**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 June 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 whether the registrant is an accelerated filer(as described in Rule 12(b)-2 of the Securities Exchange Act).  o Yes ý No

 

Indicate bycheck mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days ýYes o No

 

The number ofshares outstanding of the Registrant’s Common Stock as of July 31, 2003 was30,858,340 shares.

 

 

----

 

**ON COMMAND CORPORATION**

(An Indirect Consolidated Subsidiary ofLiberty Media Corporation)

Condensed Consolidated Balance Sheets

(unaudited)

 
|                                                    |   | **June 30,  2003**         |    | **December 31,  2002** |   |
|---------------------------------------------------------|--------|----------------------------|---------|------------------------|--------|
|                                                    |   | **(amounts in thousands)** |    |
| Assets                                                  |   |                       |    |                   |   |
| Current assets:                                         |   |                       |    |                   |   |
| Cash and cash equivalents                               |   | $                          | 999     |                   | $      | 4,501 |   |
| Accounts receivable, net                                |   | 30,529                     |    | 33,525                 |   |
| Other current assets                                    |   | 1,983                      |    | 3,461                  |   |
| Total current assets                                    |   | 33,511                     |    | 41,487                 |   |
|                                                    |   |                       |    |                   |   |
| Property and equipment:                                 |   |                       |    |                   |   |
| Video systems                                           |   |                       |    |                   |   |
| In service                                              |   | 668,036                    |    | 668,697                |   |
| Construction in progress                                |   | 34,347                     |    | 37,511                 |   |
|                                                    |   | 702,383                    |    | 706,208                |   |
| Support equipment, vehicles and  leasehold improvements |   | 26,691                     |    | 26,245                 |   |
|                                                    |   | 729,074                    |    | 732,453                |   |
| Accumulated depreciation                                |   | (466,137                   | )       | (457,482               | )      |
|                                                    |   | 262,937                    |    | 274,971                |   |
|                                                    |   |                       |    |                   |   |
| Goodwill                                                |   | 65,642                     |    | 65,580                 |   |
|                                                    |   |                       |    |                   |   |
| Other assets, net                                       |   | 15,289                     |    | 14,444                 |   |
|                                                    |   |                       |    |                   |   |
| Total assets                                            |   | $                          | 377,379 |                   | $      | 396,482 |   |

 

I - 1

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**ON COMMAND CORPORATION**

(An Indirect Consolidated Subsidiary of Liberty Media Corporation)

Condensed Consolidated Balance Sheets (continued)

(unaudited)

 
|                                                                                                                                      |   | **June 30,  2003**         |       | **December 31,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|------------|------------------------|--------|
|                                                                                                                                      |   | **(amounts in thousands)** | ** ** |
| Liabilities and Stockholders’ Deficit                                                                                                |   |                       |       |                   |   |
| Current liabilities:                                                                                                                      |   |                       |       |                   |   |
| Accounts payable                                                                                                                          |   | $                          | 20,862     |                   | $      | 28,689 |   |
| Accounts payable to parent  (note 7)                                                                                                      |   | 578                        |       | 1,906                  |   |
| Accrued compensation                                                                                                                      |   | 5,652                      |       | 6,433                  |   |
| Sales, use and property tax  liabilities                                                                                                  |   | 5,353                      |       | 4,585                  |   |
| Other accrued liabilities                                                                                                                 |   | 7,931                      |       | 7,987                  |   |
| Current portion of debt (note  6)                                                                                                         |   | 266,295                    |       | 833                    |   |
| Total current liabilities                                                                                                                 |   | 306,671                    |       | 50,433                 |   |
|                                                                                                                                      |   |                       |       |                   |   |
| Long-term debt (note 6)                                                                                                                   |   | 28                         |       | 261,946                |   |
| Other long-term liabilities                                                                                                               |   | —                     |       | 496                    |   |
|                                                                                                                                      |   |                       |       |                   |   |
| Total liabilities                                                                                                                         |   | 306,699                    |       | 312,875                |   |
|                                                                                                                                      |   |                       |       |                   |   |
| Minority interest in  consolidated subsidiary                                                                                             |   | —                     |       | 259                    |   |
|                                                                                                                                      |   |                       |       |                   |   |
| Redeemable securities:                                                                                                                    |   |                       |       |                   |   |
| Mandatorily redeemable  preferred stock                                                                                                   |   | 102,454                    |       | 97,848                 |   |
| Common stock subject to  repurchase obligation (notes 3 and 9)                                                                            |   | 2,391                      |       | 2,333                  |   |
| Total redeemable securities                                                                                                               |   | 104,845                    |       | 100,181                |   |
|                                                                                                                                      |   |                       |       |                   |   |
| Stockholders’ deficit:                                                                                                               |   |                       |       |                   |   |
| Preferred stock, $.01 par  value; shares authorized – 10,000,000; shares issued and outstanding –  98,500 in 2003 and 2002 |   | —                     |       | —                 |   |
| Common stock, $.01 par value;  shares authorized – 150,000,000; shares issued – 30,977,840 in 2003 and  30,973,989 in 2002      |   | 310                        |       | 310                    |   |
| Additional paid-in capital                                                                                                                |   | 295,663                    |       | 299,398                |   |
| Accumulated other comprehensive  loss                                                                                                     |   | (859                       | )          | (4,533                 | )      |
| Accumulated deficit                                                                                                                       |   | (302,177                   | )          | (285,777               | )      |
|                                                                                                                                      |   | (7,063                     | )          | 9,398                  |   |
| Common stock held in treasury,  at cost (119,500 shares in 2003 and 2002)                                                                 |   | (1,344                     | )          | (1,344                 | )      |
| Note receivable from  stockholder (note 7)                                                                                                |   | (25,758                    | )          | (24,887                | )      |
| Total stockholders’ deficit                                                                                                          |   | (34,165                    | )          | (16,833                | )      |
|                                                                                                                                      |   |                       |       |                   |   |
| Commitments and contingencies  (notes 6, 8 and 10)                                                                                        |   |                       |       |                   |   |
|                                                                                                                                      |   |                       |       |                   |   |
| Total liabilities and  stockholders’ deficit                                                                                         |   | $                          | 377,379    |                   | $      | 396,482 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

I - 2

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**ON COMMAND CORPORATION**

(An Indirect Consolidated Subsidiary ofLiberty Media Corporation)

Condensed Consolidated Statements ofOperations

(unaudited)

 

 
|                                                                          |   | **Three  Months Ended  June 30,**                     |    | **Six Months  Ended  June 30,** |   |
|-------------------------------------------------------------------------------|--------|-------------------------------------------------------|---------|---------------------------------|--------|
|                                                                          |   | **2003**                                              |    | **2002**                        |   | **2003** |   | **2002** |   |
|                                                                          |   | **(amounts  in thousands, except per share amounts)** |    |
| Net Revenue:                                                                  |   |                                                  |    |                            |   |   |   |   |   |
| Net room revenue                                                              |   | $                                                     | 57,471  |                            | $      | 59,130 |   | $ | 112,225 |   | $ | 113,384 |   |
| System and equipment sales and other                                          |   | 2,081                                                 |    | 1,869                           |   | 4,047 |   | 4,998 |   |
|                                                                          |   | 59,552                                                |    | 60,999                          |   | 116,272 |   | 118,382 |   |
|                                                                          |   |                                                  |    |                            |   |   |   |   |   |
| Direct costs of net revenue:                                                  |   |                                                  |    |                            |   |   |   |   |   |
| Content fees, commissions and other in-room  services (note 7)                |   | 31,566                                                |    | 29,089                          |   | 58,952 |   | 56,973 |   |
| System, equipment and other costs                                             |   | 1,123                                                 |    | 1,251                           |   | 1,985 |   | 2,631 |   |
| Total costs of net revenue                                                    |   | 32,689                                                |    | 30,340                          |   | 60,937 |   | 59,604 |   |
|                                                                          |   |                                                  |    |                            |   |   |   |   |   |
| Direct margin (exclusive of other operating  expenses shown separately below) |   | 26,863                                                |    | 30,659                          |   | 55,335 |   | 58,778 |   |
|                                                                          |   |                                                  |    |                            |   |   |   |   |   |
| Other operating expenses:                                                     |   |                                                  |    |                            |   |   |   |   |   |
| Operations support                                                            |   | 5,682                                                 |    | 7,135                           |   | 11,744 |   | 13,641 |   |
| Research and development                                                      |   | 917                                                   |    | 1,078                           |   | 2,000 |   | 2,035 |   |
| Selling, general and administrative (note  7)                                 |   | 6,256                                                 |    | 5,427                           |   | 11,832 |   | 10,969 |   |
| Depreciation and amortization                                                 |   | 19,464                                                |    | 19,870                          |   | 38,427 |   | 40,001 |   |
| Asset impairments and other charges                                           |   | 931                                                   |    | 5,821                           |   | 1,256 |   | 7,650 |   |
| Total other operating expenses                                                |   | 33,250                                                |    | 39,331                          |   | 65,259 |   | 74,296 |   |
|                                                                          |   |                                                  |    |                            |   |   |   |   |   |
| Loss from operations                                                          |   | (6,387                                                | )       | (8,672                          | )      | (9,924 | ) | (15,518 | ) |
|                                                                          |   |                                                  |    |                            |   |   |   |   |   |
| Interest expense                                                              |   | (3,311                                                | )       | (3,428                          | )      | (6,664 | ) | (7,034 | ) |
| Other income, net                                                             |   | 149                                                   |    | 240                             |   | 319 |   | 722 |   |
|                                                                          |   |                                                  |    |                            |   |   |   |   |   |
| Loss before income taxes                                                      |   | (9,549                                                | )       | (11,860                         | )      | (16,269 | ) | (21,830 | ) |
|                                                                          |   |                                                  |    |                            |   |   |   |   |   |
| Income tax expense                                                            |   | (43                                                   | )       | (337                            | )      | (131 | ) | (380 | ) |
|                                                                          |   |                                                  |    |                            |   |   |   |   |   |
| Net loss                                                                      |   | (9,592                                                | )       | (12,197                         | )      | (16,400 | ) | (22,210 | ) |
|                                                                          |   |                                                  |    |                            |   |   |   |   |   |
| Dividends on mandatorily redeemable  preferred stock                          |   | (2,344                                                | )       | (2,130                          | )      | (4,606 | ) | (4,184 | ) |
|                                                                          |   |                                                  |    |                            |   |   |   |   |   |
| Net loss attributable to common  stockholders                                 |   | $                                                     | (11,936 | )                               | $      | (14,327 | ) | $ | (21,006 | ) | $ | (26,394 | ) |
|                                                                          |   |                                                  |    |                            |   |   |   |   |   |
| Basic and diluted net loss per common share  (note 4)                         |   | $                                                     | (.39    | )                               | $      | (.46 | ) | $ | (.68 | ) | $ | (.85 | ) |
|                                                                          |   |                                                  |    |                            |   |   |   |   |   |
| Basic and diluted weighted average number  of common shares outstanding       |   | 30,858                                                |    | 30,906                          |   | 30,858 |   | 30,899 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

I - 3

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**ON COMMAND CORPORATION**

(An Indirect Consolidated Subsidiary ofLiberty Media Corporation)

Condensed Consolidated Statements ofComprehensive Loss

(unaudited)

 
|                                                 |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                 |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                 |   | **(amounts  in thousands)**       |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Net loss                                             |   | $                                 | (9,592 | )                               | $      | (12,197 | ) | $ | (16,400 | ) | $ | (22,210 | ) |
| Foreign currency translation adjustment,  net of tax |   | 1,619                             |   | 1,446                           |   | 3,674 |   | 1,375 |   |
|                                                 |   |                              |   |                            |   |   |   |   |   |
| Comprehensive loss                                   |   | $                                 | (7,973 | )                               | $      | (10,751 | ) | $ | (12,726 | ) | $ | (20,835 | ) |

 

See accompanying notes to condensed consolidated financial statements.

 

I - 4

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**ON COMMAND CORPORATION**

(An Indirect Consolidated Subsidiary of Liberty Media Corporation)

Condensed Consolidated Statement of Stockholders’ Deficit

Six Months Ended June 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                                            |   | —                      |   | —            |   | —                           |   | —                                      |    | (16,400                  | )      | —              |   | —                                  |     | (16,400                                | )      |
| Other comprehensive income                          |   | —                      |   | —            |   | —                           |   | 3,674                                       |    | —                   |   | —              |   | —                                  |     | 3,674                                  |   |
| Interest on stockholder note (note 7)               |   | —                      |   | —            |   | 871                              |   | —                                      |    | —                   |   | —              |   | (871                                    | )        | —                                 |   |
| Dividends on mandatorily redeemable preferred stock |   | —                      |   | —            |   | (4,606                           | )      | —                                      |    | —                   |   | —              |   | —                                  |     | (4,606                                 | )      |
| Balance at June 30, 2003                            |   | $                           | — |              | $      | 310                              |   | $                                           | 295,663 |                     | $      | (859                | )      | $                                       | (302,177 | )                                      | $      | (1,344 | ) | $ | (25,758 | ) | $ | (34,165 | ) |

 

See accompanying notes tocondensed 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)

 
|                                                                               |   | **Six Months  Ended June 30,**        |    |
|------------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                               |   | **2003**                              |    | **2002** |   |
|                                                                               |   | **(amounts  in thousands)  (note 5)** |    |
| Cash flows from operating  activities:                                             |   |                                  |    |   |   |
| Net loss                                                                           |   | $                                     | (16,400 | ) | $ | (22,210 | ) |
| Adjustments to reconcile net  loss to net cash provided  by  operating activities: |   |                                  |    |   |   |
| Depreciation and amortization                                                      |   | 38,427                                |    | 40,001 |   |
| Payments of restructuring costs                                                    |   | (912                                  | )       | (769 | ) |
| Asset impairments and other  charges                                               |   | 1,256                                 |    | 7,650 |   |
| Other non-cash items                                                               |   | 977                                   |    | 738 |   |
| Changes in assets and  liabilities:                                                |   |                                  |    |   |   |
| Accounts receivable                                                                |   | 3,283                                 |    | (3,013 | ) |
| Other assets                                                                       |   | 1,810                                 |    | 507 |   |
| Accounts payable                                                                   |   | (8,763                                | )       | 2,559 |   |
| Accrued liabilities                                                                |   | 156                                   |    | 3,641 |   |
|                                                                               |   |                                  |    |   |   |
| Net cash provided by operating  activities                                         |   | 19,834                                |    | 29,104 |   |
|                                                                               |   |                                  |    |   |   |
| Cash flows from investing  activities:                                             |   |                                  |    |   |   |
| Capital expenditures                                                               |   | (25,604                               | )       | (26,018 | ) |
| Acquisition of minority  interest                                                  |   | (300                                  | )       | — |   |
| Cost investments                                                                   |   | —                                |    | (2,599 | ) |
|                                                                               |   |                                  |    |   |   |
| Net cash used in investing  activities                                             |   | (25,904                               | )       | (28,617 | ) |
|                                                                               |   |                                  |    |   |   |
| Cash flows from financing  activities:                                             |   |                                  |    |   |   |
| Borrowings of debt                                                                 |   | 4,000                                 |    | 7,000 |   |
| Repayments of debt                                                                 |   | (456                                  | )       | (5,406 | ) |
| Payment of deferred financing  costs                                               |   | (1,027                                | )       | — |   |
| Proceeds from issuance of  common and preferred stock                              |   | —                                |    | 59 |   |
|                                                                               |   |                                  |    |   |   |
| Net cash provided by financing  activities                                         |   | 2,517                                 |    | 1,653 |   |
|                                                                               |   |                                  |    |   |   |
| Effect of exchange rate changes  on cash                                           |   | 51                                    |    | 46 |   |
|                                                                               |   |                                  |    |   |   |
| Net increase (decrease) in cash  and cash equivalents                              |   | (3,502                                | )       | 2,186 |   |
|                                                                               |   |                                  |    |   |   |
| Cash and cash equivalents,  beginning of period                                    |   | 4,501                                 |    | 2,869 |   |
|                                                                               |   |                                  |    |   |   |
| Cash and cash equivalents, end  of period                                          |   | $                                     | 999     |   | $ | 5,055 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

I - 6

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**ON COMMAND CORPORATION**

(An Indirect Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements

 

June 30, 2003

(unaudited)

 

(1)                    Basis Of Presentation

 

On CommandCorporation is a Delaware corporation formed in July 1996 by AscentEntertainment Group, Inc. (“Ascent”). Ascent is the controlling stockholder of On Command Corporation(together with its consolidated subsidiaries, “On Command” or the “Company”).On March 28, 2000, Liberty Media Corporation (“Liberty”) closed a cash tenderoffer for the common stock of Ascent and thereby obtained control of theCompany.  On June 8, 2000, Libertycompleted a merger with Ascent pursuant to which Ascent became an indirect,wholly-owned subsidiary of Liberty.  Theportion of Liberty’s cost to acquire Ascent that is attributable to the Companyhas not been reflected in the accompanying condensed consolidated financialstatements of the Company due to the fact that a significant percentage of theCompany’s common stock (“Company Common Stock”) is owned by stockholders otherthan Liberty.  In April 2002, LibertySatellite & Technology, Inc., (“LSAT”), a majority-owned subsidiary of Liberty,acquired 100% of the common equity of Ascent. At June 30, 2003, LSAT, through its ownership interest in Ascent, ownedapproximately 74% of the outstanding Company Common Stock and 100% of certainseries of the Company’s preferred stock, which ownership interests collectivelyrepresented approximately 80%****ofthe voting power associated with On Command’s common and preferred securities.

 

The Companydevelops, assembles and operates proprietary video systems. The Company’sprimary distribution system allows hotel guests to select, on an on-demandbasis, motion pictures on computer-controlled television sets located in theirhotel rooms. The Company also provides in-room viewing of select cable channelsand other interactive services under long-term contracts to hotels. Theseinteractive services include video games, Internet offerings, digital music andvarious hotel and guest services. At June 30, 2003, the Company’s primaryoperating subsidiaries or branches were located in the United States, Canada andMexico.

 

These interimcondensed consolidated financial statements are unaudited. In the opinion ofmanagement, all adjustments (consisting only of normal recurring accruals) havebeen made which are necessary to present fairly the financial position of theCompany as of June 30, 2003, as well as the results of its operations for thethree and six months ended June 30, 2003 and 2002. The results of operationsfor any interim period are not necessarily indicative of the results for theentire year. These condensed consolidated financial statements should be readin conjunction with the consolidated financial statements and related notesthereto included in the Company’s December 31, 2002 Annual Report on Form 10-K.

 

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent liabilities, as well asthe reported amounts of revenue and expenses. Significant estimates areinvolved in determining the allowance for doubtful accounts receivable, assetimpairments, the estimated useful lives of property and equipment andintangible assets, and the amounts of certain accrued liabilities. Actualresults may  vary significantly fromthese estimates.

 

Certain priorperiod amounts have been reclassified for comparability with the 2003presentation.

 

I - 7

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**ON COMMAND CORPORATION**

(An Indirect Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

 

 

(2)                    Liberty Transaction

 

On April 2, 2003, the Company announced that it had received an expressionof interest from Liberty regarding the possibility of Liberty acquiring all theissued and outstanding shares of the Company that Liberty (through itssubsidiaries) does not already own.  Asproposed by Liberty, the Company’s stockholders would receive 0.0787 of a shareof Liberty Media Corporation Series A common stock for each share of On Commandcommon stock held.  The transactionwould be taxable to the Company’s stockholders.

 

On Command’s Board of Directors has established a committee of independentdirectors to consider the proposal from Liberty.  The committee has engaged independent legal counsel and financialadvisors and has authority, among other things, to review and evaluate theterms and conditions of the proposed transaction, to determine whether theproposed transaction is in the best interests of the Company and its publicstockholders, to negotiate with Liberty, and to accept, reject, or modify theproposed transaction.  Any transaction between the Company and Libertywould be subject to negotiation, execution and delivery of definitivedocumentation relating thereto and any closing conditions provided for in suchdocumentation.

 

(3)                    RecentAccounting Pronouncements

 

In May 2003,the Financial Accounting Standards Board issued *Statement No. 150, Accounting forCertain Financial Instruments with Characteristics of Both Liabilities andEquity* (“Statement No. 150”).  Statement No. 150 provides guidance as towhether certain financial instruments are required to be classified asliabilities, subject to its recognition and measurement provisions.Generally, Statement No. 150 is effective for financial instruments enteredinto or modified after May 31, 2003 and is otherwise effective at the beginningof the first interim period beginning after June 15, 2003.  The Company adopted the provisions ofStatement No. 150 on July 1, 2003. As a result of adopting Statement No. 150for existing financial instruments entered into on or before May 31, 2003,liabilities increased by approximately $2.4 million, and redeemable securitiesdecreased by approximately $2.4 million, as of July 1, 2003.

 

(4)                    Earnings(Loss) Per Common Share

 

The loss percommon share is based on 30,858,000 and 30,906,000 weighted average sharesoutstanding during the three months ended June 30, 2003 and 2002, respectively,and 30,858,000 and 30,899,000 weighted average shares outstanding during thesix months ended June 30, 2003 and 2002, respectively.  Potential common shares were not included inthe computation of diluted earnings per share because their inclusion would beanti-dilutive.  At June 30, 2003and 2002, the number of potential dilutive common shares was approximately21,050,000 and 20,196,000, respectively. Such potential common shares consist of stock options to acquire sharesof Company Common Stock, warrants and convertible securities.  The foregoing potential common share amountdoes not take into account the assumed number of shares that may be repurchasedby the Company upon the exercise of stock options.

 

I - 8

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**ON COMMAND CORPORATION**

(An Indirect Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

 

 

(5)                    SupplementalDisclosures to Consolidated Statements of Cash Flows

 

Cash paid for interest was $5,956,000 and $5,968,000 during the sixmonths ended June 30, 2003 and 2002, respectively.  Cash paid for income taxes was notsignificant during these periods.

 

(6)                    Debt

 

Debt issummarized as follows (amounts in thousands):

 
|                          |   | **June 30,  2003** |    | **December 31,  2002** |   |
|-------------------------------|--------|--------------------|---------|------------------------|--------|
|                          |   |               |    |                   |   |
| Revolving Credit Facility (a) |   | $                  | 265,633 |                   | $      | 261,633 |   |
| Capital lease  obligations    |   | 690                |    | 1,146                  |   |
|                          |   | 266,323            |    | 262,779                |   |
| Less current  portion         |   | (266,295           | )       | (833                   | )      |
|                          |   | $                  | 28      |                   | $      | 261,946 |   |

 

(a)          The Company’s revolving credit facility, asamended, (the “Revolving Credit Facility”) provided for aggregate borrowings of$275,000,000 at June 30, 2003. Borrowings under the Revolving Credit Facility are due and payable inJuly 2004.  The Company had $9,367,000of remaining availability under the Revolving Credit Facility at June 30,2003.  The Company’s ability to drawadditional funds under the Revolving Credit Facility is subject to theCompany’s continued compliance with applicable financial covenants.

 

Revolvingloans extended under the Revolving Credit Facility bear interest at the LondonInterbank Offered Rate (“LIBOR”) plus a spread that may range from 1.125% to3.50% depending on certain operating ratios of the Company (4.83% effective borrowing rate at June 30,2003).  In addition, a facility feeranging from 0.375% to 0.50% per annum is charged on the Revolving CreditFacility, depending on certain operating ratios of the Company.  The Revolving Credit Facility containscustomary covenants and agreements, most notably the inclusion of restrictionson the Company’s ability to pay dividends or make other distributions  In addition, the Company is required tomaintain leverage and interest coverage ratios.  The Company was in compliance with such covenants at June 30,2003, as then in effect.  Substantiallyall of the Company’s assets are pledged as collateral for borrowings under theRevolving Credit Facility.

 

On March 28,2003, the Company and its bank lenders amended the Revolving Credit Facility topostpone until June 30, 2003 the step down of the leverage ratio covenant ofits Revolving Credit Facility from 4.25 to 3.50.  On June 27, 2003, a similar amendment was executed to postponesuch step down until October 1, 2003. Accordingly, the maximum leverage ratiopermitted under the Revolving Credit Facility at June 30, 2003 was 4.25, andthe Company’s actual leverage ratio was 4.20 as of such date.  The Company and its bank lenders executed anAmended and Restated Credit Agreement on April 17, 2003, and an amendmentthereto on June 27, 2003 (as amended, the “Amended and Restated CreditAgreement”).  The effectiveness of theAmended and Restated Credit Agreement is contingent upon the contribution of$40,000,000 by Liberty or one of its subsidiaries (collectively, the “LibertyGroup”) to the Company to be used to repay principal due, and permanentlyreduce lender commitments, pursuant to the Amended and Restated CreditAgreement.  However, the Liberty Grouphas no obligation to make any contribution to the Company, and there can be noassurance that any such contribution will be made or, if made, what the form orterms would be. After the

 

I - 9

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**ON COMMAND CORPORATION**

(An Indirect Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

 

 

proposedreduction of lender commitments, the Amended and Restated Credit Agreementwould constitute a $235,000,000 senior secured credit facility, consisting of a$50,000,000 revolving credit facility and a $185,000,000 term loanfacility.  The term loan would besubject to scheduled amortizations commencing September 30, 2003, and bothfacilities would mature on December 31, 2007. If it does not earlier become effective, and if it is not otherwiseamended, the Amended and Restated Credit Agreement will terminate on September30, 2003.

 

Although theCompany is in compliance with the leverage ratio covenant of its existingRevolving Credit Facility at June 30, 2003, and the Company expects to be incompliance with such covenant at September 30, 2003,****the Company believes that itwill be out of compliance with such covenant at December 31**,**2003 if the Amended andRestated Credit Agreement does not become effective by that date.  If the Amended and Restated Credit Agreementhas not become effective by, or is otherwise terminated prior to, December 31,2003, the Company anticipates that it will request a further amendment to itsexisting Revolving Credit Facility to postpone the step down of the leverageratio covenant.  It is uncertain whetherthe Company’s lenders would agree to such a further amendment and what termsmight be imposed by the lenders in connection with such further amendment.  In the event that the Amended and RestatedCredit Agreement does not become effective by the date that the leverage ratiois reduced to 3.50, the Company anticipates that a default would occur underthe Revolving Credit Facility.  Upon theoccurrence of a default, if left uncured, the bank lenders would have variousremedies, including terminating their revolving loan commitment, declaring alloutstanding loan amounts including interest immediately due and payable, andexercising their rights against their collateral, which consists ofsubstantially all the Company’s assets. No assurance can be given that the Amended and Restated Credit Agreementwill become effective.  In addition, ifthe Amended and Restated Credit Agreement does not become effective, noassurance can be given that the Company will be able to successfullyrestructure or refinance its existing Revolving Credit Facility on termsacceptable to the Company, or that the Company will be able to avoid a defaultunder its existing Revolving Credit Facility. In light of the uncertainties with respect to the restructuring of theRevolving Credit Facility, the Company’s independent auditors included anexplanatory paragraph in their audit report on the December 31, 2002consolidated financial statements of the Company stating in part that “TheCompany is seeking to restructure the debt facility and such restructuring iscontingent on certain events, which raises substantial doubt about theCompany’s ability to continue as a going concern.”

 

The Company has classified all borrowings outstanding under theRevolving Credit Agreement as current liabilities in its June 30, 2003condensed consolidated balance sheet due to the fact that an amendment wasobtained from its lenders that allowed the Company to meet its leverage ratiocovenant at June 30, 2003.  In theabsence of such amendment, the Company would not have been in compliance withthe leverage ratio covenant under the Revolving Credit Agreement at June 30,2003.  As the amendment postponed thestep down of the leverage ratio covenant for a period of less than 12 months,the Company has classified the debt as current in accordance with *EmergingIssues Task Force Issue No. 86-30, Classification of Obligations When aViolation is Waived by a Creditor,* and *Statement of Financial Standards No. 6,Classification of Short-Term Obligations to Be Refinanced.*  Althoughthe Company has the intent to refinance the Revolving Credit Facility withlong-term borrowings under the Amended and Restated Credit Agreement, theCompany does not now have the unilateral ability to complete the conditionsprecedent to the effectiveness of the Amended and Restated Credit Agreement.

 

I - 10

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**ON COMMAND CORPORATION**

(An Indirect Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

 

 

(7)                    RelatedParty Transactions

 

Libertyallocates certain general and administrative expenses to the Company.  Although there are no written agreementswith Liberty for these allocations, the Company believes the amounts to bereasonable.  Allocations from Libertytotaled $74,000 for each of the six month periods ended June 30, 2003 and 2002,and such amounts are included in selling, general and administrative expense inthe accompanying condensed consolidated statements of operations.  In addition, the Company reimburses Libertyfor certain expenses, including various insurance premiums, paid by Liberty onbehalf of the Company.  Amounts owed toLiberty pursuant to these arrangements ($578,000 at June 30, 2003) arenon-interest bearing.

 

Since October1, 2002, Ascent Media Group, Inc., a consolidated subsidiary of Liberty(“Ascent Media”) has provided uplink and satellite transport services to theCompany for a negotiated monthly fee. Beginning in April 2003, Ascent also began installing satelliteequipment at On Command’s downlink sites at hotels. During the six months endedJune 30, 2003, Ascent Media charged the Company $217,000 for suchservices.  The terms for the above-describedservices are set forth in a Content Preparation and Distribution ServicesAgreement that covers the five-year period beginning on April 1, 2003. AscentMedia also may supply the Company with content preparation services at anegotiated rate during the term of the agreement.  No content preparation services have been provided through June30, 2003.

 

Since July2002, the Company has acquired certain programming content from a consolidatedsubsidiary of Liberty pursuant to an affiliation agreement that expires inSeptember 2008.  During the six monthsended June 30, 2003, the amount charged to the Company pursuant to thisagreement was $50,000.

 

On August 8, 2000, the Company issued 13,500 shares of the Company’sSeries A, $.01 Par Value Convertible Participating Preferred Stock (“Series APreferred Stock”), to the former Chairman and Chief Executive Officer of theCompany in exchange for a $21,080,000 promissory note and a $13,500 cashpayment.  The promissory note is securedby the Series A Preferred Stock or proceeds thereon and the former Chairman andChief Executive Officer’s personal obligations under such promissory note arelimited to 25% of the principal amount of the note plus accrued interestthereon.  The note, which may not beprepaid, is due and payable on August 1, 2005, and interest on the note accruesat a rate of 7% per annum, compounded quarterly.

 

(8)                    SignificantCustomers

 

During the six months ended June 30, 2003, hotels owned, managed orfranchised by Marriott International, Inc. (“Marriott”), Hilton HotelsCorporation (“Hilton”), InterContinental Hotel Group (formerly Six ContinentsHotels, Inc.) (“InterContinental”), Hyatt Hotel Corporation (“Hyatt”), andStarwood Hotels and Resorts Worldwide, Inc. (“Starwood”) accounted for 33%,14%, 11%, 7% and 7%, respectively, of the Company’s total net roomrevenue.  Accordingly, hotels owned,managed or franchised by the Company’s five largest hotel chain customersaccounted for 72% of the Company’s total net room revenue during the six monthsended June 30, 2003.  The loss of any ofthese hotel chain customers, or the loss of a significant number of other hotelchain customers, could have a material adverse effect on the Company’s resultsof operations and financial condition.

 

On March 21,2001, the Company and Marriott entered into a master agreement pursuant towhich the Company distributes its services in hotel rooms owned or managed byMarriott.  In addition, the Company hasthe opportunity to enter into agreements to provide its services to additionalhotel rooms franchised by Marriott.  Themaster agreement with Marriott expires in 2008.  At June 30, 2003, On

 

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**ON COMMAND CORPORATION**

(An Indirect Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

 

 

Commandprovided entertainment services to approximately 166,000 rooms that were ownedor managed by Marriott, and approximately 89,000 rooms that were franchised byMarriott.

 

On Command’smaster contract with Hilton expired in April 2000, and in October 2000, Hiltonannounced that it would not be renewing such master contract.  As a result, domestic hotels owned, managedor franchised by Hilton are currently subject to a master contract betweenHilton and a competitor of the Company. Accordingly, the Company anticipates that domestic hotels owned byHilton will not renew their contracts with the Company as they expire.  However, domestic hotels that are managed orfranchised by Hilton are not precluded from renewing their contracts with theCompany, and, although no assurance can be given, the Company anticipates thatcertain of those domestic hotels will choose to renew with the Company.  At June 30, 2003, the Company providedservice to approximately 117,000 rooms in 506****domestic hotels that areowned, managed or franchised by Hilton. The majority of these rooms are located in managed or franchised hotelsthat are not owned by Hilton.  ThroughJune 30, 2003, the Company’s contracts with 65 of the aforementioned 506 hotels(16,000 rooms) had expired and service to these hotels is currently providedunder monthly or other short-term renewals. The Company’s individual contracts with the remaining 441 domesticHilton hotels (101,000 rooms) expire at various dates through 2010, with 46% ofthose rooms expiring by 2005.  SinceJanuary 2002, the Company has entered into new contracts, or renewed existingcontracts, with respect to 9,300 domestic rooms that were franchised by Hilton, and 2,600 domestic roomsthat were managed by Hilton.  The netroom revenue derived from domestic hotels that were owned, managed, orfranchised by Hilton decreased approximately 18% during the six months endedJune 30, 2003, as compared to the corresponding prior year period.  Over time, the Company anticipates that therevenue it derives from hotels that are owned, managed or franchised by Hiltonwill continue to decrease.  However, dueto the uncertainties involved, the Company is currently unable to predict theamount and timing of the revenue decreases**.**

 

The Company does not have master contracts with either Starwood orInterContinental, and the Company’s master contract with Hyatt provides for thesimultaneous expiration of the Company’s contractual relationships with all ofthe individual hotels that are subject to the Hyatt master contract as ofDecember 31, 2004.  At June 30, 2003,the Company provided entertainment services to approximately 60,000 rooms inhotels that are owned, managed or franchised by Hyatt, and approximately176,000 rooms in hotels that are owned, managed or franchised by Starwood orInterContinental.  Agreements withrespect to approximately 45% of such Starwood and InterContinental rooms havealready expired, or will expire by December 31, 2004.  At June 30, 2003, approximately 37,000 or 59% of the Company’sStarwood rooms were located in Sheraton or Four Points hotels that, dependingon whether such hotels are owned, managed or franchised by Starwood, may becovered by a master contract with a competitor of the Company upon theexpiration of such hotels’ contracts with the Company.  The Company is actively pursuing masteragreements with InterContinental, with Starwood with respect to the Starwoodbrands that are not already covered by a competitor’s contract, and with Hyattfor the period after December 31, 2004.

 

In certain cases, the Company is also pursuing direct contractualrelationships with individual hotels that are owned, managed or franchised bythese hotel chains.  No assurance can begiven that the Company will be successful in executing master or individualhotel contracts.  However, the Companyexpects that, regardless of the expiration dates of master contracts orindividual contracts with hotels, the Company will continue to be the providerof in-room entertainment services for individual hotels that are not undercontract until such time as a competitor’s equipment can be installed.

 

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**ON COMMAND CORPORATION**

(An Indirect Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

 

 

(9)                    Commitments and Contingencies

 

In connectionwith a first quarter 2001 acquisition of a 7.5% interest in MagiNet Corporation,formerly e-ROOM CORPORATION (“MagiNet”), and the settlement of certainlitigation, the Company agreed that MagiNet would have the option during the 15day period beginning on March 1, 2003 to cause the Company to repurchase all,but not less than all, of the 275,000 shares of Company Common Stock issued toMagiNet at a price of $15 per share. During the fourth quarter of 2002, the Company repurchased 119,500 ofsuch shares for an aggregate price of $1,344,000 or $11.25 per share. Inconnection with this transaction, the parties agreed to postpone until March 1,2004 the date on which the Company can be required to repurchase 119,500 of theremaining shares subject to repurchase**. **TheCompany is not precluded from repurchasing such shares at an earlier date. ** **The repurchase price for suchshares will be $15 per share, plus an adjustment factor calculated from March1, 2003 to the date of repurchase, at a rate of 8% per annum.  On March 1, 2003, the date on which the remaining36,000 shares will first become subject to repurchase by the Company waspostponed until March 1, 2004.  Therepurchase price for such shares will remain at $15 per share.  Subsequent to June 30, 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.

 

On February28, 2001, the Company acquired a controlling interest in Hotel Digital Network,Inc. (“Hotel Digital Network”).  Inconnection with such acquisition, the Company entered into a stockholdersagreement (the “HDN Stockholders Agreement”) with the then controllingstockholder of Hotel Digital Network (the “HDN Stockholder”).  The HDN Stockholders Agreement provided theHDN Stockholder with the right during each of the 30-day periods beginning onMarch 1, 2003 and 2004 to require the Company to exchange shares of CompanyCommon Stock for all, but not less than all, of the Hotel Digital Networkcommon shares held by the HDN Stockholder. On March 20, 2003, the HDNStockholder exercised such right, and in May 2003, the Company acquired all ofthe HDN Stockholder’s interests in Hotel Digital Network common stock for cashand certain other consideration, which in the aggregate was not material to theCompany’s financial condition.  Suchacquisition, which did not require the issuance of any shares of Company CommonStock, represented the final settlement of the Company’s purchase obligationunder the HDN Stockholders Agreement.

 

The Company isa party to affiliation agreements with programming suppliers.  Pursuant to certain of these agreements, theCompany is committed to distribute such suppliers’ programming on its videosystems.  Additionally, certain of theseagreements provide for minimum payments and per room rates that escalate as thenumber of rooms receiving programming decreases.

 

In certaincases, the Company has entered into master contracts whereby the Company hasagreed to purchase televisions and/or provide capital assistance and, to alesser extent, provide television maintenance services to hotels during therespective terms of the applicable contracts.

 

The Companyhas received a series of letters from Acacia Media Technologies Corporation(“Acacia”) regarding a portfolio of patents owned by Acacia.  Acacia has alleged that its patents covercertain activities performed by the Company and has proposed that the Companytake a license under those patents.  TheCompany has reviewed Acacia’s patents and believes there are substantialarguments that Acacia’s claims lack merit.

 

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**ON COMMAND CORPORATION**

(An Indirect Consolidated Subsidiary of Liberty Media Corporation)

Notes to Condensed Consolidated Financial Statements, continued

 

 

The Companyhas contingent liabilities related to legal proceedings and other mattersarising in the ordinary course of business. Although it is reasonably possible the Company may incur losses uponconclusion of such matters, an estimate of any loss or range of loss cannot bemade.  In the opinion of management, itis expected that amounts, if any, which may be required to satisfy suchcontingencies will not be material in relation to the accompanying condensedconsolidated financial statements.

 

(10)              Stock Compensation

 

The Companyapplies the intrinsic value-based method of accounting prescribed by AccountingPrinciples Board Opinion No. 25, *Accounting for Stock Issued to Employees,*(“APB Opinion No. 25”) and related interpretations, to account for its fixedplan stock options.  Under this method,compensation expense for stock options or awards that are fixed generally isrequired to be recognized over the vesting period only if the current marketprice of the underlying stock exceeds the exercise price on the date ofgrant.  Statement of FinancialAccounting Standards No. 123, *Accounting for Stock-Based Compensation,*(“StatementNo. 123”) established accounting and disclosure requirements using a fairvalue-based method of accounting for stock-based employee compensationplans.  As allowed by Statement No. 123,the Company has elected to continue to apply the intrinsic value-based methodof accounting prescribed by APB Opinion No. 25, and has adopted the disclosurerequirements of Statement No. 123, as amended by Statement of FinancialAccounting Standards No. 148, *Accounting for Stock-Based Compensation – Transitionand Disclosure – An Amendment of FASB Statement No. 123*.  The following table illustrates the effectson net loss and loss per share if the Company had applied the fair valuerecognition provisions of Statement No. 123 to stock-based employeecompensation (amounts in thousands except per share amounts).

 
|                                                                         |   | **Six months ended June 30,** |    |
|------------------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                         |   | **2003**                      |    | **2002** |   |
|                                                                         |   |                          |    |   |   |
| Net loss, as reported:                                                       |   | $                             | (16,400 | ) | $ | (22,210 | ) |
| Stock compensation expense determined under fair value method, net of  taxes |   | (3,120                        | )       | (2,692 | ) |
| Pro forma net loss                                                           |   | $                             | (19,520 | ) | $ | (24,902 | ) |
| Pro forma net loss applicable to common stockholders                         |   | $                             | (24,126 | ) | $ | (29,086 | ) |
|                                                                         |   |                          |    |   |   |
| Loss per share:                                                              |   |                          |    |   |   |
| Basic and diluted - as reported                                              |   | $                             | (0.68   | ) | $ | (0.85 | ) |
| Basic and diluted - pro forma                                                |   | $                             | (0.78   | ) | $ | (0.94 | ) |

 

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Management’sDiscussion And Analysis Of Financial Condition And Results Of Operations

 

General

 

The followingdiscussion and analysis provides information concerning the financial conditionand results of operations of the Company and should be read in conjunction withthe accompanying condensed consolidated financial statements of the Company, aswell as the Company’s Annual Report on Form 10-K for the year ended December31, 2002.

 

Certainstatements in this Quarterly Report on Form 10-Q constitute forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995.  Such forward-lookingstatements involve known and unknown risks, uncertainties and other important factorsthat could cause the actual results, performance, or achievements of OnCommand, or industry results, to differ materially from future results,performance, or achievements expressed or implied by such forward-lookingstatements.  Such risks, uncertaintiesand other factors include, among others:

 

•                  General economic and business conditions, andtrends in the travel and entertainment industries;

•                  Trends in hotel occupancy rates and business andleisure travel patterns, including the potential impacts that wars, actual orthreatened terrorist attacks and national security responses thereto,contagious diseases such as severe acute respiratory syndrome, or other eventsmight have on such occupancy rates and travel patterns;

•                  Uncertainties inherent in the Company’s effortsto renew or enter into agreements on acceptable terms with its significanthotel chain customers and their owned, managed and franchised hotels;

•                  The Company’s ability to access quality movies,programming networks and other content on acceptable terms;

•                  The regulatory and competitive environment of theindustry in which On Command operates;

•                  The potential impact that any negative publicity,lawsuits, or boycotts by opponents of mature-themed programming contentdistributed by the Company could have on the willingness of hotel industryparticipants to deliver such content to guests;

•                  The potential for increased government regulationand enforcement actions, and the potential for changes in laws that wouldrestrict or otherwise inhibit the Company’s ability to make mature-themedprogramming content available over its video systems;

•                  Uncertainties regarding the acceptance and buyrates for mature-themed programming content distributed by the Company;

•                  Uncertainties inherent in new business strategiessuch as the Company’s recent efforts to expand its target market to includesmaller hotels;

•                  Competitive threats posed by rapid technologicalchanges;

•                  The development, provision and marketing of newplatforms and services, and customer acceptance, usage rates, and profitabilityof such platforms and services;

•                  Uncertainties inherent in the Company’s effortsto improve future operating results by increasing revenue and decreasing costs;

•                  Uncertainties inherent in the Company’s efforts toeffectively manage capital expenditures;

•                  Uncertainties inherent in the Company’s abilityto execute planned upgrades of its video systems, including uncertaintiesassociated with operational, economic and other factors;

•                  The ability of vendors to deliver requiredequipment, software and services;

•                  Availability of qualified personnel;

•                  Competitor responses to On Command’s products andservices, and the overall market acceptance of such products and services;

 

I - 15

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•                  Uncertainties inherent in the ability of OnCommand to satisfy the conditions for the effectiveness of the Amended andRestated Credit Agreement (including the required $40,000,000 contribution fromthe Liberty Group) on a timely basis and, if not satisfied, the ability of OnCommand to restructure or refinance the Revolving Credit Facility; and

•                  Other factors discussed in this Report.

 

Theseforward-looking statements (and such risks, uncertainties and other factors)speak only as of the date of this Report, and On Command expressly disclaimsany obligation or undertaking to disseminate any updates or revisions to anyforward-looking statement contained herein, to reflect any change in OnCommand’s expectations with regard thereto, or any other changes in events,conditions, or circumstances on which any such statement is based.

 

MaterialChanges in Results of Operations

 

Revenue

 

Revenueconsists primarily of fees collected from hotels for in-room services providedto hotel guests by the Company. Services provided by the Company to hotel guests include pay-per-viewmovies, free-to-guest television programming, video games, Internet service,short subject products and digital music. The Company also earns revenue from the sale of video and music systemsto third parties and the sale of video equipment to hotels.  The Company’s total net revenue was$59,552,000 and $60,999,000 during the three months ended June 30, 2003 and2002, respectively, and $116,272,000 and $118,382,000 during the six monthsended June 30, 2003 and 2002, respectively.

 

Net roomrevenue decreased $1,159,000 or 1.0% during the six months ended June 30, 2003,as compared to the corresponding prior year period.  The decrease in net room revenue during the 2003 six-month periodis primarily attributable to a reduction in the volume of pay-per-viewbuys.  The impact of such volumereduction is partially offset by (i) an increase in revenue attributable tohigher average rates for certain pay-per-view products; (ii) a $2,066,000increase in the aggregate revenue derived from short subject, digital music andtelevision-based Internet products; and (iii) a $1,395,000 increase infree-to-guest programming revenue that is primarily the result of rateincreases.  The Company believes thatthe decrease in pay-per-view buys is attributable to the combined effect of (i)a decrease in buy rates for mature-themed pay-per-view products, (ii) adecrease in occupancy rates (as further discussed below), (iii) a change inoccupancy mix, and (iv) a reduction in the average number of rooms served bythe Company.  The 4.1% decline in theaverage number of rooms served by the Company during the 2003 period isattributable to (i) the July 2002 sale of the Company’s European operations;(ii) the loss of rooms to competitors; and (iii) the discontinuance of serviceto certain non-profitable hotels.  Netroom revenue decreased $1,659,000 or 2.8% during the three months ended June30, 2003, as compared to the corresponding prior year period.  The decrease in net room revenue during the2003 three-month period generally is attributable to the same factors that aredescribed above with respect to the six-month period.

 

Overall hoteloccupancy rates, as reported by Smith Travel Research, declined 1.5% during thesix months ended June 30, 2003, as compared to the corresponding prior yearperiod. ** **In addition, occupancy rates forhotels in the top 25 markets, as reported by Smith Travel Research, declined1.7% over the same period.**** Since the Company derives a significant portion of its revenuefrom hotels located in the top 25 markets, the Company believes that theoccupancy rate for this segment is the best indicator of the impact changes inhotel occupancy are having on the Company’s business.  Hotel occupancy rates are outside of the Company’s control, andchanges in hotel occupancy rates can have a significant impact on the Company’sresults of operations.

 

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During the six months ended June 30, 2003, hotels owned, managed orfranchised by Marriott, Hilton Hotels Corporation (“Hilton”), InterContinental,Hyatt, and Starwood accounted for 33%, 14%, 11%, 7% and 7%, respectively, ofthe Company’s total net room revenue. Accordingly, hotels owned, managed or franchised by the Company’s fivelargest hotel chain customers accounted for 72% of the Company’s total net roomrevenue during the six months ended June 30, 2003.  The loss of any of these hotel chain customers, or the loss of asignificant number of other hotel chain customers, could have a materialadverse effect on the Company’s results of operations and financialcondition.  For additional informationconcerning the Company’s relationships with its significant customers, see note8 to the accompanying condensed consolidated financial statements.

 

System andequipment sales and other revenue increased $212,000 or 11.3% during the threemonths ended June 30, 2003 and decreased $951,000 or 19.0% during the sixmonths ended June 30, 2003, as compared to the corresponding prior yearperiods.  The decrease during thesix-month period is primarily attributable to the net effect of (i) a $797,000decrease in sales of the Company’s music systems; and (ii) a $439,000 decreasein sales of the Company’s video systems and equipment. The decrease in musicsystems sales is largely attributable to the Company’s efforts to convert itsprimary music system customer to a software-based music system from ahardware-based music system. The Company expects to initiate sales of itssoftware-based music systems to this customer during the****first quarter****of2004.  As a result, the Company expectsthat it will not realize significant revenue from the sale of hardware-basedmusic systems during 2003 and future periods, and that the revenue to bederived from the sale of its software-based music systems during 2003 will besignificantly lower than the revenue derived from music system sales during2002. The increase during the three-month period is primarily attributable to a$196,000 increase in revenue from hotel pre-wire installations as individuallyinsignificant increases in other revenue items offset a $160,000 decrease insystem and equipment sales.

 

Direct Costs

 

Direct costsconsist primarily of fees paid to movie and other content providers, hotelcommissions, direct costs associated with the Company’s Internet product, andcosts associated with video and music systems sold to other providers, andvideo equipment sold to hotels.

 

Content fees,commissions and other in-room service costs increased $2,477,000 or 8.5% and$1,979,000 or 3.5% during the three and six months ended June 30, 2003,respectively, as compared to the corresponding prior year periods.  Such increases are primarily attributable to(i) increases in royalties associated with the Company’s mature-themedpay-per-view movies of $808,000 and $901,000 during the three and six monthperiods ended June 30, 2003, respectively; (ii) increases in duplication anddistribution costs of $333,000 and $852,000 during the three and six monthsended June 30, 2003, respectively; and (iii) other individually insignificantfluctuations in the components of this line item.  A $521,000 increase in hotel commissions and a $515,000 benefitassociated with the settlement of feature film royalty audits were alsoincluded in the three- and six-month fluctuations, respectively. The increasesin mature-themed royalties are the result of an increase in the quality andquantity of mature-themed movies available through the Company’s video systemsdue to the initiation of a new vendor relationship in March 2003 and increasesin the capacity of certain of the Company’s video systems.  The increases in system duplication anddistribution expense are due to an increase in the quantity of videocassettesduplicated and shipped and an increase in the frequency of titleexchanges.  Free-to-guest programmingcosts remained relatively constant during the 2003 and 2002 periods as higherrates from programmers were offset by cost savings resulting from theoptimization of certain channel line-ups and changes in certain distributionagreements. In the aggregate, content fees, commissions and other in-roomservice costs represented 52.5% and 50.2% of total net room revenue during thesix-month 2003 and 2002 periods, respectively. Certain of the Company’s contentfees and other in-room service costs do not vary with room revenue andoccupancy rates.

 

I - 17

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The Company isa party to various agreements with programming suppliers that permit theCompany to distribute movies and programming networks.  The Company expects that the cost of suchmovies and programming networks will increase in future periods as contractsexpire and renewals are negotiated. Certain of the Company’s contracts with hotel customers limit the amountof any cost increases that can be passed on to any such hotels.  Any cost increases that the Company is notable to pass on to its customers would result in increased pressure on theCompany’s operating margins.

 

System,equipment and other costs decreased $128,000 or 10.2% and $646,000 or 24.6%during the three and six months ended June 30, 2003, respectively, as comparedto the corresponding prior year periods. Such decreases primarily are attributable to lower costs as a result ofthe combined effect of lower music and video system sales and improved marginson video system sales.

 

Operations Support

 

Operationssupport expense includes the labor, materials and overhead costs associatedwith the repair, maintenance and support of video systems and other roomservice equipment.  Operations supportexpense decreased $1,453,000 or 20.4% and $1,897,000 or 13.9% during the threeand six months ended June 30, 2003, respectively, as compared to the correspondingprior year periods. Such decreases are attributable primarily to (i) costsaving measures that resulted in lower occupancy costs, and in otherindividually insignificant expense reductions; and (ii) the impact of the July2002 sale of the Company’s European operations.

 

Research and Development

 

Research anddevelopment expense decreased $161,000 or 14.9% and $35,000 or 1.7% during thethree and six months ended June 30, 2003, respectively, as compared to thecorresponding prior year periods.  Suchfluctuations are attributable to individually insignificant changes in thecomponents of this line item.

 

Selling, General and Administrative

 

Selling,general and administrative expense increased $829,000 or 15.3% and $863,000 or7.9% during the three and six months ended June 30, 2000, respectively, ascompared to the corresponding prior year periods.** **Such increases are attributable primarily to individuallyinsignificant increases in various components of this line item, offset in partby reductions in the amounts accrued for employee bonuses.  The percentage of total net revenue that isrepresented by selling, general and administrative expense was 10.2% and 9.3%during the six-month 2003 and 2002 periods, respectively.

 

Depreciation and Amortization

 

Depreciationand amortization expense decreased $406,000 or 2.0% and $1,574,000 or 3.9%during the three and six months ended June 30, 2003, respectively, as comparedto the corresponding prior year periods. Such decreases represent the net effect of reductions to the Company’sdepreciable asset base that were only partially offset by increasesattributable to capital expenditures. The reductions in the Company’s depreciable asset base are attributableto (i) assets becoming fully depreciated, and (ii) asset dispositions.

 

Asset Impairment and Other Charges

 

The Companyrecorded impairment and other charges of $1,256,000 and $7,650,000 during thesix months ended June 30, 2003 and 2002, respectively.  The 2002 amount includes a loss of$5,103,000 related to the July 2002 sale of the Company’s European operations,and a loss of $1,411,000 relating to a transaction

 

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in which certain equipment wastransferred to STSN, Inc.  The 2003charges and the remaining 2002 charges are comprised of amounts related toobsolete materials and equipment, and losses on various dispositions ofproperty and equipment, and other assets.

 

Interest Expense

 

Interestexpense decreased $117,000 or 3.4% and $370,000 or 5.3% during the three andsix months ended June 30, 2003, respectively, as compared to the correspondingprior year periods.  The decrease ininterest expense is primarily attributable to the net effect of (i) decreases associatedwith lowerweighted average interest rates; and (ii) increases associated withhigher amortization of deferred financing costs as a result of fees paid inconnection with the Amended and Restated Credit Agreement and amendments to theRevolving Credit Facility.

 

Income Taxes

 

The Company’sincome tax expense of $131,000 and $380,000 during the six months ended June30, 2003 and 2002, respectively, represents taxes in certain foreign, state andlocal jurisdictions.  The Company’sreported income tax expense differs from the expected benefit that would resultby applying the statutory rates to the Company’s pre-tax losses primarilybecause the Company is only able to realize income tax benefits for financialreporting purposes to the extent that the Company generates taxable income, orto the extent that tax benefits (i) represent refunds due to the Company or(ii) offset recorded income tax liabilities. For financial reporting purposes, all of the Company’s income taxliabilities had been fully offset by income tax benefits at June 30, 2003 and2002, respectively.

 

Net Loss

 

As a result ofthe factors described above, the Company’s net loss decreased from $22,210,000during the six months ended June 30, 2002 to $16,400,000 during the six monthsended June 30, 2003.  The Company isattempting to improve its operating results by increasing revenue whilecontaining, and wherever possible, reducing expenses and capitalexpenditures.  Specifically, the Companyplans to increase revenue by (i) developing and, to the extent economicallyfeasible, implementing new technologies that will enhance the Company’s abilityto manage its existing products and/or allow the Company to introduce new ormore technologically advanced systems or products; (ii) retaining existinghotel customers and selectively increasing the number of rooms in the Company’straditional target market (generally hotels with 150 or more rooms);  (iii) expanding the Company’s target marketby marketing the MiniMateTM platform to smaller hotels (generally hotels withless than 150 rooms) and lower cost hotels and (iv) selectively increasingprices.  In addition, the Companyexpects to continue to focus on all available opportunities to reduce orcontain costs for the foreseeable future. In this regard, the Company believes vendor and customer relationships,outsourcing, and new technologies, are among the areas that will provideopportunities for cost reduction and containment during 2003 and future periods.  The Company intends to contain and reducecapital expenditures by continuing its efforts to manage and deploy capitalwith a view towards improving the Company’s return on its capital expenditures.The Company cannot presently predict the amount of increased revenue, decreasedcosts or other benefits that might result from its efforts to improve operatingresults.  Furthermore, the Company’sability to accomplish its operating objectives is dependent to a degree onhotel occupancy rates and other factors outside of its control.  No assurance can be given that the Companywill be able to significantly increase its revenue base or reduce its expensesor capital expenditures.  To the extentthat changes in hotel occupancy rates impact the Company’s revenue base, theCompany will not experience proportionate changes in its expenses since many ofthe Company’s expenses do not vary with hotel occupancy rates.

 

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Material Changes in Financial Condition

 

During the sixmonths ended June 30, 2003, the Company used****$19,834,000 of cash providedby operating activities, $2,517,000 of cash provided by financing activitiesand a $3,502,000 decrease in cash and cash equivalents to fund the $25,904,000 used by its investingactivities.  For additional information,see the accompanying condensed consolidated statements of cash flows.

 

At June 30,2003, the Company’s Revolving Credit Facility, as amended, provided foraggregate borrowings of $275,000,000. Borrowings under the Revolving Credit Facility are due and payable inJuly 2004.  The Company had $9,367,000of remaining availability under the Revolving Credit Facility at June 30,2003.  The Company’s ability to drawadditional funds under the Revolving Credit Facility is subject to theCompany’s continued compliance with applicable financial covenants.

 

Revolvingloans extended under the Revolving Credit Facility bear interest at LIBOR plusa spread that may range from 1.125% to 3.50% depending on certain operating ratiosof the Company (4.83% effective borrowing rate at June 30, 2003).  In addition, a facility fee ranging from0.375% to 0.50% per annum is charged on the Revolving Credit Facility,depending on certain operating ratios of the Company.  The Revolving Credit Facility contains customary covenants andlimitations, most notably the inclusion of restrictions on the Company’sability to pay dividends or make other distributions.  In addition, the Company is required to maintain leverage andinterest coverage ratios.  The Companywas in compliance with such covenants at June 30, 2003, as then in effect.  Substantially all of the Company’s assetsare pledged as collateral for borrowings under the Revolving Credit Facility.

 

On March 28,2003, the Company and its bank lenders amended the Revolving Credit Facility topostpone until June 30, 2003 the step down of the leverage ratio covenant ofits Revolving Credit Facility from 4.25 to 3.50.  On June 27, 2003, a similar amendment was executed to postponesuch step down until October 1, 2003. Accordingly, the maximum leverage ratio permitted under the RevolvingCredit Facility at June 30, 2003 was 4.25, and the Company’s actual leverageratio was 4.20 as of such date.  TheCompany and its bank lenders executed an Amended and Restated Credit Agreementon April 17, 2003, and an amendment thereto on June 27, 2003.  The effectiveness of the Amended andRestated Credit Agreement is contingent upon the contribution of $40,000,000 bythe Liberty Group to the Company to be used to repay principal due, andpermanently reduce lender commitments, pursuant to the Amended and RestatedCredit Agreement.  However, the LibertyGroup has no obligation to make any contribution to the Company, and there canbe no assurance that any such contribution will be made or, if made, what theform or terms would be.  After theproposed reduction of lender commitments, the Amended and Restated CreditAgreement would constitute a $235,000,000 senior secured credit facility,consisting of a $50,000,000 revolving credit facility and a $185,000,000 termloan facility.  The term loan would besubject to scheduled amortizations commencing September 30, 2003, and bothfacilities would mature on December 31, 2007. If it does not become effective earlier, and if it is not otherwiseamended, the Amended and Restated Credit Agreement will terminate on September30, 2003.

 

Although theCompany is in compliance with the leverage ratio covenant of its existingRevolving Credit Facility at June 30, 2003, and the Company expects to be incompliance with such covenant at September 30, 2003,****the Company believes that itwill be out of compliance with such covenant at December 31**,**2003 if the Amended andRestated Credit Agreement does not become effective by that date.  If the Amended and Restated Credit Agreementhas not become effective by, or is otherwise terminated prior to, December 31,2003, the Company anticipates that it will request a further amendment to itsexisting Revolving Credit Facility to postpone the step down of the leverageratio covenant.  It is uncertain whetherthe Company’s

 

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lenders would agree to such afurther amendment and what terms might be imposed by the lenders in connectionwith such further amendment.  In theevent that the Amended and Restated Credit Agreement does not become effectiveby the date that the leverage ratio is reduced to 3.50, the Company anticipatesthat a default would occur under the Revolving Credit Facility.  Upon the occurrence of a default, if leftuncured, the bank lenders would have various remedies, including terminatingtheir revolving loan commitment, declaring all outstanding loan amountsincluding interest immediately due and payable, and exercising their rightsagainst their collateral, which consists of substantially all the Company’sassets.  No assurance can be given thatthe Amended and Restated Credit Agreement will become effective.  In addition, if the Amended and RestatedCredit Agreement does not become effective, no assurance can be given that theCompany will be able to successfully restructure or refinance its existingRevolving Credit Facility on terms acceptable to the Company, or that theCompany will be able to avoid a default under its existing Revolving CreditFacility.  In light of the uncertaintieswith respect to the restructuring of the Revolving Credit Facility, theCompany’s independent auditors included an explanatory paragraph in their auditreport on the December 31, 2002 consolidated financial statements of theCompany stating in part that “The Company is seeking to restructure the debtfacility and such restructuring is contingent on certain events, which raisessubstantial doubt about the Company’s ability to continue as a going concern.”

 

The Company has classified all borrowings outstanding under theRevolving Credit Agreement as current liabilities in its June 30, 2003condensed consolidated balance sheet due to the fact that an amendment wasobtained from its lenders that allowed the Company to meet its leverage ratiocovenant at June 30, 2003.  In theabsence of such amendment, the Company would not have been in compliance withthe leverage ratio covenant under the Revolving Credit Agreement at June 30,2003.  As the amendment postponed thestep down of the leverage ratio covenant for a period of less than 12 months,the Company has classified the debt as current in accordance with *EmergingIssues Task Force Issue No. 86-30, Classification of Obligations When aViolation is Waived by a Creditor,* and *Statement of Financial Standards No. 6,Classification of Short-Term Obligations to Be Refinanced.*  Althoughthe Company has the intent to refinance the Revolving Credit Facility withlong-term borrowings under the Amended and Restated Credit Agreement, theCompany does not now have the unilateral ability to complete the conditionsprecedent to the effectiveness of the Amended and Restated Credit Agreement.

 

During 2001,the Company issued to Ascent Entertainment Group, Inc. (“Ascent”) Series BCumulative Redeemable Preferred Stock, par value $.01 per share (the “Series BPreferred Stock”), Series C Cumulative Redeemable Preferred Stock, par value$.01 per share (the “Series C Preferred Stock”) and Series D CumulativeConvertible Redeemable Preferred Stock, par value $.01 per share (“Series DPreferred Stock”) in exchange for aggregate net cash proceeds of$84,942,000.  The Series B PreferredStock, Series C Preferred Stock and Series D Preferred Stock are classified asmandatorily redeemable preferred stock within the accompanying condensedconsolidated balance sheet due to the fact that, under certain circumstancesand subject to certain restrictions contained in the Revolving Credit Facility,Ascent could require the Company to redeem such mandatorily redeemablepreferred stock.** **Ascent has informedthe Company that it currently does not intend to redeem any portion of theliquidation value of the Series B Preferred Stock, Series C Preferred Stock, orSeries D Preferred Stock.  Accumulatedand unpaid dividends on the Company’s Series B Preferred Stock, Series CPreferred Stock and Series D Preferred Stock aggregated $17,512,000 at June 30,2003.  Such dividends have been added tothe liquidation preference of the applicable preferred stock issuance since theCompany has not paid any cash dividends since issuance.  The Company does not intend to pay cashdividends on any of its preferred stock issuances for the foreseeable future.

 

In connectionwith a first quarter 2001 acquisition of a 7.5% interest in MagiNet and thesettlement of certain litigation, the Company agreed that MagiNet would havethe option during the 15 day period beginning on March 1, 2003 to cause theCompany to repurchase all, but not less than all, of the 275,000 shares ofCompany Common Stock that had been issued to MagiNet in such transaction, at aprice of $15 per share.  During thefourth quarter of 2002, the Company repurchased 119,500 of such shares for anaggregate

 

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price of $1,344,000 or $11.25per share. In connection with this transaction, the parties agreed to postponeuntil March 1, 2004 the date on which the Company can be required to repurchase119,500 of the remaining shares subject to repurchase**. **The Company is not precluded from repurchasing such shares atan earlier date. ** **The repurchase pricefor such shares will be $15 per share, plus an adjustment factor calculatedfrom March 1, 2003 to the date of repurchase, at a rate of 8% per annum.  On March 1, 2003, the date on which theremaining 36,000 shares will first become subject to repurchase by the Companywas postponed until March 1, 2004.  Therepurchase price for such shares will remain at $15 per share.  Subsequent to June 30, 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.

 

Historically,the Company has required external financing to fund the cost of installing andupgrading video systems in hotels. However, during 2002 the Company was able to manage its operations andcapital expenditures such that the Company was able to rely on internallygenerated funds and existing sources of liquidity to finance its installationand upgrade activities.  During 2003 andfuture periods, the Company intends to continue to focus its efforts onincreasing revenue while containing, and wherever possible, reducing expensesand capital expenditures.  The Companyexpects that it will be able to rely on cash provided by operations, existingavailability under the Revolving Credit Facility, and existing cash and cashequivalent balances to fund its capital expenditures and other anticipatedliquidity requirements during 2003.  Tothe extent that the Company were to experience a revenue shortfall or any otherunfavorable variance from its 2003 operating plan, the Company would seek toreduce expenses and/or capital expenditures to compensate for any suchshortfall 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 2003.  Notwithstanding the foregoing, the Companyanticipates that it will require a $40,000,000 contribution from the LibertyGroup in order to satisfy one of the conditions for the effectiveness of itsAmended and Restated Credit Agreement, and that it would require additionalexternal financing to (i) fund any significant new growth initiatives orunanticipated liquidity requirements; or (ii) refinance the Revolving CreditFacility, if the Amended and Restated Credit Agreement does not becomeeffective on a timely basis (as discussed above).** **No assurance can be given that the Company will not berequired to seek external financing during 2003, and if external financing isrequired, no assurance can be given that any such financing would be availableon terms acceptable to the Company or at all.

 

Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk

 

The Company isexposed to market risk from changes in interest rates, which could impact itsresults of operations and financial condition, particularly the Company’sinterest expense and cash flow.  TheCompany does not hedge this exposure. Revolving loans extended under the Revolving Credit Facility generallybear interest at a variable rate based on LIBOR and certain operating ratios ofthe Company.  At June 30, 2003, theoutstanding borrowings under the Revolving Credit Facility were $265,633,000.  Exclusive of facility fees, the effective borrowingrate on amounts outstanding under the Revolving Credit Facility was 4.83% atJune 30, 2003.  Assuming no increase ordecrease in the amount outstanding, a hypothetical 1% increase (or decrease) ininterest rates at June 30, 2003 would increase (or decrease) the Company’sannual interest expense and cash outflow by approximately $2,656,000.

 

The Company’sforeign operations are located primarily in Canada and Mexico. The Companybelieves the risks of foreign exchange rate fluctuations on its presentoperations are not material to the Company’s overall financial condition.  However, the Company will consider usingforeign currency contracts, swap arrangements, or other financial instrumentsdesigned to limit exposure to foreign exchange rate fluctuations, if deemedprudent.

 

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Item 4.  Controls and Procedures

 

In accordancewith Exchange Act Rules 13a-15 and 15d-15, the Company carried out anevaluation, under the supervision and with the participation of management,including its chief executive officer and principal 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 disclosurecontrols and procedures were effective as of June 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 beenno change in the Company’s internal controls over financial reporting thatoccurred during the three months ended June 30, 2003 that has materiallyaffected, or is reasonably likely to materially affect, its internal controlsover financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1.                                     LegalProceedings

 

There are nomaterial changes to pending legal proceedings to which the Company is a partyor to which any of its property is subject, except as follows:

 

In July 2003,Broadcast Music, Inc. (“BMI”) and various other plaintiffs filed suit againstthe Company in the United States District Court for the Southern District ofNew York, Case Number 03 CV 5531, for willful copyright infringement.  The plaintiffs allege that the Company hasfailed to obtain permission to publicly perform BMI musical works contained inthe motion pictures and videos the Company transmits to hotels and motels forviewing in guest rooms on a pay-per-view basis.  The Company has been in negotiations with BMI for a performancelicense and intends to continue such negotiations.  The Company does not believe that the ultimate resolution of thismatter will have a material adverse effect on its financial condition orresults of operations.

 

Item 6.                                     Exhibits andReports 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 June 30, 2003:

 
| **Date Filed**  |   | **Items Reported** |   | **Financial Statements Filed** |
|-----------------|--------|--------------------|--------|--------------------------------|
|            |   |               |   |                           |
| April 3,  2003  |   | Items 5 and  7     |   | None                           |
|            |   |               |   |                           |
| April 4,  2003  |   | Item 7             |   | None                           |
|            |   |               |   |                           |
| April 8,  2003  |   | Items 7 and  9     |   | None                           |
|            |   |               |   |                           |
| April 25,  2003 |   | Items 5 and  7     |   | None                           |
|            |   |               |   |                           |
| May 20, 2003    |   | Items 7 and  9     |   | None                           |
|            |   |               |   |                           |
| July 2, 2003    |   | Items 5 and  7     |   | None                           |

 

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(C)        SIGNATURES

 

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

 

 
|                        | ON COMMAND  CORPORATION |
|-----------------------------|-------------------------|
|                        |                    |   |   |
|                        |                    |   |   |
| Date:  August 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         |   | Rule 13a-14(a)/15d-14(a)  Certification. |
|         |   |                                     |
| 31.2         |   | Rule  13a-14(a)/15d-14(a) Certification. |
|         |   |                                     |
| 32           |   | Section 1350  Certification.             |

 

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