of the outstanding principalamount of lons outstanding under the Original Revolving Credit Facility, and(ii) closed on an Amended and Restated Credit Agreement that replaced theOriginal Revolving Credit Facility.  Fora schedule of the Company’s annual debt maturities, after giving effect tothese transactions, see note 6 to the accompanying consolidated financialstatements.

 

The Amended and Restated CreditAgreement provides for a $235,000,000 senior secured credit facility,consisting of a $50,000,000 revolving loan and a $185,000,000 term loan.  Both the revolving and term loans mature onDecember 31, 2007, and the term loan is subject to scheduled quarterlyamortizations of principal, which began on September 30, 2003 and end onDecember 31, 2007.  Pursuant to suchamortization schedule, the Company repaid $2,500,000 of the term loan onSeptember 30, 2003.  Loans under theAmended and Restated Credit Agreement can be extended as either “ABR” loans or“Eurodollar” loans.  ABR loans bearinterest at the per annum rate equal to the greater of (i) the prime rate and(ii) the federal funds rate plus 0.5%, plus, in each case, a spread of between0.125% and 2.5% depending on the Company’s leverage ratio, with such termsresulting in an effective borrowing rate for ABR loans of 6.5% per annum atSeptember 30, 2003.  Eurodollar loansbear interest at the London interbank offered rate for United States dollar depositsplus a spread of between 1.125% and 3.5% depending on the Company’s leverageratio, with such terms resulting in an effective borrowing rate of 4.64% atSeptember 30, 2003.  At September 30,2003, $2,000,000 of the outstanding borrowings under the Amended and RestatedCredit Agreement were classified as ABR loans and the remaining outstandingamounts were classified as Eurodollar loans. In addition to the effective borrowing rate, a facility fee ranging from0.375% to 0.5% per annum is charged on the revolving loan depending on theCompany’s leverage ratio.  The Amendedand Restated Credit Agreement contains customary covenants and agreements,including restrictions on the Company’s ability to pay dividends or make otherdistributions and covenants to maintain leverage ratios and interest coverageratios.  Substantially all of theCompany’s assets are pledged as collateral for borrowings under the Amended andRestated Credit Agreement. The Company had $4,367,000 of remaining availabilityunder the revolving loan at September 30, 2003.  The Company’s ability to draw additional funds under therevolving loan is subject to the Company’s continued compliance with applicablefinancial covenants.  The Company was incompliance with such covenants at September 30, 2003.

 

The subordinated note payable toLiberty is unsecured, bears interest at the rate of 10% per annum and matureson the later of December 31, 2008 and the date that is one year after thematurity date of the Amended and Restated Credit Agreement, as it may beamended, supplemented or otherwise modified from time to time.  Pursuant to a subordination agreementbetween the Company and Liberty entered into on September 30, 2003, theCompany’s obligations with respect to this loan are subordinated to itsobligations to the lenders under the Amended and Restated Credit Agreement andno payment s of principal or interest on such loan may be made until allobligations under the Amended and Restated Credit Agreement are indefeasiblypaid in full.

 

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During 2001, the Company issued to AscentEntertainment Group, Inc. (“Ascent”) Series B Cumulative Redeemable PreferredStock, par value $.01 per share (the “Series B Preferred Stock”), Series CCumulative Redeemable Preferred Stock, par value $.01 per share (the “Series CPreferred Stock”) and Series D Cumulative Convertible Redeemable PreferredStock, par value $.01 per share (“Series D Preferred Stock”) in exchange foraggregate net cash proceeds of $84,942,000. The Series B Preferred Stock, Series C Preferred Stock and Series DPreferred Stock are classified as mandatorily redeemable preferred stock withinthe accompanying condensed consolidated balance sheet due to the fact that,under certain circumstances and subject to certain restrictions contained inthe Amended and Restated Credit Agreement, Ascent could require the Company toredeem such mandatorily redeemable preferred stock.  Ascent has informed theCompany that it currently does not intend to require the redemption of anyportion of the liquidation value of the Series B Preferred Stock, Series CPreferred Stock, or Series D Preferred Stock. Accumulated and unpaid dividends on the Company’s Series B PreferredStock, Series C Preferred Stock and Series D Preferred Stock aggregated $19,670,000at September 30, 2003.  Suchdividends have been added to the liquidation preference of the applicablepreferred stock issuance since the Company has not paid any cash dividendssince issuance.  The Company does notintend to pay cash dividends on any of its preferred stock issuances for theforeseeable future.

 

In connection with a first quarter 2001 acquisition ofa 7.5% interest in MagiNet and the settlement of certain litigation, theCompany agreed that MagiNet would have the option during the 15 day periodbeginning on March 1, 2003 to cause the Company to repurchase all, but not lessthan all, of the 275,000 shares of Company Common Stock that had been issued toMagiNet in such transaction, at a price of $15 per share.  During the fourth quarter of 2002, theCompany repurchased 119,500 of such shares for an aggregate price of $1,344,000or $11.25 per share. In connection with this transaction, the parties agreed topostpone until March 1, 2004 the date on which the Company can be required torepurchase 119,500 of the remaining shares subject to repurchase**.**  TheCompany is not precluded from repurchasing such shares at an earlier date.  The repurchase price for such shares will be$15 per share, plus an adjustment factor calculated from March 1, 2003 to thedate of repurchase, at a rate of 8% per annum. On March 1, 2003, the date on which the remaining 36,000 shares willfirst become subject to repurchase by the Company was postponed until March 1,2004.  On July 29, 2003, MagiNet agreedto assign the above-described 36,000 shares to the Company in exchange for a$540,000 credit against the cost of equipment to be purchased by MagiNet fromthe Company through March 1, 2004.  Tothe extent that MagiNet has not used all of such credit by March 1, 2004, theremaining credit will be settled in cash. Through September 30, 2003, MagiNet equipment purchases totaling$214,000 have been applied against this credit.

 

Historically, the Company has required externalfinancing to fund the cost of installing and upgrading video systems inhotels.  However, during 2002 theCompany was able to manage its operations and capital expenditures such thatthe Company was able to rely on internally generated funds and existing sourcesof liquidity to finance its installation and upgrade activities.  During the remainder of 2003 and duringfuture periods, the Company intends to continue to focus its efforts onincreasing revenue while containing, and wherever possible, reducing expensesand capital expenditures.  The Company expectsthat it will be able to rely on cash provided by operations, existingavailability under the Amended and Restated Credit Agreement, and existing cashand cash equivalent balances to fund its capital expenditures, requiredprincipal reductions under the Amended and Restated Credit Agreement (as setforth in note 6 to the accompanying condensed consolidated financialstatements), and other anticipated liquidity requirements during the remainderof 2003 and 2004.  To the extent thatthe Company were to experience revenue shortfalls or any other unfavorablevariances from its 2003 and 2004 operating plans, the Company anticipates thatit would seek to reduce expenses and/or capital expenditures to compensate forany such shortfall or unfavorable variance. Accordingly, the Company believes, although no assurance can be given,that it will not require additional sources of liquidity to fund its capitalexpenditures and anticipated liquidity requirements during the remainder of2003 and during 2004.  Notwithstandingthe foregoing, the Company anticipates that it would

 

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require additional external financing to fund any significant newgrowth initiatives or unanticipated liquidity requirements.  Noassurance can be given that the Company will not be required to seek externalfinancing during the remainder of 2003 and during 2004, and if externalfinancing is required, no assurance can be given that any such financing wouldbe available on terms acceptable to the Company or at all.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company is exposed to market risk from changes ininterest rates, which could impact its results of operations and financialcondition, particularly the Company’s interest expense and cash flow.  The Company does not hedge thisexposure.  As further described in note6 to the accompanying condensed consolidated financial statements, loansextended under the Amended and Restated Credit Agreement bear interest atvariable rates.  At September 30, 2003,the outstanding borrowings under the Amended and Restated Credit Agreement were$228,133,000.  Exclusive of facilityfees, the effective borrowing rate on amounts outstanding under the Amended andRestated Credit Agreement was 4.65% at September 30, 2003.  Assuming no increase or decrease in theamount outstanding, a hypothetical 1% increase (or decrease) in interest ratesat September 30, 2003 would increase (or decrease) the Company’s annualinterest expense and cash outflow by approximately $2,281,000.

 

The Company’s foreign operations are located primarilyin Canada and Mexico. The Company believes the risks of foreign exchange ratefluctuations on its present operations are not material to the Company’soverall financial condition.  However,the Company will consider using foreign currency contracts, swap arrangements,or other financial instruments designed to limit exposure to foreign exchangerate fluctuations, if deemed prudent.

 

Item 4. Controls and Procedures

 

In accordance with Exchange Act Rules 13a-15 and15d-15, the Company carried out an evaluation, under the supervision and withthe participation of management, including its chief executive officer andprincipal accounting and financial officer (the “Executives”), of theeffectiveness of its disclosure controls and procedures as of the end of theperiod covered by this report.  Based onthat evaluation, the Executives concluded that the Company’s disclosure controlsand procedures were effective as of September 30, 2003 to providereasonable assurance that information required to be disclosed in its reportsfiled or submitted under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

There has been no change in the Company’s internalcontrols over financial reporting that occurred during the three months endedSeptember 30, 2003 that has materially affected, or is reasonably likely tomaterially affect, its internal controls over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1.                                     LegalProceedings

 

There are no material changes to pending legalproceedings to which the Company is a party or to which any of its property issubject, except as follows:

 

On November 7, 2003, a civil action entitled NationwideTelecom, Inc.; Capitol Telecommunications v. On Command Corporation et alwas filed in the District Court in Bexar County, Texas, Civil Action No.2003C117627, arising out of the plaintiffs’ performance of installationservices for the Company.  Theplaintiffs allege breach of contract, promissory estoppel, fraud, civil theft,misappropriation, tortuous interference with prospective business relations,tortuous interference with contract, conspiracy and negligence.  The Company is investigating theallegations.

 

The Company has received a series of letters fromAcacia Media Technologies Corporation (“Acacia ”) regarding a portfolio ofpatents owned by Acacia.  Acacia hasalleged that its patents cover certain activities performed by the Company andhas proposed that the Company take a license under those patents.  The Company has reviewed Acacia's patentsand believes there are substantial arguments that Acacia's claims lackmerit.  On November 13, 2003, Acaciaannounced that it initiated a patent infringement lawsuit against the Companyin the District Court for the Central District of California.  The Company has not yet received service ofprocess.

 

Item 6.                                     Exhibitsand Reports on Form 8-K

 

(A)                                                      Exhibits

 

31.1   Rule13a-14(a)/15d-14(a) Certification.

 

31.2   Rule13a-14(a)/15d-14(a) Certification.

 

32      Section1350 Certification.

 

(B)                                                        Reportson Form 8-K filed during the quarter ended September 30, 2003:

 
| **Date Filed**     |   | **Items  Reported** |   | **Financial  Statements Filed** |
|--------------------|--------|---------------------|--------|---------------------------------|
|               |   |                |   |                            |
| July 2, 2003       |   | Items 5 and 7       |   | None                            |
|               |   |                |   |                            |
| September 16, 2003 |   | Items 5 and 7       |   | None                            |
|               |   |                |   |                            |
| October 2, 2003    |   | Item 7              |   | None                            |

 

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(C)  SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
|                           | ON COMMAND CORPORATION                                                                                      |
|--------------------------------|-------------------------------------------------------------------------------------------------------------|
|                           |
|                           |
| Date:   November 14, 2003 | By:                                                                                                         | /s/  Bernard  G. Dvorak |   |
|                           | Bernard G. Dvorak                                                                                           |
|                           | Senior Vice President, Chief Financial Officer and  Treasurer  (Principal Accounting and Financial Officer) |

 

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**EXHIBIT INDEX**

 

Exhibits

 

31.1   Rule13a-14(a)/15d-14(a) Certification.

 

31.2   Rule13a-14(a)/15d-14(a) Certification.

 

32      Section1350 Certification.

 

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